10-K 1 knd-10k_20161231.htm FORM 10-K knd-10k_20161231.htm

 

 

UNITED STATES  

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-K

 

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2016

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-14057

 

KINDRED HEALTHCARE, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

61-1323993

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

680 South Fourth Street

Louisville, Kentucky

 

40202-2412

(Address of principal executive offices)

 

(Zip Code)

(502) 596-7300

(Registrant’s telephone number, including area code)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on which Registered

Common Stock, par value $0.25 per share

 

New York Stock Exchange

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes      No  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes      No  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Annual Report on Form 10-K or any amendment of this Annual Report on Form 10-K.  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer      Accelerated filer      Non-accelerated filer      Smaller reporting company  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes      No  

The aggregate market value of the shares of the registrant held by non-affiliates of the registrant, based on the closing price of such stock on the New York Stock Exchange on June 30, 2016, was approximately $935,800,000. For purposes of the foregoing calculation only, all directors and executive officers of the registrant have been deemed affiliates.

As of January 31, 2017, there were 85,127,745 shares of the registrant’s common stock, $0.25 par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Annual Report on Form 10-K incorporates by reference from the registrant’s 2016 definitive proxy statement, which will be filed no later than 120 days after December 31, 2016.

 

 

 

 


TABLE OF CONTENTS

 

 

Page

PART I  

Item 1.

 

Business

5

Item 1A.

 

Risk Factors

44

Item 1B.

 

Unresolved Staff Comments

63

Item 2.

 

Properties

64

Item 3.

 

Legal Proceedings

64

Item 4.

 

Mine Safety Disclosures

64

 

PART II

 

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

65

Item 6.

 

Selected Financial Data

67

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

69

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

97

Item 8.

 

Financial Statements and Supplementary Data

98

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

98

Item 9A.

 

Controls and Procedures

98

Item 9B.

 

Other Information

98

 

PART III

  

Item 10.

 

Directors, Executive Officers and Corporate Governance

99

Item 11.

 

Executive Compensation

100

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

100

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

100

Item 14.

 

Principal Accounting Fees and Services

100

 

PART IV

  

Item 15.

 

Exhibits and Financial Statement Schedules

101

Item 16.

 

Form 10-K Summary

101

 

 

 

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All references in this Annual Report on Form 10-K to “Kindred,” “Company,” “we,” “us,” or “our” mean Kindred Healthcare, Inc. and, unless the context otherwise requires, our consolidated subsidiaries.

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K and the documents we incorporate by reference herein include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements include, but are not limited to, all statements regarding our ability to exit the skilled nursing facility business and the expected timing of such exit, as well as our ability to realize the anticipated benefits, sale proceeds, cost savings and strategic gains from this initiative, all statements regarding our expected future financial position, results of operations, cash flows, dividends, financing plans, business strategy, budgets, capital expenditures, competitive positions, growth opportunities, plans and objectives of management, government investigations, regulatory matters, and statements containing words such as “anticipate,” “approximate,” “believe,” “plan,” “estimate,” “expect,” “project,” “could,” “would,” “should,” “will,” “intend,” “hope,” “may,” “potential,” “upside,” and other similar expressions. Statements in this report concerning our business outlook or future economic performance, anticipated profitability, revenues, expenses, dividends or other financial items, and product or services-line growth, and expected outcome of government investigations and other regulatory matters, together with other statements that are not historical facts, are forward-looking statements that are estimates reflecting our best judgment based upon currently available information.

Such forward-looking statements are inherently uncertain, and stockholders and other potential investors must recognize that actual results may differ materially from our expectations as a result of a variety of factors, including, without limitation, those discussed below. Such forward-looking statements are based upon management’s current expectations and include known and unknown risks, uncertainties, and other factors, many of which we are unable to predict or control, that may cause our actual results, performance, or plans to differ materially from any future results, performance, or plans expressed or implied by such forward-looking statements. These statements involve risks, uncertainties, and other factors discussed below and detailed from time to time in our filings with the Securities and Exchange Commission (“SEC”).

In addition to the factors set forth above, other factors that may affect our plans, results, or stock price include, without limitation:

 

the impact of healthcare reform, which will initiate significant changes to the United States healthcare system, including potential material changes to the delivery of healthcare services and the reimbursement paid for such services by the government or other third party payors, including reforms resulting from the Patient Protection and Affordable Care Act and the Healthcare Education and Reconciliation Act (collectively, the “ACA”) or future deficit reduction measures adopted at the federal or state level. Healthcare reform is impacting each of our businesses in some manner. Potential future efforts in the U.S. Congress to repeal, amend, modify, or retract funding for various aspects of the ACA create additional uncertainty about the ultimate impact of the ACA on us and the healthcare industry. Due to the substantial regulatory changes that will need to be implemented by the Centers for Medicare and Medicaid Services (“CMS”) and others, and the numerous processes required to implement these reforms, we cannot predict which healthcare initiatives will be implemented at the federal or state level, the timing of any such reforms, or the effect such reforms or any other future legislation or regulation will have on our business, financial position, results of operations, and liquidity,

 

our ability to adjust to the new patient criteria for long-term acute care (“LTAC”) hospitals under the Pathway for SGR Reform Act of 2013 (the “SGR Reform Act”), which reduces the population of patients eligible for reimbursement under the Medicare prospective payment system for LTAC hospitals (“LTAC PPS”) and changes the basis upon which we are paid for other patients,

 

changes in the reimbursement rates or the methods or timing of payment from third party payors, including commercial payors and the Medicare and Medicaid programs, changes arising from and related to LTAC PPS, including potential changes in the Medicare payment rules, and changes in Medicare and Medicaid reimbursement for our home health and hospice operations, transitional care (“TC”) hospitals, nursing centers, and inpatient rehabilitation hospitals (“IRFs”) and the expiration of the Medicare Part B therapy cap exception process,

 

our significant level of indebtedness, including our ability to meet our substantial debt service requirements, and its impact on our funding costs, operating flexibility, and ability to fund ongoing operations, development capital expenditures, or other strategic acquisitions with additional borrowings,

 

our ability to comply with the terms of our corporate integrity agreements with the United States Department of Health and Human Services (“HHS”) Office of Inspector General (“OIG”),

 

our ability to exit the skilled nursing facility business, and realize the anticipated benefits, cost savings and strategic gains from this initiative,

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the potential for diversion of management time and use of resources in seeking to exit the skilled nursing facility business,

 

the effects of additional legislative changes and government regulations, interpretation of regulations, and changes in the nature and enforcement of regulations governing the healthcare industry,

 

the ability of our hospitals, nursing centers and other healthcare services to adjust to medical necessity reviews,

 

our ability to successfully pursue our development activities, including through acquisitions, and successfully integrate new operations, including the realization of anticipated revenues, economies of scale, cost savings, and productivity gains associated with such operations, as and when planned, including the potential impact of unanticipated issues, expenses, and liabilities associated with those activities,

 

our obligations under various laws to self-report suspected violations of law to various government agencies (including any associated obligation to refund overpayments to government payors, fines, and other sanctions),

 

the failure of our facilities and other operations to meet applicable licensure and certification requirements,

 

the consolidation or cost containment efforts of managed care organizations, other third party payors, conveners, and referral sources,

 

our ability to control costs, particularly labor and employee benefit costs,

 

increased operating costs due to shortages in qualified nurses, therapists, and other healthcare personnel,

 

our ability to successfully reduce (by divestiture of operations or otherwise) our exposure to professional liability and other claims,

 

the costs of defending and insuring against alleged professional liability and other claims and investigations (including those related to pending investigations and whistleblower and wage and hour class action lawsuits against us) and our ability to predict the estimated costs and reserves related to such claims and investigations, including the impact of differences in actuarial assumptions and estimates compared to eventual outcomes,

 

our ability to comply with our rental and debt agreements, including payment of amounts owed thereunder and compliance with the covenants contained therein, including under our master lease agreements with Ventas, Inc. (“Ventas”),

 

our inability to maintain the security and functionality of our information systems, or to defend against or otherwise prevent a cybersecurity attack or breach,

 

the condition of the financial markets, including volatility and weakness in the equity, capital, and credit markets, which could limit the availability and terms of debt and equity financing sources to fund the requirements of our businesses, or which could negatively impact our investment portfolio,

 

our ability or election to pay a dividend on our common stock as, when, and if declared by the Board of Directors, in compliance with applicable laws and our debt and other contractual arrangements,

 

national, regional, and industry-specific economic, financial, business, and political conditions, including their effect on the availability and cost of labor, credit, materials, and other services,

 

our ability to attract and retain key executives and other healthcare personnel,

 

our ability to successfully dispose of unprofitable facilities,

 

events or circumstances that could result in the impairment of an asset or other charges,

 

changes in United States generally accepted accounting principles (“GAAP”) or practices, and changes in tax accounting or tax laws (or authoritative interpretations relating to any of these matters), including a new lease accounting standard that will significantly increase balance sheet assets and liabilities on and after January 1, 2019, and

 

our ability to maintain an effective system of internal control over financial reporting.

Many of these factors are beyond our control. We caution investors that any forward-looking statements made by us are not guarantees of future performance. We disclaim any obligation to update any such factors or to announce publicly the results of any revisions to any of the forward-looking statements to reflect future events or developments.

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PART I

Item 1. Business

GENERAL

Kindred Healthcare, Inc. is a healthcare services company that through its subsidiaries operates a home health, hospice, and community care business, TC hospitals, IRFs, a contract rehabilitation services business, nursing centers, and assisted living facilities across the United States. We are organized into four operating divisions: the Kindred at Home division, the hospital division, the Kindred Rehabilitation Services division and the nursing center division. At December 31, 2016, our (1) Kindred at Home division primarily provided home health, hospice, and community care services from 635 locations in 40 states, (2) hospital division operated 82 TC hospitals (certified as LTAC hospitals under the Medicare program) in 18 states, (3) Kindred Rehabilitation Services division operated 19 IRFs and 102 hospital-based acute rehabilitation units (“ARUs”) (certified as IRFs) and provided rehabilitation services primarily in hospitals and long-term care settings in 46 states, and (4) nursing center division operated 91 nursing centers and seven assisted living facilities in 19 states.

All financial and statistical information presented in this Annual Report on Form 10-K reflects the continuing operations of our businesses for all periods presented unless otherwise indicated.

Ventas Master Lease Amendments. On November 11, 2016, as part of our strategic decision to exit the skilled nursing facility business discussed below, we entered into an agreement with Ventas which provides us with the option to acquire the real estate for all 36 skilled nursing facilities (the “Ventas SNFs”) we currently lease under our master lease agreements with Ventas (each a “Master Lease” and, collectively, the “Master Lease Agreements”) for an aggregate consideration of $700 million. The agreement also provides that, through October 31, 2018, we have the right to find one or more purchasers of the Ventas SNFs. As we locate new owners/operators for the Ventas SNFs, in exchange for our payment to Ventas of the allocable portion of the $700 million purchase price, Ventas has agreed to convey the real estate for the applicable Ventas SNF to the new owner/operator. At our option, we may also elect to renew the leases for any of the Ventas SNFs through April 30, 2025, and transfer them into Master Lease Agreement No. 5. The Ventas SNFs will remain leased under their current Master Lease Agreements until we exercise our purchase option or April 30, 2018, whichever comes first. If we do not complete the acquisition of the Ventas SNFs by April 30, 2018, the lease for any remaining Ventas SNFs will be automatically renewed through April 30, 2025, and transferred into Master Lease Agreement No. 5. Since all of the Ventas SNFs will either be sold or transferred into Master Lease Agreement No. 5, our other Master Lease Agreements with Ventas will be effectively terminated and only Master Lease Agreement No. 5 will remain.

Also on November 11, 2016, we renewed the leases for eight TC hospitals that we lease from Ventas (the “Renewed Hospitals”) through April 30, 2025, and transferred the Renewed Hospitals into Master Lease Agreement No. 5, which was amended and restated. The Renewed Hospitals were previously leased under Master Lease Agreements Nos. 1, 2 and 4, each of which was amended on November 11, 2016. The base rent and rent escalators remained the same for the Renewed Hospitals, as well as for the other 22 TC hospitals currently leased under Master Lease Agreement No. 5. The Renewed Hospitals were combined into a single renewal bundle with 16 of our other TC hospitals expiring on April 30, 2025. Master Lease Agreement No. 5 also contains one additional renewal bundle with six TC hospitals expiring on April 30, 2023. The amended and restated Master Lease Agreement No. 5 contains terms substantially similar to the existing Master Lease Agreement No. 5, except for modifications to certain restrictions applicable to us that will take effect if all of the Ventas SNFs are acquired and Ventas receives the aggregate consideration.

Strategic Exit from Skilled Nursing Facility Business.  On November 7, 2016, we announced our strategic decision to exit the skilled nursing facility business as an owner and operator. Our ability to exit the skilled nursing facility business will depend on multiple factors, including reaching agreements with several new owners and operators of these facilities and obtaining multiple third party consents. Accordingly, while we are unable at this time to determine an expected completion date, we are targeting to complete the exit from the skilled nursing facility business by the end of 2017.

LTAC Repositioning Transactions.  During 2016, we completed two separate transactions as part of our efforts to prepare for new patient criteria applicable to LTAC hospitals. On October 1, 2016, we completed the sale of 12 TC hospitals to a group of entities operating under the name “Curahealth”, which are affiliates of a private investment fund sponsored by Nautic Partners, LLC (the “Curahealth Disposal”) for $27.5 million. In June 2016, we acquired five TC hospitals operated by Select Medical Holdings Corporation (“Select”) and sold three of our TC hospitals to Select.

Gentiva Merger. On October 9, 2014, we entered into an Agreement and Plan of Merger (the “Gentiva Merger Agreement”) with Gentiva Health Services, Inc. (“Gentiva”), providing for our acquisition of Gentiva. On February 2, 2015, we consummated the acquisition with one of our subsidiaries merging with and into Gentiva (the “Gentiva Merger”), with Gentiva continuing as the surviving company and our wholly owned subsidiary.

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At the effective time of the Gentiva Merger, each share of common stock, par value $0.10 per share, of Gentiva (“Gentiva Common Stock”) issued and outstanding immediately prior to the effective time of the Gentiva Merger (other than shares held by us, Gentiva, and any wholly owned subsidiaries (which were cancelled) and shares owned by stockholders who properly exercised and perfected a demand for appraisal rights under Delaware law), including each deferred share unit, were converted into the right to receive (i) $14.50 in cash (the “Cash Consideration”), without interest, and (ii) 0.257 of a share of our validly issued, fully paid, and nonassessable common stock, par value $0.25 per share (“Common Stock”) (the “Stock Consideration” and, together with the Cash Consideration, the “Gentiva Merger Consideration”).

Gentiva Financing Transactions. We used the net proceeds from the following transactions (collectively, the “Gentiva Financing Transactions”), to fund the Cash Consideration for the Gentiva Merger, repay Gentiva’s existing debt, and pay related transaction fees and expenses:

• we issued $1.35 billion aggregate principal amount of senior notes;

• we issued approximately 15 million shares of our Common Stock through two common stock offerings and issued approximately 10 million shares of our Common Stock through the Stock Consideration;

• we issued 172,500 tangible equity units (the “Units”); and

• we amended our credit facilities.

Notes due 2020 and Notes due 2023 Offerings—On December 18, 2014, Kindred Escrow Corp. II (the “Escrow Issuer”), one of our subsidiaries, completed a private placement of $750 million aggregate principal amount of 8.00% Senior Notes due 2020 (the “Notes due 2020”) and $600 million aggregate principal amount of 8.75% Senior Notes due 2023 (the “Notes due 2023”, and, together with the Notes due 2020, the “Notes”). Upon consummation of the Gentiva Merger, the Escrow Issuer was merged with and into us, as a result of which the Notes were assumed by us and fully and unconditionally guaranteed on a senior unsecured basis by substantially all of our wholly owned, domestic material subsidiaries, including substantially all of our and Gentiva’s wholly owned, domestic material subsidiaries (the “Guarantors”), ranking pari passu with all of our respective existing and future senior unsubordinated indebtedness. On October 30, 2015, we completed a registered exchange offer to exchange the Notes for registered notes with substantially identical terms.

Common Stock Offerings—On November 25, 2014, in an offering registered with the SEC, we completed the sale of 5,000,000 shares of our Common Stock for cash and granted the underwriters a 30-day over-allotment option to purchase up to an additional 750,000 shares of Common Stock. On December 1, 2014, the underwriters exercised their over-allotment option to purchase 395,759 additional shares of Common Stock, which we closed on December 3, 2014. The net proceeds of this offering, after deducting the underwriting discount and offering expenses, were $101.0 million.

On June 25, 2014, in an offering registered with the SEC, we completed the sale of 9,000,000 shares of our Common Stock for cash and granted the underwriters a 30-day option to purchase up to an additional 1,350,000 shares of Common Stock, of which 723,468 shares were purchased on July 14, 2014. The net proceeds of this offering, after deducting the underwriting discount and offering expenses, were $220.4 million.

Units Offering—On November 25, 2014, in an offering registered with the SEC, we completed the sale of 150,000 Units for cash and granted the underwriters a 13-day over-allotment option to purchase up to an additional 22,500 Units. On December 1, 2014, the underwriters exercised in full their over-allotment option to purchase 22,500 additional Units, which we closed on December 3, 2014. Each Unit is composed of a prepaid stock purchase contract (a “Purchase Contract”) and one share of 7.25% Mandatory Redeemable Preferred Stock, Series A (the “Mandatory Redeemable Preferred Stock”) having a final preferred stock installment payment date of December 1, 2017 and an initial liquidation preference of $201.58 per share of Mandatory Redeemable Preferred Stock. The net proceeds from this offering, after deducting the underwriting discount and offering expenses, were $166.3 million.

See “Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity” and notes 2, 14, 15 and 17 of the notes to consolidated financial statements for additional information on the Gentiva Merger and the related financing transactions.

Centerre Acquisition. On November 11, 2014, we entered into an agreement to acquire Centerre Healthcare Corporation (“Centerre”), a company dedicated to operating IRFs (the “Centerre Acquisition”). On January 1, 2015, we completed the Centerre Acquisition for a purchase price of approximately $195 million in cash. At the time of the Centerre Acquisition, Centerre operated 11 IRFs with 614 beds in partnership with some of the nation’s leading acute care hospital systems. Centerre had two additional hospitals with a total of 90 beds under construction that were opened in 2015, and a pipeline of additional potential hospitals in various stages of development.

Spin-off from Ventas. On May 1, 1998, Ventas completed the spin-off of its healthcare operations to its stockholders through the distribution of our former common stock. Ventas retained ownership of substantially all of its real property and leases a portion of

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such real property to us. In anticipation of the spin-off from Ventas we were incorporated on March 27, 1998 as a Delaware corporation.

Discontinued Operations

We have completed several transactions related to the divestiture of unprofitable hospitals and nursing centers to improve our future operating results. Certain of these divestitures are described below. For accounting purposes, the operating results of these businesses and the gains, losses or impairments associated with these transactions have been classified as discontinued operations in the accompanying consolidated statement of operations for all periods presented in accordance with the authoritative guidance in effect through December 31, 2014. Effective January 1, 2015, the authoritative guidance modified the requirements for reporting discontinued operations. A disposal is now required to be reported in discontinued operations only if the disposal represents a strategic shift that has (or will have) a major effect on our operations and financial results.

Ventas Divestitures. On December 27, 2014, we entered into an agreement with Ventas to transition the operations under the leases for nine non-strategic nursing centers (the “2014 Expiring Facilities”). Each lease terminated when the operation of such nursing center was transferred to a new operator. At December 31, 2016, we had transferred the operations for all of the 2014 Expiring Facilities to new operators. For accounting purposes, the 2014 Expiring Facilities qualified as assets held for sale, and we reflected the operating results as discontinued operations in the accompanying consolidated statement of operations for all historical periods. Under the terms of the agreement to transition the operations of the 2014 Expiring Facilities, we incurred a $40 million termination fee in exchange for the early termination of the leases, which was paid to Ventas in January 2015.

HEALTHCARE OPERATIONS

We are organized into four operating divisions: the Kindred at Home division, the hospital division, the Kindred Rehabilitation Services division and the nursing center division.

The Kindred at Home division primarily provides home health, hospice, and community care services to patients in a variety of settings, including homes, nursing centers, and other residential settings. The hospital division operates TC hospitals. The Kindred Rehabilitation Services division operates IRFs and ARUs and provides rehabilitation services primarily in hospitals and long-term care settings. The nursing center division operates nursing centers and assisted living facilities.

Based upon the authoritative guidance for business segments, our operating divisions represent six reportable operating segments, including (1) home health services, (2) hospice services, (3) hospitals, (4) Kindred Hospital Rehabilitation Services, (5) RehabCare, and (6) nursing centers. The home health services and hospice services operating segments are contained within the Kindred at Home division while the Kindred Hospital Rehabilitation Services and RehabCare operating segments are both contained within the Kindred Rehabilitation Services division.

COMPETITIVE STRENGTHS

We believe that several competitive strengths support our business strategy, including:  

Diversified service offerings across the post-acute continuum. We have a large and diversified portfolio of service offerings including home health and hospice operations, TC hospitals, IRFs, contract rehabilitation services, and nursing centers. Our national scale and presence in local integrated care markets position us to meet the growing demand for post-acute care services. We provide an array of services, allowing us to coordinate and manage the care for our patients, improve care transitions, reduce lengths of stay, implement physician services strategies, prevent avoidable rehospitalizations, and reduce costs. We believe that our decision to exit the skilled nursing facility business will over time further our ability to build preferred provider networks with leading skilled nursing facility operators and enhance coverage in our integrated care markets.

Well positioned for increased demand for post-acute care and emerging payment models. We believe the demand for post-acute care will increase as the number of Medicare beneficiaries and Americans over the age of 65 continues to expand each year. Further, as healthcare reform continues to be implemented, we believe that healthcare providers that can operate with scale across the continuum of care will have a competitive advantage operating in emerging payment models, including episodic payments. Our diversified service offerings enable us to do this effectively and to participate with other healthcare providers in determining the most appropriate setting for patients as they continue their care throughout a post-acute episode. As one of the largest post-acute healthcare providers in the United States, we are well positioned to benefit from these trends by delivering the right care at the right site of service.

Strengthening care management capabilities. We continue to improve care transitions and patient outcomes by further developing differentiated capabilities to deliver integrated care across various care settings. We are developing programs and tools that will enable us and our partners to optimize post-acute care placement, better manage episodes of care, create seamless

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transitions between care settings, enhance performance improvement reporting processes, and improve patient satisfaction, thereby reducing lengths of stay and rehospitalizations at a lower cost to Medicare, Medicaid, and other payors. Our care management capabilities include (1)  a 24-hour telephone contact center staffed by registered nurses that we use to effectively manage populations by providing education, discharge planning and aftercare services, (2) the provision of physician services through our Kindred House Calls® business, (3) care managers to improve care transitions, (4) enhanced information sharing and technology connectivity across our lines of business and with our partners, and (5) condition-specific clinical programs and outcome measures. We also are positioned to become a valuable partner to health systems and managed care organizations, which are seeking to increase care coordination, improve care transitions, reduce rehospitalizations, reduce lengths of stay, more effectively manage healthcare costs, and develop new care delivery and payment models.

Delivering quality, innovation, and value in our healthcare operations. Our home health and hospice operations, TC hospitals, IRFs, and nursing centers continue to outperform national benchmarks on key quality indicators. We are committed to “succeeding in our core” operations by maintaining and improving the quality of our patient care by dedicating appropriate resources at each site of service and refining our clinical initiatives and objectives. We are focused on sending more patients home more quickly and reducing rehospitalizations, both of which create cost savings and improve patient satisfaction.

OUR STRATEGY

As one of the largest post-acute healthcare providers in the United States, we believe that we are well-positioned to grow and succeed in what will be an increasingly integrated healthcare delivery system. Our core strategy is to provide superior clinical outcomes and quality care with an approach that is patient-centered and focused on lowering costs by reducing lengths of stay and transitioning patients to their homes at the highest possible level of function, thereby preventing avoidable rehospitalizations.

The key elements of our business strategy include:

Rebalancing our Portfolio and Strengthening our Core.  During 2016, we took several steps to rebalance our portfolio and strengthen our core operations. As part of our multi-faceted mitigation strategy in response to new patient criteria in our TC hospitals, we reduced our TC hospital bed capacity by 14% during 2016. In addition, we announced our strategic decision to exit the skilled nursing facility business as an owner and operator. These actions reflect our focus on higher-growth and less capital-intensive businesses, such as our home health, hospice and IRF operations. Our exit from the skilled nursing facility business will also provide us with opportunities to reduce our rent and capital expenditure costs and optimize our overhead. As noted above, we believe our exit from the skilled nursing facility business will over time further our ability to build preferred provider networks with leading skilled nursing facility operators and support our integrated care markets.

Aggressively growing Kindred at Home. We continue to expand our presence in the home health and hospice business within our Kindred at Home division. During 2016, we acquired 24 home health locations, 9 hospice locations and expanded our community care business. We provide services in 635 locations in 40 states as of December 31, 2016, making us one of the largest home health and hospice companies in the United States based on revenues. We intend to continue expanding our home health and hospice operations through additional acquisitions, partnerships, and de novo site development.

Aggressively growing IRFs. We have one of the largest inpatient rehabilitation platforms in the United States based on revenues with 19 IRFs (including 17 joint ventures) and 102 ARUs as of December 31, 2016. During 2016, we opened two new IRFs (50 beds in Avon, Ohio and 50 beds in Chandler, Arizona) and have definitive agreements in place with joint venture partners to open four additional IRFs, three of which we expect to open in 2018 and one we expect to open in 2019. We intend to continue expanding our IRF portfolio through joint ventures with leading health systems across the United States.

Partnering with Health Systems and Payors as a Post-Acute Benefits Manager. We are pursuing joint ventures of post-acute care assets with other health systems, through which we intend to convene and manage networks of patients across the post-acute continuum of care. This would allow us to serve as the post-acute benefits manager for such networks, and in such capacity deploy our unique post-acute care management capabilities to provide better patient outcomes, reduce costs of care, enhance our market share and provide us with a diversified and additional source of revenues through fees charged for such services.

KINDRED AT HOME DIVISION

Our Kindred at Home division primarily provides home health, hospice, and community care services for patients in a variety of settings, including their homes, nursing centers, and other residential settings. The Gentiva Merger significantly increased the diversity and scale of our operations. As a result, Kindred at Home provides services in 635 locations in 40 states, making us one of the largest and geographically diversified home health and hospice companies in the United States as of December 31, 2016.

Our home health operations offer medical care and other services for patients in their homes or other residential settings. Experienced nurses, therapists, and home health aides work with the patient and his or her family members to maximize the patient’s

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ability to handle a wide variety of daily activities and to educate the patient regarding medications and management of their medical conditions. Our services include nursing, physical, occupational and speech therapies, and medical social work.

Our hospice operations provide family-oriented care designed to meet the spiritual, emotional, and physical needs of terminally ill patients and their families. We provide hospice services in the home or other settings such as nursing centers, assisted living facilities, hospitals, and inpatient hospice units. Working in conjunction with a patient’s attending physician and/or the hospice medical director, our team of hospice professionals develops a plan of care designed to support the patient’s individual needs, which may include pain and symptom management, emotional and spiritual counseling, homemaking, and dietary services.

Our community care services include personal care (bathing and grooming), meal preparation, companionship, light housekeeping, shopping, respite care, and transportation.

In key markets, we also provide physician services focused on delivering primary and urgent care for patients in home-based settings such as assisted living facilities, independent living facilities, and patients’ homes, as well as care-transition managers to follow patients with specific diagnoses and/or risk factors through the entire care continuum.

Selected Kindred at Home Division Operating Data

The following table sets forth certain operating and financial data for the Kindred at Home division (dollars in thousands, except statistics):

 

 

 

Year ended December 31,

 

 

 

2016

 

 

2015

 

 

2014

 

Kindred at Home:

 

 

 

 

 

 

 

 

 

 

 

 

Home Health:

 

 

 

 

 

 

 

 

 

 

 

 

Revenues (1)

 

$

1,762,622

 

 

$

1,578,500

 

 

$

298,907

 

Segment EBITDAR (1)

 

$

279,531

 

 

$

256,173

 

 

$

20,149

 

Sites of service (at end of period)

 

 

390

 

 

 

373

 

 

 

133

 

Episodic revenues

 

$

1,313,974

 

 

$

1,194,536

 

 

$

232,127

 

Total episodic admissions

 

 

278,358

 

 

 

249,805

 

 

 

42,047

 

Medicare episodic admissions

 

 

242,104

 

 

 

218,850

 

 

 

38,716

 

Total episodes

 

 

451,585

 

 

 

406,313

 

 

 

85,618

 

Episodes per admission

 

 

1.62

 

 

 

1.63

 

 

 

2.04

 

Revenue per episode

 

$

2,910

 

 

$

2,940

 

 

$

2,711

 

Assets at end of period (1)

 

$

1,540,370

 

 

$

1,435,176

 

 

$

203,154

 

Routine capital expenditures (1)

 

$

6,401

 

 

$

4,201

 

 

$

783

 

Hospice:

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

736,803

 

 

$

656,527

 

 

$

50,095

 

Segment EBITDAR

 

$

116,326

 

 

$

109,120

 

 

$

5,390

 

Sites of service (at end of period)

 

 

183

 

 

 

175

 

 

 

29

 

Admissions

 

 

51,959

 

 

 

45,657

 

 

 

3,448

 

Average length of stay

 

 

95

 

 

 

97

 

 

 

95

 

Patient days

 

 

4,945,769

 

 

 

4,373,044

 

 

 

325,054

 

Average daily census

 

 

13,513

 

 

 

11,981

 

 

 

891

 

Revenue per patient day

 

$

149

 

 

$

150

 

 

$

154

 

Assets at end of period

 

$

929,774

 

 

$

922,710

 

 

$

32,733

 

Routine capital expenditures

 

$

2,342

 

 

$

1,215

 

 

$

64

 

 

(1)

Includes community care and home-based physician services.

The term “Segment EBITDAR” is defined as earnings before interest, income taxes, depreciation, amortization, rent, and support center overhead. Segment EBITDAR excludes litigation contingency expense, impairment charges, restructuring charges, and transaction costs. A reconciliation of “Segment EBITDAR” to our consolidated results of operations is included in note 9 of the notes to consolidated financial statements. The term “episodes” refers to healthcare services provided to a patient over a base period of 60 days. “Average length of stay” is computed by dividing each facility’s patient days by the number of admissions in the respective period. “Patient days” refers to the total number of days of patient care provided for the periods indicated. “Average daily census” is computed by dividing each facility’s patient days by the number of calendar days in the respective period.  Routine capital expenditures include expenditures at existing facilities that generally do not result in the expansion of services.

9


Sources of Kindred at Home Division Revenues

Kindred at Home division revenues are derived principally from the Medicare and Medicaid programs, private insurers, and private pay patients. Medicare reimburses both home health and hospice services under prospective payment systems, which are subject to numerous qualifications, standards, and adjustments. Medicaid reimburses home health and hospice service providers using a number of state-specific systems. We often negotiate contract rates of reimbursement with private insurers.

The following table sets forth the approximate percentages of home health (including community care and home-based physician services) revenues derived from the payor sources indicated:

 

Year ended December 31,

 

Medicare

 

 

Medicaid

 

 

Medicare Advantage

 

 

Private Pay

 

2016

 

 

66.5

%

 

 

15.7

%

 

 

8.5

%

 

 

9.3

%

2015

 

 

68.0

 

 

 

15.1

 

 

 

8.0

 

 

 

8.9

 

2014

 

 

73.8

 

 

 

5.6

 

 

 

4.7

 

 

 

15.9

 

The following table sets forth the approximate percentages of hospice revenues derived from the payor sources indicated:

 

Year ended December 31,

 

Medicare

 

 

Medicaid

 

 

Private Pay

 

2016

 

 

93.7

%

 

 

3.4

%

 

 

2.9

%

2015

 

 

94.1

 

 

 

3.6

 

 

 

2.3

 

2014

 

 

94.5

 

 

 

3.7

 

 

 

1.8

 

For the year ended December 31, 2016, revenues of the Kindred at Home division totaled approximately $2.5 billion or 34% of our total revenues (before eliminations). For more information regarding the reimbursement of our Kindred at Home division, see “—Governmental Regulation—Kindred at Home Division—Overview of Kindred at Home Division Reimbursement.”

Kindred at Home Division Management and Operations

At December 31, 2016, the Kindred at Home division was headed by a president, overseeing a chief operating, and clinical, financial, and administrative officers, and a senior vice president of sales. A president for each of the five geographic regions and a sixth president over the community care operations, report to the chief operating officer of the division. In addition, the Kindred at Home division has division-level sales, clinical services, finance, and operations executives.

We provide our Kindred at Home division with centralized administrative support in the areas of information systems, regulatory compliance, reimbursement guidance, licensing support as well as legal, finance, accounting, purchasing, marketing, and human resources management. The centralization of these services improves operating efficiencies, promotes standardization of processes, and enables our healthcare professionals to focus on delivering quality care to our patients.

Kindred at Home Division Competition

Our Kindred at Home division operates in a highly competitive and significantly fragmented industry. Our competitors include large providers of home health and hospice services, both for-profit and nonprofit and smaller independent local operators. There often are no significant barriers to entry in many of the markets in which our Kindred at Home division operates and new providers of home health and/or hospice services may enter into our current and future markets. Many of our competitors may have greater financial and other resources than we do.

Although there is limited, if any, price competition with respect to Medicare and Medicaid patients (since revenues received for services provided to these patients are based generally on fixed rates), there is substantial price competition for private payment patients. We believe our Kindred at Home division competes based upon its reputation for providing quality services, charging competitive prices, and being consistently responsive to the needs of our patients and their families and physicians.

HOSPITAL DIVISION

Our hospital division provides long-term acute care services to post-intensive care and medically complex patients through the operation of a national network of 82 TC hospitals with 6,107 licensed beds in 18 states as of December 31, 2016. We operate the largest network of TC hospitals in the United States based upon revenues. Our TC hospitals are certified as LTAC hospitals under the Medicare program.

As a result of our commitment to the hospital business, we have developed a comprehensive program of care for post-intensive care and medically complex patients that allows us to deliver high-quality care in a cost-effective manner. A number of our hospitals

10


also provide skilled nursing, sub-acute, and outpatient services. Outpatient services may include diagnostic services, outpatient wound care, rehabilitation therapy, CT scanning, one-day surgery, and laboratory tests.

In our TC hospitals, we treat post-intensive care and medically complex patients, including the critically ill, suffering from multiple organ system failures, most commonly of the cardiovascular, pulmonary, kidney, gastro-intestinal, and cutaneous (skin) systems. In particular, we have a core competency in treating patients with cardio-pulmonary disorders, skin and wound conditions, and life-threatening infections. Prior to being admitted to one of our TC hospitals, many of our patients have undergone a major surgical procedure or developed a neurological disorder following head and spinal cord injury, cerebrovascular incident, or metabolic instability. Our expertise lies in the ability to simultaneously deliver comprehensive and coordinated medical interventions directed at all affected organ systems, while maintaining a patient-centered, integrated care plan. Post-intensive care and medically complex patients are characteristically dependent on technology for continued life support, including mechanical ventilation, total parenteral nutrition, respiratory or cardiac monitors, and kidney dialysis machines.

Our TC hospital patients generally have conditions that require a high level of monitoring and specialized care, yet may not need the services of a traditional intensive care unit. These patients are not clinically appropriate for admission to other post-acute settings because their severe medical conditions are periodically or chronically unstable. By providing a range of services required for the care of post-intensive care and medically complex patients, we believe that our TC hospitals provide our patients with high quality, cost-effective care.

Our TC hospitals employ a comprehensive program of care for their patients that draws upon the talents of interdisciplinary teams, including physician specialists. The teams evaluate patients upon admission to determine treatment programs. Our hospital division has developed specialized treatment programs focused on the needs of post-intensive care and medically complex patients. In addition to traditional medical services, our TC hospital patients receive individualized treatment plans, which may include rehabilitation, skin integrity management, and clinical pharmacology services. Where appropriate, the treatment programs may involve several disciplines, such as pulmonary medicine, infectious disease, and physical medicine.

Selected Hospital Division Operating Data

The following table sets forth certain operating and financial data for the hospital division (dollars in thousands, except statistics):

 

 

 

Year ended December 31,

 

 

 

2016

 

 

2015

 

 

2014

 

Revenues

 

$

2,383,063

 

 

$

2,440,779

 

 

$

2,450,068

 

Segment EBITDAR

 

$

436,071

 

 

$

478,205

 

 

$

522,955

 

Hospitals in operation at end of period

 

 

82

 

 

 

95

 

 

 

97

 

Licensed beds at end of period

 

 

6,107

 

 

 

7,094

 

 

 

7,147

 

Admissions

 

 

49,358

 

 

 

50,629

 

 

 

52,260

 

Patient days

 

 

1,430,717

 

 

 

1,478,204

 

 

 

1,474,739

 

Average length of stay

 

 

29.0

 

 

 

29.2

 

 

 

28.2

 

Revenues per admission

 

$

48,281

 

 

$

48,209

 

 

$

46,882

 

Revenues per patient day

 

$

1,666

 

 

$

1,651

 

 

$

1,661

 

Medicare case mix index (discharged patients only)

 

 

1.169

 

 

 

1.162

 

 

 

1.163

 

Average daily census

 

 

3,909

 

 

 

4,050

 

 

 

4,040

 

Occupancy %

 

 

65.1

 

 

 

64.9

 

 

 

64.6

 

Assets at end of period

 

$

1,211,305

 

 

$

1,633,801

 

 

$

1,751,695

 

Capital expenditures:

 

 

 

 

 

 

 

 

 

 

 

 

Routine

 

$

23,858

 

 

$

28,935

 

 

$

29,881

 

Development

 

$

-

 

 

$

-

 

 

$

2,087

 

The term “licensed beds” refers to the maximum number of beds permitted in a facility under its license regardless of whether the beds are actually available for patient care. “Medicare case mix index” is the sum of the individual patient diagnostic related group weights for the period divided by the sum of the discharges for the same period. “Occupancy %” is computed by dividing average daily census by the number of operational licensed beds, adjusted for the length of time each facility was in operation during each respective period. Routine capital expenditures include expenditures at existing facilities that generally do not result in the expansion of services. Development capital expenditures include expenditures for the development of new facilities or the expansion of services or capacity at existing facilities.

11


Sources of Hospital Revenues

The hospital division receives payment for its services from third party payors, including government reimbursement programs such as Medicare and Medicaid and nongovernment sources such as Medicare Advantage, Medicaid Managed, commercial insurance companies, health maintenance organizations, preferred provider organizations, and contracted providers. Patients covered by nongovernment payors generally are more profitable to the hospital division than those covered by the Medicare and Medicaid programs. The following table sets forth the approximate percentages of our hospital division revenues, admissions, and patient days derived from the payor sources indicated:

 

 

 

Year ended December 31,

 

 

 

2016

 

 

2015

 

 

2014

 

Revenue mix %:

 

 

 

 

 

 

 

 

 

 

 

 

Medicare

 

 

55.5

 

 

 

56.6

 

 

 

58.0

 

Medicaid

 

 

4.2

 

 

 

5.3

 

 

 

6.6

 

Medicare Advantage

 

 

11.7

 

 

 

11.4

 

 

 

10.9

 

Medicaid Managed

 

 

6.7

 

 

 

5.6

 

 

 

3.4

 

Commercial insurance and other

 

 

21.9

 

 

 

21.1

 

 

 

21.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Admissions mix %:

 

 

 

 

 

 

 

 

 

 

 

 

Medicare

 

 

65.6

 

 

 

65.6

 

 

 

66.2

 

Medicaid

 

 

3.1

 

 

 

4.5

 

 

 

6.2

 

Medicare Advantage

 

 

10.9

 

 

 

10.7

 

 

 

10.4

 

Medicaid Managed

 

 

6.4

 

 

 

5.1

 

 

 

3.4

 

Commercial insurance and other

 

 

14.0

 

 

 

14.1

 

 

 

13.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Patient days mix %:

 

 

 

 

 

 

 

 

 

 

 

 

Medicare

 

 

58.5

 

 

 

58.7

 

 

 

59.9

 

Medicaid

 

 

4.8

 

 

 

6.7

 

 

 

8.6

 

Medicare Advantage

 

 

12.2

 

 

 

11.8

 

 

 

11.4

 

Medicaid Managed

 

 

7.7

 

 

 

6.5

 

 

 

4.1

 

Commercial insurance and other

 

 

16.8

 

 

 

16.3

 

 

 

16.0

 

For the year ended December 31, 2016, revenues of the hospital division totaled approximately $2.4 billion or 32% of our total revenues (before eliminations). For more information regarding the reimbursement for our hospital services, see “—Governmental Regulation—Hospital Division—Overview of Hospital Division Reimbursement.”

12


Hospital Facilities

The following table lists by state the number of TC hospitals and licensed beds we operated as of December 31, 2016:

 

 

 

 

 

 

 

Number of facilities

 

 

State

 

Licensed beds

 

 

Owned by us

 

 

Leased from Ventas (2)

 

 

Leased from other parties

 

 

Total

 

 

California

 

 

1,028

 

 

 

4

 

 

 

5

 

 

 

4

 

 

 

13

 

 

Colorado

 

 

163

 

 

 

-

 

 

 

1

 

 

 

3

 

 

 

4

 

 

Florida (1)

 

 

742

 

 

 

3

 

 

 

6

 

 

 

1

 

 

 

10

 

 

Georgia (1)

 

 

45

 

 

 

-

 

 

 

-

 

 

 

1

 

 

 

1

 

 

Illinois (1)

 

 

575

 

 

 

-

 

 

 

4

 

 

 

2

 

 

 

6

 

 

Indiana

 

 

266

 

 

 

1

 

 

 

1

 

 

 

3

 

 

 

5

 

 

Kentucky (1)

 

 

414

 

 

 

-

 

 

 

1

 

 

 

1

 

 

 

2

 

 

Michigan (1)

 

 

77

 

 

 

-

 

 

 

-

 

 

 

1

 

 

 

1

 

 

Missouri (1)

 

 

300

 

 

 

-

 

 

 

2

 

 

 

2

 

 

 

4

 

 

Nevada

 

 

254

 

 

 

1

 

 

 

1

 

 

 

1

 

 

 

3

 

 

New Jersey (1)

 

 

117

 

 

 

-

 

 

 

-

 

 

 

3

 

 

 

3

 

 

New Mexico

 

 

61

 

 

 

-

 

 

 

1

 

 

 

-

 

 

 

1

 

 

North Carolina (1)

 

 

124

 

 

 

-

 

 

 

1

 

 

 

-

 

 

 

1

 

 

Ohio

 

 

126

 

 

 

1

 

 

 

-

 

 

 

2

 

 

 

3

 

 

Pennsylvania

 

 

167

 

 

 

1

 

 

 

1

 

 

 

1

 

 

 

3

 

 

Tennessee (1)

 

 

49

 

 

 

-

 

 

 

1

 

 

 

-

 

 

 

1

 

 

Texas

 

 

1,459

 

 

 

2

 

 

 

5

 

 

 

12

 

 

 

19

 

 

Washington (1)

 

 

140

 

 

 

2

 

 

 

-

 

 

 

-

 

 

 

2

 

 

Totals

 

 

6,107

 

 

 

15

 

 

 

30

 

 

 

37

 

 

 

82

 

 

 

 

(1)

These states have certificate of need (“CON”) regulations. See “—Governmental Regulation—Federal, State and Local Regulations.”

(2)

See “—Master Lease Agreements.”

Quality Assessment and Improvement

The hospital division maintains a clinical outcomes and customer service program that includes a review of its patient population measured against utilization and quality standards, clinical outcomes data collection, and patient/family, employee, and physician satisfaction surveys. In addition, our hospitals have integrated quality assurance and improvement programs administered by a director of quality management, which encompass quality improvement, infection control, and risk management. The programs seek to ensure that patients are managed appropriately in our hospitals and that quality healthcare is provided in a cost-effective manner.

The hospital division has implemented a program whereby internal quality auditors review its TC hospitals for compliance with standards of The Joint Commission (“TJC”). The purposes of this internal review process are to: (1) ensure ongoing compliance with industry-recognized standards for hospitals, (2) assist management in analyzing each hospital’s operations, and (3) provide consulting and educational programs for each hospital to identify opportunities to improve patient care.

Hospital Division Management and Operations

Each of our TC hospitals has a fully credentialed, multi-specialty medical staff to meet the needs of post-intensive care and medically complex patients. Our TC hospitals offer a broad range of physician services including pulmonology, internal medicine, infectious diseases, neurology, nephrology, cardiology, radiology, and pathology. In addition, our TC hospitals have multi-disciplinary teams of healthcare professionals, including a professional nursing staff trained to care for long-term acute patients, respiratory, physical, occupational, and speech therapists, pharmacists, registered dietitians, and social workers, to address the needs of post-intensive care and medically complex patients.

Each TC hospital utilizes a pre-admission assessment system to evaluate clinical needs and other information in determining the appropriateness of each potential patient admission. After admission, the TC hospital’s interdisciplinary team reviews each patient’s case to determine a care plan. Typically, and where appropriate, the care plan involves the services of several disciplines, such as pulmonary medicine, infectious disease, and physical medicine.

13


A hospital chief executive officer or administrator supervises and is responsible for the day-to-day operations at each of our hospitals. Each hospital (or network of hospitals) also employs a chief financial or accounting officer who monitors the financial matters of such hospital or network. In addition, each hospital (or network of hospitals) employs a chief clinical officer to oversee the clinical operations and a director of quality management to oversee our quality assurance programs.

We provide centralized administrative services in the areas of information systems, clinical operations, regulatory compliance, reimbursement guidance, state licensing, and Medicare and Medicaid certification and maintenance support, as well as legal, finance, accounting, purchasing, human resources management, and facilities management support to each of our hospitals. We believe that this centralization improves efficiency, promotes the standardization of certain processes, and allows staff in our hospitals to focus more attention on providing quality patient care.

A division president, chief operating officer, and a chief financial officer manage the hospital division. The operations of the hospital division are divided into five operational units consisting of two regions and three districts, each headed by an officer of the division who reports directly to the division’s chief operating officer. The division’s chief medical officer and senior vice president of clinical operations manage clinical issues and quality concerns of the hospital division. The sales and marketing efforts for the division are led by district and regional sales leaders, who in turn report to our hospital division vice president of sales.

Hospital Division Competition

In each geographic market that we serve, there are generally several competitors that provide similar services to those provided by our hospital division. In addition, several of the markets in which the hospital division operates have other LTAC hospitals and healthcare facilities that provide services comparable to those offered by our hospitals. Certain competing hospitals and healthcare facilities are operated by not-for-profit, non-taxpaying, or governmental agencies, which can finance capital expenditures on a tax-exempt basis and receive funds and charitable contributions that are unavailable to our hospital division.

Competition for patients covered by nongovernment reimbursement sources is intense. The primary competitive factors in the LTAC hospital business include quality of services, charges for services, and responsiveness to the needs of patients, families, payors, and physicians. The competitive position of any LTAC hospital also is affected by the ability of its management to negotiate contracts with purchasers of, and to receive referrals from, group healthcare services, including managed care companies, preferred provider organizations, and health maintenance organizations. Such organizations attempt to obtain discounts from established charges, as well as to limit their overall expenditures by compressing average lengths of stay. The importance of obtaining contracts with preferred provider organizations, health maintenance organizations, and other organizations that finance healthcare varies from market to market, depending on the number and market strength of such organizations.

In addition, certain third parties, known as conveners, offer patient placement and care transition services to managed care companies, Medicare Advantage plans, bundled payment participants, accountable care organizations, and other healthcare providers as part of an effort to manage post acute-care provider (“PAC”) utilization and associated costs. Thus, conveners influence patient decision on which PAC setting to choose, as well as how long to remain in a particular PAC facility. Given their focus on perceived financial savings, conveners customarily suggest that patients avoid higher cost PAC settings altogether or move as soon as practicable to lower cost PAC settings. However, conveners are not healthcare providers and may suggest a PAC setting or duration of care that is not appropriate from a clinical perspective. Conveners may suggest that patients select alternate care settings to our TC hospitals, IRFs, nursing centers, or home health and hospice locations or otherwise suggest shorter lengths of stay in such settings. 

KINDRED REHABILITATION SERVICES DIVISION

Our Kindred Rehabilitation Services division operates IRFs, manages ARUs, and provides rehabilitation services, including physical and occupational therapies and speech pathology services, to residents and patients of nursing centers, hospitals, outpatient clinics, home health agencies, and assisted living facilities. Within our Kindred Rehabilitation Services division, we are organized into two reportable operating segments: Kindred Hospital Rehabilitation Services and RehabCare. We are one of the largest providers of rehabilitation services in the United States based upon fiscal 2016 revenues of approximately $1.4 billion.

Kindred Hospital Rehabilitation Services Operations

Our Kindred Hospital Rehabilitation Services segment operates IRFs, manages ARUs, and provides program management and therapy services on an inpatient basis in LTAC hospitals, sub-acute (or skilled nursing) units, as well as on an outpatient basis to hospital-based and other satellite programs. As of December 31, 2016, our Kindred Hospital Rehabilitation Services segment operated 19 IRFs (which includes 17 joint ventures) and 102 ARUs and provided rehabilitation services in 119 LTAC hospitals, five sub-acute (or skilled nursing) units and 132 outpatient clinics.

Inpatient rehabilitation hospitals. Our IRFs provide services to patients who require intensive inpatient rehabilitative care. Our IRF patients typically have significant physical disability due to various medical and physical conditions, such as brain injuries, spinal cord injuries, stroke, hip fractures, certain orthopedic problems, and neuromuscular disease, which require medical and rehabilitative

14


healthcare services in an inpatient setting. Our nurses and physical, occupational, and speech therapists work with physicians in a multi-disciplinary environment to get patients home and to work. Nursing and therapy staff provide patient care as directed by physician orders. Our IRFs use an interdisciplinary approach to treatment that leads to better care and superior outcomes. The medical, nursing, therapy, and ancillary services provided by our IRFs comply with local, state, and federal regulations, as well as other accreditation standards. The majority of our IRFs are owned and operated through joint ventures with other health systems.

Hospital-based inpatient rehabilitation units. We are a leading provider of contract-based ARU management services. The ARUs we manage provide high acuity rehabilitation for patients recovering from strokes, medically complex and orthopedic conditions, traumatic brain injuries, and other neurological disease. We assist in the development of ARUs in acute care hospitals that have vacant space and/or unmet rehabilitation needs in their markets. We also work with acute care hospitals that currently operate ARUs to improve the delivery of clinical services to patients by implementing our scheduling, clinical protocol, and outcome systems, as well as time-management training for existing staff. In the case of acute care hospitals that do not operate ARUs, we review their historical and existing hospital population, as well as the demographics of the geographic region, to determine the optimal size of the proposed ARUs and the potential of the new facility under our management to attract patients and generate revenues sufficient to cover anticipated expenses. Our relationships with these hospitals are customarily in the form of contracts for management services, which typically have a term of three to five years.

An ARU within a hospital allows the hospital to offer rehabilitation services to patients who might otherwise be discharged to a setting outside the acute care hospital, thus improving the hospital’s ability to provide a full continuum of care and consistency in clinical services and outcomes. An ARU within a hospital typically consists of about 20 beds and is staffed with a program director, a rehabilitation physician that usually serves as the medical director, and clinical staff, which may include psychologists, physical and occupational therapists, speech/language pathologists, a social worker, a case manager, and other appropriate support personnel. Additionally, compliance, clinical education, and clinical programming are supported by our clinical compliance experts in an effort to ensure that clinical practices support the provision of quality rehabilitation services.

LTAC hospitals. We provide rehabilitation and program management services, including physical and occupational therapies and speech pathology services, to LTAC hospitals. We provide specialized care programs that support patients with complex medical needs, such as wound care, pain management, and cognitive deficits, in addition to programs for neurologic, orthopedic, cardiac, and pulmonary recovery. As of December 31, 2016, we operated therapy programs in 119 LTAC hospitals, of which approximately one-third are owned by third parties. We also provide LTAC hospitals with clinical education and programming supported by our clinical experts in an effort to ensure that clinical practices support the provision of effective and efficient quality rehabilitation services in addition to enhancing overall prevention programs in accordance with applicable standards of care.

Sub-acute units. As of December 31, 2016, we managed therapy programs in five sub-acute (or skilled nursing) units. These hospital-based units provide lower intensity rehabilitation for medically complex patients. Patients’ diagnoses cover a wide range of medical conditions, including stroke, post-surgical conditions, pulmonary disease, cancer, congestive heart failure, burns, and wounds. These sub-acute units enable patients to remain in a hospital setting where emergency medical needs can be met quickly as opposed to having to be transported from a nursing center. These types of units are typically located within the acute care hospital and are either separately licensed or under the hospital’s license as permitted by applicable laws. The hospital benefits by retaining patients who otherwise would be discharged to another setting and by utilizing idle space.

Outpatient therapy programs. We manage outpatient therapy programs that provide therapy services to patients with a variety of medical, orthopedic, and neurological conditions that may be related to work or sports injuries. As of December 31, 2016, we managed 132 hospital-based and satellite outpatient therapy programs. An outpatient therapy program complements the hospital’s occupational medicine initiatives and allows therapy to be continued for patients discharged from inpatient rehabilitation facilities and medical/surgical beds. An outpatient therapy program also attracts patients into the hospital and is operated either on the hospital’s campus or in satellite locations controlled by the hospital.

We believe our management of outpatient therapy programs enables the efficient delivery of therapy services through our scheduling, clinical protocol, and outcome systems, as well as through time-management training for our therapy personnel. We also provide our customers with guidance on compliance and quality assurance objectives.

RehabCare Operations

Our RehabCare segment provides therapy management services primarily to nursing centers, assisted living facilities, independent living communities, home health agencies, and hospice providers, allowing our customers to fulfill their continuing need for therapists on a full-time or part-time basis without the need to hire, train, and retain their own staff. As of December 31, 2016, our RehabCare segment provided rehabilitative services in 1,718 sites of service in 43 states.

RehabCare provides specialized rehabilitation programs designed to meet the individual needs of the residents and patients we serve. Our specialized care programs address complex medical needs, such as wound care, pain management, and cognitive retraining,

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in addition to programs for fractures, neurologic, orthopedic, cardiac, and pulmonary conditions. We also provide clinical education and programming that is developed and supported by our clinical experts. These programs are implemented in an effort to ensure that clinical practices support the provision of quality rehabilitation services in accordance with applicable standards of care.

RehabCare recruits and retains qualified professionals with the clinical expertise to provide quality patient care and measurable rehabilitation outcomes. RehabCare also provides quality-assurance training for all clinicians to maintain compliance with regulatory requirements.

Selected Kindred Rehabilitation Services Division Operating Data

The following table sets forth certain operating and financial data for the Kindred Rehabilitation Services division (dollars in thousands, except statistics):

 

 

Year ended December 31,

 

 

 

2016

 

 

2015

 

 

2014

 

Kindred Hospital Rehabilitation Services:

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

674,648

 

 

$

609,122

 

 

$

374,201

 

Segment EBITDAR

 

$

197,123

 

 

$

176,127

 

 

$

98,196

 

Assets at the end of period

 

$

814,838

 

 

$

802,686

 

 

$

366,153

 

Capital expenditures:

 

 

 

 

 

 

 

 

 

 

 

 

Routine

 

$

1,389

 

 

$

948

 

 

$

194

 

Development

 

$

20,773

 

 

$

4,701

 

 

$

-

 

Freestanding IRFs:

 

 

 

 

 

 

 

 

 

 

 

 

End of period data:

 

 

 

 

 

 

 

 

 

 

 

 

Number of IRFs

 

 

19

 

 

 

18

 

 

 

5

 

Number of licensed beds

 

 

995

 

 

 

919

 

 

 

215

 

Discharges (1)

 

 

18,409

 

 

 

15,991

 

 

 

4,224

 

Occupancy % (1)

 

 

69.1

 

 

 

70.2

 

 

 

70.3

 

Average length of stay (1)

 

 

12.8

 

 

 

13.2

 

 

 

13.1

 

Revenue per discharge (1)

 

$

19,531

 

 

$

19,104

 

 

$

17,757

 

Contract services:

 

 

 

 

 

 

 

 

 

 

 

 

Sites of service (at end of period):

 

 

 

 

 

 

 

 

 

 

 

 

ARUs

 

 

102

 

 

 

100

 

 

 

100

 

LTAC hospitals

 

 

119

 

 

 

119

 

 

 

117

 

Sub-acute units

 

 

5

 

 

 

7

 

 

 

10

 

Outpatient units

 

 

132

 

 

 

130

 

 

 

138

 

 

 

 

358

 

 

 

356

 

 

 

365

 

Revenue per site

 

$

858,758

 

 

$

837,606

 

 

$

805,590

 

Revenue mix %:

 

 

 

 

 

 

 

 

 

 

 

 

Company-operated

 

 

28

 

 

 

30

 

 

 

30

 

Non-affiliated

 

 

72

 

 

 

70

 

 

 

70

 

 

 

 

(1)

Excludes non-consolidating IRF.

 

 

 

Year ended December 31,

 

 

 

2016

 

 

2015

 

 

2014

 

RehabCare:

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

784,292

 

 

$

915,486

 

 

$

1,007,036

 

Segment EBITDAR

 

$

40,082

 

 

$

43,815

 

 

$

70,974

 

Revenue mix %:

 

 

 

 

 

 

 

 

 

 

 

 

Company-operated

 

 

14

 

 

 

15

 

 

 

12

 

Non-affiliated

 

 

86

 

 

 

85

 

 

 

88

 

Sites of service (at end of period)

 

 

1,718

 

 

 

1,798

 

 

 

1,935

 

Revenue per site

 

$

448,258

 

 

$

505,909

 

 

$

534,077

 

Assets at end of period

 

$

329,516

 

 

$

347,738

 

 

$

360,860

 

Routine capital expenditures

 

$

1,867

 

 

$

1,449

 

 

$

2,247

 


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Sources of Kindred Rehabilitation Services Division Revenues

In the Kindred Hospital Rehabilitation Services segment, our IRFs derive a significant portion of their revenues from Medicare, Medicaid, and other payors that received discounts from their established billing rates. The Medicare and Medicaid regulations and various managed care contracts under which these discounts are calculated are complex and are subject to interpretation and adjustment. IRFs estimate the allowance for contractual discounts on a patient-specific basis given their interpretation of the applicable regulations or contract terms. These interpretations sometimes result in payments that differ from the IRFs’ estimates. Additionally, updated regulations and contract renegotiations occur frequently, necessitating regular review and assessment of the estimation process by management.

Regarding the rehabilitation and program management services we provide to residents, patients, and customers, the basis for payment varies depending upon the type of service provided. In the Kindred Hospital Rehabilitation Services segment, our (1) ARU customers generally pay us on the basis of a negotiated fee per discharge, a flat monthly management fee, or a combination of the two, (2) LTAC hospital customers generally pay based upon a negotiated per patient day rate, (3) sub-acute rehabilitation customers generally pay based upon a flat monthly fee or a negotiated fee per patient day, and (4) outpatient therapy clients typically pay us on the basis of a negotiated fee per unit of service. In the RehabCare segment, our customers generally pay us on the basis of a negotiated patient per diem rate or a negotiated fee schedule based upon the type of service rendered.

For the year ended December 31, 2016, revenues of the Kindred Rehabilitation Services division totaled approximately $1.4 billion or 19% of our total revenues (before eliminations). Approximately 14% of our Kindred Rehabilitation Services division revenues (before eliminations) in 2016 were generated from services provided to hospitals, nursing centers, and care management functions that we operated.

As a provider of services to healthcare providers, trends and developments in healthcare reimbursement will impact our revenues and growth. Changes in the reimbursement provided by Medicare or Medicaid to our customers can impact the demand and pricing for our services. For more information regarding the reimbursement for our rehabilitation services, see “—Governmental Regulation—Kindred Rehabilitation Services Division—Overview of Kindred Rehabilitation Services Division Reimbursement,” “—Governmental Regulation—Nursing Center Division—Overview of Nursing Center Division Reimbursement.”

 

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Geographic Coverage

The following table lists by state the number of sites of service of our Kindred Hospital Rehabilitation Services operating segment as of December 31, 2016:  

 

 

 

 

 

 

 

Contract services

 

State

 

IRFs

 

 

ARUs

 

 

LTAC hospitals

 

 

Sub-acute units

 

 

Outpatient units

 

 

Total

 

Alabama

 

 

-

 

 

 

2

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2

 

Arizona

 

 

1

 

 

 

1

 

 

 

3

 

 

 

-

 

 

 

-

 

 

 

4

 

Arkansas

 

 

-

 

 

 

5

 

 

 

-

 

 

 

1

 

 

 

9

 

 

 

15

 

California

 

 

-

 

 

 

11

 

 

 

17

 

 

 

-

 

 

 

2

 

 

 

30

 

Colorado

 

 

-

 

 

 

-

 

 

 

4

 

 

 

-

 

 

 

1

 

 

 

5

 

Delaware

 

 

-

 

 

 

1

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1

 

District of Columbia

 

 

-

 

 

 

-

 

 

 

2

 

 

 

-

 

 

 

-

 

 

 

2

 

Florida

 

 

-

 

 

 

-

 

 

 

10

 

 

 

-

 

 

 

4

 

 

 

14

 

Georgia

 

 

-

 

 

 

4

 

 

 

1

 

 

 

2

 

 

 

-

 

 

 

7

 

Illinois

 

 

-

 

 

 

7

 

 

 

6

 

 

 

-

 

 

 

22

 

 

 

35

 

Indiana

 

 

1

 

 

 

6

 

 

 

7

 

 

 

-

 

 

 

10

 

 

 

23

 

Iowa

 

 

-

 

 

 

2

 

 

 

-

 

 

 

-

 

 

 

2

 

 

 

4

 

Kansas

 

 

-

 

 

 

6

 

 

 

-

 

 

 

-

 

 

 

2