You should read the following discussion together with our unaudited condensed consolidated financial statements and the related notes included elsewhere in this quarterly report on Form 10-Q. This discussion contains forward-looking statements about our business and operations. Statements that are predictive in nature, that depend upon or refer to future events or conditions or that include words like "believes," "belief," "expects," "plans," "anticipates," "intends," "projects," "estimates," "may," "might," "would," "should" and similar expressions are intended to be forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, the anticipated impact to our business with respect to developments related to the COVID-19 pandemic, including, without limitation, those related to the length and severity of the pandemic, as well as the timing, availability and adoption of effective medical treatments and vaccines; the pandemic's impact on our operations, reimbursement and our consumer population; measures we are taking to respond to the pandemic; the impact of government regulation and stimulus measures, including the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), Paycheck Protection Program and Health Care Enhancement Act ("PPPHCE Act"), the Consolidated Appropriations Act, 2021 ("CAA"), the Covid-Related Tax Relief Act of 2020, the American Rescue Plan of 2021 ("ARPA") and other stimulus legislation, along with the related uncertainties regarding the implementation of such stimulus measures and any future stimulus measures related to COVID-19; increased expenses related to personal protective equipment ("PPE"), labor, supply chain, or other expenditures; and workforce disruptions and supply shortages and disruptions; changes in operational and reimbursement processes and payment structures at the state or federal levels; changes in Medicaid, Medicare, other government program and managed care organizations policies and payment rates; changes in, or our failure to comply with, existing, federal and state laws or regulations, or our failure to comply with new government laws or regulations on a timely basis; competition in the healthcare industry; the geographical concentration of our operations; changes in the case mix of consumers and payment methodologies; operational changes resulting from the assumption by managed care organizations of responsibility for managing and paying for our services to consumers; the nature and success of future financial and/or delivery system reforms; changes in estimates and judgments associated with critical accounting policies; our ability to maintain or establish new referral sources; our ability to renew significant agreements or groups of agreements; our ability to attract and retain qualified personnel; federal, city and state minimum wage pressure, including any failure ofIllinois or any other governmental entity to enact a minimum wage offset and/or the timing of any such enactment; changes in payments and covered services due to the overall economic conditions, including economic and business conditions resulting from the COVID-19 pandemic, and deficit spending by federal and state governments; cost containment initiatives undertaken by state and other third-party payors; our ability to access financing through the capital and credit markets; our ability to meet debt service requirements and comply with covenants in debt agreements; business disruptions due to natural disasters, acts of terrorism, pandemics, riots, civil insurrection or social unrest, looting, protests, strikes or street demonstrations; our ability to integrate and manage our information systems; our ability to prevent cyber-attacks or security breaches to protect our computer systems and confidential consumer data; our expectations regarding the size and growth of the market for our services; the acceptance of privatized social services; our expectations regarding changes in reimbursement rates; eligibility standards and limits on services imposed by state governmental agencies; the potential for litigation; discretionary determinations by government officials; our ability to successfully implement our business model to grow our business; our ability to continue identifying, pursuing, consummating and integrating acquisition opportunities and expand into new geographic markets; the impact of acquisitions and dispositions on our business, including the potential inability to realize the benefits of the acquisition ofQueen City Hospice, LLC and its affiliateMiracle City Hospice, LLC (together "Queen City Hospice "); the potential impact of the discontinuation or modification of LIBOR; the effectiveness, quality and cost of our services; our ability to successfully execute our growth strategy; changes in tax rates; the impact of public health emergencies, including the COVID-19 pandemic; the impact of inclement weather or natural disasters; and various other matters, many of which are beyond our control. In addition, the risk factors set forth in Part I, Item 1A of our Annual Report on Form 10-K for the period endedDecember 31, 2020 , filed with theSEC onMarch 1, 2021 may result in these differences. You should carefully review all of these factors. Moreover, our business may be materially adversely affected by factors that are not currently known to us, by factors that we currently consider immaterial or by factors that are not specific to us, such as general economic conditions. These forward-looking statements were based on information, plans and estimates at the date of this report, and we assume no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes, except as may be required by law.
Overview
We are a home care services provider operating in three segments: personal care, hospice and home health. Our services are principally provided in-home under agreements with federal, state and local government agencies, managed care organizations, commercial insurers and private individuals. Our consumers are predominantly "dual eligible," meaning they are eligible to receive both Medicare and Medicaid benefits. Managed care revenues accounted for 37.9% and 39.1% of our net service revenues during the three months endedMarch 31, 2021 and 2020, respectively. 19
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A summary of our financial results for the three months ended
For the Three Months Ended March 31, 2021 2020 (Amounts in Thousands) Net service revenues $ 205,302 $ 190,216 Net income $ 8,894 $ 8,658 As ofMarch 31, 2021 , we provided our services in 22 states through 208 offices. For the three months endedMarch 31, 2021 and 2020, we served approximately 50,000 and 49,000 discrete individuals, respectively. Our personal care segment also includes staffing services, with clients including assisted living facilities, nursing homes and hospice facilities.
COVID-19 Pandemic Update
COVID-19, the disease caused by a novel coronavirus continues to be widespread throughoutthe United States and other parts of the world. Governments and public health officials continue to recommend and mandate precautions to mitigate the spread of the virus, including closures of and limitations on many businesses and places of public assembly. As a result, COVID-19 has significantly affected and continues to affect the overall economic conditions inthe United States . However, the number of cases of COVID-19 has decreased inthe United States in recent months, and many of the restrictions related to the COVID-19 pandemic inthe United States have been relaxed as the result of such decrease. Moreover, vaccines are expected to be widely available in the second quarter of 2021 and are currently being distributed across the country. The FDA continues to facilitate the development of therapeutics to combat COVID-19 as well as provide oversight for the development of additional vaccines. It is difficult to predict how long the pandemic will last, how many people are likely to be affected by it or the duration or types of restrictions that will be imposed or re-imposed as the situation is continuously evolving. For these and other reasons, we are unable to predict the long-term impact of the pandemic on our business at this time. For the three months endedMarch 31, 2021 , COVID-19-related expenses were approximately$2.1 million , which were offset by$1.8 million of temporary rate increases from certain payors in our personal care segment and$0.9 million related to the utilization of a portion of the funds received from theProvider Relief Fund inNovember 2020 and included in cost of service revenues on the Condensed Consolidated Statements of Income. As ofMarch 31, 2021 , the Company deferred the recognition of$5.1 million of payments received from payors for COVID-19 reimbursement, included within accrued expenses, which will be recognized as we incur specific expenses related to the pandemic, such as expenses related to acquiring additional PPE, or will be returned if COVID-19-related expenses are not incurred. We are not able to reasonably predict the total costs we will incur related to the COVID-19 pandemic, and such costs could be substantial. With the widespread adverse impacts of the COVID-19 pandemic on the hospitality and other labor-intensive industries, we continue to believe we will have an opportunity to increase our hiring of new caregivers for such period of time as the pandemic continues to have a negative impact on employment inthe United States . However, in the near term, enhanced unemployment benefits have suppressed the opportunity to attract this new pool of potential caregivers. For example, the Continued Assistance for Unemployed Workers Act, signed into law onDecember 27, 2020 , provides up to 50 weeks of unemployment benefits plus an additional$300 per week in supplemental benefits. Moreover, in the event that conditions related to the pandemic significantly improve and we return to a period of low unemployment inthe United States , these conditions may hinder our ability to attract and retain sufficient caregivers. As the COVID-19 pandemic progresses, federal agencies continue to issue related regulations and guidance, and the public health emergency continues to evolve, and, therefore, we cannot currently predict with certainty the extent to which our business, results of operations, financial condition or liquidity will ultimately be impacted. We continue to assess the potential impact of COVID-19 and government responses to the pandemic, including the enactment and implementation of the CARES Act, the PPPHCE Act, the CAA, the ARPA and other stimulus legislation, on our business, results of operations, financial condition and cash flows. Given the dynamic nature of these circumstances, the related financial effect cannot be reasonably estimated at this time but is not expected to materially adversely impact our business. See Part I, Item 1A-"Risk Factors - The COVID-19 pandemic could negatively affect our operations, business and financial condition, and our liquidity could also be negatively impacted, particularly if theU.S. economy remains unstable for a significant amount of time" of our Annual Report on Form 10-K for the period endedDecember 31, 2020 , filed with theSEC onMarch 1, 2021 .
See "Liquidity and Capital Resources" below for additional information regarding funds received related to COVID-19 relief.
Acquisitions
In addition to our organic growth, we have grown through acquisitions that have expanded our presence in current markets or facilitated our entry into new markets where in-home care has been moving to managed care organizations.
OnJuly 1, 2020 , we completed the acquisition of A Plus for approximately$14.5 million , including the amount of excess cash held by A Plus at the closing of the acquisition (approximately$2.8 million ), with funding provided by available cash. With the purchase of A Plus, we expanded our personal care services in the state ofMontana . 20
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OnNovember 1, 2020 , we completed the acquisition of County Homemakers for approximately$15.8 million , including the amount of acquired excess cash held by County Homemakers at the closing of the acquisition (approximately$1.1 million ), with funding provided by available cash. With the purchase of County Homemakers, we expanded our personal care services in the state ofPennsylvania . OnDecember 4, 2020 , we completed the acquisition ofQueen City Hospice for approximately$194.8 million , including the amount of acquired excess cash held byQueen City Hospice at the closing of the acquisition (approximately$15.4 million ). With the purchase ofQueen City Hospice , we expanded our hospice services in the state ofOhio . Additionally, onDecember 1, 2020 , we completed the acquisition of SunLife Home Care for approximately$1.7 million . With the purchase of SunLife Home Care, we expanded our personal care services in the state ofArizona . We funded these acquisitions through a combination of our revolving credit facility and available cash.
Revenue by Payor and Significant States
Our payor clients are principally federal, state and local governmental agencies and managed care organizations. The federal, state and local programs under which the agencies operate are subject to legislative, budgetary and other risks that can influence reimbursement rates. We are experiencing a transition of business from government payors to managed care organizations, which we believe aligns with our emphasis on coordinated care and the reduction of the need for acute care.
For the three months ended
Personal Care For the Three Months Ended March 31, 2021 2020 % of Segment % of Segment Amount Net Service Amount Net Service (in Thousands) Revenues (in Thousands) Revenues State, local and other governmental programs $ 80,849 49.0 % $ 79,346 49.4 % Managed care organizations 75,456 45.8 72,110 44.9 Private pay 4,903 3.0 5,270 3.3 Commercial insurance 2,346 1.4 2,576 1.6 Other 1,314 0.8 1,363 0.8 Total personal care segment net service revenues$ 164,868 100.0 %$ 160,665 100.0 % Illinois $ 73,385 44.5 % $ 71,545 44.5 % New York 27,575 16.7 31,838 19.8 New Mexico 23,593 14.3 20,694 12.9 All other states 40,315 24.5 36,588 22.8 Total personal care segment net service revenues$ 164,868 100.0 %$ 160,665 100.0 % Hospice For the Three Months Ended March 31, 2021 2020 % of Segment % of Segment Amount Net Service Amount Net Service (in Thousands) Revenues (in Thousands) Revenues Medicare $ 33,985 94.2 %$ 23,219 92.1 % Managed care organizations 1,487 4.1 1,385 5.5 Other 622 1.7 608 2.4 Total hospice segment net service revenues $ 36,094 100.0 %$ 25,212 100.0 % Ohio $ 14,114 39.1 % $ - - % New Mexico 9,230 25.6 11,009 43.7 All other states 12,750 35.3 14,203 56.3 Total hospice segment net service revenues $ 36,094 100.0 %$ 25,212 100.0 % 21
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With the acquisition of
Home Health For the
Three Months Ended
2021 2020 % of Segment % of Segment Amount Net Service Amount Net Service (in Thousands) Revenues (in Thousands) Revenues Medicare $ 3,502 80.7 % $ 3,470 80.0 % Managed care organizations 798 18.4 807 18.6 Other 40 0.9 62 1.4 Total home health segment net service revenues $ 4,340 100.0 % $ 4,339 100.0 % New Mexico $ 4,340 100.0 % $ 4,339 100.0 % Total home health segment net service revenues $ 4,340 100.0 % $ 4,339 100.0 % We derive a significant amount of our net service revenues inIllinois , which represented 35.8% and 37.7% of our net service revenues for the three months endedMarch 31, 2021 and 2020, respectively.
A significant amount of our net service revenues are derived from one payor
client, the
OnNovember 26, 2019 , theCity of Chicago voted to approve additional increases in theChicago minimum wage to$14 per hour beginningJuly 1, 2020 to$15 per hour beginningJuly 1, 2021 . The state ofIllinois finalized its fiscal year 2021 budget, with in-home care rates to be increased by 7.1% to$23.40 from$21.84 , effectiveJanuary 1, 2021 , contingent upon federal CMS approval. Although federal CMS approval was obtained by the state, as a result of on-going state revenue declines due to COVID-19 and the failure of theNovember 2020 referendum to revise theIllinois income tax code, onDecember 15, 2020 , the Governor ofIllinois announced a delay in the implementation of the scheduled rate increase toApril 1, 2021 , at which time such rate increase went into effect. OnFebruary 17, 2021 , the Governor ofIllinois introduced his fiscal year 2022 proposed budget, including a statewide rate increase from$23.40 to$24.96 effectiveJanuary 1, 2022 . State trade associations are advocating to accelerate the rate increase toJuly 1, 2021 (the beginning of the state's next fiscal year), to coincide with the increase of the minimum wage to$15 per hour, because the ARPA provides for a 10 percentage point increase in federal matching funds for Medicaid home and community-based services fromApril 1, 2021 , throughMarch 30, 2022 , provided the state satisfies certain conditions, but there can be no assurances that this will occur. Our business will benefit from the rate increases noted above, but there is no assurance that additional offsetting rate increases will be adopted inIllinois for fiscal years beyond fiscal year 2021, and our financial performance will be adversely impacted for any periods in which an additional offsetting reimbursement rate increase is not in effect.
Impact of Changes in Medicare and Medicaid Reimbursement
Home health services provided to Medicare beneficiaries are paid under the Medicare Home Health Prospective Payment System ("HHPPS"). CMS updates the HHPPS payment rates each calendar year. Effective calendar year 2021, HHPPS rates increased by 2.0%, which reflects a 2.3% market basket update, reduced by a multifactor productivity adjustment of 0.3 percentage points. CMS expects Medicare payments to home health agencies in 2021 to increase in the aggregate by 1.9% after accounting for a 0.1 percentage point decrease in payments to home health agencies due to changes in the rural add-on percentages mandated by the Bipartisan Budget Act of 2018. Home health providers that do not comply with quality data reporting requirements are subject to a 2 percentage point reduction to their market basket update. Historically, CMS paid home health providers 50% to 60% of anticipated payment at the beginning of a patient's care episode through a request for anticipated payment ("RAP"). However, to address potential program integrity risks, CMS has phased out RAP payments. In calendar year 2021, CMS will not provide any up-front payments in response to a RAP but will continue to require home health providers to submit streamlined RAPs as notice that a beneficiary is under a home health period of care. In calendar year 2022, CMS will replace the RAP with a "Notice of Admission." 22
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Table of Contents Hospice Hospice services provided to Medicare beneficiaries are paid under the Medicare Hospice Prospective Payment System, under which CMS sets a daily rate for each day a patient is enrolled in the hospice benefit. CMS updates these rates each federal fiscal year. EffectiveOctober 1, 2020 , CMS increased hospice payment rates by 2.4%. This reflected a 2.4% market basket increase reduced by the multifactor productivity adjustment of 0.0 percentage points. Additionally, the aggregate cap, which limits the total Medicare reimbursement that a hospice may receive based on an annual per-beneficiary cap amount and the number of Medicare patients served, was updated to$30,683.93 for federal fiscal year 2021. If a hospice's Medicare payments exceed its aggregate cap, it must repay Medicare the excess amount. New York CDPAP OnFebruary 11, 2021 , the state ofNew York announced its initial selection of parties to enter into contracts as a Lead Fiscal Intermediary under its previously announced Request for Offer ("RFO") process related to itsConsumer Directed Personal Assistance Program ("CDPAP"), in which the Company currently participates as a provider. The Company was not one of the selected entities in the initial RFO process. The announcement followed an extended RFO process first begun in 2019, with responses originally due inFebruary 2020 . Management believes changes are unlikely to occur during an estimated nine to 12 month transition period and does not expect a financial impact in 2021. Based on its current run rate, the Company estimates it will receive$52 million and$4 million in revenue and operating income, respectively, from the program for the year endedDecember 31, 2021 . The Company continues to explore its options, including appeals, other arrangements under which the Company may continue to provide these services, and expense reductions to minimize any potential final impact of the RFO process. OnApril 6, 2021 , theNew York Legislature finalized the fiscal year 2022 state budget. Among the actions taken since the Governor's proposed budget, the legislature included a provision to add one or two entities per county to those awarded the Lead Fiscal Intermediary, based on the scoring of the original RFO. As scoring of RFOs was not publicly released, it is unknown at this time if the Company's score ranked high enough to qualify for these additional awards. In the meantime, we continue to pursue other arrangements including our protest of the award, which was filed and accepted onMarch 19, 2021 . We are awaiting a response to the formal protest.
Components of our Statements of Income
Net Service Revenues
We generate net service revenues by providing our services directly to consumers and primarily on an hourly basis in our personal care segment, on a daily basis in our hospice segment and on an episodic basis in our home health segment. We receive payment for providing such services from our payor clients, including federal, state and local governmental agencies, managed care organizations, commercial insurers and private pay consumers. In our personal care segment, net service revenues are principally provided based on authorized hours, determined by the relevant agency, at an hourly rate, which is either contractual or fixed by legislation, and are recognized at the time services are rendered. In our hospice segment, net service revenues are provided based on daily rates for each of the levels of care and are recognized as services are provided. In our home health segment, net service revenues are based on an episodic basis at a stated rate and recognized based on the number of days elapsed during a period of care within the reporting period. We also record estimated implicit price concessions (based primarily on historical collection experience) related to uninsured accounts to record revenues.
Cost of Service Revenues
We incur direct care wages, payroll taxes and benefit-related costs in connection with providing our services. We also provide workers' compensation and general liability coverage for our employees. Employees are also reimbursed for their travel time and related travel costs in certain instances.
General and Administrative Expenses
Our general and administrative expenses include our costs for operating our network of local agencies and our administrative offices. Our agency expenses consist of costs for supervisory personnel, our community care supervisors and office administrative costs. Personnel costs include wages, payroll taxes, and employee benefits. Facility costs include rents, utilities, and postage, telephone and office expenses. Our corporate and support center expenses include costs for accounting, information systems, human resources, billing and collections, contracting, marketing and executive leadership. These expenses consist of compensation, including stock-based compensation, payroll taxes, employee benefits, legal, accounting and other professional fees, travel, general insurance, rents, provision for doubtful accounts and related facility costs. Expenses related to streamlining our operations such as costs related to terminated employees, termination of professional services relationships, other contract termination costs and asset write-offs are also included in general and administrative expenses.
Depreciation and Amortization Expenses
Depreciable assets consist principally of furniture and equipment, network administration and telephone equipment, and operating system software. Depreciable and leasehold assets are depreciated or amortized on a straight-line method over their useful lives or, if less and if
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applicable, their lease terms. We amortize our intangible assets with finite lives, consisting of customer and referral relationships, trade names, trademarks and non-competition agreements, using straight line or accelerated methods based upon their estimated useful lives.
Interest Expense
Interest expense is reported when incurred and principally consists of interest and unused credit line fees on the credit facility.
Income Tax Expense
All of our income is from domestic sources. We incur state and local taxes in states in which we operate. The effective income tax rate was 19.0% and 14.2% for the three months endedMarch 31, 2021 and 2020, respectively, compared to our federal statutory rate of 21%. The difference between our federal statutory and effective income tax rates was principally due to an excess tax benefit and the use of federal employment tax credits, offset by the inclusion of state taxes and non-deductible compensation.
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