| PSYCHIATRIC SOLUTIONS INC Item 1A Risk Factors If we fail to comply with extensive laws and government regulations, we could suffer penalties or be required to make significant changes to our operations |
| The health care industry is required to comply with extensive and complex laws and regulations at the federal, state and local government levels relating to, among other things: • billing for services; • relationships with physicians and other referral sources; • adequacy of medical care; • quality of medical equipment and services; • qualifications of medical and support personnel; • confidentiality, maintenance and security issues associated with health-related information and medical records; • licensure; • hospital rate or budget review; • operating policies and procedures; and • addition of facilities and services |
| Among these laws are the anti-kickback provision of the Social Security Act (the “Anti-kickback Statute”) and a provision of the Social Security Act commonly known as the Stark Law |
| These laws impact the relationships that we may have with physicians and other referral sources |
| The Office of Inspector General (the “OIG”) of the Department of Health and Human Services (“HHS”) has enacted safe harbor regulations that outline practices that are deemed protected from prosecution under the Anti-kickback Statute |
| Our 11 _________________________________________________________________ [45]Table of Contents current financial relationships with physicians and other referral sources may not qualify for safe harbor protection under the Anti-kickback Statute |
| Failure to meet a safe harbor does not mean that the arrangement automatically violates the Anti-kickback Statute, but may subject the arrangement to greater scrutiny |
| Further, we cannot guarantee that practices that are outside of a safe harbor will not be found to violate the Anti-kickback Statute |
| If we fail to comply with the Anti-kickback Statute, the Stark Law or other applicable laws and regulations, we could be subjected to criminal penalties, civil penalties (including the loss of our licenses to operate one or more inpatient facilities), and exclusion of one or more of our inpatient facilities from participation in the Medicare, Medicaid and other federal and state health care programs |
| In addition, if we do not operate our inpatient facilities in accordance with applicable law, our inpatient facilities may lose their licenses or the ability to participate in third party reimbursement programs |
| Because many of these laws and regulations are relatively new, we do not always have the benefit of significant regulatory or judicial interpretation of these laws and regulations |
| In the future, different interpretations or enforcement of these laws and regulations could subject our current or past practices to allegations of impropriety or illegality or could require us to make changes in our inpatient facilities, equipment, personnel, services, capital expenditure programs and operating expenses |
| A determination that we have violated these laws, or the public announcement that we are being investigated for possible violations of these laws, could have a material adverse effect on our business, financial condition, results of operations or prospects and our business reputation could suffer significantly |
| In addition, we are unable to predict whether other legislation or regulations at the federal or state level will be adopted or the effect such legislation or regulations will have on us |
| If federal or state health care programs or managed care companies reduce reimbursement rates for services provided, revenues may decline |
| A large portion of our revenue comes from the Medicare and Medicaid programs |
| In recent years, federal and state governments have made significant changes in these programs |
| On November 3, 2004, the Centers for Medicare and Medicaid Services (“CMS”) announced final regulations adopting a prospective payment system for services provided by inpatient behavioral health care facilities |
| Inpatient behavioral health care facilities historically have been reimbursed based on reasonable cost, subject to a discharge ceiling |
| For cost reporting periods after January 1, 2005, CMS began to phase in over a three-year period a prospective payment system that will pay inpatient behavioral health care facilities a per diem base rate |
| During the three-year phase-in period, CMS has agreed to a stop loss provision that will guarantee that a provider will receive at least 70prca of the amount it would have been paid under the cost-based reimbursement system |
| The per diem base rate will be adjusted by factors that influence the cost of an individual patient’s care, such as each patient’s diagnosis related group, certain other medical and psychiatric comorbidities (ie, other coexisting conditions that may complicate treatment) and age |
| The per diem amounts are calculated in part based on national averages, but will be adjusted for specific facility characteristics that increase the cost of patient care |
| The base rate per diem is intended to compensate a facility for costs incurred to treat a patient with a particular diagnosis, including nearly all labor and non-labor costs of furnishing covered inpatient behavioral health care services as well as routine, ancillary and capital costs |
| Payment rates for individual inpatient facilities will be adjusted to reflect geographic differences in wages and will allow additional outlier payments for expenses associated with extraordinary cases |
| Additionally, rural providers will receive an increased payment adjustment |
| Medicare will pay this per diem amount, as adjusted, regardless of whether it is more or less than a hospital’s actual costs |
| The per diem will not, however, include the costs of bad debt and certain other costs that are paid separately |
| Future federal and state legislation may reduce the payments we receive for our services |
| Substantially all of the patients admitted to the programs for which we provide unit management services are eligible for Medicare coverage |
| Many of the patients are also eligible for Medicaid payments |
| Similarly, we may not add new unit management contracts if prospective customers do not believe that such programs will generate sufficient revenue |
| Under Medicare and certain Medicaid programs, hospital companies currently are required to file, on a timely basis, cost reports |
| Such cost reports are subject to amending, reopening and appeal rights, which could materially affect historical costs recognized and reimbursement received from such payors |
| Insurance and managed care companies and other third parties from whom we receive payment are increasingly attempting to control health care costs by requiring that facilities discount their fees in exchange for exclusive or preferred participation in their benefit plans |
| This trend may continue and may reduce the payments received by us for our services |
| Other companies within the health care industry continue to be the subject of federal and state investigations, which increases the risk that we may become subject to investigations in the future |
| Both federal and state government agencies as well as private payors have heightened and coordinated civil and criminal enforcement efforts as part of numerous ongoing investigations of health care organizations |
| These investigations relate to a wide 12 _________________________________________________________________ [46]Table of Contents variety of topics, including: • cost reporting and billing practices; • quality of care; • financial relationships with referral sources; • medical necessity of services provided; and • treatment of indigent patients, including emergency medical screening and treatment requirements |
| The OIG and the US Department of Justice have, from time to time, undertaken national enforcement initiatives that focus on specific billing practices or other suspected areas of abuse |
| Moreover, health care providers are subject to civil and criminal false claims laws, including the federal False Claims Act, which allows private parties to bring whistleblower lawsuits against private companies doing business with or receiving reimbursement under federal health care programs |
| Some states have adopted similar state whistleblower and false claims provisions |
| Publicity associated with the substantial amounts paid by other health care providers to settle these lawsuits may encourage our current and former employees and other health care providers to bring whistleblower lawsuits |
| Any investigations of us or our executives or managers could result in significant liabilities or penalties as well as adverse publicity |
| We are subject to medical malpractice and other lawsuits due to the nature of the services we provide |
| Facilities acquired by us may have unknown or contingent liabilities, including liabilities related to patient care and liabilities for failure to comply with health care laws and regulations, which could result in large claims and significant defense costs |
| Although we generally seek indemnification covering these matters from prior owners of facilities we acquire, material liabilities for past activities of acquired facilities may exist and such prior owners may not be able to satisfy their indemnification obligations |
| We are also susceptible to being named in claims brought related to patient care and other matters at inpatient facilities owned by third parties and operated by us |
| To protect ourselves from the cost of these claims, professional malpractice liability insurance and general liability insurance coverage is maintained in amounts and with deductibles common in the industry |
| We have professional and general liability insurance in umbrella form for claims in excess of a dlra3dtta0 million self-insured retention with an insured excess limit of dlra50dtta0 million for all of our inpatient facilities |
| The self-insured reserves for professional and general liability risks are calculated based on historical claims, demographic factors, industry trends, severity factors and other actuarial assumptions calculated by an independent third-party actuary |
| This self-insured reserve is discounted to its present value using a 5prca discount rate |
| This estimated accrual for professional and general liabilities could be significantly affected should current and future occurrences differ from historical claim trends and expectations |
| We have utilized our captive insurance company to manage the self-insured retention |
| While claims are monitored closely when estimating professional and general liability accruals, the complexity of the claims and wide range of potential outcomes often hampers timely adjustments to the assumptions used in these estimates |
| There are no assurances that our insurance will cover all claims (eg, claims for punitive damages) or that claims in excess of our insurance coverage will not arise |
| A successful lawsuit against us that is not covered by, or is in excess of, our insurance coverage may have a material adverse effect on our business, financial condition and results of operations |
| This insurance coverage may not continue to be available at a reasonable cost, especially given the significant increase in insurance premiums generally experienced in the health care industry |
| We may be required to spend substantial amounts to comply with legislative and regulatory initiative relating to privacy and security of patient health information and standards for electronic transactions |
| There are currently numerous legislative and regulatory initiatives at the federal and state levels addressing patient privacy and security concerns |
| In particular, federal regulations issued under the Health Insurance Portability Accountability Act of 1996 (“HIPAA”) require our facilities to comply with standards to protect the privacy, security and integrity of health care information |
| These regulations have imposed extensive administrative requirements, technical and physical information security requirements, restrictions on the use and disclosure of individually identifiable patient health and related financial information and have provided patients with additional rights with respect to their health information |
| Compliance with these regulations requires substantial expenditures, which could negatively impact our financial results |
| In addition, our management has spent, and may spend in the future, substantial time and effort on compliance measures |
| HIPAA also mandates the use of standard formats for electronic transactions and establishing standard unique health identifiers |
| All health care providers, including our inpatient facilities, will be required to obtain a new National Provider Identifier (“NPI”) to be used in standard transactions instead of other numerical identifiers beginning no later than May 23, 2007 |
| We cannot predict whether our inpatient facilities will experience payment delays during the transition to the new identifier |
| Violations of the privacy and security regulations could subject our inpatient facilities to civil penalties of up to dlra25cmam000 per calendar year for each provision contained in the privacy and security regulations that is violated and criminal penalties of up to 13 _________________________________________________________________ [47]Table of Contents dlra250cmam000 per violation for certain other violations |
| Because there is no significant history of enforcement efforts by the federal government at this time, it is not possible to ascertain the likelihood of enforcement efforts in connection with these regulations or the potential for fines and penalties that may result from the violation of the regulations |
| If competition decreases our ability to acquire additional inpatient facilities on favorable terms, we may be unable to execute our acquisition strategy |
| An important part of our business strategy is to acquire inpatient facilities in growing markets |
| Some inpatient facilities and health care providers that compete with us have greater financial resources and a larger development staff focused on identifying and completing acquisitions |
| In addition, some competitors are owned by governmental agencies or not-for-profit corporations supported by endowments and charitable contributions and can finance capital expenditures on a tax-exempt basis |
| Our substantial indebtedness could adversely affect our financial condition |
| As of December 31, 2005, our total consolidated indebtedness was approximately dlra482dtta4 million |
| Our indebtedness could have important consequences to you, including: • increasing our vulnerability to general adverse economic and industry conditions; • requiring that a portion of our cash flow from operations be used for the payment of interest on our debt, thereby reducing our ability to use our cash flow to fund working capital, capital expenditures, acquisitions and general corporate requirements; • restricting our ability to sell assets, including capital stock of our restricted subsidiaries, merge or consolidate with other entities and engage in transactions with our affiliates; • limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions and general corporate requirements; • limiting our flexibility in planning for, or reacting to, changes in our business and the health care industry; • restricting our ability or the ability of our restricted subsidiaries to pay dividends or make other payments; and • placing us at a competitive disadvantage to our competitors that have less indebtedness |
| We and our subsidiaries may be able to incur additional indebtedness in the future, including secured indebtedness |
| If new indebtedness is added to our and our subsidiaries’ current indebtedness levels, the related risks that we and they now face could intensify |
| In addition, our amended and restated credit facility requires us to maintain specified financial ratios and tests that may require that we take action to reduce our debt or to act in a manner contrary to our business objectives |
| Events beyond our control, including changes in general business and economic conditions, may affect our ability to meet those financial ratios and tests |
| We cannot assure you that we will meet those ratios and tests or that the lenders will waive any failure to meet those ratios and tests |
| A breach of any of these covenants would result in a default under our amended and restated credit facility and any resulting acceleration thereunder may result in a default under the indentures governing our 7 ^3 /[4]% Notes and 10 ^5 /[8]% Notes |
| If an event of default under our amended and restated credit facility occurs, the lenders could elect to declare all amounts outstanding thereunder, together with accrued interest, to be immediately due and payable |
| Additional financing may be necessary to fund our acquisition strategy and capital expenditures, and such financing may not be available when needed |
| Our acquisition program requires substantial capital resources |
| Likewise, the operation of existing inpatient facilities requires ongoing capital expenditures for renovation, expansion and the upgrade of equipment and technology |
| In connection with our acquisition of the capital stock of Ardent Behavioral, we incurred significant additional indebtedness to finance the dlra500 million cash portion of the purchase price |
| This may adversely impact our ability to obtain additional financing for future acquisitions and/or capital expenditures on satisfactory terms |
| In addition, the terms of our outstanding indebtedness as well as our level of indebtedness at any time may restrict our ability to borrow additional funds |
| If we are not able to obtain additional financing, then we may not be in a position to consummate acquisitions or undertake capital expenditures |
| Recently acquired businesses and businesses acquired in the future will expose us to increased operating risks |
| We acquired 19 inpatient facilities in 2003 and acquired 10 inpatient facilities in 2004 |
| On July 1, 2005, we completed the acquisition of all of the capital stock of Ardent Behavioral |
| Ardent Behavioral owns and operates, through its subsidiaries, 20 inpatient behavioral health care facilities |
| We acquired one inpatient facility in August 2005 and three additional inpatient facilities in January 14 _________________________________________________________________ [48]Table of Contents 2006 |
| This expansion exposes us to additional business and operating risk and uncertainties, including: • our ability to effectively manage the expanded activities; • our ability to realize our investment in the increased number of inpatient facilities; • our exposure to unknown liabilities; and • our ability to meet contractual obligations |
| If we are unable to manage this expansion efficiently or effectively, or are unable to attract and retain additional qualified management personnel to run the expanded operations, it could have a material adverse effect on our business, financial condition and results of operations |
| If we fail to integrate or improve, where necessary, the operations of acquired inpatient facilities, we may be unable to achieve our growth strategy |
| We may be unable to maintain or increase the profitability of, or operating cash flows at, an existing behavioral health care facility or other acquired inpatient facility, effectively integrate the operations of an acquired facility or otherwise achieve the intended benefit of our growth strategy |
| To the extent that we are unable to enroll in third party payor plans in a timely manner following an acquisition, we may experience a decrease in cash flow or profitability |
| Hospital acquisitions generally require a longer period to complete than acquisitions in many other industries and are subject to additional regulatory uncertainty |
| Many states have adopted legislation regarding the sale or other disposition of facilities operated by not-for-profit entities |
| In other states that do not have specific legislation, the attorneys general have demonstrated an interest in these transactions under their general obligations to protect charitable assets from waste |
| These legislative and administrative efforts focus primarily on the appropriate valuation of the assets divested and the use of the proceeds of the sale by the non-profit seller |
| In addition, the acquisition of facilities in certain states requires advance regulatory approval under “certificate of need” or state licensure regulatory regimes |
| These state-level procedures could seriously delay or even prevent us from acquiring inpatient facilities, even after significant transaction costs have been incurred |
| We depend on our relationships with physicians and other health care professionals who use our inpatient facilities |
| Our business depends upon the efforts and success of the physicians and other health care professionals who provide health care services at our inpatient facilities and the strength of the relationships with these physicians and other health care professionals |
| Our business could be adversely affected if a significant number of physicians or a group of physicians: • terminate their relationship with, or reduce their use of, our inpatient facilities; • fail to maintain acceptable quality of care or to otherwise adhere to professional standards; • suffer damage to their reputation; or • exit the market entirely |
| We depend on our key management personnel |
| We are highly dependent on our senior management team, which has many years of experience addressing the broad range of concerns and issues relevant to our business |
| Our senior management team includes talented managers of our divisions, who have extensive experience in all aspects of health care |
| We have entered into an employment agreement with Joey A Jacobs, our Chief Executive Officer and President, which includes severance, non-competition and non-solicitation provisions |
| Key man life insurance policies are not maintained on any member of senior management other than Mr |
| The loss of key management or the inability to attract, retain and motivate sufficient numbers of qualified management personnel could have a material adverse effect on us |
| Failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and stock price |
| Each year we are required to document and test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent registered public accounting firm addressing these assessments |
| During the course 15 _________________________________________________________________ [49]Table of Contents of our annual testing we may identify deficiencies that we may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404 |
| In addition, if we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act |
| Failure to achieve and maintain an effective internal control environment could have a material adverse effect on our business and stock price |
| Forward-Looking Statements This Annual Report on Form 10-K and other materials we have filed or may file with the Securities and Exchange Commission, as well as information included in oral statements or other written statements made, or to be made, by our senior management, contain, or will contain, disclosures that are “forward-looking statements” within the meaning of the safe harbor provisions of The Private Securities Litigation Reform Act of 1995 |
| Forward-looking statements include all statements that do not relate solely to historical or current facts and can be identified by the use of words such as “may,” “will,” “expect,” “believe,” “intend,” “plan,” “estimate,” “project,” “continue,” “should” and other comparable terms |
| These forward-looking statements are based on the current plans and expectations of management and are subject to a number of risks and uncertainties, including those set forth below, which could significantly affect our current plans and expectations and future financial condition and results |
| We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise |
| Stockholders and investors are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in our filings and reports |
| While it is not possible to identify all these factors, we continue to face many risks and uncertainties that could cause actual results to differ from those forward-looking statements, including: • potential competition that alters or impedes our acquisition strategy by decreasing our ability to acquire additional inpatient facilities on favorable terms; • our ability to integrate and improve the operations of acquired inpatient facilities; • our ability to maintain favorable and continuing relationships with physicians who use our inpatient facilities; • our ability to receive timely additional financing on terms acceptable to us to fund our acquisition strategy and capital expenditure needs; • risks inherent to the health care industry, including the impact of unforeseen changes in regulation, reimbursement rates from federal and state health care programs or managed care companies and exposure to claims and legal actions by patients and others; • our ability to retain key employees who are instrumental to our successful operations; • our ability to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act; • our ability to ensure confidential information is not inappropriately disclosed and that we are in compliance with federal and state health information privacy standards; • our ability to comply with federal and state governmental regulation covering health care-related products and services on-line, including the regulation of medical devices and the practice of medicine and pharmacology; • our ability to obtain adequate levels of general and professional liability insurance; and • those risks and uncertainties described from time to time in our filings with the SEC In addition, future trends for pricing, margins, revenues and profitability remain difficult to predict in the industries that we serve |
| We caution you that the factors listed above, as well as the risk factors included in this Annual Report on Form 10-K may not be exhaustive |
| We operate in a continually changing business environment, and new risk factors emerge from time to time |
| We cannot predict such new risk factors, nor can we assess the impact, if any, of such new risk factors on our businesses or the extent to which any factor or combination of factors may cause actual results to differ materially from those expressed or implied by any forward-looking statements |