Significant Accounting Policies

9 Months Ended

Sep. 30, 2011

Significant Accounting Policies [Abstract]

(2) SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

USE OF ESTIMATES

Preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The most significant management estimates used in the preparation of the accompanying consolidated financial statements are associated with the allowances for provider discounts and uncollectible accounts receivable, the reserve for obsolete and damaged inventory, stock-based compensation and income taxes.

REVENUE RECOGNITION, AND ALLOWANCES FOR PROVIDER DISCOUNTS AND COLLECTIBILITY

The Company recognizes revenue when each of the following four conditions are met: 1) a contract or sales arrangement exists; 2) products have been shipped and title has transferred, or rental services have been rendered; 3) the price of the products or services is fixed or determinable; and 4) collectability is reasonably assured. Accordingly, the Company recognizes revenue, both rental and sales, when products have been delivered to the patient and the patient’s insurance (if the patient has insurance) has been verified (if any). For medical products that are sold from inventories consigned at clinic locations, the Company recognizes revenue when it receives notice that the product has been prescribed and delivered to the patient and the patient’s insurance coverage has been verified or preauthorization has been obtained from the insurance company, when required. Revenue from the rental of products is normally on a month-to-month basis and is recognized ratably over the products’ rental period. Revenue from sales to distributors is recognized when the Company ships its products, which fulfills its order and transfers title. All revenue is recognized at amounts estimated to be received from customers or third-party providers using the Company’s established rates, net of estimated provider discounts.

A significant portion of the Company’s revenue is derived, and the related receivables are due, from insurance companies or other third-party payors. The nature of these receivables within this industry has typically resulted in long and varying collection cycles. The process of determining what products will be reimbursed by third-party providers and the amounts that they will reimburse is complex and depends on conditions and procedures that vary among providers and may change from time to time. The Company maintains an allowance for provider discounts and records additions to the allowance to account for the risk of nonpayment. Provider discounts result from reimbursements from insurance or other third party payors that are less than amounts claimed (billed), where the amount claimed by the Company exceeds the insurance or other payor’s usual, customary and reasonable reimbursement rate. The Company determines the amount of the allowance, and adjusts the allowance at the end of each reporting period, based on a number of factors, including historical rates of collection, the aging of the receivables, trends in the historical rates of collection and current relationships and experience with insurance companies or other third party payors. If the rate of collection of past-due receivables recorded for previous fiscal periods changes, or if there is a trend in the rates of collection on those receivables, the Company may be required to change the rate at which it provides for additions to the allowance. A change in the rates of the Company’s collections can result from a number of factors, including experience and training of billing personnel, changes in the reimbursement policies or practices of payors, or changes in industry rates of reimbursement. Accordingly, the provision for provider discounts recorded in the income statement as a reduction of revenue has fluctuated and may continue to fluctuate significantly from quarter to quarter.

Due to the nature of the industry and the reimbursement environment in which the Company operates, estimates are required to record net revenues and accounts receivable at their net realizable values. Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available. Specifically, the complexity of third-party billing arrangements and the uncertainty of reimbursement amounts for certain products or services from payors may result in adjustments to amounts originally recorded. Due to continuing changes in the health care industry and third-party reimbursement, it is possible that management’s estimates could change in the near term, which could have an impact on results of operations and cash flows. Any differences between estimated settlements and final determinations are reflected as an increase or a reduction to revenue in the period when such final determinations are known.

The Company frequently receives refund requests from insurance providers relating to specific patients and dates of service. Billing and reimbursement disputes are very common in the Company’s industry. For example, on April 26, 2010, the Company received a refund request from Anthem Blue Cross Blue Shield (“Anthem”) covering the period from October 1, 2008 (the date of the last retrospective audit by Anthem) through March 12, 2010. These requests are sometimes related to a limited number of patients; at other times, they include a significant number of refund claims in a single request. The Company reviews and evaluates these requests and determines if any refund request is appropriate. The Company also reviews refund claims when it is rebilling or pursuing reimbursement from that insurance provider. The Company frequently has significant offsets against such refund requests, and sometimes amounts are due to the Company in excess of the amounts of refunds requested by the insurance providers. Therefore, at the time of receipt of such refund requests, the Company is generally unable to determine if a refund request is valid and should be accrued.

On September 22, 2011, the Company and Anthem reached a settlement resolving all issues, claims and disputes between the parties in the amount of $226 (the “Settlement”). The Settlement provided for an initial payment of $60 by the Company, which was paid on October 3, 2011, with the remaining amount payable over a twelve month, interest free period. The Company recorded an accrued liability of $226 as of September 30, 2011.

As of September 30, 2011, the Company believes it has adequate reserves relating to all known insurance disputes and refund requests. However, no assurances can be given with respect to such estimates of reimbursements and offsets or the ultimate outcome of any refund requests.

In addition to the allowance for provider discounts, the Company records an allowance for uncollectible accounts receivable. Uncollectible accounts receivable are primarily a result of the following: non-payment from patients who have been direct billed for co-payments or deductibles, lack of appropriate insurance coverage and disallowances of charges by third-party payors. If there is a change to a material insurance provider contract or policy, application by a provider, a decline in the economic condition of providers or a significant turnover of Company billing personnel resulting in diminished collection effectiveness, the estimate of the allowance for uncollectible accounts receivable may not be adequate and may result in an increase in the future.

At September 30, 2011 and December 31, 2010, the allowance for uncollectible accounts receivable is $1,937 and $1,262, respectively.

FAIR VALUE OF FINANCIAL INSTRUMENTS AND CREDIT RISK

The Company’s financial instruments at September 30, 2011 include cash, accounts receivable, accounts payable, capital lease obligations and the line of credit balance, for which current carrying amounts approximate fair value due to their short-term nature. At September 30, 2011 and December 31, 2010, the Company had no financial assets or liabilities subject to recurring fair value measurement.

RECLASSIFICATIONS

Certain reclassifications to the 2010 cash flow statement and balance sheet have been made to conform to the 2011 presentation, none of which had any effect on cash flows from operating, investing and financing activities or total assets, total liabilities or stockholders’ equity.

INVENTORY

Inventories, which primarily represents finished goods, are valued at the lower of cost (average) or market. Finished goods include products held at the Company’s headquarters and at different clinics by health care providers or other third parties for rental or sale to patients.

The Company monitors inventory for turnover and obsolescence, and records losses for excess and obsolete inventory as appropriate. At September 30, 2011, the Company had a reserve for obsolete and damaged inventory of approximately $661 and a reserve of approximately $549 at December 31, 2010. The Company had $2,614 of open purchase commitments at September 30, 2011.

PROPERTY AND EQUIPMENT

Property and equipment as of September 30, 2011 and December 31, 2010, are as follows:


	September 30,			December 31,
	2011			2010			Useful lives

Office furniture and equipment	$	1,391		$	1,194		3-7 years
Rental inventory		2,599			2,108		5 years
Vehicles		76			60		5 years
Leasehold improvements		404			370		2-6 years
Assembly equipment		39			11		7 years

		4,509			3,743
Less accumulated depreciation		(1,019	)		(837	)

	$	3,490		$	2,906

RECENT ACCOUNTING PRONOUNCEMENTS

In July 2011, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2011-07, “Health Care Entities (Topic 954): Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities”, which requires that certain health care entities change the presentation of their statement of operations by reclassifying the provision for bad debts associated with patient service revenue from an operating expense to a deduction from patient service revenue (net of contractual allowances and discounts). In addition, the amendments also require enhanced disclosure about policies for recognizing revenue and assessing bad debts and disclosures of qualitative and quantitative information about changes in the allowance for doubtful accounts. This ASU is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2011, with early adoption permitted. Management currently expects that this ASU will not have a material impact on the Company’s consolidated financial statements.