Acquisitions of Businesses and Acquired Interests
During the last three years we completed the acquisitions of seven clinic practices and three industrial injury prevention services businesses as detailed below.
Acquisition
|
|
Date
|
|
% Interest
Acquired
|
|
Number of
Clinics
|
December 2021 Acquisition
|
|
December 31, 2021
|
|
75%
|
|
3
|
November 2021 Acquisition
|
|
November 30, 2021
|
|
70%
|
|
*
|
September 2021 Acquisition
|
|
September 30, 2021
|
|
100%
|
|
*
|
June 2021 Acquisition
|
|
June 30, 2021
|
|
65%
|
|
8
|
March 2021 Acquisition
|
|
March 31, 2021
|
|
70%
|
|
6
|
November 2020 Acquisition
|
|
November 30, 2020
|
|
75%
|
|
3
|
September 2020 Acquisition
|
|
September 30, 2020
|
|
70%
|
|
**
|
February 2020 Acquisition
|
|
February 27, 2020
|
|
65% ***
|
|
4
|
September 2019 Acquisition
|
|
September 30, 2019
|
|
67%
|
|
11
|
April 2019 Acquisition
|
|
April 11, 2019
|
|
100%
|
|
*
|
* |
Industrial injury prevention services business
|
** |
The business includes six management contracts which have been in place for a number of years. As of the date acquired, the contracts had a remaining term
of five years.
|
*** |
The four clinics are in four separate partnerships. The Company's interest in the four partnerships range from 10.0% to 83.8%, with an overall 65.0% based
on the initial purchase transaction.
|
Physical Therapy Operations
We primarily operate through subsidiary clinic partnerships in which we generally own a 1% general partnership interest and a 10% to 99% limited partnership
interest and the managing therapist(s) of the clinics owns the remaining limited partnership interest in the majority of the clinics (hereinafter referred to as “Clinic Partnerships”). To a lesser extent, we operate some clinics through
wholly-owned subsidiaries under profit sharing arrangements with therapists (hereinafter referred to as “Wholly-Owned Facilities”).
We continue to seek to attract for employment physical therapists who have established relationships with physicians and other
referral sources by offering these therapists a competitive salary and incentives based on the profitability of the clinic that they manage. For multi-site clinic practices in which a controlling interest is acquired by us, the prior owners
typically continue on as employees to manage the clinic operations, retaining a non-controlling ownership interest in the clinics and receiving a competitive salary for managing the clinic operations. In addition, we have developed satellite
clinic facilities as part of existing Clinic Partnerships and Wholly-Owned Facilities, with the result that a substantial number of Clinic Partnerships and Wholly-Owned
Facilities operate more than one clinic location. During 2022, we intend to continue to acquire multi-clinic practices and to continue to develop outpatient physical therapy clinics as satellites in existing partnerships, along with increasing
our patient volume through marketing and new programs.
Therapists at our clinics initially perform a comprehensive evaluation of each patient, which is then followed by a treatment
plan specific to the injury as prescribed by the patient’s physician. The treatment plan may include a number of procedures, including therapeutic exercise, manual therapy techniques, ultrasound, electrical stimulation, hot packs, iontophoresis,
education on management of daily life skills and home exercise programs. A clinic’s business primarily comes from referrals by local physicians. The principal sources of payment for the clinics’ services are managed care programs, commercial
health insurance, Medicare/Medicaid and workers’ compensation insurance.
Besides the multi-clinic acquisitions referenced in the table above, during 2021 and 2020 we purchased the assets and business of three physical therapy clinics in
separate transactions. The clinics operate as satellite clinics of three of our existing clinic partnerships.
During the year ended December 31, 2021, we sold two clinics. The aggregate sales price was $0.1 million. During the year ended December 31, 2020, we sold 14
previously closed clinics. The aggregate sales price was $1.1 million, of which $0.7 million was paid in cash and $0.4 million in a note receivable payable in two equal installments of principal and any accrued interest. The first payment was
received in June 2021 and the next payment is due on June 15, 2022.
At December 31, 2021, we operated 591 clinics in 39 states. Our highest concentration of clinics are in the following states: Texas, Tennessee,
Michigan, Virginia, Florida, Oregon, Maryland, Georgia, Pennsylvania, Arizona, Idaho, Missouri and South Carolina. In addition to our 591 clinics, on December 31, 2021, we also managed 35 physical
therapy practices for unrelated physician groups and hospitals.
Our Clinics
Most of our clinics are operated as Clinic Partnerships in which we own the general partnership interest and a majority of the limited partnership interests. The
managing healthcare practitioner of the clinics usually owns a portion of the limited partnership interests. Generally, the therapist partners have no interest in the net losses of Clinic Partnerships, except to the extent of their capital
accounts. Since we also develop satellite clinic facilities of existing clinics, most Clinic Partnerships consist of more than one clinic location. As of December 31, 2021, through wholly-owned subsidiaries, we owned a 1% general partnership
interest in all the Clinic Partnerships. Our limited partnership interests range from 10% to 99% in the Clinic Partnerships. For the vast majority of the Clinic Partnerships, the managing healthcare practitioner is a physical therapist who owns
the remaining limited partnership interest in the Clinic Partnership.
For our Clinic Partnership agreements related to those in which we acquired a majority interest, generally, the prior management continues to own a 10% to 50%
interest.
Typically, each therapist partner or director, including those employed by Clinic Partnerships in which we acquired a majority interest, enters into
an employment agreement for a term of up to five years with their Clinic Partnership. Each agreement typically provides for a covenant not to compete during the period of his or her employment and for up to two years thereafter. Under each
employment agreement, the therapist partner receives a base salary and may receive a bonus based on the net revenues or profits generated by their Clinic Partnership or specific clinic. In the case of Clinic Partnerships, the therapist partner
receives earnings distributions based upon their ownership interest. Upon termination of employment, we typically have the right to purchase the therapist’s partnership interest in Clinic Partnerships; for those Clinic Partnerships we
created in connection with an acquisition, our partner also has the right to cause us to purchase their interest upon termination of their employment.
In connection with most of our acquired clinics, in the event that a limited minority partner’s employment ceases and certain requirements
are met as detailed in the respective limited partnership agreements, we have a call right (the “Call Right”) and the selling entity or individual has a put right (the “Put Right”) with respect to the partner’s limited partnership interests. The
Put Right and the Call Right do not expire, even upon an individual partner’s death, and contain no mandatory redemption feature. The purchase price of the partner’s limited partnership interest upon exercise of the Put Right or the Call Right is
calculated at a predetermined multiple of earnings performance as detailed in the respective agreements.
Each Clinic Partnership maintains an independent local identity, while at the same time enjoying the benefits of national purchasing, negotiated third-party payor
contracts, centralized support services and management practices. Under a management agreement, one of our subsidiaries provides a variety of support services to each clinic, including supervision of site selection, construction, clinic design
and equipment selection, establishment of accounting systems and billing procedures and training of office support personnel, processing of accounts payable, operational direction, auditing of regulatory compliance, payroll, benefits
administration, accounting services, legal services, quality assurance and marketing support.
Our typical clinic occupies 1,000 to 7,000 square feet of leased space in an office building or shopping center. There are 17 clinics occupying space in the range
of over 7,000 square feet to 13,500 square feet. We attempt to lease ground level space for patient ease of access to our clinics.
Typical minimum staff at a clinic consists of a licensed physical therapist and an office manager. As patient visits grow, staffing may also include additional
physical therapists, occupational therapists, therapy assistants, aides, exercise physiologists, athletic trainers and office personnel. Therapy services are performed under the supervision of a licensed therapist.
We provide services at our clinics on an outpatient basis. Patients are usually treated for approximately one hour per day, two to three times a week, typically
for two to six weeks. We generally charge for treatment on a per procedure basis. Medicare patients are charged based on prescribed time increments and Medicare billing standards. In addition, our clinics will develop, when appropriate,
individual maintenance and self-management exercise programs to be continued after treatment. We continually assess the potential for developing new services and expanding the methods of providing our existing services in the most efficient
manner while providing high quality patient care.
Factors Influencing Demand For Physical Therapy Services
We believe that the following factors, among others, influence the growth of outpatient physical therapy services:
Economic Benefits of Therapy Services. Purchasers and providers of healthcare services, such as insurance companies,
health maintenance organizations, businesses and industries, continuously seek cost savings for traditional healthcare services. We believe that our therapy services provide a cost-effective way to prevent short-term disabilities from becoming
chronic conditions, to help avoid invasive procedures, to speed recovery from surgery and musculoskeletal injuries and eliminate or minimize the need for opioids.
Earlier Hospital Discharge. Changes in health insurance reimbursement, both public and private, have encouraged the
earlier discharge of patients to reduce costs. We believe that early hospital discharge practices foster greater demand for outpatient physical therapy services.
Aging Population. In general, the elderly population has a greater incidence of disability compared to the population as
a whole. As this segment of the population continues to grow, we believe that demand for rehabilitation services will expand.
Increase in Obesity. Two of every three American men are considered to be overweight or obese and the rate continues to
grow. The strain on a person’s body can be significant. Physical therapy services help the obese become more active and fit by teaching them how to move in ways that are pain free.
Marketing
We focus our marketing efforts primarily on physicians, including orthopedic surgeons, neurosurgeons, physiatrists, internal medicine physicians, podiatrists,
occupational medicine physicians and general practitioners. In marketing to the physician community, we emphasize our commitment to quality patient care and regular communication with physicians regarding patient progress. We employ personnel to
assist clinic directors in developing and implementing marketing plans for the physician community and to assist in establishing relationships with health maintenance organizations, preferred provider organizations, case managers and insurance
companies.
Industrial Injury Prevention Services
Services provided in the industrial injury prevention services segment include onsite injury prevention and rehabilitation, performance optimization, post offer employment testing,
functional capacity evaluations, and ergonomic assessments. The majority of these services are contracted with and paid for directly by employers, including a number of Fortune 500 companies. Other clients include large insurers and their
contractors. Our Company performs these services through Industrial Sports Medicine Professionals, consisting of both physical therapists and ATCs.
In March 2017, we acquired a 55% interest in an initial industrial injury prevention services business. On April 30, 2018, we acquired a 65% interest in another business in the
industrial injury prevention sector. On April 30, 2018, we combined the two businesses. After the combination, we owned a 59.45% interest in the combined business, Briotix Health, Limited Partnership (“Briotix Health”).
On April 11, 2019, we acquired 100% of a third company that is a provider of industrial injury prevention services. The acquired company specializes in delivering injury prevention and
care, post offer employment testing, functional capacity evaluations and return-to-work services. It performs these services across a network in 45 states including onsite at eleven client locations. The business was then combined with Briotix
Health increasing our ownership position in the partnership to approximately 76.0%.
On September 30, 2021, we acquired a company that specializes in return-to-work and ergonomic services, among other offerings and contributed those
assets to industrial injury prevention services subsidiary. Subsequent to this acquisition and the purchase of the redeemable non-controlling interest of one of the limited partners, our ownership in Briotix Health is approximately 85%.
On November 30, 2021, we acquired an approximate 70.0% interest in a leading provider of industrial injury prevention services. The founders and
owners retained the remaining interest. The initial purchase price for the approximate 70% equity interest, not inclusive of a $2.0 million contingent payment in conjunction with the acquisition if specified future operational objectives are met,
was approximately $63.2 million.
SOURCES OF REVENUE
Physical Therapy Operations
Payor sources for physical therapy operations are primarily managed care programs, commercial health insurance, Medicare/Medicaid and workers’ compensation
insurance. Commercial health insurance, Medicare and managed care programs generally provide coverage to patients utilizing our clinics after payment by the patients of normal deductibles and co-insurance payments. Workers’ compensation laws
generally require employers to provide, directly or indirectly through insurance, costs of medical rehabilitation for their employees from work-related injuries and disabilities and, in some jurisdictions, mandatory vocational rehabilitation,
usually without any deductibles, co-payments or cost sharing. Treatments for patients who are parties to personal injury cases are generally paid from the proceeds of settlements with insurance companies or from favorable judgments. If an
unfavorable judgment is received, collection efforts are generally not pursued against the patient and the patient’s account is written-off against established reserves. Bad debt reserves relating to all receivable types are regularly reviewed
and adjusted as appropriate.
The following table shows our payor mix for the years ended ($ in thousands):
|
|
December 31, 2021
|
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
Payor
|
|
|
|
|
Percentage
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed Care Programs/ Commercial Health Insurance
|
|
$
|
209,129
|
|
|
|
47.7
|
%
|
|
$
|
177,877
|
|
|
|
47.7
|
%
|
|
$
|
204,051
|
|
|
|
47.1
|
%
|
Medicare/Medicaid
|
|
|
155,122
|
|
|
|
35.4
|
%
|
|
|
118,030
|
|
|
|
31.6
|
%
|
|
|
132,611
|
|
|
|
30.6
|
%
|
Workers' Compensation Insurance
|
|
|
44,549
|
|
|
|
10.2
|
%
|
|
|
48,628
|
|
|
|
13.0
|
%
|
|
|
63,542
|
|
|
|
14.7
|
%
|
Other
|
|
|
29,530
|
|
|
|
6.7
|
%
|
|
|
28,805
|
|
|
|
7.7
|
%
|
|
|
33,141
|
|
|
|
7.6
|
%
|
Total
|
|
$
|
438,330
|
|
|
|
100.0
|
%
|
|
$
|
373,340
|
|
|
|
100.0
|
%
|
|
$
|
433,345
|
|
|
|
100.0
|
%
|
Our physical therapy business depends to a significant extent on our relationships with commercial health insurers, health maintenance organizations, preferred
provider organizations and workers’ compensation insurers. In some geographical areas, our clinics must be approved as providers by key health maintenance organizations and preferred provider plans to obtain payments. Failure to obtain or
maintain these approvals would adversely affect financial results.
During the year ended December 31, 2021, approximately 37.3% of our visits and 35.4% of our net patient revenue was from patients with Medicare
or Medicaid program coverage. To receive Medicare reimbursement, a facility (Medicare Certified Rehabilitation Agency) or the individual therapist (Physical/Occupational Therapist in Private Practice) must meet applicable participation
conditions set by the Department of Health and Human Services (“HHS”) relating to the type of facility, equipment, recordkeeping, personnel and standards of medical care, and also must comply with all state and local laws. HHS, through Centers
for Medicare & Medicaid Services (“CMS”) and designated agencies, periodically inspects or surveys clinics/providers for approval and/or compliance. Failure of our
subsidiaries to obtain or maintain certifications as Medicare providers or failure to enroll as a group of physical/occupational therapists in a private practice could adversely affect financial results.
The Medicare program reimburses outpatient rehabilitation providers based on the Medicare Physician Fee Schedule (“MPFS”). For services provided in 2017 through
2019, a 0.5% increase was applied to the fee schedule payment rates before applying the mandatory budget neutrality adjustment.
In the 2020 MPFS Final Rule, CMS revised coding, documentation guidelines, and increased the code values for office/outpatient evaluation and management (E/M)
codes and cuts to other codes to maintain budget neutrality of the MPFS beginning in 2021. Under the 2021 MPFS Final Rule, CMS increased the values for the E/M office visit codes and cuts to other specialty codes to maintain budget neutrality. As
a result, CMS projected a 9% decrease in fee schedule payment rates for therapy services set to take effect in 2021. However, Congress intervened with passage of the Consolidated Appropriations Act, 2021, and reimbursement for the codes
applicable to physical/occupational therapy services provided by our clinics received an estimated 3.5% decrease in the aggregate in payment from Medicare in calendar year 2021 as compared to 2020.
In the 2022 MPFS Final Rule published on November 2, 2021, there was to be an approximately 3.75% reduction to Medicare payments for
physical/occupational therapy services. This was due to the expiration of the additional funding to the conversion factor provided by Congress in 2021 under the Consolidated Appropriations Act, 2021. However, this reduction was addressed in
the Protecting Medicare and American Farmers from Sequester Cuts Act (“2021 Act”) signed into law on December 10, 2021. Based on various provisions in the 2021 Act, the Company now estimates that the Medicare rate reduction for the full year
of 2022 will be approximately 0.75%.
In addition, the Consolidated Appropriations Act, 2021 includes reductions in Medicare payment rates of approximately 3% in each of calendar years 2023 and 2024,
unless regulatory or Congressional action results in modifications to such rates as has occurred in 2021 and 2022.
The Budget Control Act of 2011 increased the federal debt ceiling in connection with deficit reductions over the next ten years and requires automatic reductions
in federal spending by approximately $1.2 trillion. Payments to Medicare providers are subject to these automatic spending reductions, subject to a 2% cap. On April 1, 2013, a 2% reduction to Medicare payments was implemented. The Bipartisan
Budget Act of 2015, enacted on November 2, 2015, extended the 2% reductions to Medicare payments through fiscal year 2025. The Bipartisan Budget Act of 2018, enacted on February 9, 2018, extends the 2% reductions to Medicare payments through
fiscal year 2027. The CARES Act suspended the 2% payment reduction to Medicare payments for dates of service from May 1, 2020 through December 31, 2020. The Consolidated Appropriations Act, 2021 further suspended the 2% payment reduction until
March 31, 2021. On April 14, 2021, additional legislation was enacted that waived the 2% payment reduction for the remainder of calendar 2021. The 2021 Act, which was signed into law on December 10, 2021, included a three-month extension of the
2% sequester relief applied to all Medicare payments through March 31, 2022, followed by three months of 1% sequester relief through June 30, 2022. Sequester relief is scheduled to then end on June 30, 2022.
Under the Middle Class Tax Relief and Job Creation Act of 2012 (‘‘MCTRA’’), since October 1, 2012, patients who met or exceeded $3,700 in therapy expenditures
during a calendar year have been subject to a manual medical review to determine whether applicable payment criteria are satisfied. The $3,700 threshold is applied to Physical Therapy and Speech Language Pathology Services; a separate $3,700
threshold is applied to the Occupational Therapy. The Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”) directed CMS to modify the manual medical review process such that those reviews will no longer apply to all claims exceeding the
$3,700 threshold and instead will be determined on a targeted basis based on a variety of factors that CMS considers appropriate. The Bipartisan Budget Act of 2018 extends the targeted medical review indefinitely but reduces the threshold to
$3,000 through December 31, 2027. For 2028, the threshold amount will be increased by the percentage increase in the Medicare Economic Index (“MEI”) for 2028 and in subsequent years the threshold amount will increase based on the corresponding
percentage increase in the MEI for such subsequent year.
CMS adopted a multiple procedure payment reduction (‘‘MPPR’’) for therapy services in the final update to the MPFS for calendar year 2011. The MPPR applied to all
outpatient therapy services paid under Medicare Part B — occupational therapy, physical therapy and speech-language pathology. Under the policy, the Medicare program pays 100% of the practice expense component of the Relative Value Unit (‘‘RVU’’)
for the therapy procedure with the highest practice expense RVU, then reduces the payment for the practice expense component for the second and subsequent therapy procedures or units of service furnished during the same day for the same patient,
regardless of whether those therapy services are furnished in separate sessions. In 2013, the practice expense component for the second and subsequent therapy service furnished during the same day for the same patient was reduced by 50%.
Medicare claims for outpatient therapy services furnished by therapist assistants on or after January 1, 2020 must include a modifier indicating the service was
furnished by a therapist assistant. Outpatient therapy services furnished on or after January 1, 2022 in whole or part by a therapist assistant are paid at an amount equal to 85% of the payment amount otherwise applicable for the service.
Statutes, regulations, and payment rules governing the delivery of therapy services to Medicare beneficiaries are complex and subject to interpretation. We believe
that we are in compliance, in all material respects, with all applicable laws and regulations and are not aware of any pending or threatened investigations involving allegations of potential wrongdoing that would have a material effect on our
financial statements as of December 31, 2021. Compliance with such laws and regulations can be subject to future government review and interpretation, as well as significant regulatory action including fines, penalties, and exclusion from the
Medicare program. For the year ended December 31, 2021 and 2020, respectively, net patient revenue from Medicare were approximately $134.4 million and $101.6 million, respectively.
Industrial Injury Prevention Services
Services provided in this business include onsite injury prevention and rehabilitation, performance optimization, post-offer employment testing, functional
capacity evaluations and ergonomic assessments. The majority of these services are contracted with and paid for directly by employers, including a number of Fortune 500 companies. Other clients include large insurers and their contractors. These
services are performed through Industrial Sports Medicine Professionals, consisting of both physical therapists and ATCs.
REGULATION AND HEALTHCARE REFORM
Numerous federal, state and local regulations regulate healthcare services and those who provide them. Some states into which we may expand have laws requiring
facilities employing health professionals and providing health-related services to be licensed and, in some cases, to obtain a certificate of need (that is, demonstrating to a state regulatory authority the need for, and financial feasibility of,
new facilities or the commencement of new healthcare services). Only one of the states in which we currently operate requires a certificate of need for the operation of our physical therapy business functions. Our therapists and/or clinics,
however, are required to be licensed, as determined by the state in which they provide services. Failure to obtain or maintain any required certificates, approvals or licenses could have a material adverse effect on our business, financial
condition and results of operations.
Regulations Controlling Fraud and Abuse. Various federal and state laws regulate financial relationships involving
providers of healthcare services. These laws include Section 1128B(b) of the Social Security Act (42 U.S. C. § 1320a-7b[b]) (the “Fraud and Abuse Law”), under which civil and criminal penalties can be
imposed upon persons who, among other things, offer, solicit, pay or receive remuneration in return for (i) the referral of patients for the rendering of any item or service for which payment may be made, in whole or in part, by a Federal health
care program (including Medicare and Medicaid); or (ii) purchasing, leasing, ordering, or arranging for or recommending purchasing, leasing, ordering any good, facility, service, or item for which payment may be made, in whole or in part, by a
Federal health care program (including Medicare and Medicaid). We believe that our business procedures and business arrangements are in compliance with these provisions. However, the provisions are broadly written and the full extent of their
specific application to specific facts and arrangements to which we are a party is uncertain and difficult to predict. In addition, several states have enacted state laws similar to the Fraud and Abuse Law, which may be more restrictive than the
federal Fraud and Abuse Law.
The Office of the Inspector General (“OIG”) of HHS has issued regulations describing compensation financial arrangements that fall within a “Safe Harbor” and,
therefore, are not viewed as illegal remuneration under the Fraud and Abuse Law. Failure to fall within a Safe Harbor does not mean that the Fraud and Abuse Law has been violated; however, the OIG has indicated that failure to fall within a Safe
Harbor may subject an arrangement to increased scrutiny under a “facts and circumstances” test.
The OIG also has issued special fraud alerts and special advisory bulletins to remind the provider community of the importance and application of certain aspects
of the Fraud and Abuse Law. One of the OIG special fraud alerts related to the rental of space in physician offices by persons or entities to which the physicians refer patients. The OIG’s stated concern in these arrangements is that rental
payments may be disguised kickbacks to the physician-landlords to induce referrals. We rent clinic space for some of our clinics from referring physicians and have taken the steps that we believe are necessary to ensure that all leases comply to
the extent possible and applicable, with the space rental Safe Harbor to the Fraud and Abuse Law.
One of the OIG’s special advisory bulletins addressed certain complex contractual arrangements for the provision of items and services. This special advisory
bulletin identified several characteristics commonly exhibited by suspect arrangements, the existence of one or more of which could indicate a prohibited arrangement to the OIG. Generally, the indicia of a suspect contractual joint venture as
identified by the special advisory bulletin and an associated OIG advisory opinion include the following:
New Line of Business. A provider in one line of business (“Owner”) expands into a new line of business that can be provided to the
Owner’s existing patients, with another party who currently provides the same or similar item or service as the new business (“Manager/Supplier”).
Captive Referral Base. The arrangement predominantly or exclusively serves the Owner’s existing patient base (or patients under the
control or influence of the Owner).
Little or No Bona Fide Business Risk. The Owner’s primary contribution to the venture is referrals; it makes little or no financial or
other investment in the business, delegating the entire operation to the Manager/Supplier, while retaining profits generated from its captive referral base.
Status of the Manager/Supplier. The Manager/Supplier is a would-be competitor of the Owner’s new line of business and would normally
compete for the captive referrals. It has the capacity to provide virtually identical services in its own right and bill insurers and patients for them in its own name.
Scope of Services Provided by the Manager/Supplier. The Manager/Supplier provides all, or many, of the new business’ key services.
Remuneration. The practical effect of the arrangement, viewed in its entirety, is to provide the Owner the opportunity to bill
insurers and patients for business otherwise provided by the Manager/Supplier. The remuneration from the venture to the Owner (i.e., the profits of the venture) takes into account the value and volume of business the Owner generates.
Exclusivity. The arrangement bars the Owner from providing items or services to any patients other than those coming from Owner and/or
bars the Manager/Supplier from providing services in its own right to the Owner’s patients.
Due to the nature of our business operations, many of our management service arrangements exhibit one or more of these characteristics. However, we believe we have
taken steps regarding the structure of such arrangements as necessary to sufficiently distinguish them from these suspect ventures, and to comply with the requirements of the Fraud and Abuse Law. However, if the OIG believes we have entered into
a prohibited contractual joint venture, it could have an adverse effect on our business, financial condition and results of operations.
Although the business of managing physician-owned and hospital-owned physical therapy facilities is regulated by the Fraud and Abuse Law, the manner in which we
contract with such facilities often falls outside the complete scope of available Safe Harbors. We believe our arrangements comply with the Fraud and Abuse Law, even though federal courts provide limited guidance as to the application of the
Fraud and Abuse Law to these arrangements. If our management contracts are held to violate the Fraud and Abuse Law, it could have an adverse effect on our business, financial condition and results of operations.
Stark Law. Provisions of the Omnibus Budget Reconciliation Act of 1993 (42 U.S.C. § 1395nn) (the “Stark Law”) prohibit
referrals by a physician of “designated health services” which are payable, in whole or in part, by Medicare or Medicaid, to an entity in which the physician or the physician’s immediate family member has an investment interest or other financial
relationship, subject to several exceptions. Unlike the Fraud and Abuse Law, the Stark Law is a strict liability statute. Proof of intent to violate the Stark Law is not required. Physical therapy and occupational therapy services are among the
“designated health services”. Further, the Stark Law has application to our management contracts with individual physicians and physician groups, as well as, any other financial relationship between us and referring physicians, including medical
advisor arrangements and any financial transaction resulting from a clinic acquisition. The Stark Law also prohibits billing for services rendered pursuant to a prohibited referral. Several states have enacted laws similar to the Stark Law. These
state laws may cover all (not just Medicare and Medicaid) patients. As with the Fraud and Abuse Law, we consider the Stark Law in planning our clinics, establishing contractual and other arrangements with physicians, marketing and other
activities, and believe that our operations are in compliance with the Stark Law. If we violate the Stark Law or any similar state laws, our financial results and operations could be adversely affected. Penalties for violations include denial of
payment for the services, significant civil monetary penalties, and exclusion from the Medicare and Medicaid programs.
HIPAA. In an effort to further combat healthcare fraud and protect patient confidentially, Congress included several
anti-fraud measures in the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”). HIPAA created a source of funding for fraud control to coordinate federal, state and local healthcare law enforcement programs, conduct
investigations, provide guidance to the healthcare industry concerning fraudulent healthcare practices, and establish a national data bank to receive and report final adverse actions. HIPAA also criminalized certain forms of health fraud against
all public and private payors. Additionally, HIPAA mandates the adoption of standards regarding the exchange of healthcare information in an effort to ensure the privacy and electronic security of patient information and standards relating to the
privacy of health information. Sanctions for failing to comply with HIPAA include criminal penalties and civil sanctions. In February of 2009, the American Recovery and Reinvestment Act of 2009 (“ARRA”) was signed into law. Title XIII of ARRA,
the Health Information Technology for Economic and Clinical Health Act (“HITECH”), provided for substantial Medicare and Medicaid incentives for providers to adopt electronic health records (“EHRs”) and grants for the development of health
information exchange (“HIE”). Recognizing that HIE and EHR systems will not be implemented unless the public can be assured that the privacy and security of patient information in such systems is protected, HITECH also significantly expanded the
scope of the privacy and security requirements under HIPAA. Most notable are the mandatory breach notification requirements and a heightened enforcement scheme that includes increased penalties, and which now apply to business associates as well
as to covered entities. In addition to HIPAA, a number of states have adopted laws and/or regulations applicable in the use and disclosure of individually identifiable health information that can be more stringent than comparable provisions under
HIPAA.
We believe that our operations comply with applicable standards for privacy and security of protected healthcare information. We cannot predict what negative
effect, if any, HIPAA/HITECH or any applicable state law or regulation will have on our business.
Other Regulatory Factors. Political, economic and regulatory influences are fundamentally changing the healthcare
industry in the United States. Congress, state legislatures and the private sector continue to review and assess alternative healthcare delivery and payment systems. Potential alternative approaches could include mandated basic healthcare
benefits, controls on healthcare spending through limitations on the growth of private health insurance premiums and Medicare and Medicaid spending, the creation of large insurance purchasing groups, and price controls. Legislative debate is
expected to continue in the future and market forces are expected to demand only modest increases or reduced costs. For instance, managed care entities are demanding lower reimbursement rates from healthcare providers and, in some cases, are
requiring or encouraging providers to accept capitated payments that may not allow providers to cover their full costs or realize traditional levels of profitability. We cannot reasonably predict what impact the adoption of federal or state
healthcare reform measures or future private sector reform may have on our business.
COMPETITION
The healthcare industry, including the physical therapy business and the industrial injury prevention services business are
highly competitive. The physical therapy business as well as the industrial injury prevention services business are both highly fragmented with no company having a significant market share nationally. We believe that we are one of the largest
national outpatient physical therapy services providers.
Competitive factors affecting our business include quality of care, cost, treatment outcomes, convenience of location, and relationships with, and ability to meet
the needs of, referral and payor sources. Our clinics compete, directly or indirectly, with many types of healthcare providers including the physical therapy departments of hospitals, private therapy clinics, physician-owned therapy clinics, and
chiropractors. We may face more intense competition if consolidation of the therapy industry continues.
We believe that our strategy of providing key therapists in a community with an opportunity to participate in ownership or clinic profitability provides us with a
competitive advantage by helping to ensure the commitment of local management to the success of the clinic.
We also believe that our competitive position is enhanced by our strategy of locating our clinics, when possible, on the ground floor of buildings and shopping
centers with nearby parking, thereby making the clinics more easily accessible to patients. We offer convenient hours. We also attempt to make the decor in our clinics less institutional and more aesthetically pleasing than traditional hospital
clinics.
ENFORCEMENT ENVIRONMENT
In recent years, federal and state governments have launched several initiatives aimed at uncovering behavior that violates the federal civil and criminal laws
regarding false claims and fraudulent billing and coding practices. Such laws require providers to adhere to complex reimbursement requirements regarding proper billing and coding in order to be compensated for their services by government
payors. Our compliance program requires adherence to applicable law and promotes reimbursement education and training; however, a determination that our clinics’ billing and coding practices are false or fraudulent could have a material adverse
effect on us.
As a result of our participation in the Medicare and Medicaid programs, we are subject to various governmental inspections, reviews, audits and investigations to
verify our compliance with these programs and applicable laws and regulations. In addition, our prior Corporate Integrity Agreement, which expired in February 2021, required annual audits to be performed by an independent review organization on a
small sample of our clinics, the results of which were reported to the federal government. See “-Compliance Program—Corporate Integrity Agreement” for more on the Corporate Integrity Agreement (“CIA”). Managed care payors may also reserve the
right to conduct audits. An adverse inspection, review, audit or investigation could result in: refunding amounts we have been paid; fines penalties and/or revocation of billing privileges for the affected clinics; the imposition of a new
Corporate Integrity Agreement; exclusion from participation in the Medicare or Medicaid programs or one or more managed care payor networks; or damage to our reputation.
We and our clinics are subject to federal and state laws prohibiting entities and individuals from knowingly and willfully making claims to Medicare, Medicaid and
other governmental programs and third party payors that contain false or fraudulent information. The federal False Claims Act encourages private individuals to file suits on behalf of the government against healthcare providers such as us. As
such suits are generally filed under seal with a court to allow the government adequate time to investigate and determine whether it will intervene in the action, the implicated healthcare providers often are unaware of the suit until the
government has made its determination and the seal is lifted. Violations or alleged violations of such laws, and any related lawsuits, could result in (i) exclusion from participation in Medicare, Medicaid and other federal healthcare programs,
or (ii) significant financial or criminal sanctions, resulting in the possibility of substantial financial penalties for small billing errors that are replicated in a large number of claims, as each individual claim could be deemed a separate
violation. In addition, many states also have enacted similar statutes, which may include criminal penalties, substantial fines, and treble damages.
COMPLIANCE PROGRAM
Our Compliance Program. Our ongoing success depends upon our reputation for quality service and ethical business
practices. We operate in a highly regulated environment with many federal, state and local laws and regulations. We take a proactive interest in understanding and complying with the laws and regulations that apply to our business.
Our Board of Directors (the “Board”) has adopted a Code of Business Conduct and Ethics and a set of Corporate Governance Guidelines to clarify the ethical
standards under which the Board and management carry out their duties. In addition, the Board has created a Compliance Committee of the Board (“Compliance Committee”) whose purpose is to assist the Board in discharging their oversight
responsibilities with respect to compliance with federal and state laws and regulations relating to healthcare.
We have issued a Compliance Manual and created compliance training materials, hand-outs and an on-line testing program. These tools were prepared to ensure that
every employee of our Company and subsidiaries has a clear understanding of our mutual commitment to high standards of professionalism, honesty, fairness and compliance with the law in conducting business. These standards are administered by our
Chief Compliance Officer (“CCO”), who has the responsibility for the day-to-day oversight, administration and development of our compliance program. The CCO, internal and external counsel, management and the Compliance Committee review our
policies and procedures for our compliance program from time to time in an effort to improve operations and to ensure compliance with requirements of standards, laws and regulations and to reflect the on-going compliance focus areas which have
been identified by management, counsel or the Compliance Committee. We also have established systems for reporting potential violations, educating our employees, monitoring and auditing compliance and handling enforcement and discipline.
Committees. Our Compliance Committee, appointed by the Board, consists of four independent directors. The Compliance
Committee has general oversight of our Company’s compliance with the legal and regulatory requirements regarding healthcare operations. The Compliance Committee relies on the expertise and knowledge of management, the CCO and other compliance and
legal personnel. The CCO regularly communicates with the Chairman of the Compliance Committee. The Compliance Committee meets at least four times a year or more frequently as necessary to carry out its responsibilities and reports regularly to
the Board regarding its actions and recommendations.
We also have an Internal Compliance Committee, which is comprised of Company leaders in the areas of operations, clinical services, finance, human resources,
legal, information technology and credentialing. The Internal Compliance Committee has the responsibility for evaluating and assessing Company areas of risk relating to compliance with federal and state healthcare laws, and generally to assist
the CCO. The Internal Compliance Committee meets at least four times a year or more frequently as necessary to carry out its responsibilities. In addition, management has appointed a team to address our Company’s compliance with HIPAA. The HIPAA
team consists of a security officer and employees from our legal, information systems, finance, operations, compliance, business services and human resources departments. The team prepares assessments and makes recommendations regarding
operational changes and/or new systems, if needed, to comply with HIPAA.
Each clinic certified as a Medicare Rehabilitation Agency has a formally appointed governing body composed of a member of our management and the
director/administrator of the clinic. The governing body retains legal responsibility for the overall conduct of the clinic. The members confer regularly and discuss, among other issues, clinic compliance with applicable laws and regulations. In
addition, there are Professional Advisory Committees which serve as Infection Control Committees. These committees meet in the facilities and function as advisors.
We have in place a Risk Management Committee consisting of, among others, the CCO, the Vice President of Human Resources, and other legal, compliance and
operations personnel. This committee reviews and monitors all employee and patient incident reports and provides clinic personnel with actions to be taken in response to the reports.
Reporting Violations. In order to facilitate our employees’ ability to report in confidence, anonymously and without
retaliation any perceived improper work-related activities, accounting irregularities and other violations of our compliance program, we have set up an independent national compliance hotline. The compliance hotline is available to receive
confidential reports of wrongdoing Monday through Friday (excluding holidays), 24 hours a day. The compliance hotline is staffed by experienced third party professionals trained to utilize utmost care and discretion in handling sensitive issues
and confidential information. The information received is documented and forwarded timely to the CCO, who, together with the Compliance Committee, has the power and resources to investigate and resolve matters of improper conduct.
Educating Our Employees. We utilize numerous methods to train our employees in compliance related issues, including an
online learning management system. All employees complete a comprehensive training program comprised of numerous modules relating to our business and proper practices when newly hired and annually thereafter. The directors/administrators also
provide periodic “refresher” training for existing employees and one-on-one comprehensive training with new hires. The corporate compliance group responds to questions from clinic personnel and conducts frequent teleconference meetings, webinars
and training sessions on a variety of compliance related topics.
When a clinic opens, we provide a package of compliance materials containing manuals and detailed instructions for meeting Medicare Conditions of Participation
Standards and other compliance requirements. During follow up training with the director/administrator of the clinic, compliance department staff explain various details regarding requirements and compliance standards. Compliance staff will
remain in contact with the director/administrator while the clinic is implementing compliance standards and will provide any assistance required. All new office managers receive training (including Medicare, regulatory and corporate compliance,
insurance billing, charge entry and transaction posting and coding, daily, weekly and monthly accounting reports) from the training staff at the corporate office. The corporate compliance group will assist in continued compliance, including
guidance to the clinic staff with regard to Medicare certifications, state survey requirements and responses to any inquiries from regulatory agencies.
Monitoring and Auditing Clinic Operational Compliance. We have in place audit programs and other procedures to monitor
and audit clinic operational compliance with applicable policies and procedures. We employ internal auditors who, as part of their job responsibilities, conduct periodic audits of each clinic. Most clinics are audited at least once every 24
months and additional focused audits are performed as deemed necessary. During these audits, particular attention is given to compliance with Medicare and internal policies, Federal and state laws and regulations, third party payor requirements,
and patient chart documentation, billing, reporting, record keeping, collections and contract procedures. The audits are conducted on site or remotely and include interviews with the employees involved in management, operations, billing and
accounts receivable.
Formal audit reports are prepared and reviewed with corporate management and the Compliance Committee. Each clinic director/administrator receives a letter
instructing them of any corrective measures required. Each clinic director/administrator then works with the compliance team and operations to ensure such corrective measures are achieved.
Handling Enforcement and Discipline. It is our policy that any employee who fails to comply with compliance program
requirements or who negligently or deliberately fails to comply with known laws or regulations specifically addressed in our compliance program should be subject to disciplinary action up to and including discharge from employment. The Compliance
Committee, compliance staff, human resources staff and management investigate violations of our compliance program and impose disciplinary action as considered appropriate.
Corporate Integrity Agreement. We also performed certain additional compliance related functions pursuant to CIA that we
entered into with the OIG. The CIA, which became effective as of December 21, 2015, and expired in February 2021, outlined certain specific requirements relating to compliance oversight and program implementation, as well as periodic reporting.
In addition, pursuant to the CIA, an independent review organization annually performed a Medicare billing and coding audit on a small group of randomly selected Company clinics. Our Compliance Program was modified so as to comply with the
requirements of the CIA. The term of the CIA was five years and expired in February 2021.
EMPLOYEES
Our strategy is to acquire physical therapy practices, develop outpatient physical therapy clinics as satellites within existing partnerships, acquire industrial
injury prevention services businesses, and continue to support the growth of our existing businesses requires a talented workforce that can grow with us. As of December 31, 2021, we employed approximately 5,500 people nationwide, of which
approximately 3,000 were full-time employees.
It is crucial that we continue to attract and retain top talent. To attract and retain talented employees, we strive to make our corporate office and all of our
practices and businesses a diverse and healthy workplace, with opportunities for our employees to receive continuing education, skill development, encouragement to grow and develop their career, all supported by competitive compensation,
incentives, and benefits. Our clinical professionals are all licensed and a vast majority have advanced degrees. Our operational leadership teams have long-standing relationships with local and regional universities, professional affiliations,
and other applicable sources that provide our practices with a talent pipeline.
We provide competitive compensation and benefits programs to help meet our employees’ needs in the practices and communities in which they serve. These programs
(which can vary by practice and employment classification) include incentive compensation plans, a 401(k) plan, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, family leave, education assistance,
mental health and other employee assistance benefits.
We invest resources to develop the talent needed to support our business strategy. Resources include a multitude of training and development programs delivered
internally and externally, online and instructor-led, and on-the-job learning formats.
We expect to continue adding personnel in the future as we focus on potential acquisition targets and organic growth opportunities.
AVAILABLE INFORMATION
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Exchange Act are made available free of charge on our internet website at www.usph.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.