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The following is an excerpt from a 10-Q SEC Filing, filed by GENTIVA HEALTH SERVICES INC on 11/9/2011.
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GENTIVA HEALTH SERVICES INC - 10-Q - 20111109 - RISK_FACTORS
Item 1A. Risk Factors

The risk factors set forth below have been added, updated or restated to provide additional information. The risk factors should be read in conjunction with the risk factors disclosed in Item 1A of Part I of our Form 10-K for the year ended December 31, 2010.

If we are unable to obtain a waiver or amendment, our inability to maintain compliance with the financial covenants under our Credit Agreement may have a material adverse affect on our financial condition.

Our Credit Agreement requires us to maintain certain financial ratios, including a maximum consolidated leverage ratio and a minimum interest coverage ratio. While we were in compliance with all covenants in the Credit Agreement at September 30, 2011, we are, in response to changes in our business climate and uncertainties involving Medicare reimbursement as the federal government works to reduce the federal deficit, currently undergoing cost savings initiatives in order to reduce our ongoing operating costs. These initiatives include (1) the closing or divestiture of 33 home health branches and 9 hospice branches and (ii) significant reductions in staffing levels in regional, area and corporate support functions. In connection with these activities, we expect to record charges of $20 million to $25 million in the fourth quarter of 2011, related to severance costs, facility lease and other costs. As such, absent any changes, we will be out of compliance with the maximum consolidated leverage ratio in the Credit Agreement, which reduces to 4.5x for such quarter and therefore, in default. In addition, based on reductions in Medicare reimbursement for 2012 and possible outcomes from the Super Committee (a select group of 12 members of both the U.S. House of Representatives and U.S. Senate created under the Budget Contract Act of 2011) working on proposals to further reduce federal deficit spending, we anticipate that we will be further out of compliance with our financial covenants under the Credit Agreement in 2012. If we do not meet our financial covenants and are unable to obtain a waiver or amendment of our Credit Agreement or other permitted remedies, we would default under our Credit Agreement which would allow our lenders to accelerate the amounts we owe under our Credit Agreement, or avail themselves of other remedies under the Credit Agreement, including foreclosure on the collateral securing our debt. As a result, any breach of our financial covenants may have a material adverse effect on us and our financial condition.

 

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The Senate Finance Committee conducted an inquiry into certain of our practices, and the SEC has commenced an investigation relating to our participation in the Medicare Home Health Prospective Payment System.

In a letter dated May 12, 2010, the United States Senate Finance Committee requested information from us regarding our Medicare utilization rates and amount of therapy services furnished to each beneficiary. The letter was sent to all of the publicly traded home healthcare companies mentioned in a Wall Street Journal article that explored the relationship between CMS home health policies and the utilization rates of some home health agencies. As part of our initial production of documents, on May 26, 2010 the Senate Finance Committee requested supplemental information relating to our compliance program, policies and procedures and billing manuals. We responded to this request as well as to supplemental requests for information.

On October 3, 2011, the Senate Finance Committee released its report on its inquiry into the home health therapy practices of publicly traded home healthcare companies. The report was generally critical of certain practices of certain of the companies, including Gentiva. We maintain our belief that we have provided and are providing the highest quality of care and have received and continue to receive payment within the standards set forth by the reimbursement system established by CMS. We are unable to assess the probable outcome or potential liability, if any, arising from this matter on our business, financial condition, results of operations, liquidity or capital resources. We do not believe that an estimate of a reasonably possible loss or range of loss can be made for this matter at this time.

Additionally, on July 13, 2010, the SEC informed us that it has commenced an investigation relating to our participation in the Medicare Home Health Prospective Payment System, and, on July 16, 2010, we received subpoena from the SEC requesting certain documents in connection with its investigation. Similar to the Senate Finance Committee request, the SEC subpoena, among other things, focuses on issues related to the number of and reimbursement received for therapy visits before and after changes in the Medicare reimbursement system, relationships with physicians, compliance efforts including compliance with fraud and abuse laws, and certain documents sent to the Senate Finance Committee. We responded the SEC’s request. We are unable to assess the probable outcome or potential liability, if any, arising from the matter.

There can be no assurances that we will not experience negative publicity with respect to these matters, that fines or other penalties will not be imposed by the SEC or that an investigation by other governmental agencies may not be initiated for which we could incur fines or other losses as a result, including a reduction in reimbursement for certain services we perform.

The cost of healthcare is funded substantially by government and private insurance programs. If this funding is reduced or becomes limited or unavailable to our customers, our business may be adversely impacted.

Third-party payers include Medicare, Medicaid and private health insurance providers. Third-party payers are increasingly challenging prices charged for healthcare services. We cannot assure you that our services will be considered cost-effective by third-party payers; that reimbursement will be available or that payer reimbursement policies will not have a material adverse effect on our ability to sell our services on a profitable basis, if at all. We cannot control reimbursement rates, including Medicare market basket or other rate adjustments.

On March 23, 2010, the President signed into law the Patient Protection and Affordable Care Act (“Affordable Care Act”), and, on March 30, 2010, the President signed into law the Health Care and Education Reconciliation Act of 2010 (collectively the “Health Care Reform Act”). The Health Care Reform Act mandates important changes to reimbursement for home health and hospice, including reductions in reimbursement levels.

On November 2, 2010, the Centers for Medicare & Medicaid Services (“CMS”) announced final changes to home health payments for calendar year 2011 which, together with the remaining impact of the rural add-on provision enacted under the Affordable Care Act, represents a net decrease in Medicare home health reimbursement of approximately 4.89 percent in 2011 as compared to 2010. The 2011 Medicare home health reimbursement changes consist of (i) a 2.1 percent positive market basket update, (ii) a 1.0 percent reduction to the market basket update as directed by healthcare reform, (iii) a 2.5 percent reduction in the base rate to reverse the 2010 benefit resulting from changes in the home health outlier policy, (iv) a case mix creep negative adjustment of 3.79 percent and (v) fractional benefits resulting from the rural add-on provision and wage index updates. On October 31, 2011, CMS issued a final rule to update and revise Medicare home health payments for calendar year 2012. This is comprised of a net market basket update of 1.4 percent, which includes the 1 percent reduction mandated by the Affordable Care Act, offset by a case mix creep adjustment of 3.79 percent in 2012. The net effect of these changes decreases the base rate for an episode of service by 2.39 percent. In addition, the final rule states that the Medicare home health rates for calendar year 2013 will include additional negative 1.32 percent change in case mix adjustment. The final rule also shifts case mix points from high case mix and high therapy episodes to low case mix and non-therapy episodes. The shift from high therapy episodes and the removal of two hypertension codes may also have a negative impact on our revenues in 2012 in addition to the base rate decrease. There can be no assurance these changes will not adversely affect us.

Legislative and regulatory actions resulting in changes in reimbursement rates or methods of payment from Medicare and Medicaid, or implementation of other measures to reduce reimbursement for our services, may have a material adverse effect on our revenues and operating margins. Reimbursement to us for our hospice services is subject to Medicare cap amounts, which are calculated by Medicare.

In fiscal 2010 and 2009, 85 percent and 82 percent, respectively, of Gentiva’s total net revenues were generated from Medicare and Medicaid and local government programs and in fiscal 2009, 97 percent of Odyssey’s net patient service revenue consisted of payments paid primarily on a per diem basis, from the Medicare and Medicaid programs. The healthcare industry is experiencing a trend toward cost containment, as the government seeks to stabilize or reduce reimbursement and utilization rates.

In addition, the timing of payments made under these programs is subject to regulatory action and governmental budgetary constraints. For certain Medicaid programs, the time period between submission of claims and payment has increased. Further, within the statutory framework of the Medicare and Medicaid programs, there are a substantial number of areas subject to administrative rulings and interpretations that may further affect payments made under those programs. Additionally, the federal and state governments may in the future reduce the funds available under those programs or require more stringent utilization and quality reviews of providers. These pressures may be increased as a result of the Health Care Reform Act. Moreover, we cannot assure you that adjustments from regulatory actions or Medicare or Medicaid audits, including the payment of fines or penalties to the federal or state governments, will not have a material adverse effect on our liquidity or profitability.

Overall payments made by Medicare to us for hospice services are subject to cap amounts calculated by Medicare. Total Medicare payments to us for hospice services are compared to the cap amount for the hospice cap period, which runs from November 1 of one year through October 31 of the next year. CMS usually announces the cap amount in the month of July or August in the cap period and not at the beginning of the cap period. We must estimate the cap amount for the cap period before CMS announces the cap amount and are at risk if our estimate exceeds the later announced cap amount. CMS can also make retroactive adjustments to cap amounts announced for prior cap periods. Payments to us in excess of the cap amount must be returned by us to Medicare. In May 2011, CMS announced that the Medicare cap would be $24,528 per beneficiary for the 2011 cap year, which is from November 1, 2010 through October 31, 2011. A second hospice cap amount limits the number of days of inpatient care to not more than 20 percent of total patient care days within the cap period.

As part of its review of the Medicare hospice benefit, MedPAC recommended to Congress in its “Report to Congress: Medicare Payment Policy—March 2009” (“2009 MedPAC Report”) that Congress direct the Secretary of Health and Human Services to change the Medicare payment system for hospice to:

 

   

have relatively higher payments per day at the beginning of a patient’s hospice care and relatively lower payments per day as the length of the duration of the hospice patient’s stay increases;

 

   

include relatively higher payments for the costs associated with patient death at the end of the hospice patient’s stay; and

 

   

implement the payment system changes in 2013, with a brief transitional period.

In January 2011, MedPAC reaffirmed the foregoing recommendations and recommended that the hospice rate should be increased by 1 percent for fiscal 2012.

In addition, the Health Care Reform Act includes several provisions that would adversely impact hospice providers, including a provision to reduce the annual market basket update for hospice providers by a productivity adjustment. We cannot predict at this time whether the recommendations included in the 2009 MedPAC Report will be enacted or whether any additional healthcare reform initiatives will be implemented or whether the Health Care Reform Act or other changes in the administration of governmental healthcare programs or interpretations of governmental policies or other changes affecting the healthcare system will adversely affect our revenues. Further, due to budgetary concerns, several states have considered or are considering reducing or eliminating the Medicaid hospice benefit. Reductions or changes in Medicare or Medicaid funding could significantly reduce our net patient service revenue and our profitability.

In November 2010, CMS announced final changes to home health payments for calendar year 2011 which, together with the remaining impact of the rural add-on provision enacted under the Affordable Care Act, represents a net decrease in Medicare reimbursement of approximately 4.89 percent in 2011 as compared to 2010. The changes consist of (i) a 2.1 percent positive market basket update, (ii) a 1.0 percent reduction to the market basket update as directed by healthcare reform, (iii) a 2.5 percent reduction in the base rate to reverse the 2010 benefit resulting from changes in the home health outlier policy, (iv) a case mix creep negative adjustment of 3.79 percent, and (v) fractional benefits resulting from the rural add-on provision and wage index updates. On October 31, 2011, CMS issued a final rule to update and revise Medicare home health payments for calendar year 2012. This is comprised of a net market basket update of 1.4 percent, which includes the 1 percent reduction mandated by the Affordable Care Act, offset by a case mix creep adjustment of 3.79 percent in 2012. The net effect of these changes decreases the base rate for an episode of service by 2.39 percent. In addition, the final rule states that the Medicare home health rates for calendar year 2013 will include additional negative 1.32 percent change in case mix adjustment. The final rule also shifts case mix points from high case mix and high therapy episodes to low case mix and non-therapy episodes. The shift from high therapy episodes and the removal of two hypertension codes may also have a negative impact on our revenues in 2012 in addition to the base rate decrease.

Reductions in amounts paid by government programs for our services or changes in methods or regulations governing payments could cause our net patient service revenue and profits to materially decline.

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