EDGAR 10-K Filing

Company CIK: 1468328
Filing Year: 2022
Filename: 1468328_10-K_2022_0001564590-22-007171.json

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ITEM 1. BUSINESS
ITEM 1.
BUSINESS
Overview
Addus has been providing home care services since 1979. We operate three segments: personal care, hospice, and home health. Our services are principally provided in-home under agreements with federal, state and local government agencies, managed care organizations, commercial insurers and private individuals. Our consumers are predominantly “dual eligible,” meaning they are eligible to receive both Medicare and Medicaid benefits.
As of December 31, 2021, we provided services in 22 states through approximately 206 offices. For the years ended December 31, 2021 and 2020, we served approximately 67,000 and 66,000 discrete consumers, respectively.
We continue to drive organic growth while also growing through acquisitions, focusing on growth in the states in which we have a presence while adding clinical care services to our offerings. As of December 31, 2021, we provide all three levels of care, personal care, home health and hospice services, in Ohio and New Mexico and strategically continue to pursue other markets.
A summary of our financial results is provided in the table below.
For the Years Ended December 31,
(Amounts in Thousands)
Personal care
$
685,854
$
647,233
Hospice
152,253
101,297
Home health
26,392
16,245
Total net service revenue by segment
$
864,499
$
764,775
Net income
$
45,126
$
33,133
Total assets
947,585
892,582
Our services and operating model address a number of crucial needs across the healthcare continuum. Care provided in the home generally costs less than facility-based care and is typically preferred by consumers and their families. By providing services in the home to the elderly and others who require long-term care and support with the activities of daily living, we lower the cost of chronic and acute care treatment by delaying or eliminating the need for care in more expensive settings. In addition, our caregivers observe and report changes in the condition of our consumers for the purpose of facilitating early intervention in the disease process, which often reduces the cost of medical services by preventing unnecessary emergency room visits and/or hospital admissions and re-admissions. We coordinate the services provided by our team with those of other healthcare providers and payors, as appropriate. Changes in a consumer’s conditions are evaluated by appropriately trained managers, which may result in a report to the consumer’s case manager at a managed care organization or other payor. By providing care in the preferred setting of the home and by providing opportunities to improve the consumer’s conditions and allow early intervention as indicated, our model also is designed to improve consumer outcomes and satisfaction.
We believe our model provides significant value to managed care organizations. States continue to implement managed care programs for Medicaid enrollees, and, as a result, managed care organizations have been increasingly responsible for the healthcare needs and the related healthcare costs of our consumers. Managed care organizations have an economic incentive to better manage the healthcare expenditures of their members, lower costs and improve outcomes. We believe that our model is well positioned to assist in meeting those goals while also improving consumer satisfaction, and, as a result, we expect increased referrals from managed care organizations.
Our Market and Opportunity
We provide home care services that primarily include personal care services to assist with activities of daily living, as well as hospice and home health services. These services allow the elderly and other infirm adults who require long-term care and assistance with activities of daily living to maintain their independence at home with their families. Personal care services are a significant component of home and community-based services (“HCBS”), which have grown in significance and demand in recent years and during the COVID-19 pandemic. In particular, the demand for personal care services is growing from managed care delivery models, including Medicaid and Medicare Advantage plans. Managed care plans aim to manage cost, utilization and quality through collaboration of health insurance plans and healthcare providers. We also offer personal care services to private pay consumers. We expect demand for HCBS to continue to grow due to the aging of the U.S. population and improved opportunities for individuals to receive home-based care as an alternative to institutional care.
Because our model serves an aging population in a home setting at a lower cost, we believe that we have favorable opportunities for growth. Historically, there were limited barriers to entry in the home-based services industry. As a result, the personal care, home health and hospice service industries developed in a highly fragmented manner, with few large participants and many small ones. Few companies have a significant market share across multiple regions or states. The lack of licensure or certification requirements in some states makes it difficult to estimate the number of home-based services agencies. We expect ongoing consolidation within our industry, driven by the desire of healthcare systems and managed care organizations to narrow their networks of service providers, and also as a result of the industry’s increasingly complex regulatory, operating and technology requirements. We believe we are well positioned to capitalize on a consolidating industry given our reputation in the market, strong payor relationships and integration of technology into our business model.
The personal care services industry is subject to increasing regulation. At the federal level, efforts have focused on improved coordination of regulation across the various types of Medicaid programs through which personal care services are offered. Federally required state mandates include implementing electronic visit verification (“EVV”), which is used to collect home visit data, and obtaining state licenses or registrations. Providers must dedicate substantial resources to ensure continuing compliance with all applicable regulations and significant expenditures may be necessary to offer new services or to expand into new markets. We believe licensing requirements and regulations, including EVV, the increasing focus on improving health outcomes, the rising cost and complexity of operations and technology and pressure on reimbursement rates due to constrained government resources may discourage new providers and may encourage industry consolidation.
The Medicare-Medicaid Coordination Office (“MMCO”) was established within the Centers for Medicare & Medicaid Services (“CMS”) to improve services for consumers who are eligible for both Medicare and Medicaid, also known as “dual eligibles,” and improve coordination between the federal government and states to enhance access to quality services to which they are entitled. The MMCO works with state Medicaid agencies, other federal and state agencies, physicians and others, to make available technical assistance and educational tools to improve care coordination between Medicare and Medicaid and to reduce costs and improve beneficiary experience while reducing administrative and regulatory barriers between the programs. In addition, the MMCO and the CMS Innovation Center are considering or have implemented demonstration projects affecting reimbursement for services provided to dual eligibles.
We believe that our personal care program and our technology make us well-suited to partner with managed care organizations to address the needs of the “dual eligible” population, and we believe that our ability to identify changes in our consumers’ health and condition before acute intervention is required will lower the overall cost of care. We believe this approach to care delivery and the integration of our services into the broader healthcare continuum are particularly attractive to managed care organizations and others who are ultimately responsible for the healthcare needs of our consumers and over time will increase our business with them.
Our Growth Strategy
The growth of our revenues is closely correlated with the number of consumers to whom we provide our services. Our continued growth depends on our ability to provide consistently high quality care, maintain our existing payor relationships, establish relationships with new payors, increase our referral sources and our ability to attract and retain caregivers. Our continued growth is also dependent upon the authorization by state agencies of new consumers to receive our services. We believe there are several market opportunities for growth as the population ages. Moreover, we believe that individuals generally prefer to receive care in their homes. We believe that the COVID-19 pandemic has heightened this preference due to health concerns that may be associated with institutional settings for long-term care, along with concerns about the re-imposition of visitor restrictions that were imposed in many long-term care facilities in response to the pandemic. Finally, we believe the provision of home-based services is more cost-effective than the provision of similar services in institutional settings for long-term care. We plan to continue our revenue growth and margin improvement and enhance our competitive positioning by executing on the following growth strategies:
Consistently Provide High-Quality Care
We schedule and require our caregivers to perform their services as defined within the individual plan of care. We monitor the performance of our caregivers through regular supervisory visits in the homes of consumers. Our caregivers are provided with pre-service training and orientation and an evaluation of their skills. In many cases, caregivers are also required to attend ongoing in-service education. In certain states, our caregivers are required to complete certified training programs and maintain a state certification. The training assists our caregivers with identifying changes in our consumers’ health and condition before acute intervention is required, which we believe lowers the overall cost of care.
Drive Organic Growth in Existing Markets
We intend to drive organic growth through several initiatives, including continuing to build and enhance our sales and marketing capabilities, enhancing our business intelligence analytic capabilities, recruiting and retaining employees and investing in technology and operations to drive efficiencies. We also expect our organic growth will benefit from an increase in demand for our
services by an aging population and our increased alignment with referral sources and payors. We continue to selectively open new offices in existing markets when an opportunity is identified and appropriate.
Market to Managed Care Organizations
As a large-scale provider of home-based care, we are partnering with managed care organizations, taking advantage of an industry shift from traditional fee-for-service Medicare and Medicaid and toward managed care models, which aim to better coordinate care. We expect this shift to lead to narrower provider networks where we can be competitive by offering a larger, more experienced partner to these organizations, as well as by providing more sophisticated technology, electronic visit records and an outcomes-driven approach to service. We believe our coordinated care model and integration of services into the broader healthcare industry are particularly attractive to managed care organizations. In particular, our expansion from primarily personal care services into hospice and home health has increased our value to our managed care partners by diversifying our home-based care offerings.
Grow Through Acquisitions
In addition to our organic growth, we have been growing through acquisitions that have expanded our presence in current markets or facilitated our entry into new markets. We completed two acquisitions in 2021, despite the continuing challenges and disruptions related to the COVID-19 pandemic: Armada Skilled Homecare of New Mexico LLC, Armada Hospice of New Mexico LLC and Armada Hospice of Santa Fe LLC (collectively, “Armada”) on August 1, 2021 and Summit Home Health, LLC (“Summit”) on October 1, 2021. Acquisitions completed in 2021 accounted for $5.7 million in net service revenues for the year ended December 31, 2021. We also completed four acquisitions in 2020: A Plus Health Care, Inc. (“A Plus”) on July 1, 2020, County Homemakers, Inc. (“County Homemakers”) on November 1, 2020, SLHC, Inc., d/b/a SunLife Home Care (“SunLife Home Care”) on December 1, 2020 and Queen City Hospice on December 4, 2020. Acquisitions completed in 2020 accounted for $82.5 million and $12.1 million in net service revenues for the years ended December 31, 2021 and 2020, respectively.
Our active pipeline and strong financial position support additional acquisitions. With rising consolidation pressures in the industry, our focus is on identifying growing markets with favorable demographics in states that are fiscally well managed and have a reasonable minimum wage environment and where we have the potential to become one of the leading providers in the state in order to support our managed care organization strategy. We believe our experience identifying and executing on opportunities generated by our acquisition pipeline, as well as our history of integrating acquisitions, will lead to additional growth.
Our Services
We operate three business segments: (i) personal care (ii) hospice and (iii) home health. Without our services, many of our consumers would be at increased risk of placement in a long-term care institution.
Personal Care
Our personal care segment provides non-medical assistance with activities of daily living, primarily to persons who are at increased risk of hospitalization or institutionalization, such as the elderly, chronically ill or disabled. The services we provide include assistance with bathing, grooming, oral care, feeding and dressing, medication reminders, meal planning and preparation, housekeeping and transportation services. Many consumers need such services on a long-term basis to address chronic or acute conditions. Our personal care segment also includes staffing services, with clients including assisted living facilities, nursing homes and hospice facilities. Each payor client establishes its own eligibility standards, determines the type, amount, duration and scope of services, and establishes the applicable reimbursement rate in accordance with applicable law, regulations or contracts.
Hospice
Our hospice segment provides physical, emotional and spiritual care for people who are terminally ill as well as related services for their families. The hospice services we provide include palliative nursing care, social work, spiritual counseling, homemaker services and bereavement counseling. Generally, patients receiving hospice services have a life expectancy of six months or less.
Home Health
Our home health segment provides services that are primarily medical in nature to individuals who may require assistance during an illness or after hospitalization and include skilled nursing and physical, occupational and speech therapy. We generally provide home health services on a short-term, intermittent or episodic basis to individuals, typically to assist patients recovering from an illness or injury.
We measure the performance of each segment using a number of different metrics. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Results of Operations” for information regarding the Company’s segment metrics.
Our Payors
Our payor clients are principally federal, state and local governmental agencies and managed care organizations. The federal, state and local programs under which the agencies operate are subject to legislative and budgetary changes and other risks that can influence reimbursement rates. Managed care organizations that operate as an extension of our government payors are subject to similar economic pressures. Our commercial insurance payor clients are typically for profit companies and are continuously seeking opportunities to control costs.
Most of our services are provided pursuant to agreements with state and local governmental social and aging service agencies. These agreements generally have an initial term of one to two years and may be terminated with 60 days’ notice. They are typically renewed for one to five-year terms, provided that we have complied with licensing, certification and program standards, and other regulatory requirements. Reimbursement rates and methods vary by state and service type, but are typically based on an hourly or unit-of-service basis. Managed care organizations are becoming an increasing portion of our personal care segment payor mix as states shift from administering fee-for-service programs to utilizing managed care models. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Overview” for our revenue mix by payor type.
Competition
We believe our industry is highly competitive, fragmented and market specific. Each local market has its own competitive profile and no single competitor has significant market share across all of our markets. Our competition consists of personal care service providers, home health providers, hospice providers, private caregivers, larger publicly held companies, privately held companies, privately held single-site agencies, hospital-based agencies, not-for-profit organizations, community-based organizations, managed care organizations and self-directed care programs. In addition, certain governmental payors contract for services with independent providers such that our relationships with these payors are not exclusive. We have experienced, and expect to continue to experience, competition from new entrants into our markets. Increased competition may result in pricing pressures, loss of or failure to gain market share or loss of consumers or payors, any of which could harm our business. In addition, some of our competitors may have greater financial, technical, political and marketing resources, as well as name recognition with consumers and payors.
Sales and Marketing
We focus on initiating and maintaining working relationships with state and local governmental agencies responsible for the provision of the services we offer. We target these agencies in our current markets and in geographical areas that we have identified as potential markets for expansion. We also seek to identify service needs or changes in the service delivery or reimbursement systems of governmental entities and attempt to work with and provide input to the responsible government personnel, provider associations and consumer advocacy groups.
We establish new referral relationships with various managed care organizations that contract with the states for the servicing of the state Medicaid programs. We have met with many contracted managed care organizations in markets we serve and believe we are building the relationships necessary to generate continued referrals of new clients.
We receive substantially all of our personal care consumers through third-party referrals, including state departments on aging, rehabilitation, mental health and children’s services, county departments of social services, managed care organizations, the Veterans Health Administration and city departments on aging. Generally, family members of potential consumers are made aware of available in-home or alternative living arrangements through state or local case management systems. These systems are operated by governmental or private agencies.
We provide ongoing education and outreach in our target communities in order to inform the community about state and locally-subsidized care options and to communicate our role in providing quality personal care services. We also utilize consumer-directed sales, marketing and advertising programs designed to attract consumers.
With respect to our hospice and home health patients, we receive substantially all of our referrals through other health care providers, such as hospitals, physicians, nursing homes and assisted living facilities. We have a team of community liaisons in our hospice and home health operations that educate and develop relationships with other health care providers and the community at large.
Payment for Services
We are reimbursed for substantially all of our services by federal, state and local government programs, such as Medicare and Medicaid state programs, managed care organizations, other state agencies and the Veterans Health Administration. In addition, we are reimbursed by commercial insurance and private pay consumers. Depending on the type of service, coverage for services may be predicated on a case manager, physician or nurse determination that the care is necessary or on the development of a plan for care in the home.
Illinois Department on Aging
A significant amount of our net service revenues from our personal care segment are derived from one specific payor client, the Illinois Department on Aging, which accounted for 21.4% and 23.0% of our net service revenues for 2021 and 2020, respectively. The Illinois Department on Aging coordinates programs and community-based services intended to improve quality of life and preserve the independence of older individuals. The Illinois Department on Aging is funded by Medicaid and general revenue funds of the state of Illinois, and also receives funding available under the federal Older Americans Act (“OAA”). The Department on Aging’s Community Care Program (“CCP”) provides adult day services, emergency home response and in-home services, which consist of personal care services, to individuals who are age 60 and over and meet other eligibility requirements. Some of these services are provided through Medicaid waivers granted by CMS.
Consumers are identified by “care coordinators” contracted independently with the Illinois Department on Aging. Once a consumer has been evaluated and determined to be eligible for a program, an assigned care coordinator refers the consumer to a list of authorized providers, from which the consumer selects the provider. We provide our services in accordance with a care plan developed by the care coordinator and under administrative directives from the Illinois Department on Aging. We are reimbursed on an hourly fee-for-service basis.
Other Federal, State and Local Payors
Medicare
Medicare is a federal program that provides medical services to persons aged 65 or older and other qualified persons with disabilities or end-stage renal disease. Each of our hospice and home care agencies must comply with the extensive conditions of participation in the Medicare program in order to continue receiving Medicare reimbursement.
Hospice
Medicare beneficiaries who have a terminal illness and a life expectancy of six months or less may elect to receive hospice benefits (i.e., palliative services for management of a terminal illness) in lieu of standard Medicare coverage for treatment. Hospice services are paid under the Medicare Hospice Prospective Payment System (“HPPS”), under which CMS sets a daily rate for each day a patient is enrolled in the hospice benefit. CMS requires hospice providers to submit quality reporting data each year and updates hospice payment rates annually using a market basket index. Hospices that do not satisfy quality reporting requirements are subject to a 2 percentage point reduction to the market basket percentage update. Beginning in 2024, the reduction to the market basket update for failure to satisfy quality reporting requirements will increase to 4 percentage points. Additionally, hospice providers are subject to two specific payment limit caps under the Medicare program each federal fiscal year: the inpatient cap and the aggregate cap, as discussed further in Note 1 to the Notes to Consolidated Financial Statements.
Home Health
CMS reimburses home health agencies under a prospective payment system, paying a national, standardized 30-day period payment rate if a period of care meets a threshold of home health visits. The daily home health payment rate is adjusted for case-mix and area wage levels. CMS uses the Patient-Driven Groupings Model (“PDGM”) as the case-mix classification model to place periods of care into payment categories, classifying patients based on clinical characteristics. An outlier adjustment may be paid for periods of care in which costs exceed a specific threshold amount. CMS updates home health payment rates annually using a market basket index. Home health agencies that do not submit required quality data are subject to a 2 percentage point reduction to the market basket update. In addition, effective January 1, 2022, CMS began implementing a nationwide expansion of the Home Health Value-Based Purchasing (“HHVBP”) Model. Under the HHVBP Model, home health agencies will receive increases or reductions to their Medicare fee-for-service payments of up to 5%. Data collected in each performance year beginning in calendar year 2023 will impact Medicare payments two years later. The HHVBP Model is designed to support greater quality and efficiency of care by shifting from volume-based payments to a model where payments are tied to quality performance.
Effective January 1, 2022, Medicare requires home health agencies to submit a one-time Notice of Admission (“NOA”) for each patient that establishes that the beneficiary is under a Medicare home health period of care. Failure to submit the NOA within five
calendar days from the start of care date will result in a reduction to the 30-day period payment amount for each day from the start of care date until the date the NOA is submitted.
Medicaid Programs
Medicaid is a state-administered program that provides certain social and medical services to qualified low-income individuals and is jointly funded by the federal government and individual states. Reimbursement rates and methods vary by state and service type, but are typically based on an hourly or unit-of-service basis. Rates are subject to adjustment based on statutory and regulatory changes, administrative rulings, government funding limitations and interpretations of policy by individual state agencies. Within guidelines established by federal statutes and regulations, and subject to federal oversight, each state establishes its own eligibility standards, determines the type, amount, duration and scope of services, sets the rate of payment for services and administers its own program. States typically cover intermittent home health services for Medicaid beneficiaries, but cover continuous services for children and young adults with complicated medical conditions and home and community-based services for seniors and people with disabilities.
Payment models vary by state. Currently, home health services are often reimbursed by state Medicaid programs on a fee-for-service basis. For hospice services, the state pays an amount for each day that a beneficiary is under the care of a hospice provider based on the type and intensity of services furnished. Many states are moving the administration of their Medicaid hospice and home health care programs to managed care organizations in order to effectively manage costs.
Currently, personal care services and other HCBS are largely reimbursed on a fee-for-service basis. Some states have received permission from CMS to provide HCBS under waivers of traditional Medicaid requirements. In an effort to control escalating Medicaid costs, states are increasingly requiring Medicaid beneficiaries to enroll in managed care plans for better coordination of HCBS and health care services. For example, over three-quarters of Medicaid beneficiaries in Illinois are a part of the Health Choice Illinois statewide managed care program, which is serviced by various managed care organizations. Reimbursement from the managed care organizations for personal care services is generally on an hourly, fee-for-service basis with rates consistent with or as a percentage of the individual state funded rates, where applicable.
Veterans Health Administration
The Veterans Health Administration operates the nation’s largest integrated healthcare system, with more than 1,200 healthcare facilities, and provides healthcare benefits, including personal care, hospice and home health services, to eligible military veterans. The Veterans Health Administration provides funding to regional and local offices and facilities that support the in-home care needs of eligible aged and disabled veterans. Services are funded by local Veterans Medical Centers and the aid and attendance pension, which reimburses veterans for their otherwise unreimbursed health and long-term care expenses. We currently have relationships and agreements with the Veterans Health Administration to provide personal care services in several states, principally in New Mexico, Illinois and California.
Other
Other sources of funding are available to support personal care, hospice and home health services in different states and localities. For example, many states appropriate general funds or special use funds through targeted taxes or lotteries to finance personal care services for senior citizens and individuals with disabilities. Depending on the state, these funds may be used to supplement existing Medicaid programs or for distinct programs that serve non-Medicaid eligible consumers.
COVID-19 Pandemic Relief
Federal and state governments have passed legislation, promulgated regulations, and taken other administrative actions intended to assist healthcare providers in providing care to COVID-19 patients and other patients during the public health emergency. These temporary measures include relief from Medicare conditions of participation requirements for healthcare providers, relaxation of licensure requirements for healthcare professionals, relaxation of privacy restrictions for telehealth remote communications, promoting use of telehealth by expanding the scope of services for which Medicare reimbursement is available, and limited waivers of fraud and abuse laws for activities related to COVID-19 during the emergency period. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-“Overview” and “Liquidity and Capital Resources” for detailed information regarding COVID-19 pandemic relief.
Commercial Insurance
Most long-term care insurance policies contain benefits for in-home services. Policies are generally subject to dollar limitations on the amount of daily, weekly or monthly coverage provided.
Private Pay
Our private pay services are provided on an hourly or type of services basis. Our rates are established to achieve a pre-determined gross margin, and are competitive with those of other local providers. We bill our private pay consumers for services rendered weekly, bi-monthly or monthly. Other private payors include workers’ compensation programs/insurance, preferred provider organizations and employers.
Insurance Programs and Costs
We maintain workers’ compensation, general and professional liability, cyber, automobile, directors’ and officers’ liability, fiduciary liability and excess liability insurance. We offer various health insurance plans to eligible full-time and part-time employees. We believe our insurance coverage and self-insurance reserves are adequate for our current operations. However, we cannot be certain that any potential losses or asserted claims will not exceed such insurance coverage and self-insurance reserves.
Human Capital
The following is a breakdown of our part- and full-time employees, including the employees in our corporate support center, as of December 31, 2021:
Full-time
Part-time
Total
Caregivers and agency staff
5,005
26,488
31,493
Corporate support centers
5,416
26,499
31,915
Our caregivers, excluding agency staff, provide substantially all of our services and comprise approximately 95.2% of our total workforce. They undergo a criminal background check and are provided with pre-service training and orientation and an evaluation of their skills. In many cases, caregivers are also required to attend ongoing in-service education. In certain states, our caregivers are required to complete certified training programs and maintain a state certification. Approximately 52.1% of our total employees are represented by labor unions. We maintain strong working relationships with these labor unions. We have numerous collective bargaining agreements with the Service Employees International Union (“SEIU”), which are renegotiated from time to time.
We value our employees and believe they are the reason for our success. We strive to provide the following, among other things.
Employee Health and Safety
Addus continues to prioritize the health and safety of our employees. We recognize the importance of employee health and well-being, which can be assessed by measures such as employee satisfaction, work-related injuries and access to healthcare services. Our benefits strategy is to provide an attractive package for our eligible employees with quality care choices that fit their needs. Along with health insurance, we provide a number of benefits to encourage and support the health and safety of our employees, such as dental and vision insurance, disability and life insurance, a 401(k) plan and an employee assistance program.
As the COVID-19 pandemic persists, we recognize the challenges presented and have adjusted our operations to comply with health and safety standards, regulations and guidance provided by the Occupational Safety and Health Administration (“OSHA”), the United States Department of Labor and other regulatory bodies that focus on the safety of employees. The steps taken included, but were not limited to, the following:
•
Developed a multistep program in order to strongly encourage our employees to get the COVID-19 vaccine, which includes offering a vaccine stipend and incentives as well as delivering educational and motivational leadership communications;
•
Issued guidance for clinical and field staff with respect to exposure to COVID-19 and return to service;
•
Providing PPE to caregivers on a regular basis;
•
Established various communication methods in order to communicate up-to-date real-time information relative to COVID-19, including on the Addus Intranet and a texting method to provide caregivers direct information;
•
Completed branch office and corporate support center retrofitting where needed to maintain proper social distancing and implemented prescreen questionnaires; and
•
Implemented remote and flexible work arrangements for the administrative employees in our corporate support centers.
Recruiting and Development
Employee recruiting and retention remains a top priority each year for Addus, as we are committed to hiring and retaining excellent employees. As the labor market continues to be tight and unemployment has declined in comparison to earlier levels, the competition for new caregivers has increased, which will continue to impact our ability to attract and retain new caregivers.
We believe that a strong workplace culture focused on employee engagement enables ongoing learning and promotes the development of individual career growth, necessary to successfully retain and develop diverse talent. Addus recognizes the importance of employee engagement and we have implemented programs focused on new hire experiences and integration, ongoing learning opportunities though the Addus Learning Academy and Addus Institute of Skilled Care Education (“AISCE”), and mentoring through leadership training. The Addus Learning Academy allows employees to access training and resources necessary to build the skills specifically related to their respective positions at Addus. AISCE provides continuing education courses to support licensing and re-certification for our clinical employees.
Communication and Recognition
We are committed to fostering employee satisfaction and wellness through employee recognition programs, communications and services. We have developed two primary communication tools to distribute information to our branches and administrative employees, the SC Connect and Addus Ink newsletters. Addus Ink is a quarterly newsletter that features local branch content from around the country that is focused on fulfilling our Addus Mission and Values. SC Connect is a biweekly newsletter that features important Company updates, information and resources. We have also implemented the Addus Elite Program, which has three levels of recognition; peer to peer, quarterly recognition and Addus Elite Hall of Fame, designed to celebrate the amazing work our employees do on a daily basis. We believe it is important to acknowledge our colleagues, managers, and direct reports who are living our Addus Mission and Values every day.
Community Outreach
We are committed to efforts to make a difference in our communities. Our local investments include providing monetary and personnel contributions to faith based organizations, public housing authorities, public school systems and other non-profit community organizations. For example, we partner with organizations such as The Hope Foundation, which provides resources to families in need of additional help outside of the hospice benefit; the National Minority Health Association, which seeks to mobilize homecare workers to increase vaccination confidence and rates in underserved communities through its Flex for Checks community-based program; and National Association of Area Agencies on Aging, a network of agencies responsible for local planning of home and community based services delivered to older Americans. Additionally, our employees are involved in various local events such as taking part in town parades, holding food drives and providing health and PPE to first responders.
Technology
We currently utilize multiple applications to support our various lines of business and locations for patient accounting. Each application supports its respective line of business and locations with administrative, office, clinical and operating information system needs, including compliance of our operating systems with federal and state privacy, security and interoperability requirements. Each assists our staff in gathering information to improve the quality of consumer care, optimize financial performance, promote regulatory compliance and enhance staff efficiency. Each application is hosted by the vendor in a secure data center, which provides multiple redundancies for storage, power, bandwidth and security.
In order to comply with current and future state and federal regulations around EVV use, we utilize several different vendors and have built interfaces between the EVV vendor and the patient accounting system utilized in the respective branch location. Our caregivers use a mix of Interactive Voice Response (“IVR”) and mobile applications for EVV. In addition, we use these technologies to record basic information about each visit, record start and end times for a scheduled shift, track mileage reimbursement, send text messages to the caregivers and communicate basic payroll information.
We license the Qlik Business Intelligence (“Qlik”) platform to provide historical, current, and forward-looking operational performance analysis. We currently have our personal care and hospice segments integrated into Qlik. Qlik provides high-level historical and current analytical views to measure performance against budget and deliver insight into the various factors driving our execution against our financial, operational, and compliance goals. This analysis is available in summary and detailed views to accommodate user needs at all levels, from senior management to operators in the field.
We utilize the ADPVantage Suite as our base human resources and payroll processing system and use their services and products to manage our leave of absence processes, benefits, 401(k) and flexible spending account administration, garnishment services, payroll tax filings, ACA compliance and filings, and time and attendance. For financial management, we utilize Oracle’s
Planning Budgeting Cloud Service as our solution for budgeting, forecasting, and financial reporting and Oracle Fusion for the general ledger, accounts payable and fixed assets.
Government Regulation
Overview
Our business is subject to extensive federal, state and local regulation. Changes in the laws and regulations, including as a result of governmental responses to the COVID-19 pandemic, or new interpretations of existing laws and regulations may have a material impact on the definition of permissible activities, the relative cost of doing business, and the methods and amounts of payment for care by both governmental and other payors. In addition, differences among state laws may impede our ability to expand into certain markets. If we fail to comply with applicable laws and regulations, we could suffer administrative civil or criminal penalties, including the loss of our licenses to operate and our ability to participate in federal or state programs. In addition, the healthcare industry has experienced, and is expected to continue to experience, extensive and dynamic change. It is difficult to predict the effect of these changes on budgetary allocations for our services. See further discussion at “Management’s Discussion and Analysis of Financial Condition and Results of Operations-“Liquidity and Capital Resources.”
Medicare and Medicaid Participation
To participate in and qualify for reimbursement under Medicare, our home health agencies and hospices must comply with extensive conditions of participation. Likewise, to participate in Medicaid programs, our personal care services, home health agencies and hospices are subject to various requirements imposed by federal and state authorities. If we were to violate the applicable federal and state regulations governing Medicare or Medicaid participation, we could be excluded from participation in federal and state healthcare programs and be subject to substantial administrative, civil and criminal penalties.
Health Reform
The U.S. Congress and certain state legislatures have passed many laws and regulations in recent years intended to effect major change within the national healthcare system, the most prominent of which is the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, “ACA”). The ACA affects how healthcare services are delivered and reimbursed through the expansion of public and private health insurance coverage, reduction of growth in Medicare and Medicaid program spending, and the establishment and expansion of programs that tie reimbursement to quality and integration. The law has been subject to legislative and regulatory changes and court challenges. Although the current presidential administration has indicated its intent to protect the ACA, it is possible that there may be continued changes to the ACA, its implementation or interpretation.
Many states are exploring payment and delivery reform initiatives, including quality of care incentives. Some states use or have applied to use Medicaid waivers granted by CMS to implement the ACA’s Medicaid expansion provisions, impose different eligibility or enrollment restrictions, or otherwise implement programs that vary from federal standards. However, President Biden issued an executive order in 2021 that instructed certain federal governmental agencies to review and reconsider their existing policies and rules that limit access to health insurance coverage and CMS subsequently reduced certain Medicaid program flexibilities it had previously granted. Enrollment in managed Medicaid plans has increased in recent years, as state governments seek to control the cost of Medicaid programs. Managed Medicaid programs enable states to contract with one or more entities for patient enrollment, care management and claims adjudication. The states usually do not relinquish program responsibilities for financing, eligibility criteria and core benefit plan design.
The CMS Innovation Center tests innovative payment and service delivery systems to reduce Medicare and Medicaid program expenditures while maintaining or enhancing quality. For example, the CMS Innovation Center has supported testing of new models of care for “dual eligibles,” funding of home health providers that offer chronic care management services, and establishment of pilot programs that bundle acute care hospital services with physician services and post-acute care services, which may include home health services for certain patients. The Improving Medicare Post-Acute Care Transformation Act of 2014 (“IMPACT Act”) requires HHS, in conjunction with the Medicare Payment Advisory Commission, to propose a unified post-acute care payment model by 2023. A unified post-acute care payment model would pay post-acute care providers, such as long-term care facilities, skilled nursing facilities, and home health agencies, under a single framework according to a patient’s characteristics, rather than the post-acute care setting where the patient receives treatment. These systems could have a material impact on our business. It is difficult to predict the nature and success of future financial or delivery system reforms implemented by HHS, the CMS Innovation Center and other industry participants.
There is uncertainty regarding the potential impact of health reform efforts at the federal and state levels. For example, some members of Congress have proposed measures that would expand government-sponsored coverage, including single-payor models. Some states have implemented or are considering measures such as individual health insurance mandates and public health insurance
options. Other industry participants, such as private payers and large employer groups and their affiliates, may also introduce financial or delivery system reforms. Health reform initiatives and proposals from the government or the private sector may impact prices, our relationships with patients, payers or ancillary providers, and our competitive position, among other effects.
Permits, Licensure and Certificate of Need
Our hospice, home health and personal care services are authorized and/or licensed under various state and county requirements, which cover a variety of topics including standards regarding the provision of medical or care services, clinical records, personnel, infection control and care plans. Additionally, health care professionals at our agencies are required to be individually licensed or certified under state law. Although our personal care service caregivers are generally not subject to licensure requirements, certain states require them to complete pre- and post-employment training programs, background checks, and, in certain instances, maintain state certification. We believe we are currently licensed appropriately as required by the laws of the states in which we operate in all material respects, but additional licensing requirements may be imposed upon us in existing markets or markets that we enter in the future.
Some states also require a provider to obtain a certificate of need or permit of approval (“CON”) before establishing, constructing, acquiring or expanding certain health services, operations or facilities or making certain capital expenditures. These requirements are intended to avoid unnecessary duplication of services. In order to obtain a CON, a state health planning agency must determine that a need exists for the project.
Fraud and Abuse Laws
The laws and regulations governing our operations, including the terms of participation in Medicare, Medicaid and other government programs, impose certain requirements and limitations on our operations, business arrangements and our interactions with providers and consumers. These laws include, but are not limited to, the federal Anti-Kickback Statute, the federal Stark law, the federal False Claims Act (“FCA”), the federal Civil Monetary Penalties Law, other federal and state fraud and abuse, insurance fraud, and fee-splitting laws, which may extend to services reimbursable by any payer, including private insurers.
The fraud and abuse laws and regulations to which we are subject include but are not limited to:
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The federal Anti-Kickback statute, which prohibits providers and others from directly or indirectly soliciting, receiving, offering or paying any remuneration with the intent of generating referrals or orders for services or items covered by a federal health care program. Courts have interpreted this statute broadly and held that there is a violation of the Anti-Kickback Statute if just one purpose of the remuneration is to generate referrals.
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The federal physician self-referral law, commonly known as the Stark Law, which prohibits physicians from referring Medicare and Medicaid patients to healthcare entities in which they or any of their immediate family members have ownership interests or other financial arrangements, if these entities provide certain “designated health services” (including home health services) reimbursable by Medicare or Medicaid, unless an exception applies. The Stark Law also prohibits entities that provide designated health services reimbursable by Medicare and Medicaid from billing the Medicare and Medicaid programs for any items or services that result from a prohibited referral and requires the entities to refund amounts received for items or services provided pursuant to the prohibited referral on a timely basis.
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The federal FCA and similar state laws that govern the submission of claims for reimbursement and prohibit the making of false claims or statements. The government may use the FCA to prosecute Medicare and other government program fraud in areas such as coding errors and billing for services not provided. Among the many other potential bases for liability is the knowing and improper failure to report and refund amounts owed to the government within 60 days of identifying an overpayment. Submission of claims for services or items generated in violation of the Anti-kickback Statute constitutes a false or fraudulent claim under the FCA. The federal government has taken the position, and some courts have held, that providers who allegedly have violated other statutes, such as the Stark Law, have thereby submitted false claims under the FCA. The FCA may be enforced directly by the federal government or by a whistleblower on the government’s behalf.
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The federal Civil Monetary Penalties Law, which prohibits, among other conduct, offering remuneration to influence a Medicare or Medicaid beneficiary’s selection of a healthcare provider, contracting with an individual or entity known to be excluded from a federal healthcare program, billing for services not rendered or for medically unnecessary services, misrepresenting actual services rendered in order to obtain higher reimbursement, and the failure to return overpayments in a timely manner.
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State anti-kickback and self-referral provisions, false claims laws, insurance fraud laws, and fee-splitting laws. The scope and interpretation of these state laws vary, and in some cases apply to items or services reimbursed by any payer, including patients and commercial insurers.
Penalties for violation of various fraud and abuse laws or other failure to substantially comply with the numerous conditions of participation in the Medicare or Medicaid programs may result in criminal penalties, civil sanctions, including substantial civil monetary penalties, and exclusion from participation in federal healthcare programs, including Medicare and Medicaid.
Payment Integrity
We are subject to routine and periodic surveys and audits by various governmental agencies and other payors. From time to time, we receive and respond to survey reports containing statements of deficiencies. Periodic and random audits conducted or directed by these agencies could result in a delay in receipt or an adjustment to the amount of reimbursements due or received under federal or state programs.
CMS and state Medicaid agencies contract with third parties to promote the integrity of the Medicaid and Medicare programs through reviews of quality concerns and detections and corrections of improper payments. For example, CMS and state Medicaid agencies contract with recovery audit contractors (“RACs”) on a contingency fee basis to conduct post-payment reviews to detect and correct improper payments in the Medicare and Medicaid programs. In addition, CMS engages unified program integrity contractors (“UPICS”) to perform proactive analysis, audits, investigations and other program integrity functions across the Medicare and Medicaid programs, with the goal of identifying and deterring fraud and abuse to avoid improper payments.
From time to time, various federal and state agencies, such as HHS, issue pronouncements that identify practices and provider types that may be subject to heightened scrutiny, as well as practices that may violate fraud and abuse laws. We believe, but cannot assure you, that our operations comply with the principles expressed by HHS in these reports, advisories and guidance.
HIPAA and Other Privacy and Security and Data Exchange Requirements
The Health Insurance Portability and Accountability Act of 1996, as amended (“HIPAA”) and its implementing regulations require the use of uniform electronic data transmission standards and code sets for certain healthcare claims and reimbursement payment transactions submitted or received electronically. HIPAA extensively regulates the use, disclosure, confidentiality, availability and integrity of individually identifiable health information, known as “protected health information,” and provides for a number of individual rights with respect to such information. As a “covered entity” subject to HIPAA, we are required to maintain privacy and security policies, train workforce members, maintain physical, administrative, and technical safeguards, enter into confidentiality agreements with vendors that handle protected health information (“business associates”), and permit individuals to access and amend their protected health information. In addition, we must report any breaches of unsecured protected health information. HIPAA violations may result in criminal penalties and significant civil penalties. Other federal and state laws and regulations that apply to the collection, use, retention, protection, security, disclosure, transfer and other processing of personal data, such as the California Consumer Protection Act, which was recently significantly modified by the California Privacy Rights Act, may impose additional or inconsistent obligations and/or result in additional penalties. Health care providers and industry participants are also subject to a growing number of requirements intended to promote the interoperability and exchange of patient health information, including prohibitions on information blocking.
Environmental, Health and Safety Laws
We are subject to federal, state and local regulations governing the storage, transport, use and disposal of hazardous materials and waste products. In the event of an accident involving such hazardous materials, we could be held liable for any damages that result, and any liability could exceed the limits or fall outside the coverage of our insurance. We may not be able to maintain insurance on acceptable terms, or at all.
In addition, we could be affected by climate change to the extent that climate change results in severe weather conditions or other disruptions impacting the communities in which we conduct operations or adversely impacts general economic conditions, including in communities in which we conduct operations. At the current time, our compliance with environmental legal requirements, including legal requirements relating to climate change, do not have a material effect on our capital expenditures, financial results or operations, and we did not incur material capital expenditures for environmental matters during the year ended December 31, 2021. However, it is possible that developments may arise in the future arising from climate change or other environmental developments that we are unable to currently predict.
Access to Public Filings
Through our website, www.addus.com, we make available, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. In addition to our website, the SEC maintains an internet site that contains our reports, proxy and information statements, and other information that we file electronically with the SEC at www.sec.gov. The references to our website address in this Form 10-K do not constitute incorporation by reference of the information contained on the website and should not be considered part of this document.

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ITEM 1A. RISK FACTORS
ITEM 1A.
RISK FACTORS
Any of the risks described below, and the risks described elsewhere in this Form 10-K, could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows, cause the trading price of our common stock to decline and cause the actual outcome of matters to differ materially from our current expectations as reflected in forward-looking statements made in this Form 10-K. The considerations and risks that follow are organized within relevant headings but may be relevant to other headings as well. The risk factors described below and elsewhere in this Form 10-K are not the only risks we face. Our business and consolidated financial condition, results of operations and cash flows may also be materially adversely affected by factors that are not currently known to us, by factors that we currently consider immaterial or by factors that are not specific to us, such as general economic conditions.
You should refer to the explanation of the qualifications and limitations on forward-looking statements under “Special Caution Concerning Forward-Looking Statements.” All forward-looking statements made by us are qualified by the risk factors described below.
Risks Related to the COVID-19 Pandemic and External Factors
The COVID-19 pandemic could negatively affect our operations, business and financial condition, and our liquidity could also be negatively impacted, particularly if the U.S. economic and/or public health conditions deteriorate in connection with the pandemic.
On January 31, 2020, the Secretary of HHS declared a national public health emergency due to a novel coronavirus. In March 2020, the World Health Organization declared the outbreak of COVID-19, the disease caused by this novel coronavirus, a pandemic. The disease continues to be widespread throughout the United States and other parts of the world and continues to affect the overall economic conditions in the United States. In response to the emergence of new variants and increasing cases, various governmental authorities and private businesses have continued or are re-imposing certain measures intended to contain the spread of the virus, such as masking and vaccine mandates. At this time, it is difficult to predict the future impact of the pandemic on economic conditions in the United States and our business.
Our home health and hospice providers have experienced difficulty in accessing facility-based patients because of concerns about the spread of COVID-19, and we expect that this difficulty will continue. As front-line providers of healthcare services and personal care services, our employees that contract COVID-19 could be unable to continue to perform their duties, and we could face litigation if our employees or customers contract COVID-19 while our employees perform their duties. In addition, we have incurred and will continue to incur additional costs related to protecting the health and well-being, and meeting the needs, of our patients, employees, and contractors as we implement operational changes in response to the pandemic. Staffing, equipment, pharmaceutical and medical supplies shortages may impact our ability to schedule and treat patients. While the COVID-19 pandemic has not had a material effect on our business, financial condition and results of operations, the extent of future impact will depend on future developments that cannot be accurately predicted at this time, including the severity and transmission rate of prevalent strains of COVID-19, the extent and effectiveness of containment actions taken, the timing, availability and effectiveness of medical treatments, vaccines and booster shots, and the impact of any mutations of the virus.
If general economic conditions or public health conditions deteriorate, our liquidity and ability to repay our outstanding debt may be harmed. Furthermore, the COVID-19 pandemic has previously caused disruption in the financial markets and the businesses of financial institutions and may do so again, potentially causing a slowdown in the decision-making of these institutions. This may affect the timing on which we may obtain any additional funding and there can be no assurance that we will be able to raise additional funds on terms acceptable to us, if at all. Depending on the severity and length of any potential economic downturn, states could face significant fiscal challenges and revise their revenue forecasts and adjust their budgets, and sales tax collections and income tax withholdings could be depressed in fiscal year 2021 (which began July 1 in most states), and, potentially, future fiscal years. In this regard, Illinois, New Mexico and New York, our top three personal care markets, previously revised revenue estimates downward for the 2021 fiscal year as the result of earlier negative economic conditions arising from the pandemic. Also in response to reduced revenues, the state of New York authorized the issuance of short-term bonds and implemented uniform reductions to Medicaid payments. Effective for dates of service on or after April 2, 2020, the uniform reduction rate is 1.5%. The reduction applies to home health services but hospice services are exempt. We cannot determine the impact that COVID-19 may have on states’ budgets for 2022 or beyond, or if additional federal stimulus measures will be provided. However, such impacts could have a material adverse effect on our financial condition, results of operations and cash flows.
Due to the widespread availability of vaccinations and other factors, various restrictions that previously limited non-essential employment opportunities in most states that we operate in have been lifted. As the labor market continues to be tight and unemployment has declined in comparison to earlier levels, the competition for new caregivers has increased, which will continue to impact our ability to attract and retain new caregivers. In addition, the competition for skilled healthcare staff has increased significantly, which continues to impact our ability to attract and retain qualified skilled healthcare staff.
OSHA adopted a rule in November 2021 which would require all employers with 100 or more employees to require their workforce to be fully vaccinated or, alternatively, to provide a negative COVID-19 test result on a weekly basis. CMS also issued an interim rule in November 2021 requiring COVID-19 vaccinations for workers in Medicare- and Medicaid-certified providers and suppliers, including hospices and home health agencies, and covers clinical staff, individuals providing services under arrangements, volunteers and staff who are not involved in direct patient care. On January 13, 2022, the U.S. Supreme Court blocked the implementation of the OSHA rule but allowed the CMS interim rule to take effect. In response, President Biden rescinded the private employer mandate and called on states and businesses to voluntarily institute vaccination requirements to protect workers, customers and the broader community. We are monitoring developments related to these plans as information becomes available to assess how these plans, including any national, state or local vaccine mandates, may impact our workforce in personal care, home health, hospice and our corporate support centers. It is currently difficult to predict the impact that any of these vaccine mandates may have on us or the extent to which these vaccine mandates will ultimately become effective. However, these vaccine mandates, to the extent they become effective, could result in the loss of personnel who are unvaccinated, including at our hospitals and other healthcare facilities, in a manner that adversely affects us.
The foregoing and other continued disruptions to our business as a result of the COVID-19 pandemic could result in an adverse effect on our business, result of operations, financial condition, liquidity, cash flows and our ability to service our indebtedness. Furthermore, the COVID-19 pandemic could heighten the risks in certain of the other risk factors described in this Annual Report on Form 10-K.
We are unable to predict the ultimate impact of the CARES Act and other existing or future stimulus or relief legislation, if any, or the effect that such legislation and other governmental responses intended to assist healthcare providers in responding to the COVID-19 pandemic may have on our business, financial condition, results of operations or cash flows. There can be no assurance as to the total amount of financial assistance we will receive, or that we will be able to benefit from provisions intended to increase access to resources and ease regulatory burdens for healthcare providers.
In response to the COVID-19 pandemic, federal and state governments have passed legislation, promulgated regulations and taken other administrative actions intended to assist healthcare providers in providing care to COVID-19 and other patients and to provide financial relief to healthcare providers. Together, the CARES Act, the PPPHCE Act, the CAA and the ARPA authorize over $186 billion in funding to be distributed to health care providers through the Provider Relief Fund. These funds are intended to reimburse eligible providers, including public entities and Medicare and/or Medicaid-enrolled providers and suppliers, for healthcare-related expenses or lost revenues attributable to COVID-19. Recipients are not required to repay these funds, provided that they attest to and comply with certain terms and conditions, including not using Provider Relief Fund payments to reimburse expenses or losses that other sources are obligated to reimburse and submitting reports as required by HHS. The Company has acquired and may in the future acquire companies that have received funds from the Provider Relief Fund. The Company has also received amounts from the Provider Relief Fund and utilized a portion of those funds to offset increased healthcare related expenses attributable to COVID-19 that were unreimbursed by other sources and returned any unused funds. Recipients of Provider Relief Fund payments are subject to audit requirements, and we expect that recipients of funds from the Provider Relief Fund will be subject to significant scrutiny by the federal government. We have structured and will continue to structure our use of these funds in accordance with the terms and conditions, but federal regulators may disagree with our interpretation of these terms and conditions and require that we repay some or all amounts received at our facilities and pay or impose other penalties.
The CARES Act also makes other forms of financial assistance available to healthcare providers, including through Medicare and Medicaid payment adjustments and an expansion of the Medicare Accelerated and Advance Payment Program, which makes available advance payments of Medicare funds in order to increase cash flow to providers. Hospice and home health providers were able to request an advance or accelerated payment of up to 100% of the Medicare payment amount for a three-month period (not including Medicare Advantage payments). In addition to financial assistance, the CARES Act and related legislation include provisions intended to increase access to medical supplies and equipment and ease legal and regulatory burdens on healthcare providers, as well as certain federal income and other tax changes, including the deferral of the employer portion of Social Security payroll taxes.
Many of these measures, such as flexibilities related to the provision of telehealth services, are effective only for the duration of the public health emergency. The current public health emergency determination expires April 16, 2022, but HHS has indicated it will provide states with 60 days’ notice prior to termination of the declaration. The HHS Secretary may choose to renew the declaration for successive 90-day periods for as long as the emergency continues to exist and may terminate the declaration whenever he determines that the public health emergency no longer exists. It is unclear for how long the public health emergency declaration will be extended. The CARES Act also includes numerous income tax provisions including changes to the net operating loss rules and business interest expense deduction rules.
There is still a high degree of uncertainty surrounding the CARES Act and related legislation, and the pandemic continues to evolve. The federal government may consider additional stimulus and relief efforts, but we are unable to predict whether additional measures will be enacted or their impact. There can be no assurance as to the total amount of financial and other types of assistance
we will receive under existing or future legislation, if any, and it is difficult to predict the impact of such legislation on our operations or how it will affect operations of our competitors. Further, there can be no assurance that the terms and conditions of the Provider Relief Fund or other programs will not change in ways that affect funding we may receive, our ability to comply with such terms and conditions in the future or our eligibility to participate. We continue to assess the potential impact of the COVID-19 pandemic and government responses to the pandemic, including the CARES Act and related legislation, on our business, financial condition, results of operations and cash flows.
We may be more vulnerable to the effects of a public health emergency than other businesses due to the nature of our consumers and the physical proximity required by our operations.
The majority of our consumers and patients are older individuals, many of whom may be more vulnerable than the general public during a pandemic or in a public health emergency due to complex medical conditions or other socioeconomic factors. Our employees are also at greater risk of contracting contagious diseases due to their increased exposure to vulnerable consumers. Due to the physical proximity required to offer many of our services, our employees could have difficulty attending to our consumers if social distancing policies or quarantines are instituted in response to a public health emergency. In addition, the Company may expand existing internal policies in a manner that may have a similar effect. At times of high COVID-19 prevalence during the Company’s most recently completed fiscal year, a significant number of our employees were unable to provide services because of quarantine policies. If another pandemic were to occur, or the existing COVID-19 pandemic does not abate or worsens, we could again suffer significant losses to our consumer population or a reduction in the availability of our employees. According to the Centers for Disease Control and Prevention, older adults and people with certain underlying medical conditions are at a higher risk for serious illness from COVID-19. Although the impact of the COVID-19 pandemic on our results of operations has not been material, the extent to which it may impact our results in the longer term is uncertain. Accordingly, certain public health emergencies could have a material adverse effect on our financial condition and results of operations.
Risks Related to our Growth Strategy
Our growth strategy depends on our ability to manage growing and effectively integrating operations and we may not be successful in managing this growth.
Our business plan calls for significant growth in business over the next several years through the expansion of our services in existing markets and the establishment of a presence in new markets. This growth has placed and continues to place significant demands on our management team, systems, internal controls and financial and professional resources. In addition, we will need to further develop our financial controls and reporting systems to accommodate our growth. This could require us to incur expenses for hiring additional qualified personnel, retaining professionals to assist in developing the appropriate control systems and expanding our information technology infrastructure. Our inability to effectively manage growth could have a material adverse effect on our financial results.
Previously completed or future acquisitions, or growth initiatives, may be unsuccessful and could expose us to unforeseen liabilities.
Our growth strategy includes geographical expansion into new markets and the addition of new services in existing markets through the acquisition of local service providers. These acquisitions involve significant risks and uncertainties, including difficulties assimilating acquired personnel and other corporate cultures into our business, the potential loss of key employees or consumers of acquired providers, regulatory risks, the assumption of liabilities, exposure to unforeseen liabilities of acquired providers, and the diversion of the management team’s attention. In the past, we have made acquisitions that have not performed as expected or that we have been unable to successfully integrate with our existing operations. In addition, our due diligence review of acquired businesses may not successfully identify all potential issues. Further, following completion of an acquisition, we may not be able to maintain the growth rate, levels of revenue, earnings or operating efficiency that we and the acquired business have achieved or might achieve separately. While we continue to seek out and pursue acquisition opportunities, we are doing so with additional caution and diligence due to COVID-19 related considerations. The failure to effectively integrate future acquisitions could have a material adverse impact on our operations.
We have grown our business through de novo offices and we may in the future selectively open new offices in existing and new states. De novo offices involve risks, including those relating to licensing, accreditation, and payor program enrollment, hiring new personnel, establishing relationships with referral sources and delays or difficulty in installing our operating and information systems. We may not be successful in generating sufficient business activity to sustain the operating costs of such de novo operations.
We may be unable to pursue acquisitions or expand into new geographic regions without obtaining additional capital or consent from our lenders.
At December 31, 2021 and 2020, we had cash balances of $168.9 million and $145.1 million, respectively, and $224.9 million and $196.6 million, respectively, of outstanding debt on our credit facility. After giving effect to the amount drawn on our credit facility, approximately $8.2 million and $9.0 million of outstanding letters of credit at December 31, 2021 and 2020, respectively, and borrowing limits based on an advanced multiple of Adjusted EBITDA (as defined in the Credit Agreement), we had $143.6 million and $112.6 million available for borrowing under our credit facility as of December 31, 2021 and 2020, respectively. Since our credit facility provides for borrowings based on a multiple of an Adjusted EBITDA ratio, any declines in our Adjusted EBITDA would result in a decrease in our available borrowings under our credit facility.
We cannot predict the timing, size and success of our acquisition efforts, our efforts to expand into new geographic regions or the associated capital commitments. If we do not have sufficient cash resources or availability under our credit facility, our growth could be limited unless we obtain additional equity or debt financing. In the future, we may elect to issue additional equity securities in conjunction with raising capital, completing an acquisition or expanding into a new geographic region. Such issuances could be dilutive to existing shareholders. In addition, our ability under our credit facility to consummate acquisitions is restricted if we exceed certain Total Net Leverage Ratio (as defined in the Credit Agreement, and subject to adjustments as provided therein) thresholds, without the consent of the lenders; provided, however, in certain circumstances, in connection with a Material Acquisition (as defined in the Credit Agreement), we can elect to increase our Total Net Leverage Ratio compliance covenant for the then current fiscal quarter and the three succeeding fiscal quarters. Further, our credit facility requires, among other things, that we are in pro forma compliance with the financial covenants set forth therein and that no event of default exists before and after giving effect to any proposed acquisition. Our ability to expand in a manner consistent with historic practices may be limited if we are unable to obtain such consent from our lenders.
Business Risks
Timing differences in reimbursement may cause liquidity problems.
We fund operations primarily through the collection of accounts receivable, but there is a delay between the time that we provide services and the time that we receive reimbursement or payment for these services. These delays may result from such factors as changes by payors to data submission requirements, requests by fiscal intermediaries for additional data or documentation, other Medicare or Medicaid issues, or information system problems. Further, many of the states in which we operate are operating with budget deficits for the 2021 fiscal year and the ongoing economic impact of the COVID-19 pandemic could impact fiscal year 2022 state budgets. These and other states may in the future delay reimbursement, which would adversely affect our liquidity. In addition, from time to time, procedural issues require us to resubmit claims before payment is remitted, which contributes to our aged receivables. Additionally, we may experience unanticipated delays in receiving reimbursement from state programs due to changes in their policies or billing or audit procedures. Delays in receiving reimbursement or payments from Medicare, Medicaid and other payors may adversely impact our working capital. As a result, working capital management, including prompt and diligent billing and collection, is an important factor in our results of operations and liquidity. Our working capital management procedures may not successfully negate this risk.
We are and have been subject to routine and periodic surveys, audits and investigations by various governmental agencies. In addition to surveys to determine compliance with the conditions of participation, CMS has engaged a number of contractors (including Medicare Administrative Contractors ("MACs"), RACs and UPICs) to conduct audits and investigations to evaluate billing practices and identify overpayments. These audits and investigations can result in recoupments by Medicare and other payors of amounts previously paid to us. In addition to audits by CMS contractors, individual states are implementing similar integrity programs using Medicaid RACs. We are unable to predict what additional government regulations, if any, affecting our business may be enacted in the future, how existing or future laws and regulations might be interpreted or whether we will be able to comply with such laws and regulations either in the markets in which we presently conduct, or wish to commence, business. In certain states, payment of claims may be impacted by the Review Choice Demonstration for Home Health Services, a program intended to identify and prevent fraud, reduce the number of Medicare appeals, and improve provider compliance with Medicare program requirements. The program is limited to home health agencies in Illinois, Ohio, North Carolina, Florida and Texas. Providers in these states may initially select from the following claims review and approval processes: pre-claim review, post-payment review, or a minimal post-payment review with a 25% payment reduction. Home health agencies that maintain high compliance levels will be eligible for additional, less burdensome options. We are currently unable to predict what impact, if any, this program may have on our result of operations or financial position.
Our revenues are concentrated in a small number of states which makes us particularly sensitive to regulatory and economic changes in those states.
Our revenues are particularly sensitive to regulatory and economic changes in states in which we generate a significant portion of our revenues including Illinois, New Mexico and New York. Accordingly, any change in the current demographic, economic, competitive or regulatory conditions in these states could have an adverse effect on our business, financial condition or results of operations. Changes to the Medicaid programs in these states could also have a disproportionately adverse effect on our business, financial condition, results of operations or cash flows.
Future efforts to reduce the costs of the Illinois Department on Aging programs could adversely affect our service revenues and profitability.
For the years ended December 31, 2021 and 2020, we derived approximately 21.4% and 23.0%, respectively, of our revenue from the Illinois Department on Aging programs. Previous state government officials have attempted to reduce government spending by proposing changes aimed at reducing expenditures by this department. The nature and extent of any proposed future cost reduction initiatives is unknown. If future reforms impact the eligibility of consumers for services, the number of hours authorized or otherwise restrict services provided to existing consumers, our service revenues, results of operations, financial position and growth may be adversely affected.
Failure to renew a significant payor agreement or group of related payor agreements may materially impact our revenue.
Each of our agreements is generally in effect for a specific term, but they are also generally terminable with 60 days’ notice. Our ability to renew or retain our agreements depends on our quality of service and reputation, as well as other factors over which we have little or no control, such as state appropriations and changes in provider eligibility requirements. Additionally, failure to satisfy any of the numerous technical renewal requirements in connection with our proposals for agreements could result in a proposal being rejected even if it contains favorable pricing terms. Failure to obtain, renew or retain agreements with major payors may negatively impact our results of operations and revenue. We can give no assurance these agreements will be renewed on commercially reasonable terms or at all.
Negative publicity or changes in public perception of our services may adversely affect our ability to receive referrals, obtain new agreements and renew existing agreements.
Our success in receiving referrals, obtaining new agreements and renewing our existing agreements depends upon maintaining our reputation as a quality service provider among governmental authorities, physicians, hospitals, discharge planning departments, case managers, nursing homes, rehabilitation centers, advocacy groups, consumers and their families, other referral sources and the public. While we believe that the services that we provide are of high quality, if our quality measures, which are published online by CMS, are deemed to be not of the highest value, our reputation could be negatively affected. Negative publicity, changes in public perceptions of our services or government investigations of our operations could damage our reputation and hinder our ability to receive referrals, retain agreements or obtain new agreements. Increased government scrutiny may also contribute to an increase in compliance costs and could discourage consumers from using our services. Any of these events could have a negative effect on our business, financial condition and operating results.
Our business may be harmed by labor relations matters.
We are subject to a risk of work stoppages and other labor relations matters because our hourly workforce is highly unionized. As of December 31, 2021, 52.1% of our workforce was represented by labor unions. We have numerous agreements with local SEIU affiliates which are renegotiated from time to time. These negotiations are often initiated when we receive increases in our hourly rates from various state agencies. Upon expiration of these collective bargaining agreements, we may not be able to negotiate labor agreements on satisfactory terms with these labor unions. A strike, work stoppage or other slowdown could result in a disruption of our operations and/or higher ongoing labor costs, which could adversely affect our business. Moreover, potential changes to federal labor laws and regulations, including those supported by the current presidential administration, could increase the likelihood of employee unionization activity and the ability of employees to unionize. Labor costs are the most significant component of our total expenditures and, therefore, an increase in the cost of labor could significantly harm our business.
If we were required to write down all or part of our goodwill and/or our intangible assets, our net earnings and net worth could be materially adversely affected.
Goodwill and intangible assets with finite lives represent a significant portion of our assets. Goodwill represents the excess of cost over the fair market value of net assets acquired in business combinations. For example, if our market capitalization drops significantly below the amount of net equity recorded on our balance sheet, it might indicate a decline in our fair value and would require us to further evaluate whether our goodwill has been impaired. If as part of our annual review of goodwill and intangibles, we were required to write down all or a significant part of our goodwill and/or intangible assets, our net earnings and net worth could be
materially adversely affected, which could affect our flexibility to obtain additional financing. In addition, if our assumptions used in preparing our valuations for purposes of impairment testing differ materially from actual future results, we may record impairment charges in the future and our financial results may be materially adversely affected. We had $504.4 million and $469.1 million of goodwill and $64.3 million and $71.5 million of intangible assets recorded on our Consolidated Balance Sheets at December 31, 2021 and 2020, respectively.
It is not possible at this time to determine if there will be any future impairment charge, or if there is, whether such charges would be material. We will continue to review our goodwill and other intangible assets for possible impairment. We cannot be certain that a downturn in our business or changes in market conditions will not result in an impairment of goodwill or other intangible assets and the recognition of resulting expenses in future periods, which could adversely affect our results of operations for those periods.
If we fail to maintain an effective system of internal control over financial reporting, such failure could adversely impact our business and stock price.
Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, requires our management to report on, and requires our independent registered public accounting firm to attest to, the effectiveness of our internal control over financial reporting. Compliance with SEC regulations adopted pursuant to Section 404 of the Sarbanes Oxley Act requires annual management assessments of the effectiveness of our internal control over financial reporting. Compliance with Section 404(b) of the Sarbanes-Oxley Act has increased our legal and financial compliance costs making some activities more difficult, time-consuming or costly and may also place strain on our personnel, systems and resources.
Accordingly, we are required to have an audit of our internal control over financial reporting. Our management previously determined that a material weakness in our internal control existed as of December 31, 2018, and that two additional material weaknesses existed as of December 31, 2019. Although each of these material weaknesses was remediated as of December 31, 2020 and management determined that our internal control over financial reporting was effective as of that date, as discussed in Item 9A of Part II of the Annual Report on Form 10-K for the year ended December 31, 2020, we cannot assure you that we will not identify another material weakness in the future.
To the extent that we now or in the future have deficiencies in our internal control over financial reporting that are not remediated, our ability to accurately and timely report our financial position, results of operations, cash flows or key operating metrics could be impaired, which could result in a material misstatement in our financial statements, late filings of our annual and quarterly reports under the Exchange Act, restatements of our consolidated financial statements or other corrective disclosures, or other material adverse effects on our business, reputation, results of operations, financial condition or liquidity and could create a perception that our financial results do not fairly state our financial condition or results of operations, any of which could have an adverse effect on the value of our stock.
Compliance with changing laws and regulations including specific program compliance may result in additional expenses and pose challenges for our management team.
The state agencies that contract for our services require us to comply with various laws and regulations affecting the services we provide. We have a compliance officer who monitors and reports on our compliance efforts. The laws and regulations governing our operations are subject to change. The implementation of these changes may require us to increase our efforts to remain compliant, may reduce the authorizations for services to be provided, and may result in certain consumers no longer being eligible for our services, any of which may result in lower revenues and increased costs, reducing our operating performance and profitability. If we continue to serve our consumers without addressing changes in laws and regulations, we are at risk for non-compliance with program requirements and potential penalties.
Regulatory and Regulatory Risks
Our hospice operations are subject to annual Medicare caps. If we exceed the caps, our business and consolidated financial condition, results of operations and cash flows could be materially adversely affected.
Overall payments made by Medicare to each hospice provider number (generally corresponding to each of our hospice agencies) are subject to an inpatient cap and an aggregate cap, which are set each federal fiscal year. The inpatient cap limits the number of days of inpatient care to no more than 20% of total patient care days. The aggregate cap limits the amount of Medicare reimbursement a hospice may receive, based on the number of Medicare patients served. If a hospice’s Medicare payments exceed its inpatient or aggregate caps, it must repay Medicare for the excess amount. If payments received under any of our hospice provider numbers exceed these caps, we may be required to reimburse Medicare such excess amounts, which could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows.
Reductions in reimbursement and other changes to Medicare, Medicaid, and other federal, state and local medical and social programs could adversely affect our consumer caseload, units of service, revenues, gross profit and profitability.
A significant portion of our caseload and revenues are derived from government healthcare programs, primarily Medicare and Medicaid. For the year ended December 31, 2021, we derived approximately 58.0% of our net service revenues from state and local governmental agencies, primarily through Medicaid state programs. However, changes in government healthcare programs may decrease the reimbursement we receive or limit access to, or utilization of, our services. As federal healthcare expenditures continue to increase and as some state governments navigate budgetary pressures, federal and state governments have made, and may continue to make, significant changes to the Medicare and Medicaid programs and reimbursement received for services rendered to beneficiaries of such programs. For example, the Budget Control Act of 2011 requires automatic spending reductions to reduce the federal deficit, including Medicare spending reductions of up to 2% per fiscal year, with a uniform percentage reduction across all Medicare programs. CMS began imposing a 2% reduction on Medicare claims in April 2013, and these reductions have been extended through 2030, although the CARES Act and related legislation temporarily suspend this 2% reduction from May 1, 2020, through March 31, 2022, and reduce the sequestration adjustments from 2% to 1% from April 1 through June 30, 2022. The full 2% reduction is currently scheduled to resume July 1, 2022 and the reductions for 2030 have been increased to 2.25% for the first six months and to 3% for the second six months. As a result of the ARPA, an additional Medicare payment reduction of up to 4% was required to take effect in January 2022, although Congress has delayed implementation of this reduction until 2023.
The Medicaid program, which is jointly funded by the federal and state governments, is often a state’s largest program. Governmental agencies generally condition their agreements upon a sufficient budgetary appropriation. Almost all of the states in which we operate have experienced periodic financial pressures and budgetary shortfalls due to challenging economic conditions, including as a result of the COVID-19 pandemic, and the rising costs of healthcare. Reductions to federal support for state Medicaid or other programs could also result in budgetary shortfalls. As a result, many states have made, are considering or may consider making changes in their Medicaid or other state and local medical and social programs, including enacting legislation designed to reduce Medicaid expenditures.
Changes that may occur at the federal or state level to contain costs include:
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limiting increases in, or decreasing, reimbursement rates;
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redefining eligibility standards or coverage criteria for social and medical programs or the receipt of services under those programs;
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increasing consumer responsibility, including through increased co-payment requirements;
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decreasing benefits, such as limiting the number of hours of personal care services that will be covered;
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changing reimbursement methodology and program participation eligibility;
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slowing payments to providers;
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increasing utilization of self-directed care alternatives or “all inclusive” programs;
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shifting beneficiaries to managed care organizations; and
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implementing demonstration projects and alternative payment models.
Certain of these measures have been implemented by, or are proposed in, states in which we operate. For example, we provide support services as a fiscal intermediary to the New York Consumer Directed Personal Assistance Program (“CDPAP”), a self-directed care alternative program that allows eligible individuals who need help with activities of daily living or skilled nursing services to choose their caregivers. In 2019, New York initiated a new Request For Offer (“RFO”) process to competitively procure CDPAP fiscal intermediaries. We were not selected in the initial RFO process. We submitted a formal protest in response to the selection process, which was filed and accepted in March 2021, but have not yet received a response to the formal protest. The Company recognized approximately $42 million and $3 million in net service revenue and operating income, respectively, from the program for the year ended December 31, 2021.
The New York fiscal year 2022 state budget included a provision to add additional fiscal intermediaries (one or two entities per county with specified population sizes, plus entities that meet various other requirements) to those awarded contracts as a Lead Fiscal Intermediary under the initial RFO process, based on the scoring of the original RFO. As scoring of RFOs was not publicly released, it is unknown at this time if the Company’s score ranked high enough to qualify for these additional awards. The Company has submitted a response to the survey issued by the New York Department of Health to determine the additional contract awards. The New York Department of Health published an anticipated contract start date for all awards to be no earlier than November 1, 2021, but has not yet announced the exact start date. No later than the contract start date, we will be required to begin transitioning patients within the CDPAP to a fiscal intermediary that has been awarded a contract and cease providing services to those patients. We continue to consider other arrangements and to pursue our protest of the award. Given the uncertainty surrounding the program, the Company has suspended materially all of its new patient admissions under the New York CDPAP program.
Additionally, New York has identified significant expenses in excess of its Medicaid budget and exceeded a cap on the state’s Medicaid growth rate that was established by New York statute. In 2020, New York established a new Medicaid Redesign Team (“MRT II”), which is tasked with restoring financial sustainability to the state’s Medicaid program, among other objectives. Many of the MRT II’s recommended savings measures relate to long-term care services and were enacted in the state budget for state fiscal year 2021, although some were deferred as a result of the COVID-19 pandemic. The New York Department of Health has issued regulatory amendments based on the recommendations that would, among other things, limit eligibility for and access to home care services. Parts of the regulatory amendments related to personal care services and CDPAP, such as limiting consumers to one fiscal intermediary, became effective in November 2021, while other provisions, such as changes to the minimum needs (i.e., eligibility) criteria for consumers, have been delayed. The implementation of these changes and other MRT II recommendations could affect our operations and financial performance. It is not yet clear what healthcare-related initiatives the current governor, who took office in mid-2021, will pursue.
In 2021, we derived approximately 38.2% of our net service revenues from services provided in Illinois, 18.3% of our net service revenues in New Mexico and 11.5% of our net service revenues in New York. Because a substantial portion of our business is concentrated in these states, any significant reduction in expenditures that pay for our services or other significant changes in these states may have a disproportionately negative impact on our future operating results. We cannot predict whether states material to our operating results will timely pass budgets in subsequent years or experience changes or other challenges that negatively impact our ability to be reimbursed for our services in a timely manner.
The ACA made significant changes to Medicare and Medicaid policy and funding, among other broad changes across the healthcare industry, promoting a shift toward value-based care, including implementation of alternative payment models. The ACA also resulted in expanded Medicaid eligibility in many states and the establishment of various demonstration projects and Medicaid programs under which states may apply to test new or existing approaches to payment and delivery of Medicaid benefits. Future health reform efforts or make additional significant changes to the ACA could impact both federal and state programs.
If changes in Medicare, Medicaid or other state and local medical and social programs result in a reduction in available funds for the services we offer, a reduction in the number of beneficiaries eligible for our services or a reduction in the number of hours or amount of services that beneficiaries eligible for our services may receive, then our revenues and profitability could be negatively impacted. Our profitability depends principally on the levels of government-mandated payment rates and our ability to manage the cost of providing services. In some cases, commercial insurance companies and other private payors rely on government payment systems to determine payment rates. As a result, changes to government healthcare programs that reduce Medicare, Medicaid or other payments may negatively impact payments from private payors, as well. Any reduction in reimbursements or imposition of copayments that dissuade the use of our services, or any reduction in reimbursement from private payors, could also materially adversely affect our profitability.
Federal and state regulation may impair our ability to consummate acquisitions or open new agencies.
Federal laws or regulations may adversely impact our ability to acquire home health agencies or open new start-up home health agencies. For example, a Medicare regulation known as the “36 Month Rule” prohibits buyers of Medicare-certified home health agencies from assuming the Medicare billing privileges of an acquired agency if the acquired agency either enrolled in Medicare or underwent a change in majority ownership fewer than 36 months prior to the acquisition, subject to certain exceptions. Instead, the buyer must enroll the acquired home health agencies as new providers with Medicare. The 36 Month Rule can increase competition for acquisition targets that are not subject to the rule and may cause significant Medicare billing delays for the purchases of home health agencies that are subject to the rule. Further, in the past, CMS has limited enrollment of new home health agencies. If another moratorium is imposed on enrollment of new providers in a geographic area we desire to service, our ability to expand operations may be impacted.
Our ability to expand operations in a state will depend on our ability to obtain a state license to operate, and where required, CON approval. States may limit the number of licenses they issue. The failure to obtain any required CON or license could impair our ability to operate or expand our business.
The implementation of alternative payment models and the transition of Medicaid and Medicare beneficiaries to managed care organizations may limit our market share and could adversely affect our revenues.
Many government and commercial payors are transitioning providers to alternative payment models that are designed to promote cost-efficiency, quality and coordination of care. For example, accountable care organizations (“ACOs”) incentivize hospitals, physician groups, and other providers to organize and coordinate patient care while reducing unnecessary costs. Several states have implemented, or plan to implement, accountable care models for their Medicaid populations. If we are not included in these programs, or if ACOs establish programs that overlap with our services, we are at risk for losing market share and for a loss of our current business.
We may be similarly impacted by increased enrollment of Medicare and Medicaid beneficiaries in managed care plans, resulting in a shift from traditional fee-for-service models. Under the managed Medicare program, also known as Medicare Advantage, the
federal government contracts with private health insurers to provide Medicare benefits. Insurers may choose to offer supplemental benefits, including in-home support services, and impose higher plan costs on beneficiaries. Over 40% of Medicare beneficiaries are enrolled in a Medicare Advantage plan, a figure that continues to grow. While hospice services are currently reimbursed as a traditional fee-for-service program under Medicare Part A, hospice services may eventually be offered under Medicare Advantage plans, which could result in reduced reimbursement, limited utilization, and increased competition for managed care contracts.
Enrollment in managed Medicaid plans is also growing, as states are increasingly relying on managed care organizations to deliver Medicaid program services as a strategy to control costs and manage resources. We may experience increased competition for managed care contracts due to state regulation and limitations. For instance, New York law limits the number of home care providers with which a managed Medicaid long-term care plan can contract. We cannot assure you that we will be successful in our efforts to be included in plan networks, that we will be able to secure favorable contracts with all or some of the managed care organizations, that our reimbursement under these programs will remain at current levels, that the authorizations for services will remain at current levels or that our profitability will remain at levels consistent with past performance. In addition, operational processes may not be well defined as a state transitions beneficiaries to managed care. For example, membership, new referrals and the related authorization for services to be provided may be delayed, which may result in delays in service delivery to consumers or in payment for services rendered. Difficulties with operational processes may negatively affect our revenue growth rates, cash flow and profitability for services provided. Other alternative payment models may be presented by the government and commercial payors to control costs that subject our Company to financial risk. We cannot predict at this time what effect alternative payment models may have on our Company.
Our industry is highly competitive, fragmented and market-specific.
We compete with personal care service providers, hospice providers, home health providers, private caregivers, larger publicly held companies, privately held companies, privately held single-site agencies, hospital-based agencies, not-for-profit organizations, community-based organizations and self-directed care programs. Some of our competitors may have greater financial, technical, political and marketing resources, name recognition or a larger number of consumers and payors than we do. In addition, some of these organizations offer more services than we do in the markets in which we operate. These competitive advantages may limit our ability to attract and retain referrals in local markets and to increase our overall market share.
In many states, there are limited barriers to entry in providing personal care services. However, some states require entities to obtain a license before providing home care services. Licensure is generally required of agencies providing home health and hospice services, though requirements vary by state. Some states also require a provider to obtain a CON before establishing certain health services, operations or facilities. CON restrictions may reduce the level of competition in a given industry or in a particular geographic region. In addition, economic changes such as increases in minimum wage and changes in Department of Labor rules can also impact the ease of entry into a market. These factors may affect competition in the states in which we operate.
Often our contracts with payors are not exclusive. Local competitors may develop strategic relationships with referral sources and payors. This could result in pricing pressures, loss of or failure to gain market share or loss of consumers or payors, any of which could harm our business. In addition, existing competitors may offer new or enhanced services that we do not provide, or be viewed by consumers as a more desirable local alternative. The introduction of new and enhanced service offerings, in combination with the development of strategic relationships by our competitors, could cause a decline in revenue, a loss of market acceptance of our services and a negative impact on our results of operations.
If we fail to comply with the laws and extensive regulations governing our business, we could be subject to penalties or be required to make changes to our operations, which could negatively impact our profitability.
The federal government and the states in which we operate regulate our industry extensively. The laws and regulations governing our operations, along with the terms of participation in various government programs, impose certain requirements on the way in which we do business, the services we offer, and our interactions with providers and consumers. These requirements include matters related to:
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licensure and certification and enrollment with government programs;
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eligibility for services;
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appropriateness and necessity of services provided;
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adequacy and quality of services;
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qualifications and training of personnel;
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confidentiality, maintenance, data breach, identity theft, security, interoperability and refraining from information blocking, access and exchange of health-related and personal information and medical records;
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environmental protection, health and safety;
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relationships with physicians, other referral sources and recipients of referrals;
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operating policies and procedures;
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addition of, and changes to, facilities and services;
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adequacy and manner of documentation for services provided;
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billing and coding for services;
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timely and proper handling of overpayments; and
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debt collection and communications with consumers.
These laws include, but are not limited to the federal Anti-Kickback Statute, the federal Stark law, the federal FCA, the federal Civil Monetary Penalties Law, other federal and state fraud and abuse, insurance fraud, and fee-splitting laws, which may extend to services reimbursable by any payer, including private insurers, and federal and state laws governing the security and privacy of health information.
We currently have contractual relationships with current and potential referral sources and recipients, including hospitals and health systems, skilled nursing facilities and certain physicians who provide medical director and clinical services to our Company. We attempt to structure our relationships to meet applicable regulatory requirements, but we cannot provide assurance that every relationship is fully compliant.
Federal and state government agencies have heightened and coordinated civil and criminal enforcement efforts throughout the healthcare industry. While we endeavor to comply with applicable laws and regulations, we cannot assure you that our practices are fully compliant or that courts or regulatory agencies will not interpret those laws and regulations in ways that will adversely affect our practices. We may also fail to discover instances of noncompliance by businesses we acquire, which could subject us to adverse consequences. The laws and regulations governing our business are subject to change, interpretations may evolve and enforcement focus may shift. These changes could subject us to allegations of impropriety or illegality, require restructuring of relationships with referral sources and recipients or otherwise require changes to our operations. Failure to comply with applicable laws and regulations could lead to civil sanctions and criminal penalties, the termination of rights to participate in federal and state healthcare programs, exclusion from federal healthcare programs, the suspension or revocation of licenses and nonpayment or delays in our ability to bill and collect for services provided, any of which could adversely affect our business, results of operations, or financial results.
In addition, as a result of our participation in Medicaid, Medicare and Veterans Health Administration programs and other state and local governmental programs, and pursuant to certain of our contractual relationships, we are subject to various reviews, compliance audits and investigations by governmental authorities and other third parties to verify our compliance with these programs and agreements as well as applicable laws, regulations and conditions of participation. Each of our home care and hospice agencies must comply with the extensive conditions of participation in the Medicare program. If any of our agencies fail to meet any of the conditions of participation or coverage with respect to state licensure or our participation in Medicaid, Medicare programs, Veterans Health Administration programs and other state and local governmental programs, we may receive a notice of deficiency from the applicable surveyor or authority. Failure to implement a plan of action to correct the deficiency within the period provided by the surveyor or authority could result in civil or criminal penalties, damage to our reputation, cancellation of our agreements, suspension or revocation of our licenses, requirements to repay amounts received, disqualification from federal and state healthcare programs, deactivation or revocation of billing privileges, bars on re-enrollment and other negative consequences. These actions may adversely affect our ability to provide certain services, to receive payments from other payors and to continue to operate which could adversely affect our revenues and profitability. Additionally, we could face liability under the FCA if we submit claims to Medicare or Medicaid while not in compliance with certain conditions of participation. Further, actions taken against one of our offices may subject our other offices to adverse consequences.
We are subject to federal, state and local laws and regulations that govern our employment practices, including minimum wage, living wage, and paid time-off requirements. Failure to comply with these laws and regulations, or changes to these laws and regulations that increase our employment-related expenses, could adversely impact our operations.
We are required to comply with all applicable federal, state and local laws and regulations relating to employment, including OSHA requirements, wage and hour and other compensation requirements, employee benefits, providing leave and sick pay, employment insurance, proper classification of workers as employees or independent contractors, immigration and equal employment opportunity laws. These laws and regulations can vary significantly among jurisdictions and can be highly technical. Costs and expenses related to these requirements are a significant operating expense and may increase as a result of, among other things, changes in federal, state or local laws or regulations, or the interpretation thereof, requiring employers to provide specified benefits or rights to employees, increases in the minimum wage and local living wage ordinances, increases in the level of existing benefits or the
lengthening of periods for which unemployment benefits are available. Since our personal care operations are concentrated in Illinois, New Mexico and New York, we are particularly sensitive to changes in laws and regulations in these states. Additionally, the current presidential administration has signaled its support for increases in minimum wage. We may not be able to offset any increased costs and expenses. Furthermore, any failure to comply with these laws, including even a seemingly minor infraction, can result in significant penalties which could harm our reputation and have a material adverse effect on our business. The COVID-19 pandemic has increased some of these risks, with certain states modifying occupational health and safety guidelines in a manner that increases scrutiny and complexity of operations with respect to appropriate training and use in the workplace of PPE and the possibility of corresponding regulatory audit activity with respect to the adequacy of our practices and procedures. The COVID-19 pandemic has also resulted in states modifying standards associated with payment amounts and required justifications to qualify for sick leave and unemployment benefits. These modifications may result in increased operational costs to us, which may adversely impact our financial performance.
In addition, certain individuals and entities, known as excluded persons, are prohibited from receiving payment for their services rendered to Medicaid, Medicare and other federal and state healthcare program beneficiaries. If we inadvertently hire or contract with an excluded person, or if any of our current employees or contractors becomes an excluded person in the future without our knowledge, we may be subject to substantial civil penalties, including civil monetary penalties, an assessment of up to three times the amount claimed and exclusion from the program.
Each of our subsidiaries that employ an average of at least 50 full-time employees in a calendar year are required to offer a minimum level of health coverage for 95% of our full-time employees in 2021 or be subject to an annual penalty.
Our business may be adversely impacted by healthcare reform efforts, including significant modifications to the ACA.
In recent years, the U.S. Congress and certain state legislatures have considered and passed a large number of laws intended to result in significant changes to the healthcare industry, including the ACA. The ACA affects how healthcare services are delivered and reimbursed through the expansion of public and private health insurance coverage, reduction of growth in Medicare and Medicaid program spending, and the establishment and expansion of programs that tie reimbursement to quality and integration. The ACA has been subject to legislative and regulatory changes and court challenges. Although the current presidential administration has indicated that it generally intends to protect and strengthen the ACA, it is possible that there may be continued changes to the ACA, its implementation or its interpretation. Changes by Congress or government agencies could eliminate or alter provisions beneficial to us, while leaving in place provisions reducing our reimbursement or otherwise negatively impacting our business.
There is also uncertainty regarding whether, when and what other health reform measures will be adopted, and the impact of such efforts on providers as well as other healthcare industry participants. Some members of Congress have proposed expanding government-funded coverage, including proposals to expand coverage of federally-funded insurance programs as an alternative to private insurance or to establish a single payor system (such reforms are often referred to as "Medicare for All"), and some states have implemented or proposed public health insurance options.
In addition, CMS administrators may make changes to Medicaid payment models or grant various flexibilities to states in the administration of state Medicaid programs, including by expanding the scope of waivers under which states may implement Medicaid expansion provisions, impose different eligibility or enrollment restrictions, or otherwise implement programs that vary from federal standards. Other industry participants, such as private payors, may also introduce financial or delivery system reforms. We are unable to predict the nature and success of such initiatives. Healthcare reform initiatives, including changes to the ACA, may have an adverse effect on our business, financial condition, and operating results.
The industry trend toward value-based purchasing may negatively impact our revenues.
There is a trend in the healthcare industry toward value-based purchasing of healthcare services among both government and commercial payors. Generally, value-based purchasing programs emphasize quality of outcome and efficiency of care provided, rather than quantity of care provided. For example, Medicare requires hospices and home health agencies to report certain quality data in order to receive full reimbursement. Failure to report quality data or poor performance may negatively impact the amount of reimbursement received. In addition, CMS publishes home health and hospice quality measure data online, through its Care Compare website, to allow consumers and others to search and compare data for Medicare-certified providers. Alongside this quality and public reporting effort, CMS began implementing a nationwide expansion of the HHVBP Model in January 2022. Under the model, home health agencies will receive increases or decreases to their Medicare fee-for-service payments of up to 5%, based on performance against specific quality measures relative to the performance of other home health providers. Data collected in each performance year will impact Medicare payments two years later. Calendar year 2023 is the first performance year under the expanded HHVBP Model, which will affect payments in calendar year 2025.
In the future, CMS may establish new value-based purchasing programs affecting a broader range of providers. Other initiatives aimed at improving quality and cost of care include alternative payment models, including ACOs and bundled payment arrangements.
There are also several state-driven value-based care initiatives. For example, some states have aligned quality metrics across payors through legislation or regulation. Commercial payors are shifting toward value-based reimbursement arrangements as well.
We expect value-based purchasing programs, including programs that condition reimbursement on patient outcome measures, to become more common and to involve a higher percentage of reimbursement amounts. It is unclear whether alternative models will successfully coordinate care and reduce costs or whether they will decrease overall reimbursement. While we believe we are adapting our business strategies to compete in a value-based reimbursement environment, we are unable at this time to predict how this trend will affect our results of operations. If we perform at a level below the outcomes demonstrated by our competitors, fail to satisfy quality data reporting requirements, are unable to meet or exceed quality performance standards under any applicable value-based purchasing program, or otherwise fail to effectively provide or coordinate the efficient delivery of quality healthcare services, our reputation in the industry may be negatively impacted, we may receive reduced reimbursement amounts and we may owe repayments to payors, causing our revenues, financial position, results of operations and cash flows to decline.
Liability Risks
Our operations subject us to risk of litigation.
Operating in the personal care services industry exposes us to an inherent risk of wrongful death, personal injury, professional malpractice and other potential claims or litigation brought by our consumers and employees. From time to time, we are subject to claims alleging that we did not properly treat or care for a consumer that we failed to follow internal or external procedures that resulted in death or harm to a consumer or that our employees mistreated our consumers, resulting in death or harm. We are also subject to claims arising out of accidents involving vehicle collisions brought by consumers whom we are transporting, from employees driving to or from home visits or other affected individuals. We may also be subject to lawsuits from patients, employees and others exposed to COVID-19 at our facilities or in connection with the services provided by our workforce in client residences and third party facilities. Our professional and general liability insurance may not cover all claims against us.
In addition, regulatory agencies may initiate administrative proceedings alleging violations of statutes and regulations arising from our services and seek to impose monetary penalties on us. We could be required to pay substantial amounts to respond to regulatory investigations or, if we do not prevail, damages or penalties arising from these legal proceedings. We also are subject to potential lawsuits under the federal FCA or other federal and state whistleblower statutes designed to combat fraud and abuse in our industry. This and other similar lawsuits can involve significant monetary awards or penalties which may not be covered by our insurance. If our third-party insurance coverage and self-insurance coverage reserves are not adequate to cover these claims, it could have a material adverse effect on our business, results of operations and financial condition. Even if we are successful in our defense, civil lawsuits or regulatory proceedings could distract us from running our business or irreparably damage our reputation.
Our insurance liability coverage may not be sufficient for our business needs.
Although we maintain insurance consistent with industry practice, the insurance we maintain may not be sufficient to satisfy all claims made against us. We cannot assure you that claims will not be made in the future in excess of the limits of our insurance, and any such claims, if successful and in excess of such limits, may have a material adverse effect on our business or assets. We utilize historical data to estimate our reserves for our insurance programs. If losses on asserted claims exceed the current insurance coverage and accrued reserves, our business, results of operations and financial condition could be adversely affected. Changes in our annual insurance costs and self-insured retention limits depend in large part on the insurance market, and insurance coverage may not continue to be available to us at commercially reasonable rates, in adequate amounts or on satisfactory terms.
Data Security and Privacy Risks
Our business depends on the proper functioning, availability, and security of our information systems. Our operations may be disrupted if we are unable to effectively integrate, manage and maintain the security of our information systems.
Our business depends on effective and secure information systems that assist us in, among other things, gathering information to improve the quality of consumer care, optimizing financial performance, adjusting consumer mix, monitoring regulatory compliance and enhancing staff efficiency. We rely on external service providers to provide continual maintenance, upgrading, and enhancement of our primary information systems used for our operational needs. The software we license for our various patient information systems supports intake, personnel scheduling, office clinical and centralized billing and receivables management in an integrated database, enabling us to standardize the care delivered across our network of offices and monitor our performance and consumer outcomes. Information systems may be vulnerable to damage from a variety of sources, including telecommunications or network failures, human acts and natural disasters.
To the extent providers fail to support the software or systems, or if we lose our licenses, our operations could be negatively affected. Our business also depends on a comprehensive payroll and human resources system for basic payroll functions and reporting, payroll tax reporting, managing wage assignments and garnishments. We rely on an external service provider, ADP, to provide
continual maintenance, upgrading and enhancement of our primary human resource and payroll systems. To the extent that ADP fails to support the software or systems, or any of the related support services provided by them, our internal operations could be negatively affected.
Our business also supports the use of EVV to collect visit submission information through our delivery of home care services. Our solution uses a combination of IVR and GPS enabled smartphones to capture time in and time out, mileage and travel time, as well as the completed care plan tasks. We license this software through CellTrak along with partnering with states who utilize other software. We rely on these providers to provide continual maintenance, enhancements, as well as security of any protected data. To the extent that our EVV vendors fail to support these processes, our internal operations could be negatively affected. Under the 21st Century Cures Act, as amended, states had until January 1, 2020 to establish standards for EVV for Medicaid-funded personal care services. States that failed to meet this deadline could potentially lose, without an application for a good cause extension, an escalating amount of their funding. To the extent that the states fail to properly implement EVV and lose an amount of their funding or to the extent states adopt standards for EVV that are not compatible with our operations, our internal operations could be negatively affected.
The COVID-19 pandemic also has led to a substantial increase in administrative employees working remotely and, consequently, accessing our system remotely. As a result, we are more dependent on our systems that facilitate remote access and potentially could experience increased risks.
We have taken precautionary measures to prevent unanticipated problems that could affect our information systems. We have implemented backup of our key information systems that are designed to allow our operations to failover to our geographically separate disaster recovery datacenter with a quick return to operations for all sites and systems in the event our main datacenter becomes inoperable because of a natural disaster, attacks or other cause. All of our sites and branch offices have redundant connections to our primary and backup datacenters using data lines and cellular connections through VPN or MPLS. The key business functions for our main sites also have redundancies with key functions geographically split between our two main facilities, should one not be available due to the above mentioned scenarios. While we believe these measures are reasonable, no system of information security is able to eliminate the risk of business disruptions, and we or our third-party vendors that we rely upon may experience system failures.
If we experience a reduction in the performance, reliability, or availability of our information systems, our operations and ability to process transactions and produce timely and accurate reports could be adversely affected. If we experience difficulties with the transition and integration of information systems or are unable to implement, maintain, or expand our systems properly, we could suffer from, among other things, operational disruptions, regulatory problems, and increases in administrative expenses. The occurrence of any system failure could result in interruptions, delays, the loss or corruption of data and cessations or interruptions in the availability of systems, all of which could have a material, adverse effect on our financial position and results of operations and harm our business reputation.
A cyber-attack or security breach could cause a loss of confidential consumer data, give rise to remediation and other expenses, expose us to liability under HIPAA, consumer protection laws, common law and other legal theories, subject us to litigation and federal and state governmental inquiries, damage our reputation, and otherwise be disruptive to our business.
We rely extensively on computer systems to manage clinical and financial data, to communicate with our consumers, payors, vendors and other third parties, and to summarize and analyze our operating results. We frequently exchange clinical and financial data with third parties in connection with our routine operations and in order to meet our contractual and regulatory obligations. We are required to comply with the federal and state privacy and security laws and requirements, including HIPAA.
In addition, various states, including California, Colorado, Illinois, Nevada, New York, Massachusetts and Virginia have enacted, and other states are expected to enact, laws and regulations concerning privacy, data protection and information security. To the extent we are subject to such legislation, the potential effects of new legislation are often far-reaching and may require us to modify our data processing practices and policies and to incur substantial costs and expenses in an effort to comply. These laws often provide for civil penalties for violations, as well as a private right of action for data breaches that may increase data breach litigation.
We have invested in security measures designed to protect against the threat of security breaches, including cyber attacks, email phishing schemes, malware and ransomware. However, our technology, and that of our third-party service providers, may fail to adequately secure the protected health information and personally identifiable information we create, receive, transmit and maintain in our databases. In such circumstances, we may be held liable to our patients and regulators, which could result in fines, litigation or adverse publicity that could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows. Even if we are not held liable, any resulting negative publicity could harm our business and distract the attention of management.
In spite of our policies, procedures and other security measures used to protect our computer systems and data, occasionally, we have experienced breaches that have required us to notify affected consumers and the government, and we have worked with
consumers and the government to resolve such issues. While these past breaches have not had a significant adverse impact on our business or results of operations, there can be no assurance that we will not be subject to additional and/or more severe cyber-attacks or security breaches in the future. Such attacks or breaches could result in loss of protected patient medical data or other information subject to privacy laws, disrupt our information technology systems or business, subject us to governmental enforcement actions and litigation (the losses associated with which may not be covered by insurance) and otherwise materially and adversely impact our business and results of operations.
Human Capital Risks
We may not be able to attract and retain qualified personnel or we may incur increased costs in doing so.
We must attract and retain qualified non-executive personnel in the markets in which we operate in order to provide our services. We compete for personnel with other providers of social and medical services as well as companies in other service-based industries. As the labor market continues to be tight and unemployment has declined in comparison to earlier levels, the competition for employees has increased, which will continue to impact our ability to attract and retain new caregivers. In addition, the competition for skilled healthcare staff has increased significantly, which continues to impact our ability to attract and retain qualified skilled healthcare staff. To the extent that the United States continues to have lower unemployment levels and shortages of caregivers and skilled healthcare staff, it may continue to hinder our ability to attract and retain sufficient caregivers and skilled healthcare staff to meet the continuing demand for both our non-clinical and clinical services. Moreover, the increased staffing challenges have resulted in, and may continue to result in, increased labor cost to satisfy our staffing requirements. In addition, labor shortages could be further exacerbated by COVID-19 vaccination requirements.
We may not be able to offset higher labor costs by increasing the rates we charge for our services. In addition, if we fail to attract and retain qualified and skilled personnel, our ability to conduct our business operations effectively and our results of operations would be harmed.
Competition may be greater for managers, such as regional and agency directors. Our ability to attract and retain personnel depends on several factors, including our ability to provide employees with attractive assignments and competitive benefits and salaries. The loss of one or more of the members of the executive management team or the inability of a new management team to successfully execute our strategies may adversely affect our business. If we are unable to attract and retain qualified personnel, we may be unable to provide our services, the quality of our services may decline, and we could lose consumers and referral sources.
We depend on the services of our executive team members.
Our success depends upon the continued employment of certain members of our executive team to manage several of our key functional areas, including operations, business development, accounting, finance, human resources, marketing, information systems, contracting and compliance. Moreover, the current competitive labor market may make it more difficult to retain or hire members of our executive team. The departure of any member of our executive team may materially adversely affect our operations.
Risk Related to Our Indebtedness
Restrictive covenants in the agreements governing our indebtedness may adversely affect us.
Our credit facility contains various covenants that limit our ability to take certain actions, including our ability to:
•
make, create, incur, assume or suffer to exist any lien;
•
sell or otherwise dispose of assets, including capital stock of subsidiaries;
•
merge, consolidate, sell or otherwise dispose of all or substantially all our assets;
•
make restricted payments, including paying dividends and making certain loans and investments;
•
create, incur, assume, permit to exist, or otherwise become or remain directly or indirectly liable with respect to any additional indebtedness;
•
enter into transactions with affiliates;
•
engage in any line of additional line of business;
•
amend our organization documents;
•
make a change in accounting treatment or reporting practices, change our name or change our jurisdiction of organization or formation;
•
make any payment or prepayment of certain subordinated indebtedness;
•
enter into agreements that restrict dividends and certain other payments from subsidiaries;
•
engage in a sale leaseback or similar transaction; and
•
make certain capital expenditures.
In addition, our credit facility contains restrictive covenants and requires us to maintain specified financial ratios and satisfy other financial condition tests. Our ability to meet these restrictive covenants and financial ratios and tests may be affected by events beyond our control, and we cannot assure you that we will meet those tests.
A breach of any of these covenants could result in a default under our credit facility. Upon the occurrence of an event of default under our credit facility, all amounts outstanding under our credit facility may become immediately due and payable and all commitments under our credit facility to extend further credit may be terminated. The acceleration of any such indebtedness will result in an event of default under all of our other long-term indebtedness.
The potential cessation or modification of LIBOR may increase our interest expense or otherwise adversely affect us.
A substantial portion of our indebtedness under the credit facility bears interest at variable interest rates that use the London Inter-Bank Offered Rate (“LIBOR”) as a benchmark rate. On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit LIBOR quotations after 2021 (the “FCA Announcement”). The FCA Announcement indicates that the continuation of LIBOR on the current basis cannot and will not be assured after 2021, and LIBOR may cease to exist or otherwise be unsuitable for use as a benchmark. Recent proposals for LIBOR reforms may result in the establishment of new methods of calculating LIBOR or the establishment of one or more alternative benchmark rates. The Amended 2021 Credit Agreement contemplates a transition from LIBOR and specifically identifies the Secured Overnight Financing Rate (“SOFR”) as the replacement reference rate and details the mechanism for transition at LIBOR cessation, which is anticipated to occur on June 30, 2023. The transition to SOFR is not expected to have a material impact on the Company’s results of operations or liquidity.
General Risks
Inclement weather, natural disasters, acts of terrorism, pandemics, riots, civil insurrection or social unrest, looting, protests, strikes or street demonstrations may impact our ability to provide services.
Adverse weather conditions, natural disasters, acts of terrorism, pandemics, riots, civil insurrection or social unrest, looting, protests, strikes or street demonstrations may prevent our employees from providing authorized services. We are not paid for authorized services that are not delivered due to these events. Furthermore, prolonged disruptions as a result of such events in the markets in which we operate could disrupt our relationships with consumers, patients, caregivers and employees and referral sources located in affected areas and, in the case of our corporate office, our ability to provide administrative support services, including billing and collection services. For example, one of our support centers and a number of our agencies are located in the Midwestern United States, New York and California, increasing our exposure to blizzards and other major snowstorms, ice storms, tornadoes, flooding, wildfires and earthquakes. The impact of disasters and similar events is inherently uncertain. Moreover, adverse weather conditions may become more frequent and/or severe as the result of climate change. Future adverse weather conditions, natural disasters, acts of terrorism, pandemics, riots, civil insurrection or social unrest, looting, protests, strikes or street demonstrations may adversely affect our reputation, business and consolidated financial condition, results of operations and cash flows.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.

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ITEM 2. PROPERTIES
ITEM 2.
PROPERTIES
We do not own any real property. We lease administrative offices for our local branches, none of which are individually material. We lease approximately 59,000 and 106,000 square feet of office space in Downers Grove, Illinois and Frisco, Texas, respectively, which serve as our support centers. We sublease approximately 21,000 and 15,500 square feet of our office space in Downers Grove and Frisco, respectively, to third parties.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3.
LEGAL PROCEEDINGS
From time to time, we are subject to legal and/or administrative proceedings incidental to our business. It is the opinion of management that the outcome of pending legal and/or administrative proceedings will not have a material effect on our financial position and results of operations.
Further information with respect to this item may be found in Note 12 to the Consolidated Financial Statements in Part II, Item 8 - “Financial Statements and Supplementary Data,” which is incorporated herein by reference.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is listed on The Nasdaq Global Market under the symbol “ADUS.”
Holders
As of December 31, 2021, 2.0% of our shares of common stock were held by our officers and directors and approximately 98.0% of our common stock was held by 278 institutional investors. An insignificant amount of common stock is held by individual holders. As of February 17, 2022, Addus HomeCare Corporation had approximately 16,930 shareholders of its common stock, including 74 shareholders of record.
Dividends
We have never paid dividends on our common stock, including in the two most recent fiscal years, and we do not intend to pay any dividends on our common stock in the foreseeable future. We currently plan to retain any earnings to support the operation, and to finance the growth, of our business rather than to pay cash dividends. Payments of any cash dividends in the future will depend on our financial condition, capital requirements, credit facility limitations, earnings, as well as other factors deemed relevant by our Board. Our credit facility restricts our ability to declare or pay any dividend or other distribution to Holdings unless no default or event of default has occurred and is continuing or would arise as a result thereof and the aggregate amount of dividends and distributions paid in any fiscal year does not exceed $7.5 million per annum.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6.
[Reserved]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with our Consolidated Financial Statements and the related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements about our business and operations. Our actual results may differ materially from those we currently anticipate as a result of the factors we describe under “Risk Factors” and elsewhere in this Annual Report on Form 10-K and other risks as well as other factors that are not currently known to us, that we currently consider immaterial or that are not specific to us, such as general economic conditions. The discussion of our financial condition and results of operations for the year ended December 31, 2020 compared to the year ended December 31, 2019, included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) can be found in the Annual Report on Form 10-K for the year ended December 31, 2020.
Overview
We are a home care services provider operating three segments: personal care, hospice and home health. Our services are principally provided in-home under agreements with federal, state and local government agencies, managed care organizations, commercial insurers and private individuals. Our consumers are predominantly “dual eligible,” meaning they are eligible to receive both Medicare and Medicaid benefits. Managed care revenues accounted for 37.2%, 38.6% and 37.8% of our revenue during the years ended December 31, 2021, 2020, and 2019 respectively.
A summary of certain consolidated financial and statistical data results for 2021, 2020 and 2019 are provided in the table below.
For the Years Ended December 31,
(Amounts in Thousands, except States and Locations)
Net service revenues - continuing operations
$
864,499
$
764,775
$
648,791
Net income from continuing operations
45,126
33,133
25,811
Loss from discontinued operations
-
-
(574
)
Net income
$
45,126
$
33,133
$
25,237
Total assets
$
947,585
$
892,582
$
636,748
Adjusted EBITDA (1)
$
97,661
$
76,907
$
58,697
States served at period end
Locations at period end
(1)
The Company defines adjusted EBITDA as earnings before discontinued operations, net interest expense, income tax expense, depreciation and amortization, acquisition and de novo expenses, stock-based compensation expense, restructure expenses and other costs, gain or loss on the sale of assets and secondary offering costs. The Company defined adjusted EBITDA to exclude net COVID expenses arising from the pandemic from the second quarter of 2020 to the first quarter of 2021. Adjusted EBITDA is a performance measure used by management that is not calculated in accordance with generally accepted accounting principles in the United States (“GAAP”). It should not be considered in isolation or as a substitute for net income, operating income or any other measure of financial performance calculated in accordance with GAAP. Additionally, our calculation of Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies. Management believes that Adjusted EBITDA is useful to investors, management and others in evaluating the Company’s operating performance, to provide investors with insight and consistency in the Company’s financial reporting and to present a basis for comparison of the Company’s business operations among periods, and to facilitate comparison with the results of the Company’s peers. Additionally, we believe that Adjusted EBITDA is a measure widely used by securities analysts, investors and others to evaluate the financial performance of other public companies. The financial results presented in accordance with U.S. GAAP and a reconciliation of this non-GAAP measure included within this Annual Report on Form 10-K should be carefully evaluated.
COVID-19 Pandemic Update
COVID-19, the disease caused by a novel coronavirus, continues to be widespread throughout the United States and other parts of the world. Although vaccines became widely available in 2021, there continues to be a significant number of COVID-19 cases and deaths in the United States. In response, various governmental authorities and private businesses in the United States have implemented, or reinstituted, certain mitigation strategies, such as masking and vaccine requirements. Economic conditions in the United States significantly improved during 2021 compared to earlier pandemic levels, although inflationary pressures and supply chain disruptions have recently impacted the U.S. economy. The long-term trends of new cases and deaths in the United States and the future impact of the pandemic continues to be unknown.
In September 2021, President Biden announced a federal six-point plan for responding to the COVID-19 pandemic. As part of this plan, OSHA adopted a rule in November 2021 which would require all employers with 100 or more employees to require their
workforce to be fully vaccinated or, alternatively, to provide a negative COVID-19 test result on a weekly basis. Also, CMS issued an interim rule in November 2021 requiring COVID-19 vaccinations for workers in Medicare- and Medicaid-certified providers and suppliers, including hospices and home health agencies, that covers clinical staff, individuals providing services under arrangements, volunteers and staff who are not involved in direct patient care. On January 13, 2022, the U.S. Supreme Court blocked the implementation of the OSHA rule but allowed the CMS interim rule to take effect. In response, President Biden rescinded the private employer mandate and called on states and businesses to voluntarily institute vaccination requirements to protect workers, customers and the broader community. Additionally, some states have implemented, or may implement in the future, vaccine mandates with respect to healthcare personnel. It is currently difficult to predict the impact that any of these vaccine mandates may have on us or the extent to which these vaccine mandates will ultimately become effective. However, we expect that these rules, to the extent that they become effective, will impact our home health and hospice segments.
We are monitoring developments as information becomes available, including with respect to national, state and local vaccine mandates, to access the possible impact on our workforce in personal care, home health, hospice and our corporate support centers. While the Company has not mandated vaccines for our employees, we have developed a multistep program in order to strongly encourage our employees to get the COVID-19 vaccine, which included offering a vaccine stipend and incentives as well as creating educational and motivational leadership communication. These educational and motivational leadership communications are ongoing. We are actively engaged in an effort to track vaccination rates among caregivers and to continue to improve those rates. However, it is difficult to predict the future impact of the pandemic or the federal six-point COVID-19 plan and state and local vaccine mandates on economic conditions in the United States and our business at this time.
For the years ended December 31, 2021 and 2020, COVID-19-related expenses in our personal care segment were approximately $16.5 million and $7.0 million, respectively, which were offset by $12.3 million and $1.4 million, respectively, related to the utilization of the amounts received from the Provider Relief Fund in November 2020 and are included in cost of service revenues on the Consolidated Statements of Income. Additionally, we recognized revenue of $7.1 million and $4.9 million attributable to temporary rate increases from certain payors in our personal care segment for the years ended December 31, 2021 and 2020, respectively.
For the year ended December 31, 2021, COVID-19-related expenses in our hospice segment were approximately $1.9 million, which were offset by $1.9 million related to the utilization of a portion of the funds received from the Queen City Hospice Provider Relief Fund and included in cost of service revenues on the Consolidated Statements of Income.
As of December 31, 2021, the Company deferred the recognition of $6.5 million of payments received from payors for COVID-19 reimbursement, included within accrued expenses, which will be recognized as we incur specific expenses related to the pandemic, such as expenses related to acquiring additional PPE and COVID-19 related paid time off, or will be returned to the extent COVID-19-related expenses are not incurred. We are not able to reasonably predict the total costs we will incur related to the COVID-19 pandemic, and such costs could be substantial.
As the labor market has tightened and unemployment has declined in comparison to earlier levels, the competition for new caregivers, including skilled healthcare staff, has increased significantly. To the extent that we continue to experience a shortage of caregivers, it may continue to hinder our ability to attract and retain sufficient caregivers to meet the continuing demand for both our non-clinical and clinical services. The increased staffing challenges may also result in increased labor cost to satisfy our staffing requirements.
Federal and state agencies continue to issue regulations and guidance related to the COVID-19 pandemic, and the public health situation continues to evolve, and, therefore, we cannot currently predict with certainty the extent to which our business, results of operations, financial condition or liquidity will ultimately be impacted by the pandemic. We will continue to assess the impact and consequences of the COVID-19 pandemic and government responses to the pandemic, including the enactment and implementation of the CARES Act, the PPPHCE Act, the CAA, the ARPA and other stimulus and relief legislation, as well as the implementation of the President’s federal six-point COVID-19 plan and any federal and state vaccine mandates on our business, results of operations, financial condition and cash flows. Given the dynamic nature of these circumstances, the related financial effect cannot be reasonably estimated at this time but is not expected to materially adversely impact our business. See Part I, Item 1A - Risk Factors - “The COVID-19 pandemic could negatively affect our operations, business and financial condition, and our liquidity could also be negatively impacted, particularly if the U.S. economy remains unstable for a significant amount of time” of our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 1, 2021.
See “Liquidity and Capital Resources” below for additional information regarding funds received related to COVID-19 pandemic relief.
Acquisitions
In addition to our organic growth, we have grown through acquisitions that have expanded our presence in current markets, with the goal of having all three levels of in-home care in our markets, or facilitating our entry into new markets where in-home care has been moving to managed care organizations.
On July 1, 2020, we completed the acquisition of A Plus Health Care, Inc. (“A Plus”) for approximately $14.5 million, including the amount of excess cash held by A Plus at the closing of the acquisition (approximately $2.8 million), with funding provided by available cash. With the purchase of A Plus, we expanded our personal care services in the state of Montana.
On November 1, 2020, we completed the acquisition of County Homemakers, Inc. (“County Homemakers”) for approximately $15.8 million, including the amount of acquired excess cash held by County Homemakers at the closing of the acquisition (approximately $1.1 million), with funding provided by available cash. With the purchase of County Homemakers, we expanded our personal care services in the state of Pennsylvania.
On December 4, 2020, we completed the acquisition of Queen City Hospice for approximately $194.8 million, including the amount of acquired excess cash held by Queen City Hospice at the closing of the acquisition (approximately $15.4 million). With the purchase of Queen City Hospice, we expanded our hospice services in the state of Ohio. Additionally, on December 1, 2020, we completed the acquisition of SunLife Home Care (“SunLife”) for approximately $1.7 million. With the purchase of SunLife, we expanded our personal care services in the state of Arizona. We funded these acquisitions through a combination of our revolving credit facility and available cash.
On August 1, 2021, we completed the acquisition of Armada Skilled Homecare of New Mexico LLC, Armada Hospice of New Mexico LLC and Armada Hospice of Santa Fe LLC (collectively, “Armada”) for approximately $29.8 million, including the amount of acquired excess cash held by Armada at the closing of the acquisition (approximately $0.7 million), with funding provided by our revolving credit facility. With the purchase of Armada, we expanded our home health and hospice services in the state of New Mexico.
On October 1, 2021, we completed the acquisition of Summit Home Health, LLC (“Summit”) for approximately $8.1 million, with funding provided by available cash. With the purchase of Summit, we added clinical services in Illinois to our home health segment.
Revenue by Payor and Significant States
Our payor clients are principally federal, state and local governmental agencies and managed care organizations. The federal, state and local programs under which the agencies operate are subject to legislative and budgetary changes and other risks that can influence reimbursement rates. We are experiencing a transition of business from government payors to managed care organizations, which we believe aligns with our emphasis on coordinated care and the reduction of the need for acute care.
For the years ended December 31, 2021, 2020 and 2019, our revenue by payor and significant states by segment were as follows:
Personal Care
Amount
(in Thousands)
% of
Segment
Net
Service
Revenues
Amount
(in Thousands)
% of
Segment
Net
Service
Revenues
Amount
(in Thousands)
% of
Segment
Net
Service
Revenues
State, local and other governmental programs
$
338,325
49.3
%
$
324,670
50.2
%
$
303,479
52.2
%
Managed care organizations
311,801
45.5
287,032
44.3
239,559
41.3
Private pay
19,991
2.9
20,398
3.2
21,765
3.7
Commercial insurance
9,820
1.4
9,991
1.5
9,204
1.6
Other
5,917
0.9
5,142
0.8
6,721
1.2
Total personal care segment net
service revenues
$
685,854
100.0
%
$
647,233
100.0
%
$
580,728
100.0
%
Illinois
$
328,619
47.9
%
$
288,326
44.6
%
$
247,524
42.6
%
New York
99,732
14.5
115,510
17.8
108,403
18.7
New Mexico
97,784
14.3
86,618
13.4
75,666
13.0
All other states
159,719
23.3
156,779
24.2
149,135
25.7
Total personal care segment net
service revenues
$
685,854
100.0
%
$
647,233
100.0
%
$
580,728
100.0
%
Hospice
Amount
(in Thousands)
% of Segment
Net Service
Revenues
Amount
(in Thousands)
% of Segment
Net Service
Revenues
Amount
(in Thousands)
% of Segment
Net Service
Revenues
Medicare
$
142,086
93.3
%
$
94,068
92.9
%
$
49,649
92.6
%
Managed care organizations
5,664
3.7
4,931
4.9
2,768
5.2
Other
4,503
3.0
2,298
2.2
1,184
2.2
Total hospice segment net
service revenues
$
152,253
100.0
%
$
101,297
100.0
%
$
53,601
100.0
%
Ohio
$
61,415
40.3
%
$
-
-
%
$
-
-
%
New Mexico
36,063
23.7
42,648
42.1
38,790
72.4
All other states
54,775
36.0
58,649
57.9
14,811
27.6
Total hospice segment net
service revenues
$
152,253
100.0
%
$
101,297
100.0
%
$
53,601
100.0
%
With the acquisition of Queen City Hospice, the Company expanded its hospice services in the state of Ohio.
Home Health
Amount
(in Thousands)
% of Segment
Net Service
Revenues
Amount
(in Thousands)
% of Segment
Net Service
Revenues
Amount
(in Thousands)
% of Segment
Net Service
Revenues
Medicare
$
20,700
78.4
%
$
12,765
78.6
%
$
11,218
77.6
%
Managed care organizations
4,457
16.9
3,188
19.6
2,942
20.3
Other
1,235
4.7
1.8
2.1
Total home health segment net
service revenues
$
26,392
100.0
%
$
16,245
100.0
%
$
14,462
100.0
%
New Mexico
$
24,735
93.7
%
$
16,245
100.0
%
$
14,462
100.0
%
Illinois
1,657
6.3
-
-
-
-
Total home health segment net
service revenues
$
26,392
100.0
%
$
16,245
100.0
%
$
14,462
100.0
%
With the acquisition of Summit, the Company expanded its home health services in the state of Illinois.
We derive a significant amount of our net service revenues in Illinois, which represented 38.2% and 37.7% of our net service revenues for the years ended December 31, 2021 and 2020, respectively. A significant amount of our revenue is derived from one payor client, the Illinois Department on Aging, the largest payor program for our Illinois personal care operations, which accounted for 21.4% and 23.0% of our net service revenues for the years ended December 31, 2021 and 2020, respectively.
Changes in Reimbursement Rates
Illinois
On November 26, 2019, the City of Chicago voted to approve additional increases in the Chicago minimum wage to $14 per hour beginning July 1, 2020 and to $15 per hour beginning July 1, 2021.
Effective January 1, 2021, the state of Illinois fiscal year 2021 budget increased in-home care rates through the Community Care Program by 7.1%, to $23.40 from $21.84. However, the rate increase was delayed and did not take effect until April 1, 2021, as a result of on-going state revenue declines due to COVID-19 and the failure of the November 2020 referendum to revise the Illinois income tax code. On June 29, 2021, the Governor announced the authorization of bonus payments to providers in an amount equivalent to the rate increase for services delivered from January 1, 2021 to March 31, 2021 for state reimbursed hours of care provided in the fee-for-service context. The bonus payment of $3.0 million was recognized and received during the year ended December 31, 2021. On December 3, 2021, in connection with the same rate increase for in-home care, the Department of Family Services provided approval and direction for retroactive payments for the same period for all claims billed to managed care organizations. The Company recognized $2.0 million related to the rate increase for the year ended December 31, 2021.
The Illinois fiscal year 2022 budget funds a further increase of in-home care rates to $24.96 effective January 1, 2022. On July 12, 2021, in connection with the temporary increase in federal funding for Medicaid home and community-based services authorized by the ARPA, the State of Illinois submitted its Initial Spending Plan and Narrative to CMS for approval. Included in that plan is the acceleration of the rate increase to $24.96 from January 1, 2022, to November 1, 2021. The Company recognized $3.6 million related to the rate increase for the year ended December 31, 2021. CMS granted partial approval of the Illinois plan, but highlighted that the state will need to submit an amendment for certain Medicaid waiver programs with regard to any rate change methodology. The state is preparing this amendment and has not yet spent any funds in connection with the rate acceleration.
Our business will benefit from the rate increases noted above as planned for 2022, but there is no assurance that there will be additional offsetting rate increases in Illinois for fiscal years beyond fiscal year 2022, and our financial performance will be adversely impacted for any periods in which an additional offsetting reimbursement rate increase is not in effect.
Impact of Changes in Medicare and Medicaid Reimbursement
Home Health
Home health services provided to Medicare beneficiaries are paid under the Medicare Home Health Prospective Payment System (“HHPPS”), which uses national, standardized 30-day period payment rates for periods of care that meet a certain threshold of home health visits (periods of care that do not meet the visit threshold are paid a per-visit payment rate for providing care). Although payment is made for each 30-day period, the HHPPS permits continuous 60-day certification periods through which beneficiaries are verified as eligible for the home health benefit. The daily home health payment rate is adjusted for case-mix and area wage levels. CMS uses the PDGM as the case-mix classification model to place periods of care into payment categories, classifying patients based on clinical characteristics and their resource needs. An outlier adjustment may be paid for periods of care where costs exceed a specific threshold amount.
CMS updates the HHPPS payment rates each calendar year. For calendar year 2022, CMS increased HHPPS rates by an estimated 3.2%, which reflects a 3.1% market basket update and a productivity adjustment of negative 0.5 percentage points, among other changes. Home health providers that do not comply with quality data reporting requirements are subject to a 2 percentage point reduction to their market basket update. In addition, beginning January 1, 2022, Medicare requires home health agencies to submit a one-time Notice of Admission (“NOA”) for each patient that establishes that the beneficiary is under a Medicare home health period of care. Failure to submit the NOA within five calendar days from the start of care will result in a reduction to the 30-day period payment amount for each day from the start of care date until the date the NOA is submitted.
Effective January 1, 2022, CMS began implementing a nationwide expansion of the Home Health Value-Based Purchasing (“HHVBP”) Model. Under the model, home health agencies will receive adjustments to their Medicare fee-for-service payments of up to 5%, based on performance against specific quality measures relative to the performance of other home health providers. Data
collected in each performance year will impact Medicare payments two years later. Calendar year 2023 is the first performance year under the expanded HHVBP Model, which will affect payments in calendar year 2025.
In certain states, payment of claims may be impacted by the Review Choice Demonstration for Home Health Services, a program intended to identify and prevent fraud, reduce the number of Medicare appeals and improve provider compliance with Medicare program requirements. The program applies to home health agencies in Illinois, Ohio, North Carolina, Florida and Texas and may expand, in the future, into additional states. Providers in states subject to the Review Choice Demonstration may initially select from the following claims review and approval processes: pre-claim review, post-payment review or a minimal post-payment review with a 25% payment reduction. Home health agencies that maintain high compliance levels will be eligible for additional options that may be less burdensome. We are currently unable to predict what impact, if any, this program may have on our result of operations or financial position.
Hospice
Hospice services provided to Medicare beneficiaries are paid under the Medicare Hospice Prospective Payment System, under which CMS sets a daily rate for each day a patient is enrolled in the hospice benefit. CMS updates these rates each federal fiscal year. Effective October 1, 2021, CMS increased hospice payment rates by 2.0%. This reflects a 2.7% market basket increase and a negative 0.7 percentage point productivity adjustment. Hospices that do not satisfy quality reporting requirements are subject to a 2 percentage point reduction to the market basket update. Beginning in 2024, the reduction to the market basket update for failure to report quality data will increase to 4 percentage points.
Overall payments made by Medicare to each hospice provider number are subject to an inpatient cap and an aggregate cap, which is set each federal fiscal year. The inpatient cap limits the number of days of inpatient care to no more than 20% of total patient care days. The aggregate cap, which limits the total Medicare reimbursement that a hospice may receive based on an annual per-beneficiary cap amount and the number of Medicare patients served, was updated to $31,297.61 for federal fiscal year 2022. If a hospice’s Medicare payments exceed its inpatient or aggregate caps, it must repay Medicare the excess amount.
New York CDPAP
The New York Consumer Directed Personal Assistance Program (“CDPAP”) is a self-directed care alternative program that allows eligible individuals who need help with activities of daily living or skilled nursing services to choose their caregivers. We provide support services as a CDPAP fiscal intermediary. In 2019, New York initiated a new Request for Offer (“RFO”) process to competitively procure CDPAP fiscal intermediaries. On February 11, 2021, the New York Department of Health announced its initial selection of parties to enter into contracts as a Lead Fiscal Intermediary. The Company was not one of the selected entities in the initial RFO process. The Company has submitted a formal protest in response to the selection process, which was filed and accepted on March 19, 2021. The Company has not yet received a response to the formal protest. The Company recognized approximately $42 million and $3 million in revenue and operating income, respectively, from the program for the year ended December 31, 2021. The Company continues to explore its options, including appeals, other arrangements under which the Company may continue to provide these services, and expense reductions to minimize any potential final impact of the RFO process.
The New York fiscal year 2022 state budget included a provision to add additional fiscal intermediaries (one or two entities per county with specified population sizes, plus entities that meet various other requirements) to those awarded contracts as a Lead Fiscal Intermediary under the initial RFO process, based on the scoring of the original RFO. As scoring of RFOs was not publicly released, it is unknown at this time if the Company’s score ranked high enough to qualify for these additional awards. The Company has submitted a response to the survey issued by the New York Department of Health to determine the additional contract awards. The New York Department of Health published an anticipated contract start date for all awards to be no earlier than November 1, 2021, but has not yet announced the exact start date. No later than the contract start date, we will be required to begin transitioning patients within the CDPAP to a fiscal intermediary that has been awarded a contract and cease providing services to those patients. We continue to consider other arrangements and to pursue our protest of the award. Given the uncertainty surrounding the program, the Company has suspended materially all of its new patient admissions under the New York CDPAP program.
Components of our Statements of Income
Net Service Revenues
We generate net service revenues by providing our services directly to consumers and primarily on an hourly basis in our personal care segment, on a daily basis in our hospice segment and on an episodic basis in our home health segment. We receive payment for providing such services from our payor clients, including federal, state and local governmental agencies, managed care organizations, commercial insurers and private consumers.
In our personal care segment, net service revenues are principally provided based on authorized hours, determined by the relevant agency, at an hourly rate, which is either contractual or fixed by legislation, and are recognized at the time services are
rendered. In our hospice segment, net service revenues are provided based on daily rates for each of the levels of care and are recognized as services are provided. In our home health segment, net service revenues are based on an episodic basis at a stated rate and recognized based on the number of days elapsed during a period of care within the reporting period. We also record estimated implicit price concessions (based primarily on historical collection experience) related to uninsured accounts to record revenues.
Cost of Service Revenues
We incur direct care wages, payroll taxes and benefit-related costs in connection with providing our services. We also provide workers’ compensation and general liability coverage for our employees. Employees are also reimbursed for their travel time and related travel costs in certain instances.
General and Administrative Expenses
Our general and administrative expenses include our costs for operating our network of local agencies and our administrative offices. Our agency expenses consist of costs for supervisory personnel, our community care supervisors and office administrative costs. Personnel costs include wages, payroll taxes and employee benefits. Facility costs include rents, utilities, and postage, telephone and office expenses. Our corporate and support center expenses include costs for accounting, information systems, human resources, billing and collections, contracting, marketing and executive leadership. These expenses consist of compensation, including stock-based compensation, payroll taxes, employee benefits, legal, accounting and other professional fees, travel, general insurance, rents, provision for doubtful accounts and related facility costs. Expenses related to streamlining our operations such as costs related to terminated employees, termination of professional services relationships, other contract termination costs and asset write-offs are also included in general and administrative expenses.
Depreciation and Amortization Expenses
Depreciable assets consist principally of furniture and equipment, network administration and telephone equipment and operating system software. Depreciable and leasehold assets are depreciated or amortized on a straight-line method over their useful lives or, if less and if applicable, their lease terms. We amortize our intangible assets with finite lives, consisting of customer and referral relationships, trade names, trademarks and non-competition agreements, using straight line or accelerated methods based upon their estimated useful lives.
Interest Expense
Interest expense is reported when incurred and principally consists of interest and unused credit line fees on the credit facility.
Income Tax Expense
All of our income is from domestic sources. We incur state and local taxes in states in which we operate. Our effective income tax rate was 25.2% and 21.0% for the years ended December 31, 2021 and 2020, respectively, compared to our federal statutory rate of 21.0%. Our higher effective income tax rate in 2021 was principally due to the inclusion of state taxes and non-deductible compensation, partially offset by an excess tax benefit and the use of federal employment tax credits.
Discontinued Operations
Effective March 1, 2013, we sold substantially all of the assets used in our then home health business (the “2013 Home Health Business”) in Arkansas, Nevada and South Carolina, and 90% of the 2013 Home Health Business in California and Illinois. Effective October 1, 2017, we sold the remaining 10% ownership interest in the 2013 Home Health Business in California and Illinois. Therefore, we have segregated the 2013 Home Health Business operating results and presented them separately as discontinued operations for the year ended December 31, 2019, see Note 1, Significant Accounting Policies, to the Notes to Consolidated Financial Statements for additional information.
Results of Operations
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
The following table sets forth, for the periods indicated, our consolidated results of operations.
Change
Net Service
Net Service
Amount
Revenues
Amount
Revenues
Amount
%
Net service revenues
$
864,499
100.0
%
$
764,775
100.0
%
$
99,724
13.0
%
Cost of service revenues
594,651
68.8
538,538
70.4
56,113
10.4
Gross profit
269,848
31.2
226,237
29.6
43,611
19.3
General and administrative expenses
189,418
21.9
169,679
22.2
19,739
11.6
Depreciation and amortization
14,494
1.7
12,051
1.6
2,443
20.3
Total operating expenses
203,912
23.6
181,730
23.8
22,182
12.2
Operating income
65,936
7.6
44,507
5.8
21,429
48.1
Interest income
(268
)
-
(624
)
(0.1
)
(57.1
)
Interest expense
5,806
0.7
3,189
0.4
2,617
82.1
Total interest expense, net
5,538
0.7
2,565
0.3
2,973
115.9
Income before income taxes
60,398
6.9
41,942
5.5
18,456
44.0
Income tax expense
15,272
1.8
8,809
1.2
6,463
73.4
Net income
$
45,126
5.1
%
$
33,133
4.3
%
$
11,993
36.2
%
Net service revenues increased by 13.0% to $864.5 million for the year ended December 31, 2021 compared to $764.8 million in 2020. Net service revenue increased by $38.6 million and $51.0 million in our personal care and hospice segments, respectively, for the year ended December 31, 2021, compared to 2020. Net service revenue increased due to a 7.8% increase in revenues per billable hour for the year ended December 31, 2021 in our personal care segment compared to 2020. The increase in our hospice segment revenue was primarily due to an increase in average daily census and revenue per patient day, mainly attributed to the acquisition of Queen City Hospice on December 4, 2020, partially offset by a decrease in average daily census organic growth, compared to 2021.
Gross profit, expressed as a percentage of net service revenues, increased to 31.2% for the year ended December 31, 2021, from 29.6% in 2020. The increase was mainly attributed to the full-year effect in 2021 of the acquisition of our relatively higher margin hospice segment businesses in 2020.
General and administrative expenses increased to $189.4 million for the year ended December 31, 2021 compared to $169.7 million in 2020. The increase in general and administrative expenses was primarily due to acquisitions that resulted in an increase in administrative employee wages, taxes and benefit costs of $14.0 million. In addition, stock-based compensation increased by $3.4 million for the year ended December 31, 2021 compared to 2020. General and administrative expenses, expressed as a percentage of net service revenues slightly decreased to 21.9% for 2021, from 22.2% in 2020.
Depreciation and amortization increased to $14.5 million for the year ended December 31, 2021 from $12.1 million in 2020, primarily due to the increase of intangible asset amortization related to the full-year effect in 2021 of our fiscal year 2020 acquisitions and fiscal year 2021 acquisitions.
Interest expense increased to $5.5 million from $2.6 million for the year ended December 31, 2021 compared to 2020. The increase in interest expense was primarily due to higher outstanding borrowings under our credit facility for the year ended December 31, 2021 compared to 2020.
All of our income is from domestic sources. We incur state and local taxes in states in which we operate. The effective income tax rate was 25.2% and 21.0% for the years ended December 31, 2021 and 2020, respectively, compared to our federal statutory rate of 21.0%. Our higher effective income tax rate in 2021 was principally due to the inclusion of state taxes and non-deductible compensation, partially offset by an excess tax benefit and the use of federal employment tax credits. For the years ended December 31, 2021 and 2020, the effective tax rates were inclusive of an excess tax benefit of 2.0% and 5.6%, respectively. The excess tax benefit is a discrete item, primarily related to the vesting of equity shares, which requires the Company to recognize the benefit fully in the period.
Results of Operations - Segments
The following tables and related analysis summarize our operating results and business metrics by segment:
Personal Care Segment
For the Years Ended December 31,
Change
Amount
% of
Segment
Net Service
Revenues
Amount
% of
Segment
Net Service
Revenues
Amount
%
(Amounts in Thousands, Except Percentages)
Operating Results
Net service revenues
$
685,854
100.0
%
$
647,233
100.0
%
$
38,621
6.0
%
Cost of services revenues
502,024
73.2
480,191
74.2
21,833
4.5
Gross profit
183,830
26.8
167,042
25.8
16,788
10.1
General and administrative expenses
61,565
9.0
60,468
9.3
1,097
1.8
Segment operating income
$
122,265
$
17.8
%
$
106,574
16.5
%
$
15,691
14.7
%
Business Metrics (Actual Numbers, Except
Billable Hours in Thousands)
Locations at period end
Average billable census * (1)
38,051
39,199
(1,148
)
(2.9
)
%
Billable hours * (2)
30,151
30,645
(494
)
(1.6
)
Average billable hours per census per month * (2)
65.7
64.7
1.0
1.5
Billable hours per business day * (2)
115,521
116,967
(1,446
)
(1.2
)
Revenues per billable hour * (2)
$
22.71
$
21.07
$
1.64
7.8
%
Same store growth revenue % * (3)
7.3
5.9
(1)
Average billable census is the number of unique clients receiving a billable service during the year and is the total census divided by months in operation during the period.
(2)
Billable hours is the total number of hours served to clients during the period. Average billable hours per census per month is billable hours divided by average billable census. Billable hours per day is total billable hours divided by the number of business days in the period. Revenues per billable hour is revenue, attributed to billable hours, divided by billable hours.
(3)
Same store growth reflects the change in year-over-year revenue for the same store base. We define the same store base to include those stores open for at least 52 full weeks. This measure highlights the performance of existing stores, while excluding the impact of acquisitions, new store openings and closures. In addition, the Company has suspended materially all of its new patient admissions under the New York CDPAP program based on program uncertainty and therefore excludes associated revenues from this calculation.
*
Management deems these metrics to be key performance indicators. Management uses these metrics to monitor our performance, both in our existing operations and acquisitions. Many of these metrics serve as the basis of reported revenues and assessment of these, provide direct correlation to the results of operations from period to period and facilitate comparison with the results of our peers. Historical trends established in these metrics can be used to evaluate current operating results, identify trends affecting our business, determine the allocation of resources and assess the quality and potential variability of our cash flows and earnings. We believe they are useful to investors in evaluating and understanding our business but should not be used solely in assessing the Company’s performance. These key performance indicators should not be considered superior to, as a substitute for or as an alternative to, and should be considered in conjunction with, the GAAP financial measures presented herein to fully evaluate and understand the business as a whole. These measures may not be comparable to similarly-titled performance indicators used by other companies.
The personal care segment derives a significant amount of net service revenues from operations in Illinois, which represented 47.9% and 44.6% of our net service revenues for the years ended December 31, 2021 and 2020, respectively. One payor client, the Illinois Department on Aging, accounted for 21.4% and 23.0% of net service revenues for the years ended December 31, 2021 and 2020, respectively. Net service revenues from state, local and other governmental programs accounted for 49.3% and 50.2% of net service revenues for the years ended December 31, 2021 and 2020, respectively. Managed care organizations accounted for 45.5% and 44.3% of net service revenues for the years ended December 31, 2021 and 2020, respectively, with commercial insurance, private pay and other payors accounting for the remainder of net service revenues.
Net service revenues increased by 6.0% for the year ended December 31, 2021 compared to the year ended December 31, 2020 primarily as a result of an increase in revenues per billable hour of 7.8%, mainly attributed to rate increases discussed above. The Company experienced a decrease in New York net service revenues of $15.8 million for the year ended December 31, 2021, primarily driven by a decrease in the New York CDPAP program as discussed above, compared to 2020.
Gross profit, expressed as a percentage of net service revenues, increased from 25.8% for the year ended December 31, 2020 to 26.8% for the year ended December 31, 2021 due to a decrease in direct service employee wages, taxes and benefit costs of 0.7%.
General and administrative expenses increased by approximately $1.1 million for the year ended December 31, 2021. General and administrative expenses, expressed as a percentage of net service revenues was 9.0% and 9.3% for the years ended December 31, 2021 and 2020, respectively. The decrease for the year ended December 31, 2021 compared to 2020 is primarily due to synergies from acquisitions.
Hospice Segment
For the Years Ended December 31,
Change
Amount
% of Segment
Net Service
Revenues
Amount
% of Segment
Net Service
Revenues
Amount
%
(Amounts in Thousands, Except Percentages)
Operating Results
Net service revenues
$
152,253
100.0
%
$
101,297
100.0
%
$
50,956
50.3
%
Cost of services revenues
75,186
49.4
47,197
46.6
27,989
59.3
Gross profit
77,067
50.6
54,100
53.4
22,967
42.5
General and administrative expenses
34,632
22.7
25,394
25.1
9,238
36.4
Segment operating income
$
42,435
27.9
%
$
28,706
28.3
%
$
13,729
47.8
%
Business Metrics (Actual Numbers)
Locations at period end
Admissions * (1)
9,592
6,376
3,216
50.4
%
Average daily census * (2)
2,561
2,619
(58
)
(2.2
)
Average length of stay * (3)
96.5
104.9
(8.4
)
(8.0
)
Patient days * (4)
923,014
657,172
265,842
40.5
Revenue per patient day * (5)
$
164.95
$
154.14
$
10.81
7.0
%
Organic growth
- Revenue * (6)
(6.2
)
%
(5.3
)
%
- Average daily census * (6)
(11.2
)
%
1.2
%
(1)
Represents referral process and new patients on service during the period.
(2)
Average daily census is total patient days divided by the number of days in the period, adjusted for patient days for acquisitions beginning on date of acquisition.
(3)
Average length of stay is the average number of days a patient is on service, calculated upon discharge, and is total patient days divided by total discharges in the period.
(4)
Patient days is days of service for all patients in the period.
(5)
Revenue per patient day is hospice revenue divided by the number of patient days in the period.
(6)
Revenue organic growth and average daily census organic growth reflect the change in year-over-year revenue and average daily census for the same store base. We define the same store base to include those stores open for at least 52 full weeks. These measures highlight the performance of existing stores, while excluding the impact of acquisitions, new store openings and closures.
*
Management deems these metrics to be key performance indicators. Management uses these metrics to monitor our performance, both in our existing operations and acquisitions. Many of these metrics serve as the basis of reported revenues and assessment of these, provide direct correlation to the results of operations from period to period and facilitate comparison with the results of our peers. Historical trends established in these metrics can be used to evaluate current operating results, identify trends affecting our business, determine the allocation of resources and assess the quality and potential variability of our cash flows and earnings. We believe they are useful to investors in evaluating and understanding our business but should not be used solely in assessing the Company’s performance. These key performance indicators should not be considered superior to, as a substitute for or as an alternative to, and should be considered in conjunction with, the GAAP financial measures presented herein to fully evaluate and understand the business as a whole. These measures may not be comparable to similarly-titled performance indicators used by other companies.
Hospice generates revenue by providing care to patients with a life expectancy of six months or less, as well as related services for their families. Hospice offers four levels of care, as defined by Medicare, to meet the varying needs of patients and their families. The four levels of hospice include routine care, continuous care, general inpatient care and respite care. Our hospice segment principally provides routine care, but with the acquisition of Queen City Hospice, the Company expanded continuous care services.
Net service revenues from Medicare accounted for 93.3% and 92.9% and managed care organizations accounted for 3.7% and 4.9% for the years ended December 31, 2021 and 2020, respectively. Net service revenues increased by $51.0 million for the year
ended December 31, 2021 compared to the year ended December 31, 2020 primarily due to increases in average daily census and revenue per patient day, mainly attributed to the acquisition of Queen City Hospice on December 4, 2020, partially offset by a decrease in average daily census organic growth, compared to 2021.
Gross profit, expressed as a percentage of net service revenues was 50.6% and 53.4% for the years ended December 31, 2021 and 2020, respectively. The decrease in gross profit as a percentage of net service revenues was mainly attributed to an increase of direct employee wages, taxes and benefit costs of 3.0%.
The hospice segment’s general and administrative expenses primarily consist of administrative employee wages, taxes and benefit costs, rent, information technology and office expenses. General and administrative expenses, expressed as a percentage of net service revenues was 22.7% and 25.1% for the years ended December 31, 2021 and 2020, respectively. The decrease for the year ended December 31, 2021 compared to 2020 is primarily due to synergies from acquisitions. The increase in general and administrative expenses was primarily due to acquisitions that resulted in a $7.3 million increase in administrative employee wages, taxes and benefit costs and a $0.5 million increase in rent expenses for the year ended December 31, 2021.
Home Health Segment
For the Years Ended December 31,
Change
Amount
% of Segment
Net Service
Revenues
Amount
% of Segment
Net Service
Revenues
Amount
%
(Amounts in Thousands, Except Percentages)
Operating Results
Net service revenues
$
26,392
100.0
%
$
16,245
100.0
%
$
10,147
62.5
%
Cost of services revenues
17,441
66.1
11,150
68.6
6,291
56.4
Gross profit
8,951
33.9
5,095
31.4
3,856
75.7
General and administrative expenses
5,713
21.6
3,773
23.2
1,940
51.4
Segment operating income
$
3,238
12.3
%
$
1,322
8.2
%
$
1,916
144.9
%
Business Metrics (Actual Numbers)
Locations at period end
New admissions * (1)
8,781
4,122
4,659
113.0
%
Recertifications * (2)
3,547
2,578
37.6
Total volume * (3)
12,328
6,700
5,628
84.0
Visits * (4)
183,951
118,470
65,481
55.3
%
Organic growth
- Revenue * (5)
11.3
%
(3.0
)
%
(1)
Represents new patients during the period.
(2)
A home health certification period begins with a start of care visit and continues for 60 days. If at the end of the initial certification, the patient continues to require home health services, a recertification is required. This represents the number of recertifications during the period.
(3)
Total volume is total admissions and total recertifications in the period.
(4)
Represents number of services to patients in the period.
(5)
Revenue organic growth and new admissions organic growth reflect the change in year-over-year revenue and new admissions for the same store base. We define the same store base to include those stores open for at least 52 full weeks. These measures highlight the performance of existing stores, while excluding the impact of acquisitions, new store openings and closures.
*
Management deems these metrics to be key performance indicators. Management uses these metrics to monitor our performance, both in our existing operations and acquisitions. Many of these metrics serve as the basis of reported revenues and assessment of these, provide direct correlation to the results of operations from period to period and facilitate comparison with the results of our peers. Historical trends established in these metrics can be used to evaluate current operating results, identify trends affecting our business, determine the allocation of resources and assess the quality and potential variability of our cash flows and earnings. We believe they are useful to investors in evaluating and understanding our business but should not be used solely in assessing the Company’s performance. These key performance indicators should not be considered superior to, as a substitute for or as an alternative to, and should be considered in conjunction with, the GAAP financial measures presented herein to fully evaluate and understand the business as a whole. These measures may not be comparable to similarly-titled performance indicators used by other companies.
Home health generates revenue by providing home health services on a short-term, intermittent or episodic basis to individuals, generally to treat an illness or injury. Net service revenues from Medicare accounted for 78.4% and 78.6% and managed care organizations accounted for 16.9% and 19.6% for the years ended December 31, 2021 and 2020, respectively. Home health services provided to Medicare beneficiaries are paid under the Medicare Home Health Prospective Payment System, which uses national,
standardized 30-day period payment rates for periods of care. CMS uses the PDGM as the case-mix classification model to place periods of care into payment categories, classifying patients based on clinical characteristics. An outlier adjustment may be paid for periods of care in which costs exceed a specific threshold amount.
Net service revenues increased by $10.1 million for the year ended December 31, 2021 compared to 2020. Total visits increased for the year ended December 31, 2021, mainly attributed to organic growth and the acquisition of Armada on August 1, 2021.
Gross profit, expressed as a percentage of net service revenues was 33.9% and 31.4% for the years ended December 31, 2021 and 2020, respectively. The increase in gross profit as a percentage of net service revenues was due to a decrease in direct employee wages, taxes and benefit costs of 1.9% for the year ended December 31, 2021 compared to 2020. Gross profit, expressed as a percentage of net service revenues, for the year ended December 31, 2021 improved compared to 2020, due to PDGM case mix and improvements as restrictions related to COVID-19 eased.
The home health segment’s general and administrative expenses consist of administrative employee wages, taxes and benefit costs, rent, information technology and office expenses. General and administrative expenses, expressed as a percentage of net service revenues was 21.6% and 23.2% for the years ended December 31, 2021 and 2020, respectively. The decrease for the year ended December 31, 2021 compared to 2020 is primarily due to synergies from acquisitions. The increase in general and administrative expenses was primarily due to acquisitions that resulted in a $1.6 million increase in administrative employee wages, taxes and benefit costs for the year ended December 31, 2021.
Non-GAAP Financial Measures
Adjusted EBITDA is a non-GAAP measure that has limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of our results of operations as reported under generally accepted accounting principles in the United States (“GAAP”). The financial results presented in accordance with U.S. GAAP and a reconciliation of this non-GAAP measure included within this Annual Report on Form 10-K should be carefully evaluated.
We define Adjusted EBITDA as net income before discontinued operations, net interest expense, income tax expense, depreciation and amortization, acquisition and de novo expenses, stock-based compensation expense, restructure and other costs, gain or loss on the sale of assets, and secondary offering costs. The Company defined adjusted EBITDA to exclude net COVID expenses arising from the pandemic from the second quarter of 2020 to the first quarter of 2021. Adjusted EBITDA is a performance measure used by management that is not calculated in accordance with GAAP. It should not be considered in isolation or as a substitute for net income, operating income or any other measure of financial performance calculated in accordance with GAAP. Additionally, our calculation of Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies.
Management believes that Adjusted EBITDA is useful to investors, management and others in evaluating our operating performance for the following reasons:
•
By reporting Adjusted EBITDA, we believe that we provide investors with insight and consistency in our financial reporting and present a basis for comparison of our business operations between current, past and future periods. We believe that Adjusted EBITDA allows management, investors and others to evaluate and compare our core operating results, including return on capital and operating efficiencies, from period to period, by removing the impact of our capital structure (interest expense), asset base (amortization and depreciation), tax consequences, stock-based compensation expense and other identified adjustments.
•
We believe that Adjusted EBITDA is a measure widely used by securities analysts, investors and others to evaluate the financial performance of other public companies.
•
We recorded stock-based compensation expense of $9.4 million, $6.0 million and $5.8 million for the years ended December 31, 2021, 2020 and 2019, respectively. By comparing our Adjusted EBITDA in different periods, our investors can evaluate our operating results without stock-based compensation expense, which is a non-cash expense which we believe is not a key measure of our operations.
In addition, management has chosen to use Adjusted EBITDA as a performance measure because we believe that the amount of non-cash expenses, such as depreciation, amortization and stock-based compensation expense, may not directly correlate to the underlying performance of our business operations, and because such expenses can vary significantly from period to period as a result of new acquisitions, full amortization of previously acquired tangible and intangible assets or the timing of new stock-based awards, as the case may be. This facilitates internal comparisons to historical operating results, as well as external comparisons to the operating results of our competitors and other companies in the personal care services industry. Because management believes Adjusted EBITDA is useful as a performance measure, management uses Adjusted EBITDA:
•
as one of our primary financial measures in the day-to-day oversight of our business to allocate financial and human resources across our organization, to assess appropriate levels of marketing and other initiatives and to generally enhance the financial performance of our business;
•
in the preparation of our annual operating budget, as well as for other planning purposes on a quarterly and annual basis, including allocations in order to implement our growth strategy, to determine appropriate levels of investments in acquisitions and to endeavor to achieve strong core operating results;
•
to evaluate the effectiveness of business strategies, such as the allocation of resources, the mix of organic growth and acquisitive growth and adjustments to our payor mix;
•
as a means of evaluating the effectiveness of management in directing our core operating performance, which we consider to be performance that can be affected by our management in any particular period through their allocation and use of resources that affect our underlying revenue and profit-generating operations during that period;
•
for the valuation of prospective acquisitions, and to evaluate the effectiveness of integration of past acquisitions into our Company; and
•
in communications with our Board concerning our financial performance.
Although Adjusted EBITDA is frequently used by investors and securities analysts in their evaluations of companies, Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results of operations as reported under GAAP. Some of these limitations include:
•
Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or other contractual commitments;
•
Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
•
Adjusted EBITDA does not reflect interest expense or interest income;
•
Adjusted EBITDA does not reflect cash requirements for income taxes;
•
although depreciation and amortization are non-cash charges, the assets being depreciated or amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for these replacements;
•
Adjusted EBITDA does not reflect any acquisition and de novo expenses;
•
Adjusted EBITDA does not reflect any stock-based compensation;
•
Adjusted EBITDA does not reflect any restructure expense and other costs;
•
Adjusted EBITDA does not reflect any net COVID-19 expense arising from the pandemic from the second quarter of 2020 to the first quarter of 2021;
•
Adjusted EBITDA does not reflect any gains or losses on the sale of assets;
•
Adjusted EBITDA does not reflect any secondary offering costs; and
•
other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.
Management compensates for these limitations by using GAAP financial measures in addition to Adjusted EBITDA in managing the day-to-day and long-term operations of our business. We believe that consideration of Adjusted EBITDA, together with a careful review of our GAAP financial measures, is the most informed method of analyzing our Company.
The following table sets forth a reconciliation of net income, the most directly comparable GAAP measure, to Adjusted EBITDA:
For the Years Ended December 31,
(Amounts In Thousands)
Reconciliation of net income to Adjusted EBITDA (a):
Net income
$
45,126
$
33,133
$
25,237
Less: loss from discontinued operations, net of tax
-
-
Net income from continuing operations
45,126
33,133
25,811
Interest expense, net
5,538
2,565
1,582
Income tax expense from continuing operations
15,272
8,809
7,359
Depreciation and amortization
14,494
12,051
10,574
Acquisition and de novo expenses
7,306
6,956
4,775
Stock-based compensation expense
9,434
6,005
5,766
Restructure expense and other costs
1,057
5,614
2,703
COVID-19 expense, net (b)
(591
)
1,480
-
Loss on sale of assets
-
Secondary offering costs
-
-
Adjusted EBITDA*
$
97,661
$
76,907
$
58,697
(a)
The selected historical Consolidated Statements of Income data for the fiscal years ended December 31, 2021, 2020 and 2019, were derived from our audited Consolidated Financial Statements.
(b)
Excludes net COVID expenses arising from the pandemic from the second quarter of 2020 to the first quarter of 2021.
* Management deems these metrics to be key performance indicators. Management uses these metrics to monitor our performance, both in our existing operations and acquisitions. Many of these metrics serve as the basis of reported revenues and assessment of these, provide direct correlation to the results of operations from period to period and facilitate comparison with the results of our peers. Historical trends established in these metrics can be used to evaluate current operating results, identify trends affecting our business, determine the allocation of resources and assess the quality and potential variability of our cash flows and earnings. We believe they are useful to investors in evaluating and understanding our business but should not be used solely in assessing the Company’s performance. These key performance indicators should not be considered superior to, as a substitute for or as an alternative to, and should be considered in conjunction with, the GAAP financial measures presented herein to fully evaluate and understand the business as a whole. These measures may not be comparable to similarly-titled performance indicators used by other companies.
Liquidity and Capital Resources
Overview
Our primary sources of liquidity are cash on hand and cash from operations and borrowings under our credit facility. At December 31, 2021 and 2020, we had cash balances of $168.9 million and $145.1 million, respectively. Cash flows from operating activities represent the inflow of cash from our payor clients and the outflow of cash for payroll and payroll taxes, operating expenses, interest and taxes.
We drew approximately $29.0 million on the revolver portion of our credit facility to fund, in part, the acquisition of Armada on August 1, 2021. Additionally, we reallocated and refinanced $17.4 million of our outstanding initial term loans as revolving loans, as discussed below. At December 31, 2021, we had a total of $224.9 million in revolving loans, with an interest rate of 2.10% outstanding on our credit facility. After giving effect to the amount drawn on our credit facility, approximately $8.2 million of outstanding letters of credit and borrowing limits based on an advance multiple of Adjusted EBITDA (as defined in the Credit Agreement), we had $376.6 million of capacity and $143.6 million available for borrowing under our credit facility. At December 31, 2020, we had a total of $178.5 million revolving credit loans, with an interest rate of 1.90%, and $18.1 million term loans, with an interest rate of 1.90%. During the year ended December 31, 2020, the Company drew approximately $135.0 million on the revolver portion of its credit facility to fund, in part, the purchase price for the Queen City Hospice acquisition on December 4, 2020.
Our credit facility requires us to maintain a total net leverage ratio not exceeding 3.75:1.00. At December 31, 2021, we were in compliance with our financial covenants under the Credit Agreement. Although we believe our liquidity position remains strong, we can provide no assurance that we will remain in compliance with the covenants in our Credit Agreement, and in the future, it may prove necessary to seek an amendment with the bank lending group under our credit facility. Additionally, there can be no assurance that we will be able to raise additional funds on terms acceptable to us, if at all.
Borrowing Capacity
On July 30, 2021, the Company entered into a Second Amendment (the “Second Amendment”) to our Credit Agreement. The Second Amendment, among other things, reallocated and refinanced $17.4 million of our outstanding initial term loans as revolving loans (such that the Company has no outstanding initial term loans and no further initial term loans may be borrowed) and increased the Company’s revolving credit facility to an aggregate amount of $600.0 million. Moreover, the Second Amendment increased the Company’s incremental loan facility to an aggregate amount $125.0 million, which incremental loan facility may be for term loans or an increase to the revolving loan commitments. The maturity of the revolving credit facility was also extended from May 8, 2023 to July 30, 2026. Additionally, the Credit Agreement contains hardwired fallback language that contemplates a transition from LIBOR and specifically it identifies SOFR as the replacement reference rate and details the mechanism for transition at LIBOR cessation, which is anticipated to occur on June 30, 2023. The transition to SOFR is not expected to have a material impact on the Company’s results of operations or liquidity. In connection with the Second Amendment, we incurred approximately $3.0 million of debt issuance costs.
See Note 8, Long-Term Debt, to the Notes to Consolidated Financial Statements for additional details of our long-term debt.
COVID-19 Pandemic
Any deterioration in economic conditions in the United States, including as the result of the COVID-19 pandemic, would pose a risk to states’ revenues, which in turn could affect our reimbursements and collections received for services rendered. Depending on the severity and length of any potential economic downturn, states could face significant fiscal challenges and revise their revenue forecasts and adjust their budgets, and sales tax collections and income tax withholdings could be depressed in fiscal year 2021 (which began July 1 in most states), and, potentially, future fiscal years. In this regard, Illinois, New Mexico and New York, our top three personal care markets, previously revised revenue estimates downward for the 2021 fiscal year as the result of earlier negative economic conditions arising from the pandemic. Also in response to reduced revenues, the state of New York authorized the issuance of short-term bonds and implemented uniform reductions to Medicaid payments. Effective for dates of service on or after April 2, 2020, the uniform reduction rate is 1.5%. The reduction applies to home health and personal care services but hospice services are exempt.
Government Stimulus and Relief Measures
As a result of the COVID-19 pandemic, federal and state governments have passed legislation, promulgated regulations, and taken other administrative actions intended to assist healthcare providers in providing care to COVID-19 patients and other patients during the public health emergency. These temporary measures include relief from Medicare conditions of participation requirements for healthcare providers, relaxation of licensure requirements for healthcare professionals, relaxation of privacy restrictions for telehealth remote communications, promoting use of telehealth by expanding the scope of services for which Medicare reimbursement is available, and limited waivers of fraud and abuse laws for activities related to COVID-19 during the emergency period. The current federal public health emergency declaration expires April 16, 2022, but HHS has indicated it will provide states with 60 days’ notice prior to termination of the declaration.
The ARPA, which became law on March 11, 2021, provides for $350 billion in relief funding for eligible state, local, territorial, and Tribal governments to mitigate the fiscal effects of the COVID-19 public health emergency. Additionally, the law provides for a 10 percentage point increase in federal matching funds for Medicaid HCBS from April 1, 2021, through March 30, 2022, provided the state satisfies certain conditions. States must use the monies attributable to this matching fund increase to supplement, not supplant, their level of spending for the implementation of activities enhanced under the Medicaid HCBS in effect as of April 1, 2021. States will be permitted to use the state funds equivalent to the additional federal funds through March 31, 2024.
Provider Relief Fund
One of the primary sources of relief for healthcare providers is the Provider Relief Fund, which has been funded through the CARES Act and related legislation. Provider Relief Fund payments are intended to compensate healthcare providers for lost revenues and health care related expenses incurred in response to the COVID-19 pandemic and are not required to be repaid, provided that recipients attest to and comply with certain terms and conditions, including limitations on balance billing and not using funds received from the Provider Relief Fund to reimburse expenses or losses that other sources are obligated to reimburse.
In November 2020, the Company received grants in an aggregate principal amount of $13.7 million from the Provider Relief Fund, for which we had previously applied. The Company utilized $12.3 million and $1.4 million of these funds during the years ended December 31, 2021 and 2020, respectively, for healthcare related expenses, including retention payments attributable to COVID-19 that were unreimbursed by other sources. We are required to properly and fully document the use of such funds in reports to HHS, which must be submitted no later than March 31, 2022. Queen City Hospice administered retention payments totaling $1.9 million to caregivers for the year ended December 31, 2021, which we believed to be necessary to secure and maintain adequate personnel. Commercial organizations that receive and expend annual total awards of $750,000 or more in federal funding, including payments received through the Provider Relief Fund, are subject to federal audit requirements.
Medicare Accelerated and Advance Payment Program - Queen City Hospice
In addition, the CARES Act expands the Medicare Accelerated and Advance Payment Program to increase cash flow to providers impacted by the COVID-19 pandemic. Hospice and home health providers were able to request an advance or accelerated payment of up to 100% of the Medicare payment amount for a three-month period (not including Medicare Advantage payments). The Medicare Accelerated and Advance Payment Program payments are a loan that providers must repay. In April 2020, Queen City Hospice received an amount equal to $10.8 million pursuant to the Medicare Accelerated and Advance Payment Program. Queen City Hospice did not repay the funds prior to the completion of our acquisition of Queen City Hospice. However, Queen City Hospice repaid such funds following its acquisition in March 2021, prior to any CMS recoupment and before any interest accrual.
Payroll tax deferral
The CARES Act also provides for certain federal income and other tax changes, including allowing for the deferral of the employer portion of Social Security payroll taxes through December 31, 2020. The payroll tax deferral requires that the deferred payroll taxes be paid over two years, with half of the eligible deferred amount required to be paid by December 31, 2021 and the other half by December 31, 2022. The Company received a cash benefit of approximately $7.1 million related to the deferral of employer payroll taxes for 2020 under the CARES Act, for the period April 2, 2020 through June 30, 2020. Effective July 1, 2020, the Company began paying its deferred portion of employer Social Security payroll taxes and repaid $3.0 million of the $7.1 million in 2021.
Medicare sequester
The CARES Act and related legislation also include other provisions offering financial relief, for example temporarily lifting the Medicare sequester, which would have otherwise reduced payments to Medicare providers by 2% as required by the Budget Control Act of 2011, from May 1, 2020, through December 31, 2021 (but also extending sequestration through 2030). Congress further delayed these sequestration cuts through March 31, 2022, and reduced the sequestration adjustment to 1% from April 1 through June 30, 2022. The full 2% reduction is currently scheduled to resume July 1, 2022. These sequestration cuts have been extended through 2030, with the reductions for 2030 set to increase to 2.25% for the first six months and to 3% for the second six months.
In our hospice segment, Medicare sequester relief resulted in an increase in net service revenues of $2.9 million and $1.3 million for the years ended December 31, 2021 and 2020, respectively. In our home health segment, Medicare sequester relief resulted in an increase in net service revenues of $0.5 million and $0.2 million, for the years ended December 31, 2021 and 2020, respectively.
However, the ARPA increases the federal budget deficit in a manner that triggers an additional statutorily mandated sequestration under the PAYGO Act. As a result, an additional Medicare payment reduction of up to 4% was required to take effect in January 2022. However, Congress has delayed implementation of this payment reduction until 2023. We cannot currently determine if, or to what extent, our business, results of operations, financial condition or liquidity will ultimately be impacted by mandated sequestration triggers under the PAYGO Act, or if or when the mandated sequestration will occur.
Cash Flows
The following table summarizes historical changes in our cash flows for the years ended December 31, 2021, 2020 and 2019:
(Amounts in Thousands)
Net cash provided by operating activities
$
39,488
$
109,411
$
12,019
Net cash used in investing activities
(42,015
)
(214,236
)
(188,697
)
Net cash provided by financing activities
26,344
138,189
217,986
Net cash provided by operating activities was $39.5 million for the year ended December 31, 2021, compared to $109.4 million in 2020 primarily due to the timing of receipts on accounts receivable and the timing of government stimulus funds. The changes in accounts receivable were primarily related to the growth in revenue and a decrease in days sales outstanding (“DSO”) during the year ended December 31, 2021 compared to 2020, as described below. The related receivables due from the Illinois Department on Aging represented 16.1% and 15.9% of net accounts receivable at December 31, 2021 and 2020, respectively.
Net cash used in investing activities was $42.0 million for the year ended December 31, 2021, compared to $214.2 million for the year ended December 31, 2020. Our investing activities for the year ended December 31, 2021 consisted of $29.1 million primarily for the acquisition of Armada, $8.2 million for the acquisition of Summit and $4.6 million in purchases of property and equipment primarily related to technology infrastructure. Our investing activities for the year ended December 31, 2020 primarily consisted of $194.8 million for the acquisition of Queen City Hospice, $15.8 million for the acquisition of County Homemakers, $14.5 million for the acquisition of A Plus and $6.8 million in purchases of property and equipment primarily related to our ongoing investments in our technology infrastructure and investments in expanding our corporate office.
Net cash provided by financing activities was $26.3 million for the year ended December 31, 2021 compared to $138.2 million for the year ended December 31, 2020. Our financing activities for the year ended December 31, 2021 included borrowings of $29.0 million on the revolver portion of our credit facility to fund the Armada acquisition, the reallocation and refinancing of $17.4 million of our outstanding initial term loans as revolving loans and cash paid for debt issuance costs of $3.0 million. Our financing activities for the year ended December 31, 2020 primarily related to borrowings of approximately $135.0 million on the revolver portion of our credit facility to fund, in part, the Queen City Hospice acquisition and $3.9 million in cash received from the exercise of stock options.
Outstanding Accounts Receivable
Gross accounts receivable as of December 31, 2021 and 2020 were $138.4 million and $133.4 million, respectively. Outstanding accounts receivable, net of the allowance for doubtful accounts, increased by $4.3 million as of December 31, 2021 compared to December 31, 2020. The open receivable balance from the Illinois Department on Aging, the largest payor program for the Company’s Illinois personal care operation, increased by $0.8 million from $21.2 million as of December 31, 2020 to $22.0 million as of December 31, 2021. Our collection procedures include review of account aging and direct contact with our payors. We have historically not used collection agencies. An uncollectible amount is written off to the allowance account after reasonable collection efforts have been exhausted.
We calculate our DSO by taking the accounts receivable outstanding, net of the allowance for doubtful accounts, divided by the net service revenues for the last quarter, multiplied by the number of days in that quarter. Our DSOs were 54 and 61 days at December 31, 2021 and 2020, respectively. The DSOs for our largest payor, the Illinois Department on Aging, at December 31, 2021 and 2020 were 43 and 46 days, respectively.
As discussed above in “COVID-19 Pandemic”, any deterioration in economic conditions in the United States, including as the result of the COVID-19 pandemic, would pose a risk to states’ revenues, which in turn could affect our reimbursements and collections received for services rendered. Depending on the severity and length of any potential economic downturn, states could face significant fiscal challenges and revise their revenue forecasts and adjust their budgets, and sales tax collections and income tax withholdings could be depressed in fiscal year 2021 (which began July 1 in most states), and, potentially, future fiscal years. We cannot determine if Congress will provide additional relief with additional stimulus and relief legislation.
Off-Balance Sheet Arrangements
As of December 31, 2021, we did not have any off-balance sheet guarantees or arrangements with unconsolidated entities.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based on our Consolidated Financial Statements prepared in accordance with GAAP. The preparation of the financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expense and related disclosures.
Our significant accounting policies are described in Note 1 to the Notes to Consolidated Financial Statements. An accounting policy is deemed to be critical if it involves a significant level of estimation uncertainty and has had or is reasonably likely to have a material impact on our financial condition or results of operations. We base our estimates and judgments on historical experience and other sources and factors that we believe to be reasonable under the circumstances, however, actual results may differ from these estimates. Our critical accounting policies requiring estimates, assumptions and judgments that we believe have the most significant impact on our consolidated financial statements are described below.
Revenue Recognition, Accounts Receivable and Allowances
Net service revenue is recognized at the amount that reflects the consideration the Company expects to receive in exchange for providing services directly to consumers. Receipts are from federal, state and local governmental agencies, managed care organizations, commercial insurers and private consumers for services rendered. The Company assesses the consumers’ ability to pay at the time of their admission based on the Company’s verification of the customer’s insurance coverage under the Medicare, Medicaid, and other commercial or managed care insurance programs. Laws and regulations governing the governmental programs in which we participate are complex and subject to interpretation. Net service revenues related to uninsured accounts, or self-pay, is recorded net of implicit price concessions estimated based on historical collection experience to reduce revenue to the estimated amount we expect to collect. Amounts collected from all sources may be less than amounts billed due to implicit price concessions resulting from client eligibility issues, insufficient or incomplete documentation, services at levels other than authorized, pricing differences and other reasons unrelated to credit risk. We monitor our net service revenues and collections from these sources and record any necessary adjustment to net service revenues based upon management’s assessment of historical write offs and expected net collections, business and economic conditions, trends in federal, state and private employer health care coverage and other collection indicators.
Accounts receivable is reduced to the amount expected to be collected in future periods for services rendered to customers prior to the balance sheet date. Management estimates the value of accounts receivable, net of allowances for implicit price concessions based upon historical experience and other factors, including an aging of accounts receivable, evaluation of expected adjustments, past adjustments and collection experience in relation to amounts billed, current contract and reimbursement terms, shifts in payors and other relevant information. Collection of net service revenues we expect to receive is normally a function of providing complete and correct billing information to the payors within the various filing deadlines. The evaluation of these historical and other factors involves complex, subjective judgments impacting the determination of the implicit price concession assumption. In addition, we compare our cash collections to recorded net service revenues and evaluate our historical allowances, including implicit price concessions, based upon the ultimate resolution of the accounts receivable balance.
Goodwill and Intangible Assets
Under business combination accounting, assets and liabilities are generally recognized at their fair values and the difference between the consideration transferred, excluding transaction costs, and the fair values of the assets and liabilities is recognized as goodwill. The Company’s significant identifiable intangible assets consist of customer and referral relationships, trade names and trademarks and state licenses. The Company uses various valuation techniques to determine initial fair value of its intangible assets, including relief-from-royalty, income approach, discounted cash flow analysis, and multi-period excess earnings, which use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy. Under these valuation approaches, we are required to make estimates and assumptions about future market growth and trends, forecasted revenue and costs, expected periods over which the assets will be utilized, appropriate discount rates and other variables. The Company estimates the fair values of the trade names using the relief-from-royalty method, which requires assumptions such as the long-term growth rates of future revenues, the relief from royalty rate for such revenue, the tax rate and the discount rate. The Company estimates the fair value of existing indefinite-lived state licenses based on a blended approach of the replacement cost method and cost savings method, which involves estimating the total process costs and opportunity costs to obtain a license, by estimating future earnings before interest and taxes and applying an estimated discount rate, tax rate and time to obtain the license. The Company estimates the fair value of existing finite-lived state licenses based on a method of analyzing the definite revenue streams with the license and without the license, which involves estimating revenues and expenses, estimated time to build up to a current revenue base, which is market specific, and the non-licensed revenue allocation, revenue growth rates, discount rate and tax amortization benefits. The Company estimates the fair value of customer and referral relationships based on a multi-period excess earnings method, which involves identifying revenue streams associated with the assets, estimating the attrition rates based upon historical financial data, expenses and cash flows associated with the assets, contributory asset charges, rates of return for specific assets, growth rates, discount rate and tax amortization benefits. The Company estimates the fair value of non-competition agreements based on a method of analyzing the factors to compete and factors not to compete, which involves estimating historical financial data, forecasted financial statements, growth rates, tax amortization benefit, discount rate, review of factors to compete and factors not to compete as well as an assessment of the probability of successful competition for each non-competition agreement.
As of December 31, 2021 and 2020, goodwill was $504.4 million and $469.1 million, respectively, included in our Consolidated Balance Sheets. The carrying value of our goodwill is the excess of the purchase price over the fair value of the net assets acquired from various acquisitions. In accordance with ASC Topic 350, Goodwill and Other Intangible Assets, goodwill and intangible assets with indefinite useful lives are not amortized. We test goodwill for impairment at the reporting unit level on an annual basis, as of October 1, or whenever potential impairment triggers occur, such as a significant change in business climate or regulatory changes that would indicate that an impairment may have occurred. We may elect to use a qualitative test to determine whether impairment has occurred, focused on various factors including macroeconomic conditions, market trends, specific reporting unit financial performance and other entity specific events, to determine if it is more likely than not that the fair value of a reporting unit exceeds its carrying value, including goodwill. We may also bypass the qualitative assessment and perform a quantitative test. Additionally, it is our policy to update the fair value calculation of our reporting units and perform the quantitative goodwill impairment test on a periodic basis. The quantitative goodwill impairment test involves comparing the fair value of a reporting unit with its carrying value, including goodwill. If the fair value of a reporting unit exceeds its carrying value, then goodwill is not impaired. If the fair value of a reporting unit is less than its carrying value, then goodwill is impaired to the extent of the difference.
For the years ended December 31, 2021, 2020 and 2019, we performed the quantitative analysis to evaluate whether an impairment occurred. Since quoted market prices for our reporting units are not available, we rely on widely accepted valuation techniques to determine fair value, including discounted cash flow and market multiple approaches, which capture both the future income potential of the reporting unit and the market behaviors and actions of market participants in the industry that includes the reporting unit. These types of models require us to make assumptions and estimates regarding future cash flows, industry-specific economic factors and the profitability of future business strategies. The discounted cash flow model uses a projection of estimated operating results and cash flows that are discounted using a weighted average cost of capital. The market multiple model estimates fair value based on market multiples of earnings before interest, taxes and depreciation and amortization. Under the discounted cash flow model, the projection uses management’s best estimates of economic and market conditions over the projected period for each reporting unit using significant assumptions such as revenue growth rates and the weighted-average cost of capital.
Based on the totality of the information available, we concluded that it was more likely than not that the estimated fair values of our reporting units were greater than their carrying values. Consequently, we concluded that there were no impairments for the years ended December 31, 2021, 2020 or 2019. For the fiscal year 2021 impairment tests, the fair value of the reporting units exceeded their respective carrying values (commonly referred to as “headroom”) by at least 100% in the personal care and home health reporting units, and by 20% in the hospice reporting unit. The headroom percentage for the hospice reporting unit decreased as compared to the prior year primarily due to prior acquisitions increasing the carrying value combined with a decline in estimates to average daily census and an increase in estimates for labor costs both driven by the impact of the COVID-19 pandemic, resulting in lower discounted cash flows compared to 2020. We performed a sensitivity analysis on this reporting unit and determined that a more than 1.5% increase to the weighted- average cost of capital, the most sensitive assumption used in the estimate, would result in the fair value being lower than the carrying value. The Company bases its fair value estimates on assumptions management believes to be reasonable but which are unpredictable and inherently uncertain. Actual future results may differ from those estimates.
As of December 31, 2021 and 2020, intangibles, net of accumulated amortization, was $64.3 million and $71.5 million, respectively, included in our Consolidated Balance Sheets. Our identifiable intangible assets consist of customer and referral relationships, trade names, trademarks, state licenses and non-competition agreements. Definite-lived intangible assets are amortized using straight-line and accelerated methods based upon the estimated useful lives of the respective assets, which range from one to twenty-five years, and assessed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Customer and referral relationships are amortized systematically over the periods of expected economic benefit, which range from five to ten years. We would recognize an impairment loss when the estimated future non-discounted cash flows associated with the intangible asset are less than the carrying value. An impairment charge would then be recorded for the excess of the carrying value over the fair value. We estimate the fair value of these intangible assets using the income approach. In accordance with ASC Topic 350, Goodwill and Other Intangible Assets, intangible assets with indefinite useful lives are not amortized. We test intangible assets with indefinite useful lives for impairment at the reporting unit level on an annual basis, as of October 1, or whenever potential impairment triggers occur, such as a significant change in business climate or regulatory changes that would indicate that an impairment may have occurred. No impairment charge was recorded for the years ended December 31, 2021, 2020 or 2019. Amortization of intangible assets is reported in the statement of income caption, “Depreciation and amortization” and not included in the income statement caption cost of service revenues.
Recent Accounting Pronouncements
Refer to Note 1 to the Notes to Consolidated Financial Statements for further discussion.
Standby letters of credit
We had outstanding letters of credit of $8.2 million at December 31, 2021. These standby letters of credit benefit our third-party insurer for our high deductible workers’ compensation insurance program. The amount of the letters of credit is negotiated annually in conjunction with the insurance renewals.
Material Cash Requirements
We believe that our existing cash on hand, our anticipated cash flows from operations and amounts available under our Credit Agreement will be sufficient to fund our anticipated operating and investing needs for the next 12 months and for the foreseeable future thereafter. Cash from operations could also be affected by various risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic and other risks detailed in Part I, Item 1A - “Risk Factors”.
Debt
As of December 31, 2021, the Company had outstanding debt on our revolving loan under our credit facility of $224.9 million, payable on July 30, 2026. Interest payments associated with the debt totals $27.6 million, with $6.3 million payable within 12 months. As described in Note 8 to the Notes to Consolidated Financial Statements, interest on borrowings under the revolving loan are variable. The calculated interest payable amounts use actual rates available through January 2021 and assumes the January rates of 2.10%, respectively, for all future interest payable on the revolving loans. See Note 8, Long-Term Debt, to the Notes to Consolidated Financial Statements for additional details of our long-term debt.
Leases
The Company has lease arrangements for local branches, our corporate headquarters and certain equipment. As of December 31, 2021, the Company had fixed lease payment obligations of $48.5 million, with $11.0 million payable within 12 months. See Note 2, Leases, to the Notes to Consolidated Financial Statements for additional details of our leases.
Impact of Inflation
The United States has recently experienced inflationary conditions, which we believe generally commenced in the latter half of 2021. The impact of inflation on us is reflected in, and may continue to result in, increased operating costs, particularly the wages we pay our caregivers and other personnel and our ability to attract and retain personnel. Rising price levels might allow us to increase our fees to private pay clients, but our ability to realize rate increases from government programs might be limited despite inflation. Inflation may also raise our financing costs. For additional information regarding the risks to us from the current competitive labor market and increasing labor costs, see Item 1A - Risk Factors - “We may not be able to attract and retain qualified personnel or we may incur increased costs in doing so.”

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk associated with changes in interest rates on our variable rate long-term debt, including, without limitation, the potential impact of the discontinuation or modification of LIBOR. As of December 31, 2021, we had outstanding borrowings of approximately $224.9 million on our credit facility, all of which was subject to variable interest rates. As of December 31, 2020, we had outstanding borrowings of approximately $196.6 million on our credit facility, all of which was subject to variable interest rates. If the variable rates on this debt were 100 basis points higher than the rate applicable to the borrowing during the year ended December 31, 2021, our net income would have decreased by $1.7 million, or $0.10 per diluted share. We do not currently have any derivative or hedging arrangements, or other known exposures, to changes in interest rates.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Financial Statements together with the related Notes to Consolidated Financial Statements and the report of our independent registered public accounting firm, are set forth on the pages indicated in Part IV, Item 15 - “Exhibits and Financial Statement Schedules.”

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Based on the evaluation of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2021.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an assessment of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on our assessment under the framework in Internal Control - Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2021.
Under SEC Staff guidance, companies are permitted to exclude acquisitions from their first assessment of internal control over financial reporting which covers the period in which such acquisition was completed. We excluded Armada Skilled Homecare of New Mexico LLC, Armada Hospice of New Mexico LLC and Armada Hospice of Santa Fe LLC (collectively, “Armada”) and Summit Home Health, LLC (“Summit”), each of which are wholly-owned subsidiaries, from our assessment of internal control over financial reporting as of December 31, 2021 because they were acquired in purchase business combinations on August 1, 2021 and October 1, 2021, respectively.
•
Armada represented 0.5% of our revenues and 2.0% of our operating income, respectively for the year ended December 31, 2021.
•
Summit represented 0.2% of our revenues and 0.0% of our operating income, respectively for the year ended December 31, 2021.
The effectiveness of our internal control over financial reporting as of December 31, 2021 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in its report which appears within Part IV, Item 15 - “Exhibits and Financial Statement Schedules.”.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the fiscal quarter ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
ITEM 9B.
OTHER INFORMATION
On or about February 23, 2022, the Company entered into new indemnification agreements with each of its directors and executive officers (each, an “Indemnitee”). The indemnification agreements provide that the Company will indemnify the Indemnitee against certain expenses and costs arising out of claims to which he or she becomes subject in connection with his or her service to the Company. The indemnification agreements contain customary terms and conditions and establish certain customary procedures and presumptions. Each new indemnification agreement with a current director or officer will replace and supersede the prior indemnification agreement between the Company and such director or officer, if such director or officer was a party to a prior indemnification agreement. The foregoing description of the indemnification agreements does not purport to be complete and is qualified in its entirety by reference to the form of indemnification agreement filed as Exhibit 10.50 hereto and incorporated herein by reference.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated by reference to the 2022 Proxy Statement to be filed with the SEC not later than 120 days after the end of the fiscal year ended December 31, 2021.
We have adopted a Code of Business Conduct and Ethics (“Code of Conduct”) that is applicable to all of our employees, officers and members of our Board of Directors, and our subsidiaries. The Code of Conduct addresses, among other things, legal compliance, conflicts of interest, corporate opportunities, protection and proper use of Company assets, confidential and proprietary information, integrity of records, compliance with accounting principles and relations with government agencies. A copy of the current version of our Code of Conduct is available in the Investors-Corporate Governance section of our internet website located at www.addus.com. A copy of the Code of Conduct is also available in print, free of charge, to any stockholder who requests it by writing to Addus HomeCare Corporation, 6303 Cowboys Way, Suite 600, Frisco, TX 75034. We intend to post amendments to or waivers from, if any, our Code of Conduct at this location on our website, in each case to the extent such amendment or waiver would otherwise require the filing of a Current Report on Form 8-K pursuant to Item 5.05 thereof.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the 2022 Proxy Statement to be filed with the SEC not later than 120 days after the end of the fiscal year ended December 31, 2021.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference to the 2022 Proxy Statement to be filed with the SEC not later than 120 days after the end of the fiscal year ended December 31, 2021.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference to the 2022 Proxy Statement to be filed with the SEC not later than 120 days after the end of the fiscal year ended December 31, 2021.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is incorporated by reference to the 2022 Proxy Statement to be filed with the SEC not later than 120 days after the end of the fiscal year ended December 31, 2021.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
(1), (2) The Financial Statements listed on the index on page following are included herein. All schedules are omitted, either because they are not applicable or because the required information is shown in the financial statements or the notes thereto.
(b)
Exhibits
EXHIBIT INDEX
Incorporated by Reference
Exhibit
Number
Description of Document
Form
File No.
Date Filing
Exhibit
Number
3.1
Amended and Restated Certificate of Incorporation of Addus HomeCare Corporation dated as of October 27, 2009.
10-Q
001-34504
11/20/2009
3.1
3.2
Amended and Restated Bylaws of Addus HomeCare Corporation, as amended by the First Amendment to Amended and Restated Bylaws.
10-Q
001-34504
05/9/2013
3.2
4.1
Form of Common Stock Certificate.
S-1
333-160634
10/2/2009
4.1
4.2
Description of Securities of Addus HomeCare Corporation Registered under Section 12 of the Exchange Act.
10-K
001-34504
8/10/2020
4.2
10.1*
Separation and General Release Agreement, dated as of September 20, 2009, between Addus HealthCare, Inc. and W. Andrew Wright, III.
S-1
333-160634
9/21/2009
10.1(b)
10.2*
Addus HealthCare, Inc. Home Health and Home Care Division Vice President and Regional Director Bonus Plan.
S-1
333-160634
7/17/2009
10.10
10.3*
Addus HealthCare, Inc. Support Center Vice President and Department Director Bonus Plan.
S-1
333-160634
7/17/2009
10.11
10.4*
Addus Holding Corporation 2006 Stock Incentive Plan.
S-1
333-160634
7/17/2009
10.12
10.5*
Director Form of Non-Qualified Stock Option Certificate under the 2006 Stock Incentive Plan.
S-1
333-160634
7/17/2009
10.13
10.6*
Executive Form of Non-Qualified Stock Option Certificate under the 2006 Stock Incentive Plan.
S-1
333-160634
7/17/2009
10.14
10.7
2009 Form of Indemnification Agreement.
S-1
333-160634
7/17/2009
10.16
10.8
License Agreement for Horizon Homecare Software, dated March 24, 2006, between McKesson Information Solutions, LLC and Addus HealthCare, Inc.
S-1
333-160634
8/26/2009
10.17
10.9
Contract Supplement to License Agreement No. C0608555, dated March 24, 2006.
S-1
333-160634
8/26/2009
10.17(a)
10.10
Contract Supplement to License Agreement No. 00608555, dated March 28, 2006.
S-1
333-160634
8/26/2009
10.17(b)
10.11
Amendment to License Agreement No. C0608555, dated March 28, 2006, between McKesson Information Solutions LLC and Addus HealthCare, Inc.
S-1
333-160634
8/26/2009
10.17(c)
10.12*
Form of Addus HomeCare Corporation 2009 Stock Incentive Plan.
S-1
333-160634
9/21/2009
10.20
10.13*
Form of Nonqualified Stock Option Award Agreement pursuant to the 2009 Stock Incentive Plan.
S-1
333-160634
9/21/2009
10.20(a)
10.14*
Form of Restricted Stock Award Agreement pursuant to the 2009 Stock Incentive Plan.
S-1
333-160634
9/21/2009
10.20(b)
10.15*
The Executive Nonqualified “Excess” Plan Adoption Agreement, by Addus HealthCare, Inc., dated April 1, 2012.
8-K
001-34504
4/5/2012
99.1
10.16*
The Executive Nonqualified Excess Plan Document.
8-K
001-34504
4/5/2012
99.2
10.17
Asset Purchase Agreement, dated as of February 7, 2013, by and among Addus HealthCare, Inc., its subsidiaries identified therein, LHC Group, Inc. and its subsidiaries identified therein.
8-K
001-34504
3/6/2013
99.1
10.18*
Employment and Non-Competition Agreement, effective December 15, 2014, by and between Addus HealthCare, Inc. and Maxine Hochhauser.
8-K
001-34504
12/15/2014
99.1
10.19
Securities Purchase Agreement, dated as of April 24, 2015, by and among Addus HealthCare, Inc., Margaret Coffey, Carol Kolar, South Shore Home Health Service, Inc. and Acaring Home Care, LLC.
10-Q
001-34504
5/8/2015
10.1
10.20*
Separation Agreement and General Release, dated as of March 18, 2016, by and between Addus HealthCare, Inc. and Inna Berkovich.
8-K
001-34504
03/23/2016
10.1
10.21*
Separation Agreement and General Release, effective May 25, 2016, by and between Addus HealthCare, Inc. and Donald Klink.
8-K
001-34504
5/27/2016
99.1
10.22*
Separation Agreement and General Release, dated as of March 1, 2016, by and between Addus HomeCare Corporation and Mark S. Heaney.
8-K
001-34504
3/2/2016
99.2
10.23*
Severance Agreement and General Release, dated as of February 13, 2017, by and between Addus HomeCare Corporation and Maxine Hochhauser.
8-K
001-34504
1/18/2017
10.1
10.24
Credit Agreement, dated as of May 8, 2017, by and among Addus Healthcare, Inc., as the Borrower, the other parties from time to time a party thereto, and Capital One, National Association, as a Lender and Swing Lender and as Agent for all Lenders, Suntrust Bank, as Documentation Agent, Bank of the West, Compass Bank, Fifth Third Bank and JPMorgan Chase Bank, N.A., as Co-Syndication Agents, the other financial institutions party thereto, as Lenders, Capital One, National Association, Bank of the West, Compass Bank, Fifth Third Bank and JPMorgan Chase Bank, N.A. and Suntrust Robinson Humphrey as Joint Lead Arrangers and Capital One, National Association, as Sole Bookrunner.
10-Q
001-34504
5/9/2017
10.3
10.25*
Addus HomeCare Corporation’s 2017 Omnibus Incentive Plan, effective as of April 27, 2017.
8-K
001-34504
6/16/2017
10.1
10.26*
Form of Nonqualified Stock Option Award Agreement pursuant to the 2017 Omnibus Incentive Plan.
10-K
001-34504
3/14/2018
10.28
10.27*
Form of Restricted Stock Award Agreement pursuant to the 2017 Omnibus Incentive Plan.
10-K
001-34504
3/14/2018
10.29
10.28*
Amended and Restated Employment and Non-Competition Agreement, dated April 25, 2017, by and between Addus HealthCare, Inc. and Brenda Belger.
10-Q
001-34504
8/8/2017
10.7
10.29*
Transition Agreement and Release, effective as of August 14, 2017, by and between Addus HealthCare, Inc. and Brenda Belger.
8-K
001-34504
7/31/2017
10.1
10.30
Stock Purchase Agreement, dated February 27, 2018, by and among Addus Healthcare, Inc., Michael J. Merrell and Mary E. Merrell, individually, Michael J. Merrell and Mary E. Merrell, as Trustees of the Merrell Revocable Trust UTA dated June 3, 2012, and Michael J. Merrell and Mary E. Merrell, as Trustees of the Ambercare Corporation Employee Stock Ownership Plan Trust.
8-K
001-34504
3/5/2018
10.1
10.31
Amended and Restated Credit Agreement by and among Addus HealthCare, Inc., as borrower, the Company, the other Credit Parties party thereto, the Lenders and L/C Issuers party thereto, and Capital One, National Association, as administrative agent.
10-Q
001-34504
8/11/2018
10.2
10.32*
Second Amended and Restated Employment and Non-Competition Agreement, dated November 5, 2018, by and between Addus HealthCare, Inc. and R. Dirk Allison.
10-Q
001-34504
8/11/2018
10.3
10.33*
Second Amended and Restated Employment and Non-Competition Agreement, dated November 5, 2018, by and between Addus HealthCare, Inc. and Brian Poff.
10-Q
001-34504
8/11/2018
10.4
10.34*
Second Amended and Restated Employment and Non-Competition Agreement, dated November 5, 2018, by and between Addus HealthCare, Inc. and James Zoccoli.
10-Q
001-34504
8/11/2018
10.5
10.35*
Second Amended and Restated Employment and Non-Competition Agreement, dated November 5, 2018, by and between Addus HealthCare, Inc. and Darby Anderson.
10-Q
001-34504
8/11/2018
10.6
10.36*
Second Amended and Restated Employment and Non-Competition Agreement, dated November 5, 2018, by and between Addus HealthCare, Inc. and W. Bradley Bickham.
10-Q
001-34504
8/11/2018
10.7
10.37*
Amended and Restated Employment and Non-Competition Agreement, dated November 5, 2018, by and between Addus HealthCare, Inc. and Laurie Manning.
10-Q
001-34504
8/11/2018
10.8
10.38
Amended and Restated Credit Agreement, dated as of October 31, 2018, by and among Addus HealthCare, Inc., as borrower, the Company, the other Credit Parties party thereto, the Lenders and L/C Issuers party thereto, and Capital One, National Association, as administrative agent.
10-Q
001-34504
11/8/2018
10.2
10.39*
Employment and Non-Competition Agreement, effective April 29, 2019, by and between Addus HealthCare, Inc. and Sean Gaffney.
8-K
001-34504
4/8/2019
99.2
10.40*
Employment and Non-Competition Agreement, effective November 7, 2019, by and between Addus HealthCare, Inc. and David Tucker.
10-K
001-34504
8/10/2020
10.40
10.41*
Employment and Non-Competition Agreement, effective November 7, 2019, by and between Addus HealthCare, Inc. and Mike Wattenbarger.
10-K
001-34504
8/10/2020
10.41
10.42*
Transition Agreement and Release, effective as of July 31, 2019, by and between Addus HealthCare, Inc. and James “Zeke” Zoccoli.
8-K
001-34504
7/24/2019
10.1
10.43
Equity Purchase Agreement, dated August 25, 2019, by and among Addus Healthcare, Inc., Hospice Partners of America, LLC, New Capital Partners II - HS, Inc., Senior Care Services, LLC, Eastside Partners II, L.P., and New Capital Partners II, LLC.
S-3ASR
333-233600
9/3/2019
2.1
10.44
First Amendment to Amended and Restated Credit Agreement, dated as of September 12, 2019, by and among Addus HealthCare, Inc., as the Borrower, Addus HomeCare Corporation, other Credit Parties party thereto, Capital One, National Association, as administrative agent and as a Lender, and the other Lenders party thereto.
10-Q
001-34504
9/13/2019
10.1
10.45
Unit Purchase Agreement, dated November 10, 2020, by and among Addus Healthcare, Inc., Queen City Hospice, LLC, Miracle City Hospice, LLC, and QCH Holdings LLC.
10-K
001-34504
3/1/2021
10.45
10.46
Amendment to Unit Purchase Agreement, dated December 3, 2020, by and among Addus Healthcare, Inc., Queen City Hospice, LLC, Miracle City Hospice, LLC, and QCH Holdings LLC.
10-K
001-34504
3/1/2021
10.46
10.47*
Transition Agreement and Release, effective June 11, 2021, by and among Addus HealthCare, Inc. and Laurie Manning.
10-Q
001-34504
8/4/2021
10.1
10.48*
Employment and Non-Competition Agreement, effective June 14, 2021, by and between Addus HealthCare, Inc. and Roberton James Stevenson.
10-Q
001-34504
8/4/2021
10.2
10.49**
Second Amendment to Amended and Restated Credit Agreement, dated as of July 30, 2021, by and among Addus HealthCare, Inc., as the Borrower, Addus HomeCare Corporation, the other Credit Parties party thereto, Capital One, National Association, as administrative agent and as a Lender, and the other Lenders party thereto.
8-K
001-34504
8/4/2021
10.1
10.50*
2022 Form of Indemnification Agreement.
21.1
Subsidiaries of Addus HomeCare Corporation.
23.1
Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm.
31.1
Certification of Chief Executive Officer Pursuant to Rule 13-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Chief Financial Officer Pursuant to Rule 13-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).
101.SCH
Inline XBRL Taxonomy Extension Schema Document.
101.CAL
Inline XBRL Taxonomy Calculation Linkbase Document.
101.LAB
Inline XBRL Taxonomy Label Linkbase Document.
101.PRE
Inline XBRL Presentation Linkbase Document.
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document.
Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101).
*
Management compensatory plan or arrangement
**
Schedules and exhibits have been omitted pursuant to Item 601 of Regulation S-K. The Company hereby undertakes to furnish supplementally a copy of any of the omitted schedules and exhibits upon request by the Securities and Exchange Commission.