A restated description of the risk factors associated with our
business is set forth below. This description includes any material changes to and supersedes the description of the risk factors associated with our business previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the
year ended December 31, 2013. The risks discussed below are not the only ones facing our business. Please read the cautionary notice regarding forward-looking statements under the heading Managements Discussion and Analysis of
Financial Condition and Results of Operations.
Risk factors related to our U.S. dialysis and related lab services, ancillary services and
strategic initiatives:
If the average rates that commercial payors pay us decline significantly, it would have a material adverse effect on our
revenues, earnings and cash flows.
Approximately 33% of our dialysis and related lab services revenues for the six months ended
June 30, 2014, were generated from patients who have commercial payors as their primary payor. The majority of these patients have insurance policies that pay us on terms and at rates that are generally significantly higher than Medicare rates.
The payments we receive from commercial payors generate nearly all of our profit and all of our nonacute dialysis profits come from commercial payors. We continue to experience downward pressure on some of our commercial payment rates as a result of
general conditions in the market, recent and future consolidations among commercial payors, increased focus on dialysis services and other factors. There is no guarantee that commercial payment rates will not be materially lower in the future.
We are continuously in the process of negotiating our existing or potentially new agreements with commercial payors who tend to be aggressive
in their negotiations with us. Sometimes many significant agreements are up for renewal or being renegotiated at the same time. In the event that our continual negotiations result in overall commercial rate reductions in excess of overall commercial
rate increases, the cumulative effect could have a material adverse effect on our financial results. Consolidations have significantly increased the negotiating leverage of commercial payors. Our negotiations with payors are also influenced by
competitive pressures, and we may experience decreased contracted rates with commercial payors or experience decreases in patient volume as our negotiations with commercial payors continue. In addition to downward pressure on contracted commercial
payor rates, payors have been attempting to impose restrictions and limitations on non-contracted or out-of-network providers, and in some circumstances designate our centers as out-of-network providers. Rates for out-of-network providers are on
average higher than rates for in-network providers. We believe commercial payors have or will begin to restructure their benefits to create disincentives for patients to select or remain with out-of-network providers and to decrease payment rates
for out-of-network providers. Decreases in out-of-network rates and restrictions on out-of-network access, our turning away new patients in instances where we are unable to come to agreement on rates, or decreases in contracted rates could result in
a significant decrease in our overall revenues derived from commercial payors. If the average rates that commercial payors pay us decline significantly, or if we see a decline in commercial patients, it would have a material adverse effect on our
revenues, earnings and cash flows. For additional details regarding specific risks we face regarding regulatory changes that could result in fewer patients covered under commercial plans or an increase of patients covered under more restrictive
commercial plans with lower reimbursement rates, see the discussion of individual and small group health plans in the risk factor below under the heading Health care reform could substantially reduce our revenues, earnings and cash
flows.
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If the number of patients with higher-paying commercial insurance declines, then our revenues, earnings and
cash flows would be substantially reduced.
Our revenue levels are sensitive to the percentage of our patients with higher-paying
commercial insurance coverage. A patients insurance coverage may change for a number of reasons, including changes in the patients or a family members employment status. Currently, for a patient covered by an employer group health
plan, Medicare generally becomes the primary payor after 33 months, or earlier, if the patients employer group health plan coverage terminates. When Medicare becomes the primary payor, the payment rate we receive for that patient decreases
from the employer group health plan rate to the lower Medicare payment rate. We have seen an increase in the number of patients who have government-based programs as their primary payors which we believe is largely a result of improved mortality and
recent economic conditions which have a negative impact on the percentage of patients covered under commercial insurance plans. To the extent there are sustained or increased job losses in the U.S., independent of whether general economic conditions
might be improving, we could experience a continued decrease in the number of patients covered under commercial plans. We could also experience a further decrease if changes to the healthcare regulatory system result in fewer patients covered under
commercial plans or an increase of patients covered under more restrictive commercial plans with lower reimbursement rates. In addition, our continuous process of negotiations with commercial payors under existing or potentially new agreements could
result in a decrease in the number of patients under commercial plans to the extent that we cannot reach agreement with commercial payors on rates and other terms, resulting in termination or non-renewals of existing agreements or our inability to
enter into new ones. If there is a significant reduction in the number of patients under higher-paying commercial plans relative to government-based programs that pay at lower rates, it would have a material adverse effect on our revenues, earnings
and cash flows.
Changes in the structure of and payment rates under the Medicare ESRD program, including the American Taxpayer Relief Act of 2012, the
Budget Control Act of 2011 and other healthcare reform initiatives, could substantially reduce our revenues, earnings and cash flows.
Approximately 47% of our dialysis and related lab services revenues for the six months ended June 30, 2014 was generated from patients who
have Medicare as their primary payor. For patients with Medicare coverage, all ESRD payments for dialysis treatments are made under a single bundled payment rate which provides a fixed payment rate to encompass all goods and services provided during
the dialysis treatment, including pharmaceuticals that were historically separately reimbursed to the dialysis providers, such as Epogen (EPO), vitamin D analogs and iron supplements, irrespective of the level of pharmaceuticals administered or
additional services performed. Most lab services that used to be paid directly to laboratories are also included in the bundled payment. The bundled payment rate is also adjusted for certain patient characteristics, a geographic usage index and
certain other factors.
The current bundled payment system presents certain operating, clinical and financial risks, which include:
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Risk that our rates are reduced by CMS. CMS issued the 2014 final rule for the ESRD PPS, which phases in over three to four years the 12% cut mandated by ATRA. Although no reimbursement reduction is expected in 2014 or
2015 under the final ESRD PPS rule, it is anticipated that future reductions will occur no later than 2017. However, the recent Protecting Access to Medicare Act that was passed on March 31, 2014 further modified the reduction to
only 1.25% in 2016 and 2017, and 1% in 2018. While this modification eases reimbursement pressure, future legislative actions could have the opposite effect. CMS recently issued the 2015 proposed rule for the ESRD PPS, which was published in the
Federal Register on July 11, 2014. The proposed rule, which may change before it is finalized, would increase payments to dialysis facilities modestly by 0.3% to 0.5%, although rural facilities would receive a decrease of 0.5%. Uncertainty
about future payment rates remain a material risk to our business.
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Risk that increases in our operating costs will outpace the Medicare rate increases we receive. We expect to continue experiencing increases in operating costs that are subject to inflation, such as labor and
supply costs, regardless of whether there is a compensating inflation-based increase in Medicare payment rates or in payments under the bundled payment rate system.
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Risk of federal budget sequestration cuts. As a result of the Budget Control Act of 2011 (BCA) and subsequent activity in Congress, a $1.2 trillion sequester (across-the-board spending cuts) in discretionary
programs took effect on March 1, 2013. In particular, a 2% reduction to Medicare payments took effect on April 1, 2013, which was recently extended through 2014 and 2015 by a two-year funding bill signed into law on December 26, 2013.
The across-the-board spending cuts pursuant to the sequester have affected and will continue to adversely affect our revenues, earnings and cash flows.
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Risk that we may not be able to comply with the CMS ESRD Quality Incentive Program (QIP) requirements. Beginning in payment year 2016, CMS proposed to adopt two new clinical and reporting measures, continue using six
existing clinical and reporting measures, revise two existing clinical and reporting measures, and expand one existing reporting measure. The final rule establishes calendar year 2014 as the performance period for all of the quality measures. The
July 11, 2014 proposed rule further modifies the QIP by removing hemoglobin as a measurable indicator and adding hospital readmission as a reporting measure. CMS proposes to have a total of eleven clinical measures and five reporting measures
in 2018. The QIP continues to evolve and undergo material changes. To the extent we are not able to meet CMSs quality measures, it could have a material adverse effect on our revenues, earnings and cash flows.
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For additional details regarding the risks we face for failing to adhere to our Medicare and Medicaid regulatory compliance obligations, see
the risk factor below under the heading If we fail to adhere to all of the complex government regulations that apply to our business, we could suffer severe consequences that would substantially reduce our revenues, earnings, cash flows and
stock price.
Health care reform could substantially reduce our revenues, earnings and cash flows.
We cannot predict how employers, private payors or persons buying insurance might react to the changes brought on by broad U.S. health care
reform legislation or what form many of these regulations will take before implementation.
The health care reform legislation introduced
health care insurance exchanges which provide a marketplace for eligible individuals and small employers to purchase health care insurance. Although we cannot predict the short or long term effects of these measures, we believe the health care
insurance exchanges could result in a reduction in patients covered by commercial insurance or an increase of patients covered through the exchanges under more restrictive commercial plans with lower reimbursement rates. To the extent that the
implementation of such exchanges results in a reduction in patients covered by commercial insurance or a reduction in reimbursement rates for our services from commercial and/or government payors, our revenues, earnings and cash flows could be
adversely affected.
In addition, the health care reform legislation introduced severe penalties for the knowing and improper retention of
overpayments collected from government payors and reduced the timeline to file Medicare claims. As a result, we made significant initial investments in new resources to accelerate the time it takes us to identify and process overpayments and we
deployed significant resources to reduce our timeline and improve our claims processing methods to ensure that our Medicare claims are filed in a timely fashion. We may be required to make additional investments in the future. Failure to timely
identify and return overpayments may result in significant additional penalties, which may have a negative impact on our revenues, earnings and cash flows. Failure to file a claim within the one year window could result in payment denials, adversely
affecting our revenues, earnings and cash flows.
The health care reform legislation also added several new tax provisions that, among
other things, impose various fees and excise taxes, and limit compensation deductions for health insurance providers and their affiliates. These rules could negatively impact our cash flow and tax liabilities.
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The CMS Center for Medicare & Medicaid Innovation (Innovation Center) is currently
working with various healthcare providers to develop and implement ACOs and other innovative models of care for Medicare and Medicaid beneficiaries. We are currently uncertain of the extent to which these models of care, including ACOs, Bundled
Payments for Care Improvement Initiative, Comprehensive ESRD Care Model (which includes the development of ESCOs), the Comprehensive Primary Care Initiative, the Duals Demonstration, or other models, will impact the health care market. Our U.S.
dialysis business may choose to participate in one or several of these models either as a partner with other providers or independently. We are currently seeking to participate in the Comprehensive ESRD Care Model with the Innovation Center. Even if
we do not participate in this or other programs, some of our patients may be assigned to a program, in which case the quality and cost of care that we furnish will be included in an ACOs or other programs calculations. As new models of
care emerge, we may be at risk for losing our Medicare patient base, which would have a materially adverse effect on our revenues, earnings and cash flow. Other initiatives in the government or private sector may arise, including the development of
models similar to ACOs, IPAs and integrated delivery systems or evolutions of those concepts which could adversely impact our business.
CMS instituted new screening procedures which we expect will delay the Medicare contractor approval process, potentially causing a delay in
reimbursement. We anticipate the new screening and enrollment requirements will require additional personnel and financial resources and will potentially delay the enrollment and revalidation of our centers which in turn will delay payment. These
delays may negatively impact our revenues, earnings and cash flows.
Other reform measures allow CMS to place a moratorium on new
enrollment of providers and to suspend payment to providers upon a credible allegation of fraud from any source. These types of reform measures, as well as other measures, could adversely impact our revenues, earnings and cash flows depending upon
the scope and breadth of the implementing regulations.
There is also a considerable amount of uncertainty as to the prospective
implementation of the federal healthcare reform legislation and what similar measures might be enacted at the state level. The enacted reforms as well as future legislative changes could have a material adverse effect on our results of operations,
including lowering our reimbursement rates and increasing our expenses.
Changes in state Medicaid or other non-Medicare government-based programs or
payment rates could reduce our revenues, earnings and cash flows.
Approximately 20% of our dialysis and related lab services revenues
for the six months ended June 30, 2014 was generated from patients who have state Medicaid or other non-Medicare government-based programs, such as coverage through the Department of Veterans Affairs (VA), as their primary coverage. As state
governments and other governmental organizations face increasing budgetary pressure, we may in turn face reductions in payment rates, delays in the receipt of payments, limitations on enrollee eligibility or other changes to the applicable programs.
For example, certain state Medicaid programs and the VA have recently considered, proposed or implemented payment rate reductions.
The VA
recently adopted Medicares bundled PPS pricing methodology for any veterans receiving treatment from non-VA providers under a new national contracting initiative. Since we are a non-VA provider, these reimbursements are now tied to a
percentage of Medicare reimbursement, and we have additional exposure to any dialysis reimbursement changes made by CMS. Approximately 2% of our dialysis and related lab services revenues for the six months ended June 30, 2014 was generated by
the VA. In 2013, we entered into a five-year Nationwide Dialysis Services contract with the VA which is subject to one-year renewal periods, consistent with all provider agreements with the VA under this contract. These agreements provide for the
right of the VA to terminate the agreements without cause on short notice. Should the VA not renew or cancel these agreements for any reason, we may cease accepting patients under this program and may be forced to close centers, which could
adversely affect our revenues, earnings and cash flows.
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State Medicaid programs are increasingly adopting Medicare-like bundled payment systems, but
sometimes these payment systems are poorly defined and are implemented without any claims processing infrastructure, or patient or facility adjusters. If these payment systems are implemented without any adjusters and claims processing changes,
Medicaid payments will be substantially reduced and the costs to submit such claims may increase, which will have a negative impact on our revenues, earnings and cash flows. In addition, some state Medicaid program eligibility requirements mandate
that citizen enrollees in such programs provide documented proof of citizenship. If our patients cannot meet these proof of citizenship documentation requirements, they may be denied coverage under these programs, resulting in decreased patient
volumes and revenue. These Medicaid payment and enrollment changes, along with similar changes to other non-Medicare government programs could reduce the rates paid by these programs for dialysis and related services, delay the receipt of payment
for services provided, and further limit eligibility for coverage which could adversely affect our revenues, earnings and cash flows.
Changes in
clinical practices, payment rates or regulations impacting EPO and other pharmaceuticals could adversely affect our operating results, reduce our revenues, earnings and cash flows and negatively impact our ability to care for patients.
Medicare bundles EPO into the prospective payment system such that dosing variations do not change the amount paid to a dialysis facility.
Although some Medicaid programs and other payors suggest movement towards a bundled payment system inclusive of EPO, some non-Medicare payors continue to pay for EPO separately from the treatment rate. The administration of EPO and other
pharmaceuticals that are separately billable accounted for approximately 3% of our dialysis and related lab services revenues for the six months ended June 30, 2014, with EPO alone accounting for approximately 2% of our dialysis and related lab
services revenues during that period. Changes in physician clinical practices that result in further decreased utilization of prescribed pharmaceuticals or changes in payment rates for those pharmaceuticals could reduce our revenues, earnings and
cash flows.
Evaluations on the utilization and reimbursement for ESAs, which have occurred in the past and may occur in the future, and
related actions by the U.S. Congress and federal agencies, could result in further restrictions on the utilization and reimbursement for ESAs. Additionally, commercial payors have increasingly examined their administration policies for EPO and, in
some cases, have modified those policies. Changes in labeling of EPO and other pharmaceuticals in a manner that alters physician practice patterns or accepted clinical practices, changes in private and governmental payment criteria, including the
introduction of EPO administration policies or the conversion to alternate types of administration of EPO or other pharmaceuticals that result in further decreases in utilization of EPO for patients covered by commercial payors could have a material
adverse effect on our revenues, earnings and cash flows. Further increased utilization of EPO for patients for whom the cost of EPO is included in a bundled reimbursement rate, or further decreases in reimbursement for EPO and other pharmaceuticals
that are not included in a bundled reimbursement rate, could also have a material adverse effect on our revenues, earnings and cash flows.
Additionally, as a result of the current high level of scrutiny and controversy, we may be subject to increased inquiries or audits from a
variety of governmental bodies or claims by third parties. Although we believe our anemia management practices and other pharmaceutical administration practices have been compliant with existing laws and regulations, increased inquiries or audits
from governmental bodies or claims by third parties would require managements attention, and could result in significant legal expense. Any negative findings could result in substantial financial penalties or repayment obligations, the
imposition of certain obligations on and changes to our practices and procedures as well as the attendant financial burden on us to comply with the obligations, or exclusion from future participation in the Medicare and Medicaid programs, and could
have a material adverse effect on our revenues, earnings and cash flows.
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Changes in EPO pricing could materially reduce our earnings and cash flows and affect our ability to care for
our patients.
Future increases in the cost of EPO without corresponding increases in payment rates for EPO from commercial payors and
without corresponding increases in the Medicare bundled rate could have a material adverse effect on our earnings and cash flows and ultimately reduce our income. In November 2011, we entered into a seven year Sourcing and Supply Agreement with
Amgen USA Inc., pursuant to which we committed to purchase EPO in amounts necessary to meet no less than 90% of our requirements for ESAs. As long as we meet certain conditions, the agreement limits Amgens ability to unilaterally increase the
price for EPO during the term of the agreement. Our agreement with Amgen for EPO provides for discounted pricing and rebates for EPO. However, some of the rebates are subject to various conditions including, but not limited to, future pricing levels
of EPO by Amgen and data submission by us. In addition, the rebates are subject to certain limitations. We cannot predict whether, over the seven year term of the agreement, we will continue to receive the rebates for EPO that we have received in
the past, or whether we will continue to achieve the same levels of rebates within that structure as we have historically achieved. In the initial years of the agreement, the total rebate opportunity is less than what was provided in the agreement
that expired at the end of 2011; however, the opportunity for us to earn discounts and rebates increases over the term of the agreement. Factors that could impact our ability to qualify for rebates provided for in our agreement with Amgen in the
future include, but are not limited to, our ability to track certain data elements. We cannot predict whether we will be able to meet the applicable qualification requirements for receiving rebates. Failure to meet certain targets and earn the
specified rebates could have a material adverse effect on our earnings and cash flows.
We are the subject of a number of investigations by the federal
government and two private civil suits, any of which could result in substantial penalties or awards against us, the imposition of certain obligations on our practices and procedures, exclusion from future participation in the Medicare and Medicaid
programs and possible criminal penalties.
We are the subject of a number of investigations by the federal government. We have received
subpoenas or other requests for documents from the federal government in connection with the Vainer private civil suit, the 2010 U.S. Attorney physician relationship investigation, the 2011 U.S. Attorney physician relationship investigation and the
2011 U.S. Attorney Medicaid investigation. Certain current and former members of our Board, as well as executives and other teammates have been subpoenaed to testify before a grand jury in Colorado related to the 2011 U.S. Attorney physician
relationship investigation. (See Note 9 to the condensed consolidated financial statements of this report for additional details regarding these matters.)
With respect to the Vainer private civil suit, after investigation, the federal government did not intervene and is not actively pursuing this
private civil suit. With respect to the Swoben civil suit, the United States Department of Justice declined to intervene after its review of the allegations contained in the Third Amended Complaint and is not actively pursuing this private civil
suit other than its partial intervention for the purpose of settlement with and dismissal of the initial defendant in this proceeding. In each of these private civil suits, a relator filed a complaint against us in federal court under the
qui
tam
provisions of the False Claims Act (FCA) (and in the Swoben matter, provisions of the California False Claims Act, as well) and pursued the claims independently after the government declined to intervene. The parties are engaged in active
litigation in the Vainer private civil suit. With regard to the Swoben private civil suit, in July 2013, the court granted HCPs motion and dismissed with prejudice all of the claims in the Third Amended Complaint, and in October 2013 the
plaintiff filed an appeal of the dismissal, which is currently pending. (See Note 9 to the condensed consolidated financial statements of this report for additional details regarding these matters).
We are cooperating with HHSs OIG and those offices of the U.S. Attorney pursuing the matters mentioned above. In addition, we have
agreed to a framework for a global resolution with the United States Attorneys Office for the District of Colorado, the Civil Division of the United States Department of Justice and the Office of the Inspector General for both the 2010 and the
2011 U.S. Attorney Physician Relationship Investigations. The settlement will include the payment of approximately $389 million, entry into a corporate integrity agreement,
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the appointment of an independent compliance monitor, and the imposition of certain other business restrictions related to a subset of our joint venture arrangements. We have agreed to unwind a
limited subset of joint ventures that were created through partial divestiture to nephrologists, and agreed not to enter into this type of partial divestiture joint venture with nephrologists in the future. The final settlement remains subject to
negotiation of specific terms, and we can make no assurances as to the final outcome.
If we fail to adhere to all of the complex government
regulations that apply to our business, we could suffer severe consequences that would substantially reduce our revenues, earnings, cash flows and stock price.
Our dialysis operations are subject to extensive federal, state and local government regulations, including Medicare and Medicaid payment rules
and regulations, federal and state anti-kickback laws, the physician self-referral law (Stark Law) and analogous state self-referral prohibition statutes, Federal Acquisition Regulations, the FCA and federal and state laws regarding the collection,
use and disclosure of patient health information and the storage, handling and administration of pharmaceuticals. The Medicare and Medicaid reimbursement rules related to claims submission, enrollment and licensing requirements, cost reporting, and
payment processes impose complex and extensive requirements upon dialysis providers as well. A violation or departure from any of these legal requirements may result in government audits, lower reimbursements, significant fines and penalties, the
potential loss of certification, recoupment efforts or voluntary repayments.
We endeavor to comply with all legal requirements, however,
there is no guarantee that we will be able to adhere to all of the complex government regulations that apply to our business. For example, we have experienced past security breaches with regard to patient health information and there can be no
assurance that we will not suffer security breaches in the future. We further endeavor to structure all of our relationships with physicians to comply with state and federal anti-kickback and physician self-referral laws. We utilize considerable
resources to monitor the laws and implement necessary changes. However, the laws and regulations in these areas are complex and often subject to varying interpretations. For example, if an enforcement agency were to challenge the level of
compensation that we pay our medical directors or the number of medical directors whom we engage, we could be required to change our practices, face criminal or civil penalties, pay substantial fines or otherwise experience a material adverse effect
as a result of a challenge to these arrangements. In addition, amendments to the FCA impose severe penalties for the knowing and improper retention of overpayments collected from government payors. These amendments could subject our procedures for
identifying and processing overpayments to greater scrutiny. We have made significant investments in new resources to decrease the time it takes to identify and process overpayments and we may be required to make additional investments in the
future. An acceleration in our ability to identify and process overpayments could result in us refunding overpayments to government and other payors more rapidly than we have in the past which could have a material adverse effect on our operating
cash flows. Additionally, amendments to the federal anti-kickback statute in the health reform law make anti-kickback violations subject to FCA prosecution, including
qui tam
or whistleblower suits.
If any of our operations are found to violate these or other government regulations, we could suffer severe consequences that would have a
material adverse effect on our revenues, earnings, cash flows and stock price, including:
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Suspension or termination of our participation in government payment programs;
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Refunds of amounts received in violation of law or applicable payment program requirements;
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Loss of required government certifications or exclusion from government payment programs;
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Loss of licenses required to operate health care facilities or administer pharmaceuticals in some of the states in which we operate;
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Reductions in payment rates or coverage for dialysis and ancillary services and related pharmaceuticals;
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Fines, damages or monetary penalties for anti-kickback law violations, Stark Law violations, FCA violations, civil or criminal liability based on violations of law, or other failures to meet regulatory requirements;
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Enforcement actions by governmental agencies and/or state claims for monetary damages by patients who believe their protected health information has been used, disclosed or not properly safeguarded in violation of
federal or state patient privacy laws, including Health Insurance Portability and Accountability Act (HIPAA) of 1996;
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Mandated changes to our practices or procedures that significantly increase operating expenses;
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Imposition of and compliance with corporate integrity agreements that could subject us to ongoing audits and reporting requirements as well as increased scrutiny of our billing and business practices which could lead to
potential fines;
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Termination of relationships with medical directors; and
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Harm to our reputation which could impact our business relationships, affect our ability to obtain financing and decrease access to new business opportunities.
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Delays in state Medicare and Medicaid certification of our dialysis centers could adversely affect our revenues, earnings and cash flows.
Before we can begin billing for patients treated in our outpatient dialysis centers who are enrolled in government-based programs, we are
required to obtain state and federal certification for participation in the Medicare and Medicaid programs. As state agencies responsible for surveying dialysis centers on behalf of the state and Medicare program face increasing budgetary pressure,
certain states are having difficulty keeping up with certifying dialysis centers in the normal course resulting in significant delays in certification. If state governments continue to have difficulty keeping up with certifying new centers in the
normal course and we continue to experience significant delays in our ability to treat and bill for services provided to patients covered under government programs, it could cause us to incur write-offs of investments or accelerate the recognition
of lease obligations in the event we have to close centers or our centers operating performance deteriorates, and it could have an adverse effect on our revenues, earnings and cash flows.
If our joint ventures were found to violate the law, we could suffer severe consequences that would have a material adverse effect on our revenues,
earnings and cash flows.
As of June 30, 2014, we owned a controlling interest in numerous dialysis-related joint ventures, which
represented approximately 22% of our U.S. dialysis and related lab services revenues for the six months ended June 30, 2014. In addition, we also owned minority equity investments in several other dialysis related joint ventures. We may
continue to increase the number of our joint ventures. Many of our joint ventures with physicians or physician groups also have certain physician owners providing medical director services to centers we own and operate. Because our relationships
with physicians are governed by the federal and state anti-kickback statutes, we have sought to structure our joint venture arrangements to satisfy as many federal safe harbor requirements as we believe are commercially reasonable. However, our
joint venture arrangements do not satisfy all of the elements of any safe harbor under the federal anti-kickback statute. Arrangements that do not meet all of the elements of a safe harbor are not automatically prohibited under the federal
anti-kickback statute but are susceptible to government scrutiny. We have recently agreed to a framework for a global resolution with the United States Attorneys Office for the District of Colorado, the Civil Division of the United States
Department of Justice and the Office of the Inspector General for both the 2010 and the 2011 U.S. Attorney Physician Relationship Investigations, including the payment of approximately $389 million, entry into a corporate integrity agreement, the
appointment of an independent compliance monitor, and the imposition of certain other business restrictions related to a subset of our joint venture arrangements. Under the terms of the framework for resolution, we have agreed to unwind a limited
subset of joint ventures that were created through
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partial divestiture to nephrologists, and agreed not to enter into this type of partial divestiture joint venture with nephrologists in the future. The final settlement remains subject to
negotiation of specific terms, and we can make no assurances as to the final outcome.
There are significant estimating risks associated with the
amount of dialysis revenues and related refund liabilities that we recognize and if we are unable to accurately estimate our revenues and related refund liabilities, it could impact the timing and the amount of our revenues recognition or have a
significant impact on our operating results.
There are significant estimating risks associated with the amount of dialysis and related
lab services revenues and related refund liabilities that we recognize in a reporting period. The billing and collection process is complex due to ongoing insurance coverage changes, geographic coverage differences, differing interpretations of
contract coverage, and other payor issues. Determining applicable primary and secondary coverage for approximately 168,000 U.S. patients at any point in time, together with the changes in patient coverage that occur each month, requires complex,
resource-intensive processes. Errors in determining the correct coordination of benefits may result in refunds to payors. Revenues associated with Medicare and Medicaid programs are also subject to estimating risk related to the amounts not paid by
the primary government payor that will ultimately be collectible from other government programs paying secondary coverage, the patients commercial health plan secondary coverage or the patient. Collections, refunds and payor retractions
typically continue to occur for up to three years and longer after services are provided. We generally expect our range of U.S. dialysis and related lab services revenues estimating risk to be within 1% of net revenues for the segment, which
represents approximately 5% of dialysis and related lab services adjusted operating income. If our estimates of dialysis and related lab services revenues and related refund liabilities are materially inaccurate, it could impact the timing and the
amount of our revenues recognition and have a significant impact on our operating results.
Our ancillary services and strategic initiatives, including
our international dialysis operations, that we invest in now or in the future may generate losses and may ultimately be unsuccessful. In the event that one or more of these activities is unsuccessful, we may have to write off our investment and
incur other exit costs.
Our ancillary services and strategic initiatives currently include pharmacy services, disease management
services, vascular access services, ESRD clinical research programs, physician services, direct primary care and our international dialysis operations. We expect to add additional service offerings and pursue additional strategic initiatives in the
future as circumstances warrant, which could include healthcare services not related to dialysis. Many of these initiatives require or would require investments of both management and financial resources and can generate significant losses for a
substantial period of time and may not become profitable. There can be no assurance that any such strategic initiative will ultimately be successful. Any significant change in market conditions, or business performance, or in the political,
legislative or regulatory environment, may impact the economic viability of any of these strategic initiatives. If any of our ancillary services or strategic initiatives, including our international dialysis operations, do not perform as planned, we
may incur a material write-off or an impairment of our investment, including goodwill, in one or more of these activities or we could incur significant termination costs if we were to exit a certain line of business.
If a significant number of physicians were to cease referring patients to our dialysis centers, whether due to regulatory or other reasons, it would have a
material adverse effect on our revenues, earnings and cash flows.
We believe that physicians prefer to have their patients treated at
dialysis centers where they or other members of their practice supervise the overall care provided as medical director of the center. As a result, the primary referral source for most of our centers is often the physician or physician group
providing medical director services to the center.
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Our medical director contracts are for fixed periods, generally ten years, and at any given time
a large number of them could be up for renewal at the same time. Medical directors have no obligation to extend their agreements with us and if we are unable to enforce noncompetition provisions contained in terminated medical director agreements,
our former medical directors may choose to provide medical director services for competing providers or establish their own dialysis centers in competition with ours. Neither our current nor former medical directors have an obligation to refer their
patients to our centers.
Opportunities presented by our competitors or different affiliation models in the changing healthcare
environment, such as an increase in the number of physicians becoming employed by hospitals or a perceived decrease in the quality of service levels at our centers may negatively impact a medical directors decision to enter into or extend his
or her agreement with us, refer patients to our centers or otherwise negatively impact treatment volumes.
In addition, we may take
actions to restructure existing relationships or take positions in negotiating extensions of relationships to assure compliance with the anti-kickback statute, Stark Law and other similar laws. If the terms of any existing agreement are found to
violate applicable laws, we may not be successful in restructuring the relationship which could lead to the early termination of the agreement, or cause the physician to stop referring patients to our dialysis centers. These actions in an effort to
comply with applicable laws and regulations could negatively impact the decision of physicians to extend their medical director agreements with us or to refer their patients to us. If a significant number of physicians were to cease referring
patients to our dialysis centers, our revenues, earnings and cash flows would be substantially reduced.
Deterioration in economic conditions as well
as further disruptions in the financial markets could have a material adverse effect on our revenues, earnings and cash flows and otherwise adversely affect our financial condition.
Deterioration in economic conditions could adversely affect our business and our profitability. Among other things, the potential decline in
federal and state revenues that may result from such conditions may create additional pressures to contain or reduce reimbursements for our services from Medicare, Medicaid and other government sponsored programs. Increasing job losses or slow
improvement in the unemployment rate in the U.S. as a result of adverse economic conditions has and may continue to result in a smaller percentage of our patients being covered by an employer group health plan and a larger percentage being covered
by lower paying Medicare and Medicaid programs. Employers may also select more restrictive commercial plans with lower reimbursement rates. To the extent that payors are negatively impacted by a decline in the economy, we may experience further
pressure on commercial rates, a further slowdown in collections and a reduction in the amounts we expect to collect. In addition, uncertainty in the financial markets could adversely affect the variable interest rates payable under our credit
facilities or could make it more difficult to obtain or renew such facilities or to obtain other forms of financing in the future, if at all. Any or all of these factors, as well as other consequences of a deterioration in economic conditions which
cannot currently be anticipated, could have a material adverse effect on our revenues, earnings and cash flows and otherwise adversely affect our financial condition.
If there are shortages of skilled clinical personnel or if we experience a higher than normal turnover rate, we may experience disruptions in our business
operations and increases in operating expenses.
We are experiencing increased labor costs and difficulties in hiring nurses due to a
nationwide shortage of skilled clinical personnel. We compete for nurses with hospitals and other health care providers. This nursing shortage may limit our ability to expand our operations. In addition, changes in certification requirements or
increases in the required staffing levels for skilled clinical personnel can impact our ability to maintain sufficient staff levels to the extent our teammates are not able to meet new requirements or we experience a higher than normal turnover rate
due to increased competition for qualified clinical personnel. If we are unable to hire skilled clinical personnel when needed, or if we experience a higher than normal turnover rate for our skilled clinical personnel, our operations and treatment
growth will be negatively impacted, which would result in reduced revenues, earnings and cash flows.
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Our business is labor intensive and could be adversely affected if we are unable to maintain satisfactory
relations with our employees or if union organizing activities result in significant increases in our operating costs or decreases in productivity.
Our business is labor intensive, and our results are subject to variations in labor-related costs, productivity and the number of pending or
potential claims against us related to labor and employment practices. If political efforts at the national and local level result in actions or proposals that increase the likelihood of union organizing activities at our facilities or if union
organizing activities increase for other reasons, or if labor and employment claims, including the filing of class action suits, trend upwards, our operating costs could increase and our employee relations, productivity, earnings and cash flows
could be adversely affected.
Upgrades to our billing and collections systems and complications associated with upgrades and other improvements to our
billing and collections systems could have a material adverse effect on our revenues, cash flows and operating results.
We are
continuously performing upgrades to our billing systems and expect to continue to do so in the near term. In addition, we continuously work to improve our billing and collections performance through process upgrades, organizational changes and other
improvements. We may experience difficulties in our ability to successfully bill and collect for services rendered as a result of these changes, including a slow-down of collections, a reduction in the amounts we expect to collect, increased risk of
retractions from and refunds to commercial and government payors, an increase in our provision for uncollectible accounts receivable and noncompliance with reimbursement regulations. The failure to successfully implement upgrades to the billing and
collection systems and other improvements could have a material adverse effect on our revenues, cash flows and operating results.
Our ability to
effectively provide the services we offer could be negatively impacted if certain of our suppliers are unable to meet our needs or if we are unable to effectively access new technology, which could substantially reduce our revenues, earnings and
cash flows.
We have significant suppliers that are either the sole or primary source of products critical to the services we provide,
including Amgen, Baxter Healthcare Corporation, NxStage Medical, Inc. and others or to which we have committed obligations to make purchases including Gambro and FMC. If any of these suppliers are unable to meet our needs for the products they
supply, including in the event of a product recall or shortage, and we are not able to find adequate alternative sources, or if some of the drugs that we purchase are not reimbursed or not adequately reimbursed by commercial payors or through the
bundled payment rate by Medicare, our revenues, earnings and cash flows could be substantially reduced. In addition, the technology related to the products critical to the services we provide is subject to new developments and may result in superior
products. If we are not able to access superior products on a cost-effective basis or if suppliers are not able to fulfill our requirements for such products, we could face patient attrition which could substantially reduce our revenues, earnings
and cash flows.
Risk factors related to HCP:
HCP
is subject to many of the same risks to which our dialysis business is subject.
As a participant in the healthcare industry, HCP is
subject to many of the same risks to which our dialysis business is subject to as described in the risk factors set forth above in this Part II, Item 1A, any of which could materially and adversely affect HCPs revenues, earnings or cash
flows. Among these risks are the following:
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The healthcare business is heavily regulated and changes in laws, regulations, or government programs could have a material impact on HCP;
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Failure to comply with complex governmental regulations could have severe consequences to HCP, including, without limitation, exclusion from governmental payor programs like Medicare and Medicaid;
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HCP could become the subject of governmental investigations, claims, and litigation;
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HCP may be unable to continue to explore potential acquisition candidates, make acquisitions or successfully integrate such acquisitions into its business, and such acquisitions may include liabilities of which HCP was
not aware; and
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As a result of the broad scope of HCPs medical practice, HCP is exposed to medical malpractice claims, as well as claims for damages and other expenses, that may not be covered by insurance or for which adequate
limits of insurance coverage may not be available.
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Under most of HCPs agreements with health plans, HCP assumes some or all of the
risk that the cost of providing services will exceed its compensation.
Substantially all of HCPs revenue is derived from fixed
Per Member Per Month (PMPM) fees paid by health plans under capitation agreements with HCP or its associated physician groups. While there are variations specific to each arrangement, DaVita HealthCare Partners Plan, Inc., a subsidiary of HealthCare
Partners Holdings, LLC and a restricted Knox-Keene licensed entity (DaVita HealthCare Partners Plan), HCPs associated physician groups generally contract with health plans to receive a PMPM fee for professional services and assume the
financial responsibility for professional services only. In some cases, the health plans separately enter into capitation contracts with third parties (typically hospitals) who receive directly a PMPM fee and assume contractual financial
responsibility for hospital services. In other cases, the health plan does not pay any portion of the PMPM fee to the hospital, but rather administers claims for hospital expenses itself. In both scenarios, HCP enters into managed care-related
administrative services agreements or similar arrangements with those third parties (typically hospitals) under which HCP agrees to be responsible for utilization review, quality assurance, and other managed care-related administrative functions and
claim payments. As compensation for such administrative services, HCP is entitled to receive a percentage of the amount by which the institutional capitation revenue received from health plans exceeds institutional expenses; any such risk-share
amount to which HCP is entitled is recorded as medical revenues and HCP is also responsible for a percentage of any short-fall in the event that institutional expenses exceed institutional revenues. To the extent that members require more care than
is anticipated, aggregate fixed PMPM amounts, or capitation payments, may be insufficient to cover the costs associated with treatment. If medical expenses exceed estimates, except in very limited circumstances, HCP will not be able to increase the
PMPM fee received under these risk agreements during their then-current terms and could, directly or indirectly through its contracts with its associated physician groups, suffer losses with respect to such agreements.
Changes in HCPs or its associated physician groups anticipated ratio of medical expense to revenue can significantly impact
HCPs financial results. Accordingly, the failure to adequately predict and control medical expenses and to make reasonable estimates and maintain adequate accruals for incurred but not reported claims, may have a material adverse effect on
HCPs financial condition, results of operations or cash flows.
Historically, HCPs and its associated physician groups
medical expenses as a percentage of revenue have fluctuated. Factors that may cause medical expenses to exceed estimates include:
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the health status of members;
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higher than expected utilization of new or existing healthcare services or technologies;
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an increase in the cost of healthcare services and supplies, including pharmaceuticals, whether as a result of inflation or otherwise;
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changes to mandated benefits or other changes in healthcare laws, regulations, and practices;
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periodic renegotiation of provider contracts with specialist physicians, hospitals, and ancillary providers;
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periodic renegotiation of contracts with HCPs affiliated primary care physicians and specialists;
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changes in the demographics of the participating members and medical trends;
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contractual or claims disputes with providers, hospitals, or other service providers within a health plans network;
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the occurrence of catastrophes, major epidemics, or acts of terrorism; and
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the reduction of health plan premiums.
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Risk-sharing arrangements that HCP and its associated physician
groups have with health plans and hospitals could result in their costs exceeding the corresponding revenues, which could reduce or eliminate any shared risk profitability.
Most of the agreements between health plans and HCP and its associated physician groups contain risk-sharing arrangements under which the
physician groups can earn additional compensation from the health plans by coordinating the provision of quality, cost-effective healthcare to members. However, such arrangements may require the physician group to assume a portion of any loss
sustained from these arrangements, thereby reducing HCPs net income. Under these risk-sharing arrangements, HCP and its associated physician groups are responsible for a portion of the cost of hospital services or other services that are not
capitated. The terms of the particular risk-sharing arrangement allocate responsibility to the respective parties when the cost of services exceeds the related revenue, which results in a deficit, or permit the parties to share in any surplus
amounts when actual costs are less than the related revenue. The amount of non-capitated medical and hospital costs in any period could be affected by factors beyond the control of HCP, such as changes in treatment protocols, new technologies,
longer lengths of stay by the patient, and inflation. To the extent that such non-capitated medical and hospital costs are higher than anticipated, revenue may not be sufficient to cover the risk-sharing deficits the health plans and HCP are
responsible for, which could reduce HCPs revenues and profitability. Certain of HCPs agreements with health plans stipulate that risk-sharing pool deficit amounts are carried forward to offset any future years surplus amounts HCP
would otherwise be entitled to receive. HCP accrues for any such risk-sharing deficits.
Although HCP seeks to contractually reduce or
eliminate its liability for risk-sharing deficits, risk-sharing deficits could significantly impact HCPs profitability.
Renegotiation, renewal,
or termination of capitation agreements with health plans could have a significant impact on HCPs future profitability.
Under
most of HCPs and its associated physician groups capitation agreements with health plans, the health plan is generally permitted to modify the benefit and risk obligations and compensation rights from time to time during the terms of the
agreements. If a health plan exercises its right to amend its benefit and risk obligations and compensation rights, HCP and its associated physician groups are generally allowed a period of time to object to such amendment. If HCP or its associated
physician group so objects, under some of the risk agreements, the relevant health plan may terminate the applicable agreement upon 90 to 180 days written notice. If HCP or its associated physician groups enter into capitation contracts or other
risk sharing arrangements with unfavorable economic terms, or a capitation contract is amended to include unfavorable terms, HCP could, directly or indirectly through its contracts with its associated physician groups, suffer losses with respect to
such contract. Since HCP does not negotiate with CMS or any health plan regarding the benefits to be provided under their Medicare Advantage plans, HCP often has just a few months to familiarize itself with each new annual package of benefits it is
expected to offer. Depending on the health plan at issue and the amount of revenue associated with the health plans risk agreement, the renegotiated terms or termination may have a material adverse effect on HCPs and DaVitas future
revenues and profitability.
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Laws regulating the corporate practice of medicine could restrict the manner in which HCP is permitted to
conduct its business and the failure to comply with such laws could subject HCP to penalties or require a restructuring of HCP.
Some
states have laws that prohibit business entities, such as HCP, from practicing medicine, employing physicians to practice medicine, exercising control over medical decisions by physicians (also known collectively as the corporate practice of
medicine) or engaging in certain arrangements, such as fee-splitting, with physicians. In some states these prohibitions are expressly stated in a statute or regulation, while in other states the prohibition is a matter of judicial or regulatory
interpretation. Of the states in which HCP currently operates, California and Nevada prohibit the corporate practice of medicine.
In
California and Nevada, HCP operates by maintaining long-term contracts with its associated physician groups which are each owned and operated by physicians and which employ or contract with additional physicians to provide physician services. Under
these arrangements, HCP provides management services and, receives a management fee for providing non-medical management services; however, HCP does not represent that it offers medical services, and does not exercise influence or control over the
practice of medicine by the physicians or the associated physician groups.
In addition to the above management arrangements, HCP has
certain contractual rights relating to the orderly transfer of equity interests in certain of its associated California and Nevada physician groups through succession agreements and other arrangements with their physician equity holders. However,
such equity interests cannot be transferred to or held by HCP or by any non-professional organization. Accordingly, neither HCP nor HCPs subsidiaries directly own any equity interests in any physician groups in California and Nevada. In the
event that any of these associated physician groups fails to comply with the management arrangement or any management arrangement is terminated and/or HCP is unable to enforce its contractual rights over the orderly transfer of equity interests in
its associated physician groups, such events could have a material adverse effect on HCPs business, financial condition or results of operations.
It is possible that a state regulatory agency or a court could determine that HCPs agreements with physician equity holders of certain
managed California and Nevada associated physician groups as described above, either independently or coupled with the management services agreements with such associated physician groups are in violation of the corporate practice of medicine
doctrine. As a result, these arrangements could be deemed invalid, potentially resulting in a loss of revenues and an adverse effect on results of operations derived from such associated physician groups. Such a determination could force a
restructuring of HCPs management arrangements with associated physician groups in California and/or Nevada, which might include revisions of the management services agreements, including a modification of the management fee and/or establishing
an alternative structure, which would permit HCP to contract with a physician network without violating the corporate practice of medicine prohibition. There can be no assurance that such a restructuring would be feasible, or that it could be
accomplished within a reasonable time frame without a material adverse effect on HCPs operations and financial results. In December 2013, DaVita HealthCare Partners Plan obtained a restricted Knox-Keene license in California pursuant to the
California Knox-Keene Health Care Service Plan Act of 1975 (the Knox-Keene Act), which permits DaVita HealthCare Partners Plan to contract with health plans in California to accept global risk without violating the corporate practice of medicine
prohibition. However, HCPs Nevada associated physician groups and HCP, as well as those physician equity holders of associated physician groups who are subject to succession agreements with HCP, could be subject to criminal or civil penalties
or an injunction for practicing medicine without a license or aiding and abetting the unlicensed practice of medicine.
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If HCPs agreements or arrangements with any physician equity holder(s) of associated physicians,
physician groups, or IPAs are deemed invalid under state law, including laws against the corporate practice of medicine, or federal law, or are terminated as a result of changes in state law, or if there is a change in accounting standards by the
Financial Accounting Standards Board (FASB) or the interpretation thereof affecting consolidation of entities, it could impact HCPs consolidation of total revenues derived from such associated physician groups.
HCPs financial statements are consolidated and include the accounts of its majority-owned subsidiaries and certain non-owned
HCP-associated and managed physician groups, which consolidation is effectuated in accordance with applicable accounting standards. Such consolidation for accounting and/or tax purposes does not, is not intended to, and should not be deemed to,
imply or provide to HCP any control over the medical or clinical affairs of such physician groups. In the event of a change in accounting standards promulgated by FASB or in interpretation of its standards, or if there were an adverse determination
by a regulatory agency or a court, or a change in state or federal law relating to the ability to maintain present agreements or arrangements with such physician groups, HCP may not be permitted to continue to consolidate the total revenues of such
organizations. A change in accounting for consolidation with respect to HCPs present agreement or arrangements would diminish HCPs reported revenues but would not be expected to materially adversely affect its reported results of
operations, while regulatory or legal rulings or changes in law interfering with HCPs ability to maintain its present agreements or arrangements could materially diminish both revenues and results of operations.
If DaVita HealthCare Partners Plan, Inc. is not able to satisfy financial solvency or other regulatory requirements, DaVita HealthCare Partners Plan, Inc.
could become subject to sanctions and its license to do business in California could be limited, suspended or terminated.
The
Knox-Keene Act requires health care service plans operating in California to comply with financial solvency and other requirements overseen by the California Department of Managed Health Care (DMHC). Under the Knox-Keene Act, and as a California
health care services plan, DaVita HealthCare Partners Plan, Inc. is required to, among other things:
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Maintain, at all times, a minimum tangible net equity;
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Submit periodic financial solvency reports to the DMHC containing various data regarding performance and financial solvency;
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Comply with extensive regulatory requirements; and
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Submit to periodic regulatory audits and reviews concerning DaVita HealthCare Partner Plan, Inc.s operations and compliance with the Knox-Keene Act.
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In the event that DaVita HealthCare Partners Plan, Inc. is not in compliance with the provisions of the Knox-Keene Act, it could be subject to
sanctions, or limitations on, or suspension of its license to do business in California.
If HCPs associated physician group is not able to
satisfy the California Department of Managed Health Cares financial solvency requirements, HCPs associated physician group could become subject to sanctions and HCPs ability to do business in California could be limited or
terminated.
The DMHC has instituted financial solvency regulations to monitor the financial solvency of capitated physician groups.
Under these regulations, HCPs associated physician group is required to, among other things:
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Maintain, at all times, a minimum cash-to-claims ratio (where cash-to-claims ratio means the organizations cash, marketable securities, and certain qualified receivables, divided by the organizations total
unpaid claims liability). The regulation currently requires a cash-to-claims ratio of 0.75.
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Submit periodic reports to the DMHC containing various data and attestations regarding performance and financial solvency, including incurred but not reported calculations and documentation, and attestations as to
whether or not the organization was in compliance with the Knox-Keene Act requirements related to claims payment timeliness had maintained positive tangible net equity (i.e., at least $1.00), and had maintained positive working capital (i.e., at
least $1.00).
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In the event that HCPs associated physician group is not in compliance with any of the above criteria,
HCPs associated physician group could be subject to sanctions, or limitations on, or removal of, its ability to do business in California.
Reductions in Medicare Advantage health plan reimbursement rates stemming from recent healthcare reforms and any future related regulations may negatively
impact HCPs business, revenue and profitability.
A significant portion of HCPs revenue is directly or indirectly derived
from the monthly premium payments paid by CMS to health plans for medical services provided to Medicare Advantage enrollees. As a result, HCPs results of operations are, in part, dependent on government funding levels for Medicare Advantage
programs. Any changes that limit or reduce Medicare Advantage reimbursement levels, including those recently approved and effective in 2014, such as reductions in or limitations of reimbursement amounts or rates under programs, reductions in funding
of programs, expansion of benefits without adequate funding, elimination of coverage for certain benefits, or elimination of coverage for certain individuals or treatments under programs, could have a material adverse effect on HCPs revenues,
earnings and cash flows. On April 7, 2014 CMS issued final guidance for 2015 Medicare Advantage rates, which incorporated a re-blending of the risk adjustment models which CMS utilizes to determine risk acuity scores of Medicare Advantage
patients. We estimate that the final cumulative impact of the 2015 rate structure represents an increase of up to approximately 0.5% of HCPs average revenues it manages on behalf of its senior capitated population as compared to 2014.
The Health Reform Acts contain a number of provisions that negatively impact Medicare Advantage plans, which may each have an adverse
effect on HCPs revenues, earnings, and cash flows. These provisions include the following:
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Medicare Advantage benchmarks for 2011 were frozen at 2010 levels. Beginning in 2012, Medicare Advantage benchmark rates are being phased down from prior levels to levels that are between 95% and 115% of the Medicare
FFS costs, depending on a plans geographic area. Failure to meet these revised benchmarks may have a significant negative impact on HCPs revenues, earnings and cash flows.
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Rebates received by Medicare Advantage plans that underbid based on payment benchmarks will be reduced, with larger reductions for plans failing to receive certain quality ratings.
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The Secretary of the HHS has been granted the explicit authority to deny Medicare Advantage plan bids that propose significant increases in cost sharing or decreases in benefits. If the bids submitted by plans
contracted with HCP are denied, this would have a significant negative impact on HCPs revenues, earnings and cash flows.
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Beginning in 2014, Medicare Advantage plans with medical loss ratios below 85% are required to pay a rebate to the Secretary of HHS. The rebate amount will be the total revenue under the contract year multiplied by the
difference between 85% and the plans actual medical loss ratio. The Secretary of HHS will halt enrollment in any plan failing to meet this ratio for three consecutive years, and terminate any plan failing to meet the ratio for five consecutive
years. If an HCP-contracting Medicare Advantage plan experiences a limitation on enrollment or is otherwise terminated from the Medicare Advantage program, HCP may suffer materially adverse consequences to its business or financial condition.
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Since January 1, 2011, cost-sharing for certain services (such as chemotherapy and skilled nursing care) has been limited to the cost-sharing permitted under the original FFS Medicare program, which could reduce
HCPs revenues, earnings and cash flows by reducing the amount that enrollees are permitted to pay for such services.
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Prescription drug plans are now required to cover all drugs on a list developed by the Secretary of HHS, which could increase the cost of providing care to Medicare Advantage enrollees, and thereby reduce HCPs
revenues. The Medicare part D premium subsidy for high-income beneficiaries has been reduced by 25%, which could lower the number of Medicare Advantage enrollees, which would have a negative impact on HCPs revenues, earnings and cash flows.
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Beginning in 2014, CMS is required to increase coding intensity adjustments for Medicare Advantage plans, which is expected to reduce CMS payments to Medicare Advantage plans, which in turn will likely reduce the
amounts payable to HCP and its associated physicians, physician groups, and IPAs under its capitation agreements. The governments budget for Fiscal Year 2014 further increases the coding intensity adjustments starting in 2015, which may
further reduce HCPs revenues, earnings and cash flows.
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The Presidents proposed 2015 budget proposes nearly $400
million in cuts to Medicare over the next decade. Although the majority of the cuts are not targeted at Medicare Advantage plans, the broad cuts could signal further downward pressure on reimbursement to Medicare providers and Medicare Advantage
plans, which would have a negative impact on HCPs revenues, earnings and cash flows.
On April 1, 2013, CMS published its final
2014 Call Letter CMSs annual notice to health plans regarding the Medicare Advantage payment methodology and estimated rates for 2014. In a reversal of its previous estimates, which called for a 2.2% reduction in the 2014
Medicare Advantage rates, CMS included in its final 2014 Call Letter an estimated 3.3% increase in the 2014 Medicare Advantage rates. This reversal was the result of CMSs new assumption that congressional action would prospectively fix the
Medicare physician fee schedules SGR formula. By assuming an imminent solution to the SGR formulas automatic rate reductions, CMS was able to base its 2014 Medicare Advantage estimates on an assumed 0% change in the Medicare physician
fee schedule rates for 2014. As noted above, this change in CMSs assumption has a dramatic positive impact on the estimated Medicare Advantage rates for 2014; however, a resolution of the SGR formula has yet to be passed by Congress. On
March 31, 2014 Congress passed its 17
th
delay to the implementation of the SGR formula, which would have led to a 24% reduction in Medicare payments to physicians. This delay extends
implementation for a further 12 months, during which time we believe that Congress intends to be able to pass a more permanent solution to the SGR formula. Although a congressionally mandated change to the SGR formula, as described above, would
potentially have a significant positive impact on HCPs Medicare Advantage revenues and net income, the likelihood of increasing medical costs and the uncertainty of congressional action mitigate against the positive impact of CMSs recent
Medicare Advantage estimates.
In addition to the uncertainty surrounding whether Congress will be able to resolve the SGR formulas
automatic rate reductions, there is uncertainty regarding both Medicare Advantage payment rates and beneficiary enrollment, which, if reduced as a result of the implementation of the Health Reform Acts, would reduce HCPs overall revenues and
net income. For example, although the Congressional Budget Office (CBO) predicted in 2012 that Medicare Advantage participation would drop precipitously by 2020, in 2013 the CBO reversed its prediction and instead predicted that enrollment in
Medicare Advantage could increase by up to 50% in the next decade. Further fluctuation in Medicare Advantage payment rates were evidenced by CMSs announcement in its final 2015 Call Letter that Medicare Advantage rates would rise
an average of 0.4% in 2015, instead of falling 1.9% as it had proposed in February 2014. Uncertainty over Medicare Advantage enrollment and payment rates present a continuing risk to HCPs business.
Finally, although the Health Reform Acts provide for reductions in payments to Medicare Advantage plans, the Health Reform Acts also provide
for bonus payments to Medicare Advantage plans with four or five star
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quality ratings. In November 2011, CMS announced a three-year demonstration project with an alternative bonus structure that awards bonuses to plans with three or more stars. In the 2015 guidance
issued by CMS on April 7, 2014, CMS indicated that the demonstration project to provide incremental reimbursement to health plans with less than four stars would not be continued. This may negatively impact the level of reimbursement HCP
receives from those health plans, which may have an adverse effect on HCPs revenues, earnings and cash flows.
HCPs operations are
dependent on competing health plans and, at times, a health plans and HCPs economic interests may diverge.
For the six
months ended June 30, 2014, 66% of HCPs consolidated capitated medical revenues were earned through contracts with three health plans.
HCP expects that, going forward, substantially all of its revenue will continue to be derived from its contracts with health plans. Each
health plan may immediately terminate any of HCPs contracts and/or any individual credentialed physician upon the occurrence of certain events. They may also amend the material terms of the contracts under certain circumstances. Failure to
maintain the contracts on favorable terms, for any reason, would materially and adversely affect HCPs results of operations and financial condition. A material decline in the number of members could also have a material adverse effect on
HCPs results of operations.
Notwithstanding each health plans and HCPs current shared interest in providing service to
HCPs members who are enrolled in the subject health plans, the health plans may have different and, at times, opposing economic interests from those of HCP. The health plans provide a wide range of health insurance services across a wide range
of geographic regions, utilizing a vast network of providers. As a result, they and HCP may have different views regarding the proper pricing of services and/or the proper pricing of the various service providers in their provider networks, the cost
of which HCP bears to the extent that the services of such service providers are utilized. These health plans may also have different views than HCP regarding the efforts and expenditures that they, HCP, and/or other service providers should make to
achieve and/or maintain various quality ratings. In addition, several health plans have acquired or announced their intent to acquire provider organizations. If health plans with which HCP contracts acquire a significant number of provider
organizations, they may not continue to contract with HCP or contract on less favorable terms or seek to prevent HCP from acquiring or entering into arrangements with certain providers. Similarly, as a result of changes in laws, regulations,
consumer preferences, or other factors, the health plans may find it in their best interest to provide health insurance services pursuant to another payment or reimbursement structure. In the event HCPs interests diverge from the interests of
the health plans, HCP may have limited recourse or alternative options in light of its dependence on these health plans. There can be no assurances that HCP will continue to find it mutually beneficial to work with the health plans. As a result of
various restrictive provisions that appear in some of the managed care agreements with health plans, HCP may at times have limitations on its ability to cancel an agreement with a particular health plan and immediately thereafter contract with a
competing health plan with respect to the same service area.
HCP and its associated physicians, physician groups and IPAs and other physicians may be
required to continue providing services following termination or renegotiation of certain agreements with health plans.
There are
circumstances under federal and state law pursuant to which HCP and its associated physician groups IPAs, and other physicians could be obligated to continue to provide medical services to HCP members in their care following a termination of their
applicable risk agreement with health plans and termination of the receipt of payments thereunder. In certain cases, this obligation could require the physician group or IPA to provide care to such member following the bankruptcy or insolvency of a
health plan. Accordingly, the obligations to provide medical services to HCP members (and the associated costs) may not terminate at the time the applicable agreement with the health plan terminates, and HCP may not be able to recover its cost of
providing those services from the health plan, which could have a material adverse effect on HCPs financial condition, results of operations, and/or cash flows.
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HCP operates primarily in Arizona, California, Florida, Nevada and New Mexico, and may not be able to
successfully establish a presence in new geographic regions.
HCP derives substantially all of its revenue from operations in Arizona,
California, Florida, Nevada and New Mexico, (hereinafter referred to as the Existing Geographic Regions). As a result, HCPs exposure to many of the risks described herein is not mitigated by a greater diversification of geographic focus.
Furthermore, due to the concentration of HCPs operations in the Existing Geographic Regions, it may be adversely affected by economic conditions, natural disasters (such as earthquakes or hurricanes), or acts of war or terrorism that
disproportionately affect the Existing Geographic Regions as compared to other states and geographic markets.
To expand the operations of
its network outside of the Existing Geographic Regions, including entry into the Pennsylvania market with operations expected to commence the first quarter of 2015, HCP must devote resources to identifying and exploring such perceived opportunities.
Thereafter, HCP must, among other things, recruit and retain qualified personnel, develop new offices, establish potentially new relationships with one or more health plans, and establish new relationships with physicians and other healthcare
providers. The ability to establish such new relationships may be significantly inhibited by competition for such relationships and personnel in the health care marketplace in the targeted new geographic regions. Additionally, HCP may face the risk
that a substantial portion of the patients served in a new geographic area may be enrolled in a Medicare FFS program and will not desire to transition to a Medicare Advantage program, such as those offered through the health plans that HCP serves,
or they may enroll with other health plans with whom HCP does not contract to receive services, which could reduce substantially HCPs perceived opportunity in such geographic area. In addition, if HCP were to seek to expand outside of the
Existing Geographic Regions, HCP would be required to comply with laws and regulations of states that may differ from the ones in which it currently operates, and could face competitors with greater knowledge of such local markets. HCP anticipates
that any geographic expansion may require it to make a substantial investment of management time, capital, and/or other resources. There can be no assurance that HCP will be able to establish profitable operations or relationships in any new
geographic markets.
Reductions in the quality ratings of the health plans HCP serves could have an adverse effect on its results of operations,
financial condition, and/or cash flow.
As a result of the Health Reform Acts, HCP anticipates that the level of reimbursement each
health plan receives from CMS will be dependent, in part, upon the quality rating of the Medicare plan that such health plan serves. Such ratings are expected to impact the percentage of any cost savings rebate and any bonuses earned by such health
plan. Since a significant portion of HCPs revenue is expected to be calculated as a percentage of CMS reimbursements received by these health plans with respect to HCP members, reductions in the quality ratings of a health plan that HCP serves
could have an adverse effect on its results of operations, financial condition, and/or cash flows. In addition, CMS has announced its intention to terminate any plan that has a rating of less than three stars for three consecutive years. Medicare
Advantage plans with five stars are permitted to conduct enrollment throughout the year and enrollees in plans with 4.5 or fewer stars are permitted to change plans during the year. Currently, HCP does not contract with any five star plans. Given
each health plans control of its plans and the many other providers that serve such plans, HCP believes that it will have limited ability to influence the overall quality rating of any such plan. Accordingly, since low quality ratings can
potentially lead to the termination of a plan that HCP serves, HCP may not be able to prevent the potential termination of a contracting plan or a shift of patients to other plans based upon quality issues which could, in turn, have an adverse
effect on HCPs results of operations, financial condition, and/or cash flows.
HCPs records and submissions to a health plan may contain
inaccurate or unsupportable information regarding risk adjustment scores of members, which could cause HCP to overstate or understate its revenue and subject it to various penalties.
HCP, on behalf of itself and its associated physicians, physician groups and IPAs, submits to health plans claims and encounter data that
support the risk adjustment factor, or RAF, scores attributable to members. These
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RAF scores determine, in part, the revenue to which the health plans and, in turn, HCP is entitled for the provision of medical care to such members. The data submitted to CMS by each health plan
is based on medical charts and diagnosis codes prepared and submitted by HCP. Each health plan generally relies on HCP to appropriately document and support such RAF data in HCPs medical records. Each health plan also relies on HCP to
appropriately code claims for medical services provided to members. HCP may periodically review medical records and may find inaccurate or unsupportable coding or otherwise inaccurate records. Erroneous claims and erroneous encounter records and
submissions could result in inaccurate PMPM fee revenue and risk adjustment payments, which may be subject to correction or retroactive adjustment in later periods. This corrected or adjusted information may be reflected in financial statements for
periods subsequent to the period in which the revenue was recorded. HCP might also need to refund a portion of the revenue that it received, which refund, depending on its magnitude, could damage its relationship with the applicable health plan and
could have a material adverse effect on HCPs results of operations, financial condition or cash flows.
CMS audits Medicare
Advantage plans for documentation to support RAF-related payments for members chosen at random. The Medicare Advantage plans ask providers to submit the underlying documentation for members that they serve. It is possible that claims associated with
members with higher RAF scores could be subject to more scrutiny in a CMS audit. HCP has experienced increases in RAF scores attributable to its members, and thus there is a possibility that a Medicare Advantage plan may seek repayment from HCP as a
result of CMS payment adjustments to the Medicare Advantage plan. The plans also may hold HCP liable for any penalties owed to CMS for inaccurate or unsupportable RAF scores provided by HCP.
CMS has indicated that, starting with payment year 2011, payment adjustments will not be limited to RAF scores for the specific Medicare
Advantage enrollees for which errors are found but may also be extrapolated to the entire Medicare Advantage plan subject to a particular CMS contract. CMS has described its audit process as plan-year specific and stated that it will not extrapolate
audit results for plan years prior to 2011.
CMS has not specifically stated that payment adjustments as a result of one plan years
audit will not be extrapolated to prior plan years. There can be no assurance that a health plan will not be randomly selected or targeted for review by CMS or that the outcome of such a review will not result in a material adjustment in HCPs
revenue and profitability, even if the information HCP submitted to the plan is accurate and supportable. Since the CMS rules, regulations, and statements regarding this audit program are still not well defined and, in some cases, have not been
published in final form, there is also a risk that CMS may adopt new rules and regulations that are inconsistent with their existing rules, regulations, and statements.
A failure to accurately estimate incurred but not reported medical expense could adversely affect HCPs profitability.
Patient care costs include estimates of future medical claims that have been incurred by the patient but for which the provider has not yet
billed HCP. These claim estimates are made utilizing actuarial methods and are continually evaluated and adjusted by management, based upon HCPs historical claims experience and other factors, including an independent assessment by a
nationally recognized actuarial firm. Adjustments, if necessary, are made to medical claims expense and capitated revenues when the assumptions used to determine HCPs claims liability changes and when actual claim costs are ultimately
determined.
Due to the inherent uncertainties associated with the factors used in these estimates and changes in the patterns and rates
of medical utilization, materially different amounts could be reported in HCPs financial statements for a particular period under different conditions or using different, but still reasonable, assumptions. It is possible that HCPs
estimates of this type of claim may be inadequate in the future. In such event, HCPs results of operations could be adversely impacted. Further, the inability to estimate these claims accurately may also affect HCPs ability to take
timely corrective actions, further exacerbating the extent of any adverse effect on HCPs results.
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HCP faces certain competitive threats which could reduce HCPs profitability and increase competition for
patients.
HCP faces certain competitive threats based on certain features of the Medicare programs, including the following:
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As a result of the direct and indirect impacts of the Health Reform Acts, many Medicare beneficiaries may decide that an original FFS Medicare program is more attractive than a Medicare Advantage plan. As a result,
enrollment in the health plans HCP serves may decrease.
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Managed care companies offer alternative products such as regional preferred provider organizations (PPOs) and private FFS plans. Medicare PPOs and private FFS plans allow their patients more flexibility in selecting
physicians than Medicare Advantage health plans, which typically require patients to coordinate care with a primary care physician. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 has encouraged the creation of regional
PPOs through various incentives, including certain risk corridors, or cost reimbursement provisions, a stabilization fund for incentive payments, and special payments to hospitals not otherwise contracted with a Medicare Advantage plan that treat
regional plan enrollees. The formation of regional Medicare PPOs and private FFS plans may affect HCPs relative attractiveness to existing and potential Medicare patients in their service areas.
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The payments for the local and regional Medicare Advantage plans are based on a competitive bidding process that may indirectly cause a decrease in the amount of the PMPM fee or result in an increase in benefits
offered.
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The annual enrollment process and subsequent lock-in provisions of the Health Reform Acts may adversely affect HCPs level of revenue growth as it will limit the ability of a health plan to market to and enroll new
Medicare beneficiaries in its established service areas outside of the annual enrollment period.
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CMS allows Medicare beneficiaries who are enrolled in a Medicare Advantage plan with a quality rating of 4.5 stars or less to enroll in a 5-star rated Medicare Advantage plan at any time during the benefit year. None of
the plans HCP serves are 5-star rated. Therefore, HCP may face a competitive disadvantage in recruiting and retaining Medicare beneficiaries.
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In addition to the competitive threats intrinsic to the Medicare programs, competition among health plans and among healthcare providers may
also have a negative impact on HCPs profitability. For example, HCPs Existing Geographic Regions have become increasingly attractive to health plans that may compete with HCP, including the health plans with which HCP and its associated
physicians, physician groups, and IPAs currently compete. HCP may not be able to continue to compete profitably in the healthcare industry if additional competitors enter the same market. If HCP cannot compete profitably, the ability of HCP to
compete with other service providers that contract with competing health plans may be substantially impaired. Similarly, HCPs Existing Geographic Regions have also become increasingly attractive to HCPs competitors due to the large
populations of Medicare beneficiaries. HCP may not be able to continue to compete effectively if additional competitors enter the same regions.
HCP competes directly with various regional and local companies that provide similar services in HCPs Existing Geographic Regions.
HCPs competitors vary in size and scope and in terms of products and services offered. HCP believes that some of its competitors and potential competitors may be significantly larger than HCP and have greater financial, sales, marketing, and
other resources. Furthermore, it is HCPs belief that some of its competitors may make strategic acquisitions or establish cooperative relationships among themselves.
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A disruption in HCPs healthcare provider networks could have an adverse effect on HCPs operations
and profitability.
In any particular service area, healthcare providers or provider networks could refuse to contract with HCP, demand
higher payments, or take other actions that could result in higher healthcare costs, disruption of benefits to HCPs members, or difficulty in meeting applicable regulatory or accreditation requirements. In some service areas, healthcare
providers or provider networks may have significant market positions. If healthcare providers or provider networks refuse to contract with HCP, use their market position to negotiate favorable contracts, or place HCP at a competitive disadvantage,
then HCPs ability to market or to be profitable in those service areas could be adversely affected. HCPs provider networks could also be disrupted by the financial insolvency of a large provider group. Any disruption in HCPs
provider networks could result in a loss of members or higher healthcare costs.
HCPs revenues and profits could be diminished if HCP fails to
retain and attract the services of key primary care physicians.
Key primary care physicians with large patient enrollment could
retire, become disabled, terminate their provider contracts, get lured away by a competing independent physician association or medical group, or otherwise become unable or unwilling to continue practicing medicine or contracting with HCP or its
associated physicians, physician groups, or IPAs. In addition, HCPs associated physicians, physician groups and IPAs could view the business model as unfavorable or unattractive to such providers, which could cause such associated physicians,
physician groups or IPAs to terminate their relationships with HCP. Moreover, given limitations relating to the enforcement of post-termination noncompetition covenants in California, it would be difficult to restrict a primary care physician from
competing with HCPs associated physicians, physician groups, or IPAs. As a result, members who have been served by such physicians could choose to enroll with competitors physician organizations or could seek medical care elsewhere,
which could reduce HCPs revenues and profits. Moreover, HCP may not be able to attract new physicians to replace the services of terminating physicians or to service its growing membership.
Participation in Accountable Care Organization programs is new and subject to federal regulation, supervision, and evolving regulatory developments and may
result in financial liability.
The Health Reform Acts establish Medicare Shared Savings Program (MSSP) for ACOs, which took effect in
January 2012. Under the MSSP, eligible organizations are accountable for the quality, cost and overall care of Medicare beneficiaries assigned to an ACO and may be eligible to share in any savings below a specified benchmark amount. The Secretary of
HHS is also authorized, but not required, to use capitation payment models with ACOs. HCP has formed an MSSP ACO through its subsidiary and is evaluating whether to participate in more ACOs in the future. The continued development and expansion of
ACOs will have an uncertain impact on HCPs revenue and profitability.
The ACO programs are new and therefore operational and
regulatory guidance is limited. It is possible that the operations of HCPs subsidiary ACO may not fully comply with current or future regulations and guidelines applicable to ACOs, may not achieve quality targets or cost savings, or may not
attract or retain sufficient physicians or patients to allow HCP to meet its objectives. Additionally, poor performance could put the HCP ACO at financial risk with a potential obligation to CMS. Traditionally, other than FFS billing by the medical
clinics and healthcare facilities operated by HCP, HCP has not directly contracted with CMS and has not operated any health plans or provider sponsored networks. Therefore, HCP may not have the necessary experience, systems, or compliance to
successfully achieve a positive return on its investment in the ACO or to avoid financial or regulatory liability. To date, demonstration projects using healthcare delivery models substantially similar to an ACO have not resulted in savings. HCP
believes that its historical experience with fully delegated managed care will be applicable to operation of its subsidiary ACO, but there can be no such assurance.
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California hospitals may terminate their agreements with HCPAMG or reduce the fees they pay to HCP.
In California, HCPAMG maintains significant hospital arrangements designed to facilitate the provision of coordinated hospital care with those
services provided to members by HCPAMG and its associated physicians, physician groups, and IPAs. Through contractual arrangements with certain key hospitals, HCPAMG provides utilization review, quality assurance, and other management services
related to the provision of patient care services to members by the contracted hospitals and downstream hospital contractors. In the event that any one of these key hospital agreements is amended in a financially unfavorable manner or is otherwise
terminated, such events could have a material adverse effect on HCPs financial condition, and results of operations.
HCPs professional
liability and other insurance coverage may not be adequate to cover HCPs potential liabilities.
HCP maintains primary
professional liability insurance and other insurance coverage through California Medical Group Insurance Company, Risk Retention Group, an Arizona corporation in which HCP is the majority owner, and through excess coverage contracted through
third-party insurers. HCP believes such insurance is adequate based on its review of what it believes to be all applicable factors, including industry standards. Nonetheless, potential liabilities may not be covered by insurance, insurers may
dispute coverage or may be unable to meet their obligations, the amount of insurance coverage and/or related reserves may be inadequate, or the amount of any HCP self-insured retention may be substantial. There can be no assurances that HCP will be
able to obtain insurance coverage in the future, or that insurance will continue to be available on a cost-effective basis, if at all. Moreover, even if claims brought against HCP are unsuccessful or without merit, HCP would have to defend itself
against such claims. The defense of any such actions may be time-consuming and costly and may distract HCP managements attention. As a result, HCP may incur significant expenses and may be unable to effectively operate its business.
Changes in the rates or methods of third-party reimbursements may adversely affect HCP operations.
Any negative changes in governmental capitation or FFS rates or methods of reimbursement for the services HCP provides could have a significant
adverse impact on HCPs revenue and financial results. Since governmental healthcare programs generally reimburse on a fee schedule basis rather than on a charge-related basis, HCP generally cannot increase its revenues from these programs by
increasing the amount it charges for its services. Moreover, if HCPs costs increase, HCP may not be able to recover its increased costs from these programs. Government and private payors have taken and may continue to take steps to control the
cost, eligibility for, use, and delivery of healthcare services due to budgetary constraints, and cost containment pressures as well as other financial issues. HCP believes that these trends in cost containment will continue. These cost containment
measures, and other market changes in non-governmental insurance plans have generally restricted HCPs ability to recover, or shift to non-governmental payors, any increased costs that HCP experiences. HCPs business and financial
operations may be materially affected by these cost containment measures, and other market changes.
HCPs business model depends on numerous
complex management information systems and any failure to successfully maintain these systems or implement new systems could materially harm HCPs operations and result in potential violations of healthcare laws and regulations.
HCP depends on a complex, specialized, and integrated management information system and standardized procedures for operational and financial
information, as well as for HCPs billing operations. HCP may experience unanticipated delays, complications, or expenses in implementing, integrating, and operating these integrated systems. Moreover, HCP may be unable to enhance its existing
management information system or implement new management information systems where necessary. HCPs management information system may require modifications, improvements, or replacements that may require both substantial expenditures as well
as interruptions in operations. HCPs ability to implement and operate its integrated systems is subject to the availability of information technology and skilled personnel to assist HCP in creating and maintaining these systems.
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HCPs failure to successfully implement and maintain all of its systems could have a
material adverse effect on its business, financial condition, and results of operations. For example, HCPs failure to successfully operate its billing systems could lead to potential violations of healthcare laws and regulations. If HCP is
unable to handle its claims volume, or if HCP is unable to pay claims timely, HCP may become subject to a health plans corrective action plan or de-delegation until the problem is corrected, and/or termination of the health plans
agreement with HCP. This could have a material adverse effect on HCPs operations and profitability. In addition, if HCPs claims processing system is unable to process claims accurately, the data HCP uses for its incurred but not reported
(IBNR) estimates could be incomplete and HCPs ability to accurately estimate claims liabilities and establish adequate reserves could be adversely affected. Finally, if HCPs management information systems are unable to function in
compliance with applicable state or federal rules and regulations, including, without limitation, medical information confidentiality laws such as HIPAA, possible penalties and fines due to this lack of compliance could have a material adverse
effect on HCPs financial condition, and results of operations.
Federal and state privacy and information security laws are complex and HCP may
be subject to government or private actions due to privacy and security breaches.
HCP must comply with numerous federal and state laws
and regulations governing the collection, dissemination, access, use, security and privacy of protected health information (PHI), including HIPAA and its implementing privacy and security regulations, as amended by the federal HITECH Act and
collectively referred to as HIPAA. In the event that HCPs non-compliance with existing or new laws and regulations related to PHI results in privacy or security breaches, HCP could be subject to monetary fines, civil suits, civil penalties or
criminal sanctions and requirements to disclose the breach publicly.
HCP may be impacted by eligibility changes to government and private insurance
programs.
Due to potential decreased availability of healthcare through private employers, the number of patients who are uninsured or
participate in governmental programs may increase. The Health Reform Acts will increase the participation of individuals in the Medicaid program in states that elect to participate in the expanded Medicaid coverage. A shift in payor mix from managed
care and other private payors to government payors as well as an increase in the number of uninsured patients may result in a reduction in the rates of reimbursement to HCP or an increase in uncollectible receivables or uncompensated care, with a
corresponding decrease in net revenue. Changes in the eligibility requirements for governmental programs such as the Medicaid program under the Health Reform Acts and state decisions on whether to participate in the expansion of such programs also
could increase the number of patients who participate in such programs and the number of uninsured patients. Even for those patients who remain in private insurance plans, changes to those plans could increase patient financial responsibility,
resulting in a greater risk of uncollectible receivables. These factors and events could have a material adverse effect on HCPs business, financial condition, and results of operations.
Negative publicity regarding the managed healthcare industry generally or HCP in particular could adversely affect HCPs results of operations or
business.
Negative publicity regarding the managed healthcare industry generally, the Medicare Advantage program or HCP in particular,
may result in increased regulation and legislative review of industry practices that further increase HCPs costs of doing business and adversely affect HCPs results of operations or business by:
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requiring HCP to change its products and services;
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increasing the regulatory, including compliance, burdens under which HCP operates, which, in turn, may negatively impact the manner in which HCP provides services and increase HCPs costs of providing services;
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adversely affecting HCPs ability to market its products or services through the imposition of further regulatory restrictions regarding the manner in which plans and providers market to Medicare Advantage
enrollees; or
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adversely affecting HCPs ability to attract and retain members.
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Risk factors related to our overall business and ownership of our common stock:
Disruptions in federal government operations and funding create uncertainty in our industry and could have a material adverse effect on our revenues,
earnings and cash flows and otherwise adversely affect our financial condition.
A substantial portion of our revenues is dependent on
federal healthcare program reimbursement, and any disruptions in federal government operations could have a material adverse effect on our revenues, earnings and cash flows. Although the government passed a budget for fiscal year 2014, there is no
guarantee that the U.S. government will be able to pass the federal budget for subsequent fiscal years. In addition, if the U.S. government defaults on its debt, there could be broad macroeconomic effects that could raise our cost of borrowing
funds, and delay or prevent our future growth and expansion. Any future federal government shutdown, U.S. government default on its debt and/or failure of the U.S. government to enact annual appropriations for fiscal year 2014 could have a material
adverse effect on our revenues, earnings and cash flows. Additionally, disruptions in federal government operations may negatively impact regulatory approvals and guidance that are important to our operations, and create uncertainty about the pace
of upcoming health care regulatory developments.
Changes in CMS diagnosis and inpatient procedure coding require us to make modifications to processes
and information systems, which could result in significant development costs and which if unsuccessful could adversely affect our revenues, earnings and cash flows.
CMS has mandated the use of new patient codes for reporting medical diagnosis and inpatient procedures, referred to as ICD-10. CMS is requiring
all providers, payors, clearinghouses, and billing services to utilize ICD-10 when submitting claims for payment. ICD-10 will affect diagnosis and inpatient procedure coding for everyone covered by HIPAA, not just those who submit Medicare or
Medicaid claims. Claims for services provided on or after the date that CMS sets must use ICD-10 for medical diagnosis and inpatient procedures or they will not be paid. In a bill passed on March 31, 2014, Congress voted to delay the ICD-10
implementation deadline until no earlier than October 1, 2015. Although CMS is expected to delay the deadline only until October 1, 2015, it has the authority to delay implementation even further. Uncertainty about when ICD-10 will be
mandated could lead to additional costs of running ICD-9 and ICD-10 systems, which could negatively impact our revenues, earnings and cash flows.
We anticipate that if our services, processes or information systems or those of our payors do not comply with ICD-10 requirements at any
future date, it could potentially delay or even reduce reimbursement payments to us. These delays or reductions could negatively impact our revenues, earnings and cash flows.
We may engage in acquisitions, mergers or dispositions, which may affect our results of operations, debt-to-capital ratio, capital expenditures or other
aspects of our business, and if businesses we acquire have liabilities we are not aware of, we could suffer severe consequences that would materially and adversely affect our business.
Our business strategy includes growth through acquisitions of dialysis centers and other businesses. We may engage in acquisitions, mergers or
dispositions, which may affect our results of operations, debt-to-capital ratio, capital expenditures, or other aspects of our business. There can be no assurance that we will be able to identify suitable acquisition targets or merger partners or
that, if identified, we will be able to acquire these targets on acceptable terms or agree to terms with merger partners. There can also be no assurance that we will be successful in completing any acquisitions, mergers or dispositions that we
announce, or integrating any acquired business into our overall operations. There is no guarantee that we will be able to operate acquired businesses successfully as stand-alone businesses, or that any such acquired business will operate profitably
or will not otherwise adversely impact our results of operations. Further, we cannot be certain that key talented individuals at the business being acquired will continue to work for us after the acquisition or that they will be able to continue to
successfully manage or have adequate resources to successfully operate any acquired business.
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Businesses we acquire may have unknown or contingent liabilities or liabilities that are in
excess of the amounts that we originally estimated, and may have other issues, including those related to internal controls over financial reporting or issues that could affect our ability to comply with healthcare laws and regulations and other
laws applicable to our expanded business. As a result, we cannot make any assurances that the acquisitions we consummate will be successful. Although we generally seek indemnification from the sellers of businesses we acquire for matters that are
not properly disclosed to us, we are not always successful. In addition, even in cases where we are able to obtain indemnification, we may discover liabilities greater than the contractual limits, the amounts held in escrow for our benefit (if any),
or the financial resources of the indemnifying party. In the event that we are responsible for liabilities substantially in excess of any amounts recovered through rights to indemnification or alternative remedies that might be available to us, or
any applicable insurance, we could suffer severe consequences that would substantially reduce our earnings and cash flows or otherwise materially and adversely affect our business.
If we are not able to continue to make acquisitions, or maintain an acceptable level of non-acquired growth, or if we face significant patient attrition to
our competitors or a reduction in the number of our medical directors or associated physicians, it could adversely affect our business.
Acquisitions, patient retention and medical director and physician retention are an important part of our growth strategy. We face intense
competition from other companies for acquisition targets. In our U.S. dialysis business, we continue to face increased competition from large and medium-sized providers which compete directly with us for acquisition targets as well as for individual
patients and medical directors. In addition, as we continue our international dialysis expansion into various international markets, we will face competition from large and medium-sized providers for these acquisition targets as well. Because of the
ease of entry into the dialysis business and the ability of physicians to be medical directors for their own centers, competition for growth in existing and expanding markets is not limited to large competitors with substantial financial resources.
Occasionally, we have experienced competition from former medical directors or referring physicians who have opened their own dialysis centers. In addition, Fresenius, our largest competitor, manufactures a full line of dialysis supplies and
equipment in addition to owning and operating dialysis centers. This may give it cost advantages over us because of its ability to manufacture its own products. If we are not able to continue to make acquisitions, continue to maintain acceptable
levels of non-acquired growth, or if we face significant patient attrition to our competitors or a reduction in the number of our medical directors or associated physicians, it could adversely affect our business.
HCP operates in a different line of business from our historical business. We may face challenges managing HCP as a new business and may not realize
anticipated benefits.
As a result of the HCP transaction, we are now significantly engaged in a new line of business. We may not have
the expertise, experience, and resources to pursue all of our businesses at once, and we may be unable to successfully operate all businesses in the combined Company. The administration of HCP will require implementation of appropriate operations,
management, and financial reporting systems and controls. We may experience difficulties in effectively implementing these and other systems. The management of HCP will require the focused attention of our management team, including a significant
commitment of its time and resources. The need for management to focus on these matters could have a material and adverse impact on our revenues and operating results. If the HCP operations are less profitable than we currently anticipate or we do
not have the experience, the appropriate expertise, or the resources to pursue all businesses in the combined company, the results of operations and financial condition may be materially and adversely affected.
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If we fail to successfully maintain an effective internal control over financial reporting or if the internal
control of HCP over financial reporting were found to be ineffective, the integrity of our, and/or HCPs, financial reporting could be compromised which could result in a material adverse effect on our reported financial results.
The integration of HCP into our internal control over financial reporting has required and will continue to require significant time and
resources from our management and other personnel and will increase our compliance costs. Failure to maintain an effective internal control environment could have a material adverse effect on our ability to accurately report our financial results
and the markets perception of our business and our stock price.
The market price of our common stock may be affected by factors different from
those affecting the shares of our common stock prior to consummation of the HCP transaction.
Our historical business differs
substantially from that of HCP. Accordingly, the results of operations of the combined company and the market price of our common stock may be affected by factors different from those that previously affected the independent results of operations of
each of the Company and HCP.
Expansion of our operations to and offering our services in markets outside of the U.S. subjects us to political,
economical, legal, operational and other risks that could adversely affect our business, results of operations and cash flows.
We are
continuing an expansion of our operations by offering our services outside of the U.S., which increases our exposure to the inherent risks of doing business in international markets. Depending on the market, these risks include, without limitation,
those relating to:
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changes in the local economic environment;
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political instability, armed conflicts or terrorism;
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intellectual property legal protections and remedies;
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procedures and actions affecting approval, production, pricing, reimbursement and marketing of products and services;
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repatriating or moving to other countries cash generated or held abroad, including considerations relating to tax-efficiencies and changes in tax laws;
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lack of reliable legal systems which may affect our ability to enforce contractual rights;
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changes in local laws or regulations;
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potentially longer ramp-up times for starting up new operations and for payment and collection cycles;
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financial and operational, and information technology systems integration; and
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failure to comply with U.S. or local laws that prohibit us or our intermediaries from making improper payments to foreign officials for the purpose of obtaining or retaining business.
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Additionally, some factors that will be critical to the success of our international business and operations will be different than those
affecting our domestic business and operations. For example, conducting international operations requires us to devote significant management resources to implement our controls and
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systems in new markets, to comply with local laws and regulations and to overcome the numerous new challenges inherent in managing international operations, including those based on differing
languages, cultures and regulatory environments, and those related to the timely hiring, integration and retention of a sufficient number of skilled personnel to carry out operations in an environment with which we are not familiar.
We anticipate expanding our international operations through acquisitions of varying sizes or through organic growth, which could increase
these risks. Additionally, though we might invest material amounts of capital and incur significant costs in connection with the growth and development of our international operations, there is no assurance that we will be able to operate them
profitably anytime soon, if at all. As a result, we would expect these costs to be dilutive to our earnings over the next several years as we start-up or acquire new operations.
These risks could have a material adverse effect on our financial condition, results of operations and cash flows.
The level of our current and future debt could have an adverse impact on our business and our ability to generate cash to service our indebtedness depends
on many factors beyond our control.
We have substantial debt outstanding, we incurred a substantial amount of additional debt in
connection with the HCP transaction and we may incur additional indebtedness in the future. The high level of our indebtedness, among other things, could:
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make it difficult for us to make payments on our debt securities;
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increase our vulnerability to general adverse economic and industry conditions;
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require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures,
acquisitions and investments and other general corporate purposes;
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limit our flexibility in planning for, or reacting to, changes in our business and the markets in which we operate;
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expose us to interest rate volatility that could adversely affect our earnings and cash flow and our ability to service our indebtedness;
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place us at a competitive disadvantage compared to our competitors that have less debt; and
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limit our ability to borrow additional funds.
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Our ability to make payments on our
indebtedness and to fund planned capital expenditures and expansion efforts, including any strategic acquisitions we may make in the future, will depend on our ability to generate cash. This, to a certain extent, is subject to general economic,
financial, competitive, regulatory and other factors that are beyond our control.
We cannot provide assurance that our business will
generate sufficient cash flow from operations in the future or that future borrowings will be available to us in an amount sufficient to enable us to service our indebtedness or to fund other liquidity needs. If we are unable to generate sufficient
funds to service our outstanding indebtedness, we may be required to refinance, restructure, or otherwise amend some or all of such obligations, sell assets, or raise additional cash through the sale of our equity. We cannot make any assurances that
we would be able to obtain such refinancing on terms as favorable as our existing financing terms or that such restructuring activities, sales of assets, or issuances of equity can be accomplished or, if accomplished, would raise sufficient funds to
meet these obligations.
The borrowings under our Senior Secured Credit Facilities are guaranteed by a substantial portion of our direct
and indirect wholly-owned domestic subsidiaries and are secured by a substantial portion of DaVita HealthCare Partners Inc.s and its subsidiaries assets.
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We may be subject to liability claims for damages and other expenses not covered by insurance that could
reduce our earnings and cash flows.
Our operations and how we manage the Company may subject the Company, as well as its officers and
directors to whom the Company owes certain defense and indemnity obligations, to litigation and liability for damages. Our business, profitability and growth prospects could suffer if we face negative publicity or we pay damages or defense costs in
connection with a claim that is outside the scope or limits of coverage of any applicable insurance coverage, including claims related to adverse patient events, contractual disputes, professional and general liability, and directors and
officers duties. In addition, we have received several notices of claims from commercial payors and other third parties related to our historical billing practices and the historical billing practices of the centers acquired from Gambro
Healthcare and other matters related to their settlement agreement with the Department of Justice. Although the ultimate outcome of these claims cannot be predicted, an adverse result with respect to one or more of these claims could have a material
adverse effect on our financial condition, results of operations, and cash flows. We currently maintain insurance coverage for those risks we deem are appropriate to insure against and make determinations about whether to self-insure as to other
risks or layers of coverage. However, a successful claim, including a professional liability, malpractice or negligence claim which is in excess of any applicable insurance coverage, or that is subject to our self-insurance retentions, could have a
material adverse effect on our earnings and cash flows.
In addition, if our costs of insurance and claims increase, then our earnings
could decline. Market rates for insurance premiums and deductibles have been steadily increasing. Our earnings and cash flows could be materially and adversely affected by any of the following:
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the collapse or insolvency of our insurance carriers;
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further increases in premiums and deductibles;
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increases in the number of liability claims against us or the cost of settling or trying cases related to those claims; or
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an inability to obtain one or more types of insurance on acceptable terms, if at all.
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Provisions in our
charter documents, compensation programs and Delaware law may deter a change of control that our stockholders would otherwise determine to be in their best interests.
Our charter documents include provisions that may deter hostile takeovers, delay or prevent changes of control or changes in our management, or
limit the ability of our stockholders to approve transactions that they may otherwise determine to be in their best interests. These include provisions prohibiting our stockholders from acting by written consent; requiring 90 days advance notice of
stockholder proposals or nominations to our Board of Directors; and granting our Board of Directors the authority to issue preferred stock and to determine the rights and preferences of the preferred stock without the need for further stockholder
approval.
Most of our outstanding employee stock-based compensation awards include a provision accelerating the vesting of the awards in
the event of a change of control. We also maintain a change of control protection program for our employees who do not have a significant number of stock awards, which has been in place since 2001, and which provides for cash bonuses to the
employees in the event of a change of control. Based on the market price of our common stock and shares outstanding on June 30, 2014, these cash bonuses would total approximately $614 million if a change of control transaction occurred at that
price and our Board of Directors did not modify this program. These change of control provisions may affect the price an acquirer would be willing to pay for our Company.
We are also subject to Section 203 of the Delaware General Corporation Law that, subject to exceptions, would prohibit us from engaging
in any business combinations with any interested stockholder, as defined in that section, for a period of three years following the date on which that stockholder became an interested stockholder.
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These provisions may discourage, delay or prevent an acquisition of our Company at a price that
our stockholders may find attractive. These provisions could also make it more difficult for our stockholders to elect directors and take other corporate actions and could limit the price that investors might be willing to pay for shares of our
common stock.