| PEDIATRIX MEDICAL GROUP INC ITEM 1A RISK FACTORS Any of the following risks could have a material adverse effect on our business, financial condition or results of operations and the trading price of our common stock |
| The Federal Trade Commission or other parties may assert that our business practices violate antitrust laws |
| The health care industry is highly regulated for antitrust purposes |
| In recent years, the FTC, the Department of Justice, and state Attorney Generals have increasingly reviewed and, in some cases, taken enforcement action against business conduct, including acquisitions, in the health care industry |
| We continue to be the subject of an active and ongoing investigation by the FTC relating to issues of competition in connection with our 2001 acquisition of Magella and our business practices generally |
| At this time, we are unable to predict the timing or outcome of this investigation and whether it will have a material adverse effect on our business, financial condition, results of operations and the trading price of our common stock |
| We are subject to billing investigations by federal and state government authorities |
| State and federal statutes impose substantial penalties, including civil and criminal fines, exclusion from participation in government health care programs and imprisonment, on entities or individuals (including any individual corporate officers or physicians deemed responsible) that fraudulently or wrongfully bill governmental or other third-party payors for health care services |
| In addition, federal laws allow a private person to bring a civil 19 _________________________________________________________________ [67]Table of Contents action in the name of the United States government for false billing violations |
| We have agreed in principle on a financial settlement with respect to ongoing investigations by federal and state authorities related to our billing practices for services reimbursed by the Medicaid program nationwide, the Federal Employees Health Benefits Program and the TRICARE program for military dependents and retirees |
| The agreement in principle is subject to, among other things, completion of negotiation and approval of a final settlement agreement with relevant federal and state authorities, including a corporate integrity agreement with the Office of Inspector General of the Department of Health and Human Services |
| Therefore, there can be no assurance that a final settlement agreement will be reached |
| We believe that additional audits, inquiries and investigations from government agencies will continue to occur from time to time in the ordinary course of our business, which could result in substantial defense costs to us and a diversion of management’s time and attention |
| We cannot predict whether any such pending or future audits, inquiries or investigations, or the public disclosure of such matters, will have a material adverse effect on our business, financial condition, results of operations and the trading price of our common stock |
| The health care industry is highly regulated and government authorities may determine that we have failed to comply with applicable laws or regulations |
| The health care industry and physicians’ medical practices, including the health care and other services that we and our affiliated physicians provide, are subject to extensive and complex federal, state and local laws and regulations, compliance with which imposes substantial costs on us |
| Of particular importance are: • federal laws (including the federal False Claims Act) that prohibit entities and individuals from knowingly or recklessly making claims to Medicaid and other government programs, as well as third party payors, that contain false or fraudulent information; • a provision of the Social Security Act, commonly referred to as the “anti-kickback” law, that prohibits the knowing and willful offering, payment, solicitation or receipt of any bribe, kickback, rebate or other remuneration, in cash or in kind, in return for the referral or recommendation of patients for items and services covered, in whole or in part, by federal healthcare programs, such as Medicaid; • a provision of the Social Security Act, commonly referred to as the Stark Law, that, subject to limited exceptions, prohibits physicians from referring Medicaid patients to an entity for the provision of certain “designated health services” if the physician or a member of such physician’s immediate family has a direct or indirect financial relationship (including a compensation arrangement) with the entity; • a provision of the Social Security Act that imposes criminal penalties on healthcare providers who fail to disclose or refund known overpayments; • similar state law provisions pertaining to anti-kickback, fee-splitting, self-referral and false claims issues, which typically are not limited to relationships involving federal payors; • provisions of, and regulations relating to, the Health Insurance Portability and Accountability Act of 1996 that prohibit knowingly and willfully executing a scheme or artifice to defraud a healthcare benefit program or falsifying, concealing or covering up a material fact or making any material false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services; • state laws that prohibit general business corporations from practicing medicine, controlling physicians’ medical decisions or engaging in certain practices, such as splitting fees with physicians; • federal and state laws that prohibit providers from billing and receiving payment from Medicaid for services unless the services are medically necessary, adequately and accurately documented, and billed using codes that accurately reflect the type and level of services rendered; • federal and state laws pertaining to the provision of services by non-physician practitioners, such as advanced nurse practitioners, physician assistants and other clinical professionals, physician supervision of such services, and reimbursement requirements that may be dependent on the manner in which the services are provided and documented; 20 _________________________________________________________________ [68]Table of Contents • federal laws that impose civil administrative sanctions for, among other violations, inappropriate billing of services to federally funded healthcare programs, inappropriately reducing hospital care lengths of stay for such patients, or employing individuals who are excluded from participation in federally funded healthcare programs; and • provisions of the federal Health Insurance Portability and Accountability Act of 1996 limiting how healthcare providers may use and disclose individually identifiable health information and the security measures taken in connection with that information and related systems, as well as similar state laws |
| In addition, we believe that our business will continue to be subject to increasing regulation, the scope and effect of which we cannot predict |
| We are currently and may in the future become the subject of regulatory or other investigations or proceedings, and our interpretations of applicable laws, rules and regulations may be challenged |
| For example, regulatory authorities or other parties may assert that our arrangements with our affiliated professional contractors constitute fee-splitting or the corporate practice of medicine and seek to invalidate these arrangements, which could have a material adverse effect on our business, financial condition, or results of operations and the trading price of our common stock |
| Regulatory authorities or other parties also could assert that our relationships, including fee arrangements, among our affiliated professional contractors, hospital clients or referring physicians violate the anti-kickback, fee splitting or self-referral laws and regulations |
| Such investigations, proceedings and challenges could result in substantial defense costs to us and a diversion of management’s time and attention |
| In addition, violations of these laws are punishable by monetary fines, civil and criminal penalties, exclusion from participation in government-sponsored health care programs, and forfeiture of amounts collected in violation of such laws and regulations, any of which could have a material adverse effect on our business, financial condition, or results of operations and the trading price of our common stock |
| We are subject to changes in private employer healthcare insurance and government-sponsored programs |
| We believe that over the past several years there has been a general decline in private employers that offer healthcare insurance coverage to their employees, and for those employers who do offer healthcare insurance coverage, an increase in the required contributions from employees for coverage for them and their families |
| These trends could continue or accelerate and, as a consequence, the number of patients who are uninsured or participate in government-sponsored programs may increase |
| Payments received from government-sponsored programs are substantially less than payments received from managed care and other third party payors |
| A payor mix shift from managed care and other third party payors to government payors results in an increase in our estimated provision for contractual adjustments and uncollectibles and a corresponding decrease in our net patient service revenue |
| Further increases in the government component of our payor mix at the expense of other third-party payors could result in a significant reduction in our average reimbursement rates |
| Moreover, changes in eligibility requirements for government-sponsored programs could increase the number of patients who participate in such programs or the number of uninsured patients |
| In addition, private employers who offer healthcare insurance could change employee coverage by increasing patient responsibility amounts |
| These factors and events could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock |
| Government programs or private insurers may limit, reduce or make retroactive adjustments to reimbursement amounts or rates |
| A significant portion of our net patient revenue is derived from payments made by government-sponsored health care programs, principally Medicaid |
| These government programs, as well as private insurers, have taken and may continue to take steps, including a movement toward managed care, to control the cost, eligibility for, use and delivery of health care services as a result of budgetary constraints, cost containment pressures and other reasons, including those described above under “Government Regulation — Government Reimbursement Requirements” |
| As a result, payments from government programs or private payors may decrease significantly |
| Our business may be materially affected by limitations of or reductions in reimbursement amounts or rates or elimination of coverage for 21 _________________________________________________________________ [69]Table of Contents certain individuals or treatments |
| Moreover, because government programs generally provide for reimbursements on a fee schedule basis rather than on a charge-related basis, we generally cannot increase our revenues from these programs by increasing the amount we charge for our services |
| To the extent our costs increase, we may not be able to recover our increased costs from these programs and cost containment measures and market changes in non-governmental insurance plans have generally restricted our ability to recover, or shift to non-governmental payors, these increased costs |
| In addition, funds we receive from third-party payors are subject to audit with respect to the proper billing for physician and ancillary services and, accordingly, our revenue from these programs may be adjusted retroactively |
| Any retroactive adjustments to our reimbursement amounts could have a material effect on our financial condition, results of operations, and the trading price of our common stock |
| Our affiliated physicians may not appropriately record or document services they provide |
| Our affiliated physicians are responsible for assigning reimbursement codes and maintaining sufficient supporting documentation for the services they provide |
| We use this information to seek reimbursement for their services from third-party payors |
| If these physicians do not appropriately code or document their services, our business, financial condition and results of operations could be adversely affected |
| We may not find suitable acquisition candidates or successfully integrate our acquisitions |
| Our acquisitions may affect our payor mix |
| We have expanded and intend to continue to seek to expand our presence in new and existing metropolitan areas for us by acquiring established neonatal and maternal-fetal physician practice groups and other complementary pediatric subspecialty physician groups, such as, pediatric cardiologists, pediatric intensivists and pediatric hospitalists |
| We also intend to explore other strategic opportunities that are related to our physician and newborn screening services and in areas within health care that would allow us to benefit from our current business expertise |
| For example, we have been exploring opportunities within other hospital-based specialties that have operational characteristics that are similar to neonatology, such as anesthesiology |
| However, our acquisition strategy involves numerous risks and uncertainties, including: • We may not be able to identify suitable acquisition candidates or strategic opportunities or implement successfully or realize the expected benefits of any suitable opportunities |
| In addition, we compete for acquisitions with other potential acquirers, some of which may have greater financial or operational resources than we do |
| This competition may intensify due to the ongoing consolidation in the health care industry, which may increase our acquisition costs |
| • We may not be able to successfully integrate completed acquisitions, including our recent acquisitions |
| Integrating completed acquisitions into our existing operations involves numerous short-term and long-term risks, including diversion of our management’s attention, failure to retain key personnel, long-term value of acquired intangible assets and acquisition expenses |
| In addition, we may be required to comply with laws and regulations that may differ from those of the states in which our operations are currently conducted |
| • We cannot be certain that any acquired business will continue to maintain its pre-acquisition revenues and growth rates or be financially successful |
| In addition, we cannot be certain of the extent of any unknown or contingent liabilities of any acquired business, including liabilities for failure to comply with applicable laws, including laws relating to medical malpractice |
| We may incur material liabilities for past activities of acquired businesses |
| • We could incur or assume indebtedness and issue equity in connection with acquisitions |
| The issuance of shares of our common stock for an acquisition may result in dilution to our existing shareholders and, depending on the number of shares that we issue, the resale of such shares could affect the trading price of our common stock |
| • We may acquire businesses that derive a greater portion of their revenue from government-sponsored programs than what we recognize on a consolidated basis |
| These acquisitions could effect our overall payor mix in future periods |
| Such acquisitions could divert management’s attention and our resources |
| Numerous federal and state laws and regulations govern the collection, dissemination, use, security and confidentiality of patient-identifiable health information, including the federal Health Insurance Portability and Accountability Act of 1996 and related rules, or HIPAA As part of our medical record keeping, third-party billing, research and other services, we collect and maintain patient health information in paper and electronic format |
| New patient health information standards, whether implemented pursuant to HIPAA, congressional action or otherwise, could have a significant effect on the manner in which we handle health care-related data and communicate with payors, and compliance with these standards could impose significant costs on us or limit our ability to offer services, thereby negatively impacting the business opportunities available to us |
| If we do not comply with existing or new laws and regulations related to patient health information we could be subject to monetary fines, civil penalties or criminal sanctions |
| There may be federal and state health care reform, or changes in the interpretation of governmentsponsored health care programs |
| Federal and state governments continue to focus significant attention on health care reform |
| In recent years, many legislative proposals have been introduced or proposed in Congress and some state legislatures that would effect major changes in the health care system |
| Among the proposals which are being or have been considered are cost controls on hospital physicians and other providers, healthcare insurance reforms, Medicaid reforms and the creation of a single government health plan that would cover all citizens |
| We cannot predict which, if any, proposal that has been or will be considered will be adopted or what effect any future legislation will have on us |
| Changes in healthcare laws or regulations could reduce our revenue, impose additional costs on us, or affect our opportunities for continued growth |
| We may not be able to successfully recruit and retain qualified physicians to serve as affiliated physicians or independent contractors |
| We are dependent upon our ability to recruit and retain a sufficient number of qualified physicians to service existing units at hospitals and our affiliated practices, and expand our business |
| We compete with many types of health care providers, including teaching, research and government institutions and other practice groups, for the services of qualified physicians |
| We may not be able to continue to recruit new physicians or renew contracts with existing physicians on acceptable terms |
| If we do not do so, our ability to service existing or new hospitals units and staff existing or new office-based practices could be adversely affected |
| A significant number of our affiliated physicians could leave our affiliated practices or our affiliated professional contractors may be unable to enforce the non-competition covenants of departed physicians |
| Our affiliated professional contractors usually enter into employment agreements with our affiliated physicians which typically can be terminated without cause by any party upon prior written notice |
| In addition, substantially all of our affiliated physicians have agreed not to compete within a specified geographic area for a certain period after termination of employment |
| The law governing non-compete agreements and other forms of restrictive covenants varies from state to state |
| Although we believe that the non-competition and other restrictive covenants of our affiliated physicians are reasonable in scope and duration and therefore enforceable under applicable state law, courts and arbitrators in some states are reluctant to strictly enforce non-compete agreements and restrictive covenants applicable to physicians |
| If a substantial number of our affiliated physicians leave our affiliated practices or our affiliated professional contractors are unable to enforce the non-competition covenants in the employment agreements, our business, financial condition and results of operations could be materially adversely affected |
| We cannot predict whether a court or arbitration panel would enforce these covenants |
| 23 _________________________________________________________________ [71]Table of Contents We may be subject to medical malpractice and other lawsuits not covered by insurance |
| Our business entails an inherent risk of claims of medical malpractice against our affiliated physicians and us |
| We may also be subject to other lawsuits which may involve large claims and significant defense costs |
| Although we currently maintain liability insurance coverage intended to cover professional liability and other claims, there can be no assurance that our insurance coverage will be adequate to cover liabilities arising out of claims asserted against us where the outcomes of such claims are unfavorable to us |
| In addition, this insurance coverage generally must be renewed annually and may not continue to be available to us in future years at acceptable costs and on favorable terms |
| With respect to professional liability insurance, we self-insure our liabilities to pay deductibles through a wholly-owned captive insurance subsidiary |
| Liabilities in excess of our insurance coverage, including coverage for professional liability and other claims, could have a material adverse effect on our business, financial condition, results of operations and the trading price of our common stock |
| ” The reserves that we have established in respect of our professional liability losses are subject to inherent uncertainties and if a deficiency is determined this may lead to a reduction in our net earnings |
| We have established reserves for losses and related expenses, which represent estimates involving actuarial projections, at a given point in time, of our expectations of the ultimate resolution and administration of costs of losses incurred in respect of professional liability risks for the amount of risk retained by us |
| Insurance reserves are inherently subject to uncertainty |
| Our reserves are based on historical claims, demographic factors, industry trends, severity and exposure factors and other actuarial assumptions calculated by an independent actuary firm |
| The independent actuary firm will perform studies on projected ultimate losses at least annually |
| We use the actuarial estimates to establish reserves |
| Our reserves could be significantly affected should current and future occurrences differ from historical claim trends and expectations |
| While claims are monitored closely when estimating reserves, the complexity of the claims and wide range of potential outcomes often hampers timely adjustments to the assumptions used in these estimates |
| Actual losses and related expenses may deviate, perhaps substantially, from the reserve estimates reflected in our financial statements |
| If our estimated reserves are determined to be inadequate, we will be required to increase reserves at the time the deficiency is determined |
| We may write-off intangible assets, such as goodwill |
| Our intangible assets, which consist primarily of goodwill related to our acquisitions, are subject to annual impairment testing |
| Under current accounting standards, goodwill is tested for impairment on an annual basis and we may be subject to impairment losses as circumstances after an acquisition change |
| If we record an impairment loss related to our goodwill, it could have a material adverse effect on our results of operations for the year in which the impairment is recorded |
| We may not effectively manage our growth |
| We have experienced rapid growth in our business and number of our employees and affiliated physicians in recent years |
| Continued rapid growth may impair our ability to provide our services efficiently and to manage our employees adequately |
| While we are taking steps to manage our growth, our future results of operations could be materially adversely affected if we are unable to do so effectively |
| We may not be able to maintain effective and efficient information systems |
| Our operations are dependent on uninterrupted performance of our information systems |
| Failure to maintain reliable information systems or disruptions in our information systems could cause disruptions in our business operations, including errors and delays in billings and collections, difficulty satisfying requirements under hospital contracts, disputes with patients and payors, violations of patient privacy and confidentiality requirements and other regulatory requirements, increased administrative expenses and other adverse consequences, any or all of which could have a material adverse effect on our business, financial condition and results of operations |
| 24 _________________________________________________________________ [72]Table of Contents Our quarterly results will likely fluctuate from period to period |
| We have historically experienced and expect to continue to experience quarterly fluctuations in net patient service revenue and net income |
| For example, we typically experience negative cash flow from operations in the first quarter of each year, principally as a result of bonus payments to affiliated physicians |
| In addition, a significant number of our employees and associated professional contractors (primarily affiliated physicians) exceed the level of taxable wages for social security during the first and second quarters |
| As a result, we incur a significantly higher payroll tax burden and our net income is lower during those quarters |
| Moreover, a lower number of calendar days are present in the first and second quarters of the year as compared to the remainder of the year |
| Because we provide services in the NICU on a 24-hour-a-day basis, 365 days a year, any reduction in service days will have a corresponding reduction in net patient service revenue |
| We also have significant fixed operating costs, including costs for our affiliated physicians, and as a result, are highly dependent on patient volume and capacity utilization of our affiliated physicians to sustain profitability |
| Quarterly results may also be impacted by the timing of acquisitions and any fluctuation in patient volume |
| As a result, our results of operations for any quarter are not indicative of results of operations for any future period or full year |
| The value of our common stock may fluctuate |
| There has been significant volatility in the market price of our common stock and securities of health care companies generally that we believe in many cases has been unrelated to operating performance |
| In addition, we believe that certain factors, such as legislative and regulatory developments, including announced regulatory investigations, quarterly fluctuations in our actual or anticipated results of operations, lower revenues or earnings than those anticipated by securities analysts, and general economic and financial market conditions, could cause the price of our common stock to fluctuate substantially |
| We may not be able to collect reimbursements for our services from third-party payors in a timely manner |
| A significant portion of our net patient service revenue is derived from reimbursements from various third-party payors, including government-sponsored health care plans, private insurance plans and managed care plans, for services provided by our affiliated professional contractors |
| We are responsible for submitting reimbursement requests to these payors and collecting the reimbursements, and assume the financial risks relating to uncollectible and delayed reimbursements |
| In the current health care environment, payors continue their efforts to control expenditures for health care, including proposals to revise coverage and reimbursement policies |
| Due to the nature of our business and our participation in government and private reimbursement programs, we are involved from time to time in inquiries, reviews, audits and investigations by governmental agencies and private payors of our business practices, including assessments of our compliance with coding, billing and documentation requirements |
| We may be required to repay these agencies or private payors if a finding is made that we were incorrectly reimbursed, or we may be subjected to pre-payment reviews, which can be time-consuming and result in non-payment or delayed payment for the services we provide |
| We may also experience difficulties in collecting reimbursements because third-party payors may seek to reduce or delay reimbursements to which we are entitled for services that our affiliated physicians have provided |
| If we are not reimbursed fully and in a timely manner for such services or there is a finding that we were incorrectly reimbursed, our revenues, cash flows and financial condition could be materially adversely affected |
| Hospitals may terminate their agreements with us, our physicians may lose the ability to provide services in hospitals or administrative fees paid to us by hospitals may be reduced |
| Our net patient service revenue is derived primarily from fee-for-service billings for patient care provided within hospital units by our affiliated physicians and from administrative fees paid to us by hospitals |
| Our hospital partners may cancel or not renew their contracts with us or they may reduce or eliminate our administrative fees in the future |
| To the extent that our arrangements with our hospital partners are canceled, or are not renewed or replaced with other arrangements having at least as favorable terms, our business, financial condition and results of operations could be adversely affected |
| In addition, to the 25 _________________________________________________________________ [73]Table of Contents extent our affiliated physicians lose their privileges in hospitals or hospitals enter into arrangements with other physicians, our business, financial condition and results of operations could be materially adversely affected |
| Our industry is already competitive and could become more competitive |
| The health care industry is highly competitive and subject to continual changes in the methods by which services are provided and the manner in which health care providers are selected and compensated |
| Because our operations consist primarily of physician services provided within hospital-based units, primarily NICUs, we compete with other health care services companies and physician groups for contracts with hospitals to provide our services to patients |
| We also face competition from hospitals themselves to provide our services |
| Companies in other health care industry segments, some of which have greater financial and other resources than ours, may become competitors in providing neonatal, maternal-fetal and pediatric subspecialty care |
| We may not be able to continue to compete effectively in this industry, additional competitors may enter metropolitan areas where we operate, and this increased competition may have a material adverse effect on our business, financial condition and results of operations |
| Unfavorable changes or conditions could occur in the states where our operations are concentrated |
| A majority of our net patient service revenue in 2005 was generated by our operations in five states |
| In particular, Texas accounted for approximately 29prca of our net patient service revenue in 2005 |
| See “Geographic Coverage” |
| Adverse changes or conditions affecting these particular states, such as health care reforms, changes in laws and regulations, reduced Medicaid reimbursements and government investigations, may have a material adverse effect on our financial condition and results of operations |
| We are dependent upon our key management personnel for our future success |
| Our success depends to a significant extent on the continued contributions of our key management personnel, including our Chief Executive Officer, Roger J Medel, MD, for the management of our business and implementation of our business strategy |
| Medel or other key management personnel could have a material adverse effect on our business, financial condition, results of operations and the trading price of our common stock |
| Our currently outstanding preferred stock purchase rights could deter takeover attempts |
| We have adopted a preferred share purchase rights plan, under which each outstanding share of our common stock includes a preferred stock purchase right entitling the registered holder, subject to the terms of our rights agreement, to purchase from us a one-thousandth of a share of our series A junior participating preferred stock at an initial exercise price of dlra150 |
| If a person or group of persons acquires, or announces a tender offer or exchange offer which if consummated would result in the acquisition or beneficial ownership of 15prca or more of the outstanding shares of our common stock, each right will entitle its holder (other than the person or persons acquiring 15prca or more of our common stock) to purchase dlra300 worth of our common stock for dlra150 |
| Some provisions contained in our rights agreement may have the effect of discouraging a third-party from making an acquisition proposal for Pediatrix and may thereby inhibit a change in control |
| For example, such provisions may deter tender offers for our shares, which offers may be attractive to shareholders, or deter purchases of large blocks of common stock, thereby limiting the opportunity for shareholders to receive a premium for their shares over the then-prevailing market prices |
| Provisions of our articles and bylaws could deter takeover attempts |
| Our amended and restated articles of incorporation authorize our board of directors to issue up to 1cmam000cmam000 shares of undesignated preferred stock and to determine the powers, preferences and rights of these shares, without shareholder approval |
| This preferred stock could be issued with voting, liquidation, dividend and other rights superior to those of the holders of common stock |
| The issuance of preferred stock under some circumstances could have the effect of delaying, deferring or preventing a change in control |
| In addition, provisions in our amended and restated bylaws, including those relating to calling shareholder meetings, taking action by written consent and other matters, could render it more difficult or discourage an attempt to obtain control of 26 _________________________________________________________________ [74]Table of Contents Pediatrix through a proxy contest or consent solicitation |
| These provisions could limit the price that some investors might be willing to pay in the future for our shares of common stock |