The following discussion and analysis provides information we believe is relevant to an assessment and understanding of our results of operations and financial condition for 2019, 2018 and 2017. This discussion should be read in conjunction with our audited financial statements included in Item 8, "Financial Statements and Supplementary Data" and Part I, Item 1, "Business" of this Annual Report on Form 10-K. The following analysis contains forward-looking statements about our future revenues, operating results and expectations. See "Special Caution Concerning Forward-Looking Statements" for a discussion of the risks, assumptions and uncertainties affecting these statements as well as Part I, Item 1A, "Risk Factors." Overview We are a provider of high-quality in-home healthcare and related services to the chronic, co-morbid, aging American population, with approximately 74%, 73% and 76% of our revenue derived from Medicare for 2019, 2018 and 2017, respectively. 31
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Our operations involve servicing patients through our three reportable business
segments: home health, hospice and personal care. Our home health segment
delivers a wide range of services in the homes of individuals who may be
recovering from an illness, injury or surgery. Our hospice segment provides care
that is designed to provide comfort and support for those who are facing a
terminal illness. Our personal care segment provides patients assistance with
the essential activities of daily living. As of
Home Health Hospice Personal Care At December 31, 2016 330 81 14 Acquisitions/Start-Ups/De Novos 3 2 7 Closed/Consolidated (10 ) - (6 ) At December 31, 2017 323 83 15 Acquisitions/Start-Ups/De Novos 1 1 1 Closed/Consolidated (1 ) - (4 ) At December 31, 2018 323 84 12 Acquisitions/Start-Ups/De Novos 3 59 - Closed/Consolidated (5 ) (5 ) - At December 31, 2019 321 138 12 When we refer to "same store business," we mean home health, hospice and personal-care care centers that we have operated for at least the last twelve months and start-ups that are an expansion of a same store care center; when we refer to "acquisitions," we mean home health, hospice and personal-care care centers that we acquired within the last twelve months; and when we refer to "de novos," we mean home health, hospice and personal-care care centers opened by us in the last twelve months which are not an expansion of a same store care center. Once a care center has been in operation for a twelve month period, the results for that particular care center are included as part of our same store business from that date forward. 2019 Developments • Continued to deliver on our goal of clinical distinction with 86% of our
care centers at 4+ Stars in the
release.
• Outperformed the industry on all Hospice Item Set ("HIS") measures.
• Performed over 12.3 million visits.
• Lowered company voluntary turnover rate to 16.9%.
• Acquired and successfully integratedCompassionate Care Hospice ("CCH") andRoseRock Healthcare ("RoseRock") and signed a definitive agreement to acquireAsana Hospice (subsequently closed onJanuary 1, 2020 ) makingAmedisys the third largest hospice company inthe United States , exceeding 11,000 in hospice average daily census. • Successfully piloted several tools and data analytics platforms of Medalogix, a predictive data and analytics company, helping to further optimize our current business and enabling us to work more closely with Medicare Advantage payors. • Implemented pay practice changes and staffing model efficiencies to further drive operational excellence. • Invested in the business to prepare ourselves for the Patient-Driven Groupings Model ("PDGM"). • Executed innovative personal care partnership withClearCare , givingAmedisys access to personal care services nationwide.
• Increased net service revenue 18% and operating income 14%.
• Expanded home health gross margin as a percentage of revenue by 150 basis points.
• Delivered over
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2020 Strategy • Continue our commitment to clinical distinction with a goal of all care
centers achieving a minimum of 4.0 Quality Star Rating.
• Continue to focus on consistent organic growth (de novos) and inorganic
expansion in all three segments.
• Focus on recruitment and retention, applying more sophisticated analytics
to understand what drives turnover.
• Successfully implement PDGM.
• Invest in further expansion of Medalogix products.
• Deliver on CCH expectations through realization of synergies.
• Expand revenue in innovative payment relationships with Medicare Advantage payors. • Build infrastructure to provide care coordination to patients in need of home health, hospice or personal care. • Incubate new and innovative relationships focused on expanding our breadth and depth inside the home. FinancialPerformance Results for the year endedDecember 31, 2019 reflect the results of our continued focus on operational improvements and efficiencies and the successful acquisition and integration of our hospice acquisitions. Our home health care centers experienced growth in volumes and improvement in utilization and clinician mix which, combined with the positive impact of the 2019 changes in reimbursement, led to the segment delivering a$27 million increase in operating income. Our hospice segment completed the acquisitions of CCH and RoseRock. These acquisitions contributed approximately$22 million in operating income to the hospice segment. Our personal care segment contributed approximately$8 million in operating income during 2019. Economic and Industry Factors Our home health, hospice and personal care segments operate in a highly fragmented and highly competitive industry. The degree of competitiveness varies based upon whether our care centers operate in states that require a certificate of need (CON) or permit of approval (POA). In such states, expansion by existing providers or entry into the market by new providers is permitted only where determination is made by state health authorities that a given amount of unmet healthcare need exists. Currently, 70% and 28% of our home health and hospice care centers, respectively, operate in CON/POA states. As the Federal government continues to debate a reduction in expenditures and a reform of the Medicare system, our industry continues to face reimbursement pressures. These reform efforts could result in major changes in the health care delivery and reimbursement system on a national and state level, including changes directly impacting the reimbursement systems for our home health and hospice care centers. Payment InJuly 2019 , theCenters for Medicare and Medicaid Services ("CMS") issued a final rule to update hospice payment rates and the wage index for fiscal year 2020. The rule includes a rebasing of continuous home care, inpatient respite care and general inpatient care to better reflect the costs of care. This rebasing resulted in a reduction in routine home care payments of 2.7% to achieve budget neutrality. In addition, CMS eliminated the one-year "lag" in the use of the hospital wage index in an effort to align with the Inpatient Prospective Payment System ("IPPS") and other payment systems. CMS estimates hospices serving Medicare beneficiaries would see an estimated 2.6% increase in payments. This increase is the result of a 3.0% market basket adjustment less a 0.4% productivity adjustment. We have estimated the impact of the final rule on us to be an increase in revenue of approximately 0.5%; however, we are expecting the impact on gross margin percentage to be a reduction of approximately 0.5% as the majority of the revenue increase will be passed through to the general inpatient and respite facilities. These estimates are subject to change based on our mix of patients. The CMS Calendar Year 2019 Home Health Final Rule, released inNovember 2018 , provided for the first payment rate increase for home health providers since 2010. In the 2019 rule, CMS also issued proposed payment changes for Medicare home health providers for 2020. These proposed changes included changes to the Home Health Prospective Payment System ("HHPPS") case-mix adjustment methodology through the use of a new PDGM for home health payments, a change in the unit of payment from a 60-day payment period to a 30-day payment period and the elimination of the use of therapy visits in the determination of payments. 33
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The CMS Calendar Year 2020 Home Health Final Rule, released in
Home Health Hospice 2020 (1) 2019 2018 (2) 2020 (3) 2019 2018 Market Basket Update 1.5 % 3.0 % 1.0 % 3.0 % 2.9 % 1.0 % Rural Add-On Adjustment (0.2 ) - - - - - Nominal Case Mix Adjustment - - (0.9 ) - - - PPACA Adjustment - - - - (0.3 ) - Productivity Adjustment - (0.8 ) - (0.4 ) (0.8 ) - Estimated Industry Impact 1.3 % 2.2 % 0.1 % 2.6 % 1.8 % 1.0 % Behavioral Assumptions (4.4 )% Estimated Industry Impact Including Behavioral Assumptions (3.1 )% Estimated Company-Specific Impact (4) (2.8 )% 1.2 % (0.7 )% 0.5 % 1.6 % 1.0 % (1) The estimated industry impact of 1.3% only applies to episodes that started on or beforeDecember 31, 2019 and are scheduled to complete on or afterJanuary 1, 2020 . The estimated industry impact including behavioral assumptions of (3.1)% only applies to episodes that started on or afterJanuary 1, 2020 . (2) Includes the targeted extension of the home health rural add-on payment from the Bipartisan Budget Act of 2018.
(3) Effective for services provided from
(4) Our company-specific impact of the home health final rule differs depending
on differences in the wage index and the impact of coding and outlier changes. Our company-specific impact of the hospice final rule differs based on our mix of patients. Payor Changes EffectiveNovember 1, 2019 , one of our episodic payors phased out their episodic plan offering, and the members were transferred to plans that pay per visit. We expect the overall financial impact of the change to be minimal. Partnerships InJuly 2019 , we signed an agreement withClearCare, Inc. ("ClearCare"), the provider of the personal care industry's leading software platform, representing 4,000 personal care agencies in every zip code inthe United States . Our agreement withClearCare creates an opportunity to establish a network partnership betweenAmedisys and personal care agencies usingClearCare in order to better coordinate patient care. Long term, we believe this allows us to build a nation-wide network of personal care agencies and furthers our efforts to provide patients with a true care continuum in the home. This relationship will also help us as we continue to have innovative payment conversations with Medicare Advantage plans who have begun to recognize the value that combined home health, hospice and personal care services bring to their members and care delivery infrastructure. Governmental Inquiries and Investigations and Other Litigation See Item 8, Note 10 - Commitments and Contingencies to our consolidated financial statements for additional information regarding our corporate integrity agreement ("CIA"), the CCH CIA, the subpoena and civil investigative demands issued by theU.S. Department of Justice and theSouth Carolina and Florida Zone Program Integrity Contractor audits. No assurances can be given as to the timing or outcome of these items. 34
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Results of Operations Consolidated The following table summarizes our consolidated results of operations (amounts in millions): For the Years Ended December 31, 2019 2018 2017 Net service revenue$ 1,955.6 $ 1,662.6 $ 1,511.3 Gross margin, excluding depreciation and amortization 805.3 669.7 607.9 % of revenue 41.2 % 40.3 % 40.2 % Other operating expenses 607.9 501.3 482.3 % of revenue 31.1 % 30.1 % 31.9 % Depreciation and amortization 18.4 13.3 17.1 Securities Class Action Lawsuit settlement, net - - 28.7 Asset impairment charge 1.5 - 1.3 Operating income 177.5 155.1 78.5 Total other (expense) income, net (7.1 ) 3.8 2.3 Income tax expense (42.5 ) (38.8 ) (50.1 ) Effective income tax rate 24.9 % 24.4 % 62.0 % Net income 127.9 120.1 30.7 Net income attributable to noncontrolling interests (1.1 ) (0.8 ) (0.4 )
Net income attributable to
Year Ended
Total other (expense) income, net includes the following items (amounts in millions): For the Years Ended December 31, 2019 2018 Interest income$ 0.1 $ 0.3 Interest expense (14.5 ) (7.4 ) Equity in earnings from equity method investments 5.3 7.7 Miscellaneous, net 2.0 3.2$ (7.1 ) $ 3.8
Interest expense increased
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regarding our Amended Credit Agreement). Equity in earnings from equity method investments includes gains of$2 million and$5 million for 2019 and 2018, respectively. Year EndedDecember 31, 2018 Compared to the Year EndedDecember 31, 2017 Overall, our operating income increased$77 million on a revenue increase of$151 million . Our 2017 operating results were negatively impacted$40 million ; these impacts include a$30 million charge for the Securities Class Action Lawsuit settlement and related legal fees, a$7 million reduction in revenue as a result of the Florida ZPIC audit and charges of approximately$3 million related to our home health closures and restructuring plan. Excluding these 2017 impacts, operating income increased$37 million , driven by continued growth in our home health and hospice segments, increases in clinical productivity in our home health segment and a continued focus on maintaining cost discipline, as our other operating expenses increased only 3% on a 10% increase in net service revenue. In addition, our gross margin as a percentage of revenue was relatively flat despite a net reduction of$3 million in net service revenue and gross margin resulting from the 2018 changes in reimbursement and planned wage increases. Our 2018 operating results include the results of our acquisition ofChristian Care at Home, which provided home health services to the state ofKentucky , East Tennessee Personal Care Services, which owned and operated one personal-care care center servicing the state ofTennessee , and certain personal care operations from Bring Care Home inMassachusetts . These three acquisitions accounted for approximately$5 million of our$151 million increase in revenue and$1 million of our$15 million increase in other operating expenses. Total other income, net includes the impact of the following items (amounts in millions): For the Years Ended December 31, 2018 2017 Interest income$ 0.3 $ 0.1 Interest expense (7.4 ) (5.0 ) Equity in earnings from equity method investments 7.7 3.4 Miscellaneous, net 3.2 3.8$ 3.8 $ 2.3
Interest expense includes interest expense related to the Florida ZPIC audit of
Our 2017 income tax expense includes a
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Home Health Division The following table summarizes our home health segment results of operations: For the Years Ended December 31, 2019 2018 2017 Financial Information (in millions): Medicare$ 859.2 $ 830.8 $ 793.3 Non-Medicare 397.2 343.7 290.6 Net service revenue 1,256.4 1,174.5 1,083.9 Cost of service 754.1 722.1 670.9 Gross margin 502.3 452.4 413.0 Asset impairment charge 1.5 - 1.3 Other operating expenses 301.4 279.8 281.9 Operating income$ 199.4 $ 172.6 $ 129.8 Same Store Growth (1): Medicare revenue 4 % 6 % (4 %) Non-Medicare revenue 16 % 18 % 17 % Total admissions 7 % 5 % 2 % Total volume (2) 5 % 7 % 4 % Key Statistical Data - Total (3): Medicare: Admissions 195,513 190,748 190,132 Recertifications 110,460 112,773 106,774 Total volume 305,973 303,521 296,906 Completed episodes 300,551 296,223 290,227 Visits 5,207,563 5,261,315 5,067,436
Average revenue per completed episode (4)
17.3 17.6 17.3 Non-Medicare: Admissions 133,180 118,577 107,665 Recertifications 62,108 55,736 46,364 Total volume 195,288 174,313 154,029 Visits 3,065,745 2,772,339 2,347,363
Total (3):
Visiting Clinician Cost per Visit
$ 8.04 $ 8.01 $ 8.44 Total Cost per Visit$ 91.15 $ 89.89 $ 90.48 Visits 8,273,308 8,033,654 7,414,799 (1) Same store information represents the percent change in our Medicare, Non-Medicare and Total revenue, admissions or volume for the period as a percent of the Medicare, Non-Medicare and Total revenue, admissions or volume of the prior period. EffectiveJuly 1, 2019 , same store is defined as care centers that we have operated for at least the last twelve months and startups that are an expansion of a same store care center.
(2) Total volume includes all admissions and recertifications.
(3) Total includes acquisitions and de novos.
(4) Average Medicare revenue per completed episode is the average Medicare revenue earned for each Medicare completed episode of care. (5) Medicare visits per completed episode are the home health Medicare visits on completed episodes divided by the home health Medicare episodes completed during the period. 37
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Year EndedDecember 31, 2019 Compared to the Year EndedDecember 31, 2018 Operating Results Overall, our operating income increased$27 million on an$82 million increase in net service revenue. Our gross margin as a percentage of revenue was positively impacted by the 2019 changes in reimbursement, growth in volumes, the acuity level of our patients, improved utilization and a focus on discipline mix. The impact of the 2019 change in reimbursement was an increase in net service revenue and gross margin of approximately$12 million . Net Service Revenue Our revenue increased$82 million (7%) on a 5% increase in total volume and a 2% increase in Medicare revenue per episode. The volume growth was driven by a 7% increase in admissions offset by lower recertification volume. The increase in Medicare revenue per episode is the result of a 1.2% increase in reimbursement with the remainder due to an increase in the acuity level of our patients. Additionally, our non-Medicare (per visit and episodic) rates increased approximately 3% which is a combination of rate increases and increases in the acuity level of our patients. Revenue was also positively impacted by a reduction in our revenue adjustments. Cost of Service, Excluding Depreciation and Amortization Our cost of service consists of costs associated with direct clinician care in the homes of our patients as well as the cost of clinical managers who monitor the overall delivery of care. Our cost of service increased 4% on a 3% increase in total visits. Our total cost per visit increased approximately 1% as improvements in clinician utilization and optimization of discipline mix partially offset planned wage increases. Additionally, changes in our home health care center staffing resulted in a shift of some office staff from cost of service to other operating expenses totaling approximately$4 million . Other Operating Expenses Other operating expenses increased approximately$22 million primarily due to an increase in salaries and benefits expense as a result of the addition of resources to support volume growth, planned wage increases and the home health staffing shifts referenced above. Year EndedDecember 31, 2018 Compared to the Year EndedDecember 31, 2017 Operating Results Overall, our operating income increased$43 million on a$91 million increase in net service revenue. The$43 million increase includes a$7 million reduction in revenue related to the Florida ZPIC audit in 2017. Our growth in volumes and increases in clinician productivity positively impacted our gross margin as a percentage of revenue, which increased despite the 2018 changes in reimbursement and planned wage increases. The impact of the 2018 changes in reimbursement was a reduction in net service revenue and gross margin of approximately$7 million . Net Service Revenue Our revenue increased$91 million on a 7% increase in total volume. The volume growth was driven by a 5% increase in admissions and a 130 basis point increase in our Medicare recertification rate. In addition to the increase in volume, our revenue per episode was up$31 per episode as a result of an increase in the acuity level of our patients which enabled us to overcome the 70 basis point reimbursement reduction effectiveJanuary 1, 2018 . Cost of Service, Excluding Depreciation and Amortization Our cost of service increased 8% on an 8% increase in total visits. Our increase in total visits was driven by growth in volumes as well as an increase in visits per completed episode which is the result of an increase in the acuity level of our patients. Our cost per visit decreased 1% as an increase in clinician productivity offset planned wage increases. 38
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Other Operating Expenses Other operating expenses decreased approximately$2 million on an 8% increase in net service revenue primarily due to a decrease in salaries and benefits expense as 2017 operating expenses included approximately$3 million in costs related to our home health restructuring plan. Additionally, we experienced decreases in rent expense, professional fees and telecommunications expense which were offset by increases in information technology expense and travel and training expense. Hospice Division The following table summarizes our hospice segment results of operations: For the Years Ended December 31, 2019 2018 2017 Financial Information (in millions): Medicare$ 586.6 $ 390.2 $ 350.7 Non-Medicare 30.6 20.7 17.1 Net service revenue 617.2 410.9 367.8 Cost of service 335.1 212.0 187.5 Gross margin 282.1 198.9 180.3 Other operating expenses 139.1 85.7 77.5 Operating income$ 143.0 $ 113.2 $ 102.8 Same Store Growth (1): Medicare revenue 7 % 11 % 17 % Hospice admissions 4 % 8 % 11 % Average daily census 7 % 11 % 15 % Key Statistical Data - Total (2): Hospice admissions 40,194 27,596 25,381 Average daily census 11,164 7,588 6,820 Revenue per day, net$ 151.47 $ 148.36 $ 147.75 Cost of service per day$ 82.24 $ 76.53 $ 75.31 Average discharge length of stay 98 100 93 (1) Same store information represents the percent change in our Medicare revenue, Hospice admissions or average daily census for the period as a percent of the Medicare revenue, Hospice admissions or average daily census of the prior period. EffectiveJuly 1, 2019 , same store is defined as care centers that we have operated for at least the last twelve months and startups that are an expansion of a same store care center.
(2) Total includes acquisitions and de novos.
Year Ended
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Net Service Revenue Our hospice revenue increased$206 million ; approximately$174 million of which is attributable to our acquisition activities. The remaining$32 million increase is the result of a 7% increase in our average daily census and increases in reimbursement totaling 1.6% and 0.5% effective for services provided fromOctober 1, 2018 andOctober 1, 2019 , respectively, partially offset by an increase in our revenue adjustments, which include a$7 million reduction to revenue and gross margin related to theU.S. Department of Justice matter noted above. Cost of Service, Excluding Depreciation and Amortization Our hospice cost of service increased$123 million , approximately$110 million of which is attributable to our acquisition activity. The remaining$13 million increase is primarily due to a 7% increase in average daily census, planned wage increases and an increase in our general inpatient and respite facility costs as the majority of the reimbursement increase, which became effectiveOctober 1, 2019 , will be passed through to these facilities. Our cost of service per day increased 7%, largely driven by our acquisitions as our same store cost of service per day remained relatively flat. We expect our acquisitions' cost of service per day to approximate our legacy metric as we fully integrate them during 2020. Other Operating Expenses Other operating expenses increased$53 million ; approximately$42 million of the increase is related to our acquisition activity. The remaining$11 million increase is due to increases in other care center related expenses, primarily salaries and benefits expense due to the addition of resources to support census growth and planned wage increases, professional fees and travel and training expense. Year EndedDecember 31, 2018 Compared to the Year EndedDecember 31, 2017 Operating Results Overall, our operating income increased$10 million on a$43 million increase in net service revenue. The 12% increase in net service revenue was partially offset by a lower gross margin as a percentage of revenue primarily related to planned wage increases, an increase in revenue adjustments and amounts due back to Medicare for hospice caps and an increase in other operating expenses. Net Service Revenue Our hospice revenue increased$43 million on an 11% increase in our average daily census and a 1.0% and 1.6% increase in reimbursement effective for services provided from eachOctober 1, 2017 andOctober 1, 2018 , respectively. We experienced a$2 million increase in our revenue adjustments and cap which partially offset the revenue increase for the year endedDecember 31, 2018 . Cost of Service, Excluding Depreciation and Amortization Our hospice cost of service increased$25 million (13%) as the result of an 11% increase in average daily census. Our cost of service per day increased 2% primarily due to an increase in salary cost per day as a result of planned wage increases. Other Operating Expenses Other operating expenses increased$8 million on a 12% increase in net service revenue. The increase was related to other care center related expenses, primarily salaries and benefits expense, advertising expense, information technology expense, professional fees and travel and training expense as a result of the addition of resources to support census growth. 40
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Personal Care Division The following table summarizes our personal care segment results of operations: For the Years Ended December 31, 2019 2018 2017 Financial Information (in millions): Medicare $ - $ - $ - Non-Medicare 82.0 77.2 59.6 Net service revenue 82.0 77.2 59.6 Cost of service 61.1 58.8 45.0 Gross margin 20.9 18.4 14.6 Other operating expenses 12.5 13.1 9.7 Operating income $ 8.4 $ 5.3 $ 4.9 Key Statistical Data: Billable hours 3,308,338 3,248,304 2,604,794 Clients served 17,364 17,981 16,774 Shifts 1,488,175 1,468,541 1,195,511 Revenue per hour 24.80 23.75 22.86 Revenue per shift 55.13 52.54 49.80 Hours per shift 2.2 2.2 2.2 Year EndedDecember 31, 2019 Compared to the Year EndedDecember 31, 2018 Operating income related to our personal care segment increased$3 million on a$5 million increase in net service revenue. These results are inclusive of the acquisitions of East Tennessee Personal Care Services (May 2018 ) and Bring Care Home (October 2018 ). As a result, our personal care operating results for 2019 and 2018 are not fully comparable. Gross margin as a percentage of revenue increased 170 basis points as the segment benefited from rate increases combined with operating cost controls. Additionally, other operating expenses decreased approximately$1 million resulting in an increase in operating income. Year EndedDecember 31, 2018 Compared to the Year EndedDecember 31, 2017 Operating income related to our personal care segment remained flat on an$18 million increase in net service revenue. 2018 revenues were positively impacted by the following acquisitions: Intercity Home Care (October 2017 ), East Tennessee Personal Care Services (May 2018 ) and Bring Care Home (October 2018 ). The segment experienced a decrease in gross margin as a percentage of revenue related to additional costs associated with these acquisitions and the Employer Medical Assistance Contribution program ("EMAC") that became effective in the state ofMassachusetts onJanuary 1, 2018 . Other operating expenses increased$3 million on an$18 million increase in net service revenue. Acquisitions are included in our consolidated financial statements from their respective acquisition dates. As a result, our personal care operating results for 2018 and 2017 are not fully comparable. Corporate The following table summarizes our corporate results of operations: For the Years Ended December 31, 2019 2018 2017 Financial Information (in millions): Other operating expenses$ 160.9 $ 127.6 $ 117.8 Depreciation and amortization 12.4 8.4 12.5 Total operating expenses before Securities Class Action Lawsuit settlement, net$ 173.3 $ 136.0 $ 130.3 Securities Class Action Lawsuit settlement, net - - 28.7 Total operating expenses$ 173.3 $ 136.0 $ 159.0 41
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Corporate expenses consist of costs relating to our executive management and administrative support functions, primarily information services, accounting, finance, billing and collections, legal, compliance, risk management, procurement, marketing, clinical administration, training, human resources and administration. Year EndedDecember 31, 2019 Compared to the Year EndedDecember 31, 2018 During 2019, corporate operating expenses increased$37 million ; approximately$27 million of which is attributable to the CCH acquisition:$7 million relates to CCH corporate and administrative support functions,$6 million relates to CCH intangibles amortization and approximately$14 million relates to CCH acquisition and integration costs. Excluding the impact of the CCH acquisition, corporate operating expenses increased$10 million which represents 3% of our$293 million increase in revenue. This increase is primarily due to increases in salaries and benefits expense and information technology expense which were partially offset by decreases in professional fees and legal settlements as well as gains on the sale of fleet vehicles. Year EndedDecember 31, 2018 Compared to the Year EndedDecember 31, 2017 Excluding the Securities Class Action Lawsuit settlement during the year endedDecember 31, 2017 , corporate operating expenses increased 4% on a 10% increase in net service revenue. Approximately$2 million of the increase was related to a reduction in our indemnity receivable related to theFlorence, South Carolina third party audit (see Item 8, Note 10 - Commitments and Contingencies to our consolidated financial statements for additional information). The remaining increase was related to increases in salaries and benefits expense and travel and training expense which were offset by a decrease in depreciation and amortization. Liquidity and Capital Resources Cash Flows The following table summarizes our cash flows for the periods indicated (amounts in millions): For the Years Ended December 31, 2019 2018 2017
Cash provided by operating activities
(352.9 ) (22.2 ) (44.0 ) Cash provided by (used in) financing activities 227.2 (267.4 ) (5.5 ) Net increase (decrease) in cash, cash equivalents and restricted cash 76.3 (66.1 ) 56.2 Cash, cash equivalents and restricted cash at beginning of period 20.2 86.4 30.2 Cash, cash equivalents and restricted cash at end of period$ 96.5 $ 20.2 $ 86.4 Cash provided by operating activities totaled$202.0 million for 2019,$223.5 million for 2018 and$105.7 million for 2017. During each year, we maintained sufficient liquidity to finance our capital expenditures, both routine and non-routine, and acquisitions. Changes in our cash provided by operating activities during the past three years were primarily the result of fluctuations in our net income, the collections of our accounts receivable and the timing of payments of accrued expenses. During 2017, operating cash flows were negatively impacted by approximately$30 million related to the Securities Class Action Lawsuit settlement (see Item 8, Note 10 - Commitments and Contingencies to our consolidated financial statements). Cash used in investing activities increased$330.7 million during 2019 compared to 2018 primarily due to the acquisitions of CCH and RoseRock. Cash used in investing activities decreased$21.8 million during 2018 compared to 2017 primarily due to decreases in cash paid for acquisitions ($24.5 million ) and capital expenditures ($4.1 million ) offset by an increase in investments ($6.7 million ). Cash provided by financing activities totaled$227.2 million during 2019 and is primarily related to our borrowings under our Amended Credit Agreement to fund acquisitions. Cash used in financing activities increased$261.9 million during 2018 compared to 2017 primarily due to our repurchase of company stock and the repayments of borrowings under our Term Loan and Revolving Credit Facility offset by borrowings under our new Credit Agreement. Liquidity Typically, our principal source of liquidity is the collection of our patient accounts receivable, primarily through the Medicare program. In addition to our collection of patient accounts receivable, from time to time, we can and do obtain additional sources of liquidity by the incurrence of additional indebtedness. 42
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During 2019, we spent$7.9 million in capital expenditures compared to$6.6 million and$10.7 million during 2018 and 2017, respectively. Our capital expenditures for 2020 are expected to be approximately$6.0 million to$8.0 million , excluding the impact of any future acquisitions. As ofDecember 31, 2019 , we had$30.3 million in cash and cash equivalents and$449.8 million in availability under our$550.0 million Revolving Credit Facility. During 2017, we settled the Securities Class Action Lawsuit for approximately$43.7 million , of which approximately$15.0 million was paid by the Company's insurance carriers; we used cash on hand to make the required remaining$28.7 million payment. Based on our operating forecasts and our new debt service requirements, we believe we will have sufficient liquidity to fund our operations, capital requirements and debt service requirements. Outstanding Patient Accounts Receivable Our patient accounts receivable increased$48.6 million fromDecember 31, 2018 toDecember 31, 2019 primarily due to our acquisition activity. Our cash collection as a percentage of revenue was 105% and 104% for the twelve-month periods endedDecember 31, 2019 and 2018, respectively. Our days revenue outstanding, net atDecember 31, 2019 was 40.9 days which is an increase of 2.9 days fromDecember 31, 2018 . Our acquisition activity has negatively impacted our days revenue outstanding by approximately 2.3 days. Our patient accounts receivable includes unbilled receivables and are aged based upon our initial service date. We monitor unbilled receivables on a care center by care center basis to ensure that all efforts are made to bill claims within timely filing deadlines. Our unbilled patient accounts receivable can be impacted by acquisition activity, probe edits or regulatory changes which result in additional information or procedures needed prior to billing. The timely filing deadline for Medicare is one year from the date the episode was completed, varies by state for Medicaid-reimbursable services and varies among insurance companies and other private payors. The following schedules detail our patient accounts receivable, by payor class, aged based upon initial date of service (amounts in millions, except days revenue outstanding): 0-90 91-180 181-365 Over 365 Total AtDecember 31, 2019 : Medicare patient accounts receivable$ 115.2 $ 13.8 $ 6.8 $ 1.0 $ 136.8 Other patient accounts receivable: Medicaid 22.6 5.7 4.0 - 32.3 Private 60.0 6.3 2.2 - 68.5 Total$ 82.6 $ 12.0 $ 6.2 $ -$ 100.8 Total patient accounts receivable$ 237.6 Days revenue outstanding (1) 40.9 0-90 91-180 181-365 Over 365 Total AtDecember 31, 2018 : Medicare patient accounts receivable$ 95.5 $ 8.1 $ 1.0 $ 1.8 $ 106.4 Other patient accounts receivable: Medicaid 13.1 2.7 1.1 - 16.9 Private 51.3 6.7 4.4 3.3 65.7 Total$ 64.4 $ 9.4 $ 5.5 $ 3.3 $ 82.6 Total patient accounts receivable$ 189.0 Days revenue outstanding (1) 38.0
(1) Our calculation of days revenue outstanding, net is derived by dividing our
ending net patient accounts receivable atDecember 31, 2019 and 2018 by our average daily net patient revenue for the three-month periods endedDecember 31, 2019 and 2018, respectively. 43
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Indebtedness
First Amendment to Amended and Restated Credit Agreement OnFebruary 4, 2019 , we entered into the First Amendment to the Credit Agreement (as amended by the First Amendment, the "Amended Credit Agreement"). The Amended Credit Agreement provides for a senior secured credit facility in an initial aggregate principal amount of up to$725.0 million , which includes the$550.0 million Revolving Credit Facility under the Credit Agreement, and a term loan facility in the principal amount of up to$175.0 million (the "Term Loan Facility" and collectively with the Revolving Credit Facility, the "Credit Facility"), which was added by the First Amendment. We borrowed the entire principal amount of the Term Loan Facility onFebruary 4, 2019 in order to fund a portion of the purchase price of the CCH acquisition, with the remainder of the purchase price and associated transactional fees and expenses funded by proceeds from the Revolving Credit Facility. Our weighted average interest rate for borrowings under our$550.0 million Revolving Credit Facility was 4.0% for the period endedDecember 31, 2019 . Our weighted average interest rate for borrowings under our$175.0 million Term Loan Facility was 3.8% for the periodFebruary 4, 2019 toDecember 31, 2019 . As ofDecember 31, 2019 , our consolidated leverage ratio was 1.0 and our consolidated interest coverage ratio was 17.2 and we are in compliance with our covenants under the Amended Credit Agreement. As ofDecember 31, 2019 , our availability under our$550.0 million Revolving Credit Facility was$449.8 million as we have$70.0 million outstanding in borrowings and$30.2 million outstanding in letters of credit. See Item 8, Note 7 - Long Term Obligations to our consolidated financial statements for additional details on our outstanding long-term obligations. Share Repurchase 2019 Stock Repurchase Program OnFebruary 25, 2019 , we announced that our Board of Directors authorized a stock repurchase program, under which we may repurchase up to$100 million of our outstanding common stock throughMarch 1, 2020 . Under the terms of the program, we are allowed to repurchase shares from time to time in open market transactions, block purchases or in private transactions in accordance with applicable federal securities laws and other legal requirements. We are allowed to enter into Rule 10b5-1 plans to effect some or all of the repurchases. The timing and the amount of the repurchases will be determined by management based on a number of factors, including but not limited to share price, trading volume and general market conditions, as well as on working capital requirements, general business conditions and other factors. We did not repurchase any shares pursuant to this stock purchase program during 2019. 2018 Share Repurchase OnJune 4, 2018 , we purchased 2,418,304 of our common shares from affiliates ofKKR Credit Advisors (US) LLC ("KKR"), representing one-half of KKR's then current holdings in the Company and 7.1% of the aggregate outstanding shares of the Company's common stock for a total purchase price of$181.4 million including related direct costs. The Company repurchased the shares at$73.96 which represents 96% of the closing stock price of the Company's common stock onJune 4, 2018 . The repurchased shares are classified as treasury shares. Contractual Obligations Our future contractual obligations atDecember 31, 2019 were as follows (amounts in millions): 44
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Payments Due by Period Less than 1-3 4-5 After Total 1 Year Years Years 5 Years Long-term obligations$ 242.3 $ 8.2 $ 17.5 $ 216.6 $ - Interest on long-term obligations (1) 22.3 6.9 10.3 5.1 - Finance leases 3.6 1.9 1.7 - - Operating leases 90.7 30.2 39.3 14.2 7.0 Capital commitments 0.3 0.3 - - - Purchase obligations 11.1 4.2 6.6 0.3 - Uncertain tax positions 2.7 - 2.7 - -$ 373.0 $ 51.7 $ 78.1 $ 236.2 $ 7.0 (1) Interest on debt with variable rates was calculated using the current rate for that particular debt instrument atDecember 31, 2019 . Critical Accounting Estimates The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance withU.S. generally accepted accounting principles ("U.S. GAAP"). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, collectability of accounts receivable, reserves related to insurance and litigation, goodwill, intangible assets, income taxes and contingencies. We base these estimates on our historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results experienced may vary materially and adversely from our estimates. To the extent there are material differences between our estimates and the actual results, our future results of operations may be affected. We believe the following critical accounting policies represent our most significant judgments and estimates used in the preparation of our consolidated financial statements. Revenue Recognition We account for revenue from contracts with customers in accordance with Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606) and ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (collectively, "ASC 606"), and as such, we recognize revenue in the period in which we satisfy our performance obligations under our contracts by transferring our promised services to our customers in amounts that reflect the consideration to which we expect to be entitled in exchange for providing patient care, which are the transaction prices allocated to the distinct services. The Company's cost of obtaining contracts is not material. Revenues are recognized as performance obligations are satisfied, which varies based on the nature of the services provided. Our performance obligation is the delivery of patient care services in accordance with the nature and frequency of services outlined in physicians' orders, which are determined by a physician based on a patient's specific goals. The Company's performance obligations relate to contracts with a duration of less than one year; therefore, the Company has elected to apply the optional exemption provided by ASC 606 and is not required to disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied as of the end of the reporting period. The unsatisfied or partially unsatisfied performance obligations are generally completed when the patients are discharged, which generally occurs within days or weeks of the end of the reporting period. We determine the transaction price based on gross charges for services provided, reduced by estimates for contractual and non-contractual revenue adjustments. Contractual revenue adjustments include adjustments provided to patients and third-party payors based on contracted rates. Non-contractual revenue adjustments include discounts provided to self-pay, uninsured patients or other payors, adjustments resulting from payment reviews and adjustments arising from our inability to obtain appropriate billing documentation, authorizations or face-to-face documentation. Subsequent changes to the estimate of the transaction price are recorded as adjustments to net service revenue in the period of change. Contractual revenue adjustments are recorded for the difference between our standard rates and the contracted rates to be realized from patients, third party payors and others for services provided. Non-contractual revenue adjustments are recorded for self-pay, uninsured patients and other payors by major payor class based on our historical collection experience, aged accounts receivable 45
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by payor and current economic conditions. Non-contractual revenue adjustments represent the difference between amounts billed and amounts we expect to collect based on our collection history with similar payors. The Company assesses its ability to collect for the healthcare services provided at the time of patient admission based on the Company's verification of the patient's insurance coverage under Medicare, Medicaid, and other commercial or managed care insurance programs. Medicare represents approximately 74% of the Company's consolidated net service revenue. Amounts due from third-party payors, primarily commercial health insurers and government programs (Medicare and Medicaid), include variable consideration for retroactive revenue adjustments due to settlements of audits and payment reviews. We determine our estimates for non-contractual revenue adjustments related to payment reviews based on our historical experience and success rates in the claim appeals and adjudication process. We determine our estimates for non-contractual revenue adjustments related to our inability to obtain appropriate billing documentation, authorizations, or face-to-face documentation based on our historical experience, which primarily includes a historical collection rate of over 99% on Medicare claims. Revenue is recorded at amounts we estimate to be realizable for services provided. Home Health Revenue Recognition Medicare Revenue Net service revenue is recorded under the Medicare prospective payment system ("PPS") based on an established Federal Medicare home health episode payment rate, that is subject to adjustment based on certain variables including, but not limited to: (a) an outlier payment if a patient's care was unusually costly (capped at 10% of total reimbursement per provider number); (b) a LUPA if the number of visits was four or fewer; (c) a partial payment if a patient transferred to another provider or we admitted a patient transferring from another provider before completing the episode; (d) a payment adjustment based upon the level of therapy services required (with various incremental adjustments made for additional visits, with larger payment increases associated with the sixth, fourteenth and twentieth visit thresholds); (e) the number of episodes of care provided to a patient, regardless of whether the same home health provider provided care for the entire series of episodes; (f) changes in the base episode payments established by the Medicare Program; and (g) adjustments to the base episode payments for case mix and geographic wages. Medicare rates are based on the severity of the patient's condition, service needs and goals, and other factors relating to the cost of providing services and supplies, bundled into an episode of care, not to exceed 60 days. An episode starts the first day a billable visit is performed and ends 60 days later or upon discharge, if earlier, with multiple continuous episodes allowed. The Medicare home health benefit requires that beneficiaries be homebound (meaning that the beneficiary is unable to leave their home without a considerable and taxing effort), require intermittent skilled nursing, physical therapy or speech therapy services, and receive treatment under a plan of care established and periodically reviewed by a physician. All Medicare contracts are required to have a signed plan of care which represents a single performance obligation, comprising of the delivery of a series of distinct services that are substantially similar and have a similar pattern of transfer to the customer. Accordingly, the Company accounts for the series of services ("episode") as a single performance obligation satisfied over time, as the customer simultaneously receives and consumes the benefits of the goods and services provided. Expected Medicare revenue per episode is recognized based on a pro-rated service output method, utilizing our historical average length of episode prior to discharge. The base episode payment can be adjusted based on each patient's health including clinical condition, functional abilities and service needs, as well as for the applicable geographic wage index, low utilization, patient transfers and other factors. The services covered by the episode payment include all disciplines of care in addition to medical supplies. Medicare can also make various adjustments to payments received if we are unable to produce appropriate billing documentation or acceptable authorizations. We estimate the impact of such adjustments based on our historical experience, which primarily includes a historical collection rate of over 99% on Medicare claims, and record this estimate during the period in which services are rendered as a reduction to revenue and a corresponding reduction to patient accounts receivable. A portion of reimbursement from each Medicare episode is billed near the start of each episode, and cash is typically received before all services are rendered. The amount of revenue recognized for episodes of care which are incomplete at period end is based on the company's average percentage of days complete on episodes as of the end of the year. As ofDecember 31, 2019 , the difference between the cash received from Medicare for a request for anticipated payment ("RAP") on episodes in progress and the associated estimated revenue was recorded to accrued expenses within our consolidated balance sheet. Non-Medicare Revenue Episodic-based Revenue. We recognize revenue in a similar manner as we recognize Medicare revenue for episodic-based rates that are paid by other insurance carriers, including Medicare Advantage programs; however, these rates can vary based upon the negotiated terms which generally range from 90% to 100% of Medicare rates. 46
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Non-episodic based Revenue. Gross revenue is recorded on an accrual basis based upon the date of service at amounts equal to our established or estimated per-visit rates. Contractual revenue adjustments are recorded for the difference between our standard rates and the contracted rates to be realized from patients, third parties and others for services provided and are deducted from gross revenue to determine net service revenue. We also make non-contractual revenue adjustments to non-episodic revenue based on historical experience, to reflect the estimated transaction price.We receive a minimal amount of our net service revenue from patients who are either self-insured or are obligated for an insurance co-payment. Hospice Revenue Recognition Hospice Medicare Revenue Gross revenue is recorded on an accrual basis based upon the date of service at amounts equal to the estimated payment rates. The estimated payment rates are predetermined daily or hourly rates for each of the four levels of care we deliver. The four levels of care are routine care, general inpatient care, continuous home care and respite care. Routine care accounted for 99%, 97% and 97% of our total net Medicare hospice service revenue for each of 2019, 2018 and 2017, respectively. There are two separate payment rates for routine care: payments for the first 60 days of care and care beyond 60 days. In addition to the two routine rates, we may also receive a service intensity add-on ("SIA"). The SIA is based on visits made in the last seven days of life by a registered nurse ("RN") or medical social worker ("MSW") for patients in a routine level of care. The performance obligation is the delivery of hospice services to the patient, as determined by a physician, each day the patient is on hospice care. We make adjustments to Medicare revenue for non-contractual revenue adjustments, which include our inability to obtain appropriate billing documentation or acceptable authorizations and other reasons unrelated to credit risk. We estimate the impact of these non-contractual revenue adjustments based on our historical experience, which primarily includes a historical collection rate of over 99% on Medicare claims, and record it during the period services are rendered. Additionally, our hospice service revenue is subject to certain limitations on payments from Medicare which are considered variable consideration. We are subject to an inpatient cap limit and an overall Medicare payment cap for each provider number. We monitor these caps on a provider-by-provider basis and estimate amounts due back to Medicare if we estimate a cap has been exceeded. We record these adjustments as a reduction to revenue and an increase in accrued expenses within our consolidated balance sheet. Beginning for the cap year endingOctober 31, 2017 , providers are required to self-report and pay their estimated cap liability byFebruary 28th of the following year. As ofDecember 31, 2019 , we have settled our Medicare hospice reimbursements for all fiscal years throughOctober 31, 2012 . As ofDecember 31, 2019 , we have recorded$5.7 million in accrued expenses for estimated amounts due back to Medicare for the Federal cap years endedOctober 31, 2013 throughSeptember 30, 2020 ; approximately$1.9 million of this amount is related to the cap liability acquired as part of the CCH acquisition. As ofDecember 31, 2018 , we had recorded$1.7 million for estimated amounts due back to Medicare in accrued expenses for the Federal cap years endedOctober 31, 2013 throughSeptember 30, 2019 . Hospice Non-Medicare Revenue Gross revenue is recorded on an accrual basis based upon the date of service at amounts equal to our established rates or estimated per day rates, as applicable. Contractual revenue adjustments are recorded for the difference between our standard rates and the contractual rates to be realized from patients, third party payors and others for services provided and are deducted from gross revenue to determine our net service revenue. We also make non-contractual revenue adjustments to non-Medicare revenue based on historical experience, to reflect the estimated transaction price. Personal Care Revenue Recognition Personal Care Revenue We generate net service revenues by providing our services directly to patients based on authorized hours, visits or units determined by the relevant agency, at a rate that is either contractual or fixed by legislation. Net service revenue is recognized at the time services are rendered based on gross charges for the services provided, reduced by estimates for contractual and non-contractual revenue adjustments. We receive payment for providing such services from payors, including state and local governmental agencies, managed care organizations, commercial insurers and private consumers. Payors include the following elder service agencies: Aging Services Access Points (ASAPs), Senior Care Options (SCOs), Program of All-Inclusive Care for the Elderly (PACE) and theVeterans Administration (VA). 47
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Goodwill and Other Intangible AssetsGoodwill represents the amount of the purchase price in excess of the fair values assigned to the underlying identifiable net assets of acquired businesses.Goodwill is not amortized, but is subject to an annual impairment test. Tests are performed more frequently if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. These events or circumstances include, but are not limited to, a significant adverse change in the business environment, regulatory environment or legal factors, or a substantial decline in the market capitalization of our stock. Generally Accepted Accounting Principles ("GAAP") allows for impairment testing to be done on either a quantitative or qualitative basis. During 2019, we utilized a qualitative analysis for our annual impairment test and determined that there were no triggering events that would indicate that it is "more likely than not" that the carrying values of our reporting units are higher than their respective fair values. As a result, we did not record any goodwill impairment charges and none of the goodwill associated with our various reporting units was considered at risk of impairment as ofOctober 31, 2019 . Since the date of our last annual goodwill impairment test, there have been no material developments, events, changes in operating performance or other circumstances that would cause management to believe it is more likely than not that the fair value of any of our reporting units would be less than their carrying amounts. Intangible assets consist of certificates of need, licenses, acquired names and non-compete agreements. We amortize non-compete agreements and acquired names that we do not intend to use in the future on a straight-line basis over their estimated useful lives, which is generally two to three years for non-compete agreements and up to five years for acquired names. Our indefinite-lived intangible assets are reviewed for impairment annually or more frequently if events occur or circumstances change that would more likely than not reduce the fair value of the intangible asset below its carrying amount. During 2019, we performed a qualitative assessment to determine if any of our indefinite-lived intangible assets were impaired; as a result of this analysis, we wrote off approximately$1.5 million of acquired names during the three-month period endedDecember 31, 2019 . There have been no material developments, events, changes in operating performance or other circumstances that would cause management to believe it is more likely than not that the fair value of any of our remaining intangible assets would be less than their carrying amounts.
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