| RES CARE INC /KY/ Item 1A Risk Factors Changes in federal, state and local reimbursement policies could adversely affect our revenues and profitability |
| We derive virtually all of our revenues from federal, state and local government agencies, including state Medicaid programs |
| Our revenues therefore depend to a large degree on the size of the governmental appropriations for the services we provide |
| Budgetary pressures, as well as economic, industry, political and other factors, could influence governments not to increase and in some cases, to decrease appropriations for these services, which could reduce our revenues materially |
| In fact, in connection with Medicaid, a Medicaid commission has been established to advise the Secretary of the Department of Health and Human Services on, among other things, ways to achieve dlra10 billion in Medicaid savings over five years |
| Many state governments also continue to experience shortfalls in their Medicaid budgets despite cost containment efforts |
| Future federal or state initiatives could institute managed care programs for individuals we serve or otherwise make material changes to the Medicaid program as it now exists |
| Future revenues may be affected by changes in rate-setting structures, methodologies or interpretations that may be proposed or are under consideration in states where we operate |
| Furthermore, federal, state and local government agencies generally condition their contracts with us upon a sufficient budgetary appropriation |
| If a government agency does not receive an appropriation sufficient to cover its contractual obligations with us, it may terminate a contract or defer or reduce our reimbursement |
| Additionally, there is risk that previously appropriated funds could be reduced through subsequent legislation |
| For example, President Bush’s proposed budget for fiscal 2007 proposes substantial cuts in federal spending for workforce employment and training |
| We cannot predict whether any of the proposed cuts will be made or how they will impact us |
| The loss or reduction of reimbursement under our contracts could have a material adverse effect on our business, financial condition and operating results |
| Our revenues and operating profitability depend on our reimbursement rates |
| Our revenues and operating profitability depend on our ability to maintain our existing reimbursement levels, to obtain periodic increases in reimbursement rates to meet higher costs and demand for more services, and to receive timely payment |
| If we do not receive or cannot negotiate increases in reimbursement rates at approximately the same time as our costs of providing services increase, our revenues and profitability could be adversely affected |
| Labor shortages could reduce our margins and profitability and adversely affect the quality of our care |
| Our cost structure and ultimate operating profitability are directly related to our labor costs |
| Labor costs may be adversely affected by a variety of factors, including limited availability of qualified personnel in each geographic area, local competitive forces, the ineffective utilization of our labor force, changes in minimum wages or other direct personnel costs, strikes or work stoppages by employees represented by labor unions, and changes in client services models, such as the trends toward supported living and managed care |
| The difficulty experienced in hiring direct service staff and nursing staff in certain markets from time to time has resulted in higher labor costs in some of our operating units |
| These higher labor costs are associated with increased overtime, recruitment and retention, training programs, and use of temporary staffing personnel and outside clinical consultants |
| We face substantial competition in attracting and retaining experienced personnel, and we may be unable to grow our business if we cannot attract and return qualified employees |
| Our success depends to a significant degree on our ability to attract and retain highly qualified and experienced social service professionals who possess the skills and experience necessary to deliver high quality services to our clients |
| These employees are in great demand and are likely to remain a limited resource for the foreseeable future |
| Contractual requirements and client needs determine the number, education and experience levels of social service professionals we hire |
| Our ability to attract and retain employees with the requisite experience and skills depends on several factors including, but not limited to, our ability to offer competitive wages, benefits and professional growth opportunities |
| The inability to attract and retain experienced personnel could have a material adverse effect on our business |
| 16 _________________________________________________________________ [49]Table of Contents We may not realize the anticipated benefit of any future acquisitions and we may experience difficulties in integrating these acquisitions |
| As part of our growth strategy, we intend to make selective acquisitions, including the January 3, 2006 acquisition of ACS Workforce Services |
| Growing our business through acquisitions involves risks because with any acquisition there is the possibility that: • we may be unable to maintain and renew the contracts of the acquired business; • unforeseen difficulties may arise when integrating the acquired operations, including information systems and accounting controls; • operating efficiencies, synergies, economies of scale and cost reductions may not be achieved as expected; • the business we acquire may not continue to generate income at the same historical levels on which we based our acquisition decision; • management may be distracted from overseeing existing operations by the need to integrate the acquired business; • we may acquire or assume unexpected liabilities or there may be other unanticipated costs; • we may fail to retain and assimilate key employees of the acquired business; • we may finance the acquisition by additional debt and may become highly leveraged; and • the culture of the acquired business may not match well with our culture |
| As a result of these risks, there can be no assurance that any future acquisition will be successful or that it will not have a material adverse effect on our business, financial condition and results of operations |
| Our insurance coverage and self-insurance reserves may not cover future claims |
| Changes in the market for insurance may affect our ability to obtain insurance coverage at reasonable rates |
| The professional and general liability coverage provides for a dlra1 million deductible per occurrence for policy year commencing July 1, 2005, and claims limits of dlra5 million per occurrence up to a dlra6 million annual aggregate limit |
| The automobile coverage provides for a dlra1 million deductible per occurrence and claims limits of dlra5 million per occurrence up to a dlra5 million aggregate limit |
| In addition, we purchased excess liability coverage with limits of dlra15 million effective July 1, 2005, to bring the total liability coverage limits to dlra20 million |
| The excess liability policy covers the general and professional liability program, as well as the automobile liability program |
| Our workers’ compensation coverage provides for a dlra1 million deductible per occurrence, and claims up to statutory limits |
| The property coverage provides for an aggregate limit of dlra100 million, with varying deductibles and sub-limits depending on the type of loss |
| We utilize historical data to estimate our reserves for our insurance programs |
| If losses on asserted claims exceed the current insurance coverage and accrued reserves, our business, results of operations, financial condition and ability to meet obligations under our indebtedness could be adversely affected |
| 17 _________________________________________________________________ [50]Table of Contents Our industry is subject to substantial government regulation and if we fail to comply with those regulations, we could suffer penalties or be required to make significant changes to our operations |
| The health care industry, including our company, is required to comply with extensive and complex laws and regulations at the federal, state and local government levels relating to, among other things: • licensure and certification; • adequacy and quality of health care services; • qualifications of health care and support personnel; • confidentiality, maintenance and security issues associated with medical records and claims processing; • relationships with referral sources; • operating policies and procedures; • addition of facilities and services; and • billing for services |
| Many of these laws and regulations are expansive, and we do not always have the benefit of significant regulatory or judicial interpretation of them |
| 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 facilities, equipment, personnel, services, capital expenditure programs and operating expenses |
| If we fail to comply with applicable laws and regulations, we could be subject to various sanctions, including criminal penalties, civil penalties (including the loss of our licenses to operate one or more of our facilities) and exclusion of one or more of our facilities from participation in the Medicare, Medicaid and other federal and state health care programs |
| For example, one of our operating subsidiaries is subject to criminal charges brought by the Attorney General in one of the states in which we operate arising from the death of a client |
| This subsidiary served approximately 125 clients |
| We voluntarily surrendered the license of the subsidiary involved and settled the related civil litigation, which was covered by insurance |
| We believe we have viable defenses to the criminal allegations against this subsidiary and an adverse outcome would not affect the participation of our other facilities in federal and state health programs |
| If similar allegations were to arise in the future in respect of a more significant subsidiary or in respect of ResCare, an adverse outcome could have a material adverse effect on our business |
| Both federal and state government agencies have heightened and coordinated civil and criminal enforcement efforts as part of numerous ongoing investigations of health care companies |
| These investigations relate to a wide variety of topics, including: • billing practices; • quality of care; • financial relationships with referral sources; and • medical necessity of services provided |
| 18 _________________________________________________________________ [51]Table of Contents Like other participants in the health care industry, we receive requests for information from government agencies in connection with the regulatory or investigational authority |
| Moreover, health care providers are also subject to “qui tam” whistleblower lawsuits and false claims provisions at both the state and federal level |
| We are required to comply with laws governing the transmission of privacy of health information |
| The Health Insurance Portability and Accountability Act of 1996 (HIPAA) requires us to comply with standards for the exchange of health information within our company and with third parties, such as payors, business associates and patients |
| These include standards for common health care transactions, such as: • claims information, plan eligibility, payment information and the use of electronic signatures; • unique identifiers for providers, employers, health plans and individuals; and • security, privacy and enforcement |
| The Department of Health and Human Services has released final rules to implement a number of these requirements, and several HIPAA initiatives have become effective, including privacy protections, transaction standards and security standards |
| If we fail to comply with these standards, we could be subject to criminal penalties and civil sanctions |
| Increases in regulatory oversight can result in higher operating costs |
| Although we are operating in compliance with established laws and regulations, state regulatory agencies often have broad powers to mandate the types and levels of services we provide to individuals without providing appropriate funding |
| We have experienced this unfunded, increased regulatory oversight in the District of Columbia |
| This increased regulatory oversight has resulted in higher operating costs, including labor, consulting and maintenance expenditures, and historical losses |
| This, in turn, led to our decision to cease providing disabilities services in the District in the first half of 2006 |
| Our operations may subject us to substantial litigation |
| Our management of residential, training, educational and support programs for our clients exposes us to potential claims or litigation by our clients or other individuals for wrongful death, personal injury or other damages resulting from contact with our facilities, programs, personnel or other clients |
| Regulatory agencies may initiate administrative proceedings alleging violations of statutes and regulations arising from our programs and facilities and seeking to impose monetary penalties on us |
| We could be required to pay substantial amounts of money to respond to regulatory investigations or, if we do not prevail, in damages or penalties arising from these legal proceedings and some awards of damages or penalties may not be covered by any insurance |
| If our third-party insurance coverage and self-insurance reserves are not adequate to cover these claims, it could have a material adverse effect on our business, results of operations, financial condition and ability to satisfy our obligations under our indebtedness |
| Media coverage critical of us or our industry may harm our results |
| Media coverage of the industry, including operators of facilities and programs for individuals with mental retardation and other developmental disabilities, has, from time to time, included reports critical of the current trend toward privatization and of the operation of certain of these facilities and programs |
| Adverse media coverage about providers of these services in general, and us in particular, could lead to increased regulatory scrutiny in some areas, and could adversely affect our revenues and profitability by, among other things, adversely affecting our ability to obtain or retain contracts, discouraging government agencies from privatizing facilities and programs, increasing regulation and resulting compliance costs, or discouraging clients from using our services |
| 19 _________________________________________________________________ [52]Table of Contents Our facility and program expenses fluctuate |
| Our facility and program expenses may also fluctuate from period to period, due in large part to changes in labor costs and insurance costs |
| Labor costs are affected by a number of factors, including the availability of qualified personnel, effective management of our programs, changes in service models, state budgetary pressures, severity of weather and other natural disasters |
| Our annual insurance costs and self-insured retention limits can rise due to developments in the insurance market or our claims history |
| Significant fluctuations in our facility and program expenses may adversely affect our business, results of operations and financial condition |
| Our quarterly operating results may fluctuate significantly |
| Our revenues and net income may fluctuate from quarter to quarter, in part because annual Medicaid rate adjustments may be announced by the various states at different times of the year and are usually retroactive to the beginning of the particular state’s fiscal reporting period |
| Generally, future adjustments in reimbursement rates in most states will consist primarily of cost-of-living adjustments, adjustments based upon reported historical costs of operations, or other negotiated changes in rates |
| However, many states in which we operate are experiencing budgetary pressures and certain of these states, from time to time, have initiated service reductions, or rate freezes and/or rate reductions |
| Some reimbursement rate increases must be paid to our direct care staff in the form of wage pass-throughs |
| Additionally, some states have, from time to time, revised their rate-setting methodologies, which has resulted in rate decreases as well as rate increases |
| Our inability to renew our existing contracts with governmental agencies and to obtain additional contracts would adversely affect our revenues |
| Our Job Corps contracts are re-bid, regardless of operating performance, at least every five years |
| We may not be successful in bidding for contracts to operate, or to continue operating, Job Corps centers |
| Changes in the market for services and contracts, including increasing competition, transition costs or costs to implement awarded contracts, could adversely affect the timing and/or viability of future development activities |
| Additionally, many of our contracts are subject to state or federal government procurement rules and procedures |
| Changes in procurement policies that may be adopted by one or more of these agencies could also adversely affect our ability to obtain and retain these contracts |
| If downsizing, privatization and consolidation in our industry do not continue, our business may not continue to grow |
| The maintenance and expansion of our operations depend on the continuation of trends toward downsizing, privatization and consolidation, and our ability to tailor our services to meet the specific needs of the populations we serve |
| Our success in a changing operational environment is subject to a variety of political, economic, social and legal pressures, virtually all of which are beyond our control |
| Such pressures include a desire of governmental agencies to reduce costs and increase levels of services; federal, state and local budgetary constraints; political pressure from unions opposed to privatization or for-profit service providers; and actions brought by advocacy groups and the courts to change existing service delivery systems |
| Material changes resulting from these trends and pressures could adversely affect the demand for and reimbursement of our services and our operating flexibility, and ultimately our revenues and profitability |
| If we fail to establish and maintain relationships with officials of government agencies, we may not be able to successfully procure or retain government-sponsored contracts which could negatively impact our revenues |
| To facilitate our ability to procure or retain government-sponsored contracts, we rely in part on establishing and maintaining relationships with officials of various government agencies |
| These relationships enable us to maintain and renew existing contracts and obtain new contracts and referrals |
| These relationships also enable us to provide informal input and advice to the government agencies prior to the development of a “request for proposal” or program for privatization of social services and enhance our chances of procuring contracts with these payors |
| The effectiveness of our relationships may be reduced or eliminated with changes in the personnel holding various government offices or staff positions |
| We also may lose key personnel who have these relationships |
| Any failure to establish, maintain or manage relationships with government and agency personnel may hinder our ability to procure or retain government-sponsored contracts |
| 20 _________________________________________________________________ [53]Table of Contents Events that harm our reputation with governmental agencies and advocacy groups could reduce our revenues and operating results |
| Our success in obtaining new contracts and renewals of our existing contracts depends upon maintaining our reputation as a quality service provider among governmental authorities, advocacy groups for individuals with developmental disabilities and their families, and the public |
| We also rely on government entities to refer clients to our facilities and programs |
| Negative publicity, changes in public perception, the actions of clients under our care or investigations with respect to our industry, operations or policies could increase government scrutiny, increase compliance costs, hinder our ability to obtain or retain contracts, reduce referrals, discourage privatization of facilities and programs, and discourage clients from using our services |
| Any of these events could have a material adverse effect on our business, results of operations, financial condition or ability to satisfy our obligations under our indebtedness |
| A loss of our status as a licensed service provider in any jurisdiction could result in the termination of existing services and our inability to market our services in that jurisdiction |
| We operate in numerous jurisdictions and are required to maintain licenses and certifications in order to conduct our operations in each of them |
| Each state and county has its own regulations, which can be complicated, and each of our service lines can be regulated differently within a particular jurisdiction |
| As a result, maintaining the necessary licenses and certifications to conduct our operations can be cumbersome |
| Our licenses and certifications could be suspended, revoked or terminated for a number of reasons, including: the failure by some of our facilities or employees to properly care for clients; the failure to submit proper documentation to the government agency, including documentation supporting reimbursements for costs; the failure by our programs to abide by the applicable regulations relating to the provisions of human services; or the failure of our facilities to abide by the applicable building, health and safety codes and ordinances |
| We have had some of our licenses or certifications temporarily suspended in the past |
| If we lost our status as a licensed provider of human services in any jurisdiction or any other required certification, we would be unable to market our services in that jurisdiction, and the contracts under which we provide services in that jurisdiction could be subject to termination |
| Moreover, such an event could constitute a violation of provisions of contracts in other jurisdictions, resulting in other contract terminations |
| Any of these events could have a material adverse effect on our operations |
| Expenses incurred under government contracts are subject to scrutiny |
| We derive virtually all of our revenues from state and local government agencies, and a substantial portion of these revenues are state-funded with federal Medicaid matching dollars |
| As a result of our participation in these government funded programs, we are often subject to governmental reviews, audits and investigations to verify our compliance with applicable laws and regulations |
| As a result of these reviews, audits and investigations, these government payors may be entitled to, in their discretion: • terminate or modify our existing contracts; • suspend or prevent us from receiving new contracts or extending existing contracts because of violations or suspected violations of procurement laws or regulations; • impose fines, penalties or other sanctions on us; • reduce the amount we are paid under our existing contracts; and/or • require us to refund amounts we have previously been paid |
| 21 _________________________________________________________________ [54]Table of Contents In some states, we operate on a cost reimbursement model in which revenues are recognized at the time costs are incurred |
| In these states, payors audit our historical costs on a regular basis, and if it is determined that we do not have enough costs to justify our rates, our rates may be reduced, or we may be required to retroactively return fees paid to us |
| We cannot assure you that our rates will be maintained, or that we will be able to keep all payments made to us until an audit of the relevant period is complete |
| Our revenue growth has been related to increases in the number of individuals served in each of our operating segments |
| Our historical growth in revenues has been directly related to increases in the number of individuals served in each of our operating segments |
| This growth has depended largely upon development-driven activities, including the acquisitions of other businesses or facilities, the acquisition of management contract rights to operate facilities, the award of contracts to open new facilities or start new operations or to assume management of facilities previously operated by governmental agencies or other organizations, and the extension or renewal of contracts previously awarded to us |
| Our future revenues will depend primarily upon our ability to maintain, expand and renew existing service contracts and leases, and to a lesser extent upon our ability to obtain additional contracts to provide services to the special needs populations we serve, through awards in response to requests for proposals for new programs, in connection with facilities being privatized by governmental agencies, or by selected acquisitions |
| We depend upon the continued services of certain members of our senior management team, without whom our business operations would be significantly disrupted |
| Our success depends, in part, on the continued contributions of our executive officers and other key employees |
| Our management team has significant industry experience and would be difficult to replace |
| If we lose or suffer an extended interruption in the service of one or more of our senior officers, our financial condition and operating results could be adversely affected |
| Moreover, the market for qualified individuals is highly competitive and we may not be able to attract and retain qualified personnel to replace or succeed members of our senior management or other key employees, should the need arise |
| Much of our revenue is derived from state and local government and government procedures can be complex |
| Government reimbursement, group home credentialing and client Medicaid eligibility and service authorization procedures are often complicated and burdensome, and delays can result from, among other reasons, difficulties in timely securing documentation and coordinating necessary eligibility paperwork between agencies |
| These reimbursement and procedural issues occasionally cause us to have to resubmit claims several times before payment is remitted and are primarily responsible for our aged receivables |
| Changes in the manner in which state agencies interpret program policies and procedures, and review and audit billings and costs could also affect our business, results of operations, financial condition and our ability to meet obligations under our indebtedness |
| If we cannot maintain our controls and procedures for managing our billing and collecting, our business, results of operations, financial condition and ability to satisfy our obligations under our indebtedness could be adversely affected |
| The collection of accounts receivable is a significant management challenge and requires continual focus |
| The limitations of some state information systems and procedures, such as the ability to obtain timely documentation or disperse funds electronically, may limit the benefits we derive from our automated billing and collection system |
| We must maintain our controls and procedures for managing our billing and collection activities if we are to collect our accounts receivable on a timely basis |
| An inability to do so could adversely affect our business, results of operations, financial condition and ability to satisfy our obligations under our indebtedness |
| 22 _________________________________________________________________ [55]Table of Contents We may not be able to generate sufficient cash flows to meet our debt service obligations |
| Our ability to generate sufficient cash flows from operations to make scheduled payments on our debt obligations and maintain compliance with various financial covenants contained in our debt arrangements will depend on our future financial performance, which will be affected by a range of economic, competitive and business factors, many of which are outside of our control |
| If we do not generate sufficient cash flows from operations to satisfy our debt obligations and maintain covenant compliance, we may have to undertake alternative financing plans, such as refinancing or restructuring our debt, selling assets, reducing or delaying capital investments or seeking to raise additional capital |
| We can provide no assurance that any refinancing would be possible, that any assets could be sold, or, if sold, of the timing of the sales and the amount of proceeds realized from those sales, or that additional financing could be obtained on acceptable terms, if at all |
| Our inability to generate sufficient cash flows to satisfy our debt obligations, maintain covenant compliance or refinance our obligations on commercially reasonable terms would have a material adverse effect on our business, financial condition and results of operations, as well as on our ability to satisfy our obligations under our indebtedness |
| We have a significant amount of debt, which could adversely affect our business financial condition and results of operations and could prevent us from fulfilling our obligations under the notes |
| Our level of indebtedness could have important consequences, including: • making it more difficult for us to satisfy our obligations under our indebtedness, which could result in an event of default under the debt; • requiring us to dedicate a substantial portion of our cash flow from operations to make required payments on indebtedness, thereby reducing the availability of cash flow for working capital, capital expenditures and other general corporate purposes; • limiting our ability to obtain additional financing in the future; • limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; • impairing our ability to withstand a downturn in our business or in the economy generally; and • placing us at a competitive disadvantage against other less leveraged competitors |
| The occurrence of any one of these events could have a material adverse effect on our business, financial condition and results of operations, as well as our ability to satisfy our obligations under our indebtedness |
| We operate in a highly competitive industry, which can adversely affect our results |
| We compete with other for-profit companies, not-for-profit entities, and governmental agencies for contracts |
| Competitive factors may favor other providers, thereby reducing our success in obtaining contracts, which in turn would hinder our growth |
| Non-profit providers may be affiliated with advocacy groups, health organizations, or religious organizations that have substantial influence with legislators and government agencies |
| States may give preferences to non-profit organizations in awarding contracts |
| Non-profit providers also may have access to government subsidies, foundation grants, tax deductible contributions and other financial resources not available to us |
| Governmental agencies and non-profit providers may be subject to limits on liability that do not apply to us |
| In some markets, smaller local companies may have a better understanding of local conditions and may have more political and public influence than we do |
| The competitive advantages enjoyed by other providers may decrease our ability to procure contracts and limit our revenues |
| Increased competition may also result in pricing pressures, loss of or failure to gain market share or loss of clients or payors, any of which could harm our business |