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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark one)

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

For the quarterly period ended March 31, 2014.

OR

 

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

For the transition period from                      to                     

Commission file number: 001-33930

 

 

IPC THE HOSPITALIST COMPANY, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware		95-4562058
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
4605 Lankershim Boulevard, Suite 617 North Hollywood, California		91602
(Address of principal executive offices)		(Zip code)

Registrant’s telephone number, including area code: (888) 447-2362

 

 

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  x    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  x    No  ¨

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		x		Accelerated filer		¨
Non-accelerated filer		¨  (Do not check if a smaller reporting company)		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  x

As of April 18, 2014, there were 17,131,994 shares of the registrant’s common stock, $0.001 par value, outstanding.

 

 

 

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IPC The Hospitalist Company, Inc.

FORM 10-Q

QUARTERLY REPORT

TABLE OF CONTENTS

 

				Page
		PART I
Item 1		Consolidated Financial Statements (unaudited)
		Consolidated Balance Sheets – March 31, 2014 and December 31, 2013			3
		Consolidated Statements of Income – Three months ended March 31, 2014 and 2013			4
		Consolidated Statements of Cash Flows – Three months ended March 31, 2014 and 2013			5
		Notes to Consolidated Financial Statements			6
Item 2		Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
Item 3		Quantitative and Qualitative Disclosures about Market Risk			21
Item 4		Controls and Procedures			21
		PART II
Item 1		Legal Proceedings			22
Item 6		Exhibits			22
Signatures					23
Exhibit Index					24

Note: Items 1A, 2, 3, 4 and 5 of Part II are omitted because they are not applicable.

 

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PART I – FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

IPC The Hospitalist Company, Inc.

Consolidated Balance Sheets

(dollars in thousands, except for share data)

 

		March 31,				December 31,
		2014				2013
		(Unaudited)
Assets
Current assets:
Cash and cash equivalents		$	23,274			$	25,010
Accounts receivable, net			117,649				103,585
Insurance receivable for malpractice claims - current portion			12,076				11,653
Prepaid expenses and other current assets			15,076				19,378
Total current assets			168,075				159,626
Property and equipment, net			6,238				6,343
Goodwill			361,325				357,387
Other intangible assets, net			5,565				5,857
Insurance receivable for malpractice claims - less current portion			21,341				20,599
Total assets		$	562,544			$	549,812
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities		$	9,746			$	5,486
Accrued compensation			38,409				35,639
Payable for practice acquisitions, current portion			28,574				32,430
Medical malpractice and self-insurance reserves, current portion			12,690				12,211
Deferred tax liabilities, current portion			969				969
Total current liabilities			90,388				86,735
Long-term debt			85,000				90,000
Medical malpractice and self-insurance reserves, less current portion			45,353				44,044
Payable for practice acquisitions, less current portion			6,272				8,289
Deferred tax liabilities, less current portion			5,762				5,762
Total liabilities			232,775				234,830
Stockholders’ equity:
Preferred stock, $0.001 par value, 15,000,000 shares authorized, none issued			0				0
Common stock, $0.001 par value, 50,000,000 shares authorized, 17,125,914 and 17,015,580 shares issued and outstanding at March 31, 2014 and December 31, 2013, respectively			17				17
Additional paid-in capital			172,439				167,926
Retained earnings			157,313				147,039
Total stockholders’ equity			329,769				314,982
Total liabilities and stockholders’ equity		$	562,544			$	549,812

The accompanying notes are an integral part of these consolidated financial statements.

 

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IPC The Hospitalist Company, Inc.

Consolidated Statements of Income

(dollars in thousands, except for per share data)

(unaudited)

 

		Three Months Ended March 31,
		2014				2013
Net revenue		$	172,726			$	153,091
Operating expenses:
Cost of services—physician practice salaries, benefits and other			127,273				112,068
General and administrative			27,607				23,823
Net change in fair value of contingent consideration			(383	)			(1,093	)
Depreciation and amortization			1,265				1,154
Total operating expenses			155,762				135,952
Income from operations			16,964				17,139
Investment income			1				2
Interest expense			(314	)			(115	)
Income before income taxes			16,651				17,026
Income tax provision			6,377				6,521
Net income		$	10,274			$	10,505
Net income per share:
Basic		$	0.60			$	0.63
Diluted		$	0.58			$	0.61

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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IPC The Hospitalist Company, Inc.

Consolidated Statements of Cash Flows

(dollars in thousands)

(unaudited)

 

		Three Months Ended March 31,
		2014				2013
Operating activities
Net income		$	10,274			$	10,505
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			1,265				1,154
Stock-based compensation expense			1,965				1,735
Changes in assets and liabilities:
Accounts receivable			(14,064	)			(12,136	)
Prepaid expenses and other current assets			4,270				4,248
Accounts payable and accrued liabilities			4,260				3,839
Accrued compensation			2,770				4,796
Medical malpractice and self-insurance reserves, net			623				899
Accrued contingent consideration			(1,189	)			(1,093	)
Net cash provided by operating activities			10,174				13,947
Investing activities
Acquisitions of physician practices			(8,740	)			(9,691	)
Purchase of property and equipment			(750	)			(1,113	)
Net cash used in investing activities			(9,490	)			(10,804	)
Financing activities
Repayments of long-term debt			(5,000	)			0
Net proceeds from issuance of common stock			2,160				1,333
Excess tax benefits from stock-based compensation			420				317
Net cash (used in) provided by financing activities			(2,420	)			1,650
Net (decrease) increase in cash and cash equivalents			(1,736	)			4,793
Cash and cash equivalents, beginning of period			25,010				16,214
Cash and cash equivalents, end of period		$	23,274			$	21,007
Supplemental disclosure of cash flow information
Cash paid for:
Interest		$	102			$	75
Income taxes		$	635			$	490

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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IPC The Hospitalist Company, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

March 31, 2014

Note 1. Basis of Presentation and Significant Accounting Policies

Basis of Presentation

IPC The Hospitalist Company, Inc. and its wholly-owned subsidiaries (the “Company,” “IPC,” “we,” “us,” and “our”) is a national physician group practice company that operates and manages full-time hospitalist practices. We prepared the accompanying unaudited consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) on the same basis as our audited annual financial statements. The consolidated financial statements include all accounts of IPC The Hospitalist Company, Inc. and its wholly owned subsidiaries and consolidated professional medical corporations (Professional Medical Corporations) managed under long-term management agreements.

Through the management agreements and our relationship with the stockholders of the Professional Medical Corporations, we have exclusive authority over all non-medical decision making related to the ongoing business operations of the Professional Medical Corporations. Further, our rights under the management agreements are unilaterally salable or transferable. Based on the provisions of the agreements, we have determined that the Professional Medical Corporations are variable interest entities (VIE’s), and that we are the primary beneficiary because we have control over the operations of these VIE’s, provide full financial and management support to them, and take all residual benefits and bear all residual losses from their operations. Consequently, we consolidate the revenue and expenses of the Professional Medical Corporations from the date of execution of the agreements. All intercompany balances and transactions have been eliminated in consolidation.

In our opinion, these consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial information set forth therein. Certain information and footnote disclosures normally included in complete financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to GAAP and SEC rules and regulations, which are applicable to interim financial statements. As a result, the following disclosures should be read in conjunction with our audited consolidated financial statements and notes thereto as of December 31, 2013 included in our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on February 26, 2014.

Revenue

Net revenue consists of fees for medical services provided by our affiliated hospitalists under fee-for-service, case rate and other professional fee arrangements with various payors including Medicare, Medicaid, managed care organizations, insurance companies and hospitals. Net revenue is reported in the period in which services are provided at amounts expected to be collected, which excludes contractual discounts and an estimate of uncollectible accounts.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions of the fair value of certain reported amounts of assets, liabilities, revenues and expenses at the date and for the periods that the financial statements are prepared. Significant estimates include the estimated net realizable value of accounts receivable, medical malpractice insurance receivable and payable for known claims, liabilities for claims incurred but not reported (IBNR) related to medical malpractice, fair value of contingent consideration related to business combinations and the analysis of goodwill for impairment. The process of estimating these assets and liabilities involves judgment decisions, which are subject to an inherent degree of uncertainty. Actual results could differ from those estimates. The results of operations for the current interim period are not necessarily indicative of the results for the entire year ending December 31, 2014.

Fair Value of Financial Instruments

Our consolidated balance sheets as of March 31, 2014 and December 31, 2013 included the following financial instruments: cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, payable for practice acquisitions and long-term debt. We consider the carrying amounts of cash and cash equivalents, accounts receivable and accounts payable and accrued liabilities to approximate their fair value because of the relatively short period of time between the origination of these instruments and their expected realization. The carrying amount of our long-term debt borrowed from our line of credit approximated its fair value at March 31, 2014 and December 31, 2013. Pursuant to GAAP, we determine the fair value of our long-term borrowing using observable inputs, which is defined as Level 2 input under GAAP on fair value measures.

 

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Our payable for practice acquisitions consisted of accrued contingent consideration for practice acquisitions. The accrued contingent consideration is carried at fair value largely determined using the income approach with unobservable inputs defined as Level 3 inputs under GAAP. See Note 3 for more information.

Goodwill

The changes in the carrying amount of goodwill for the three months ended March 31, 2014 are as follows (in thousands):

 

Goodwill - beginning balance at January 1, 2014		$	357,387
Goodwill acquired during 2014			5,799
Adjustment for prior year transactions			(1,861	)
Goodwill - ending balance at March 31, 2014		$	361,325

The valuation studies related to the practice acquisitions that occurred in the fourth quarter of 2013 were completed in early 2014, and as a result, the value of contingent consideration liability related to these acquisitions as of the acquisition dates was reduced by $1,861,000, along with a corresponding reduction in our goodwill.

Medical Malpractice Liability Insurance

We record our medical malpractice reserves, on an undiscounted basis, for claims incurred and reported and claims incurred but not reported (IBNR) during the policy period, based on actuarial loss projections using historical loss patterns. For claims incurred and reported, an insurance receivable from our carrier has been recorded pursuant to GAAP. Total accrued medical malpractice reserves and related insurance receivables were as follows (in thousands):

 

		March 31, 2014																December 31, 2013
		Assets				Liabilities												Assets				Liabilities
		Insurance Receivable				Claims Reserve				IBNR Reserve				Total Liabilities				Insurance Receivable				Claims Reserve				IBNR Reserve				Total Liabilities
Current Portion		$	12,076			$	12,076				614				12,690			$	11,653			$	11,653				558				12,211
Long-term Portion			21,341				21,341				24,012				45,353				20,599				20,599				23,445				44,044
Total		$	33,417			$	33,417				24,626				58,043			$	32,252			$	32,252				24,003				56,255

Note 2. Business Acquisitions

For practice acquisitions, we recognize all of the assets acquired, liabilities assumed and any contingent consideration at the acquisition-date fair value and expense all transaction related costs.

During the three months ended March 31, 2014, we completed the acquisition of three hospitalist physician practices. In connection with these acquisitions, we recorded goodwill and other identifiable intangible assets consisting of physician and hospital agreements.

Goodwill represents the potential business synergy from the combined operations of our existing and acquired practices through an expanded national network of providers, improved managed care contracting, improved collections, identification of growth initiatives and cost savings based upon the significant infrastructure we have developed. Amounts recorded as goodwill and identifiable intangible assets with indefinite lives are not amortizable for GAAP financial reporting purpose but are amortized for tax purposes over 15 years.

 

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In addition to the initial consideration paid at the close of each transaction, the asset purchase agreements for the three acquisitions completed during the three months ended March 31, 2014 provide for contingent consideration to be paid, which is generally based upon the achievement of certain operating results of the acquired practices as of certain measurement dates. These additional payments are not contingent upon the future employment of the sellers. The contingent consideration for the three acquisitions completed during the three months ended March 31, 2014 was recorded on a provisional basis pending completion of the valuation studies as of the acquisition dates.

We estimate the fair value of contingent consideration to be paid based on discounted projected earnings of the acquired practices as of certain measurement dates. The discount rate that we use consists of a risk-free U.S. Treasury bond yield plus a Company specific credit spread which we believe is acceptable by willing market participants.

The following table summarizes the total amounts recorded during the three months ended March 31, 2014, related to the acquisition of hospitalist practices (in thousands):

 

Acquired assets – paid and accrued:
Goodwill - 2014 transactions		$	5,799
Other intangible assets			118
Total acquired assets - 2014			5,917
Goodwill - adjustment for prior year transactions			(1,861	)
			4,056
Cash paid for acquisitions:
2014 transactions			(3,025	)
Contingent consideration			(5,715	)
Total cash paid for acquisitions			(8,740	)
Change in fair value of contingent consideration:
Net change in fair value of contingent consideration - recognized			(383	)
Net change in fair value of contingent consideration - paid			(806	)
Net change in fair value of contingent consideration			(1,189	)
Net change in payable for practice acquisitions			(5,873	)
Payable for practice acquisitions, beginning of period			40,719
Payable for practice acquisitions, end of period		$	34,846

Note 3. Fair Value Measurement

Some of our liabilities are measured and recorded at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The established fair value hierarchy distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (Levels 1 and 2) and the reporting entity’s own assumptions about market participant assumptions (Level 3). This hierarchy is used to measure fair value as follows:

 

•

Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities.

 

•

Level 2 inputs include quoted prices for similar assets and liabilities in active markets; quoted prices in markets that are not active; and other inputs that are observable or can be corroborated by observable market data for the asset or liability.

 

•

Level 3 inputs are unobservable inputs for the asset or liability that are supported by little or no market activity.

 

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The following table presents our liabilities measured at fair value on a recurring basis as of March 31, 2014 (in thousands):

 

		Quoted Price In Active Markets for Identical Instruments				Significant Other Observable Inputs				Significant Unobservable Inputs
		(Level 1)				(Level 2)				(Level 3)				Total Balance
Accrued contingent consideration for practice acquisitions (included in payable for practice acquisitions)		$	0			$	0			$	34,846			$	34,846

The following table presents a rollforward of our liabilities measured at fair value on a recurring basis using significant unobservable inputs (level 3) for the three months ended March 31, 2014 (in thousands):

 

		Three Months
		Ended
		March 31, 2014
Accrued contingent consideration for practice acquisitions
Beginning balance		$	40,719
Addition through acquisition transactions			2,892
Adjustment for prior year transactions			(1,861	)
Change in fair value recognized			(383	)
Change in fair value paid			(806	)
Payments			(5,715	)
Ending balance		$	34,846

The fair value of our accrued contingent consideration is determined using widely accepted valuation techniques, which include the income approach for estimating future consideration to be paid based on projected earnings of our acquired practices as of specified measurement dates. The income approach involves the use of a probability-weighted discounted cash flow model based on significant inputs not observable in the market. The significant inputs include discount rates of 2.04% to 2.35%, 100% probability of achieving the estimated projected earnings, and 25% to 90% probability of the acquisition of certain other hospitalist practices.

Because our accrued contingent consideration is generally based on a certain multiple of earnings of the acquired practices during a specified measurement period, a moderate change in such projected earnings may result in a material change to the fair value of such contingent consideration liability with a corresponding adjustment to income from operations. We reassess our projected earnings and the related fair value of our accrued contingent consideration for practice acquisitions on a quarterly basis.

Note 4. Debt

Our secured revolving credit agreement (Credit Facility) provides a revolving line of credit of $125.0 million and contains an “accordion” feature that allows an increase of up to $25.0 million to the Credit Facility with lender approval. The Credit Facility has a maturity date of August 4, 2016 and is available for working capital, practice acquisitions, capital expenditures and general business expenses. As of March 31, 2014, we had borrowings of $85.0 million and letters of credit of $0.3 million outstanding, and $39.7 million available under the Credit Facility.

The revolving line of credit is limited by a formula based on a certain multiple times the trailing twelve months of earnings before interest, taxes, depreciation, amortization and certain non-cash items. Interest rate options for each borrowing under the Credit Facility, to be selected by us at the time of each borrowing, include either LIBOR plus 0.75% to 1.75%, or the lender’s prime rate plus 0% to 0.75%, both based on a leverage ratio. We pay an unused commitment fee equal to 0.25% per annum on the difference between the revolving line capacity and the average balance outstanding during the year. Outstanding amounts advanced to us under the revolving line of credit are repayable on or before the maturity date. The interest rate for our borrowings under the Credit Facility at March 31, 2014 was 1.4375% per annum.

 

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The Credit Facility is guaranteed by our subsidiaries and affiliated Professional Medical Corporations and limited liability companies, and is secured by substantially all of our and our guarantors’ tangible and intangible assets. The Credit Facility includes various customary financial covenants and restrictions, as well as customary remedies for our lenders following an event of default. As of March 31, 2014, we were in compliance with such financial covenants and restrictions.

Note 5. Income Taxes

Following are the income tax provisions and effective tax rates for the three months ended March 31, 2014 and 2013 (dollars in thousands):

 

		Three Months Ended March 31,
		2014				2013
Income tax provision		$	6,377			$	6,521
Effective tax rate			38.3	%			38.3	%

The effective tax rates differ from the statutory U.S. federal income tax rate of 35.0% due primarily to state income taxes.

Our accounting policy is to include interest and penalties related to income tax liabilities in income tax expense. As of March 31, 2014, we did not have any estimated interest and penalties related to uncertain tax positions.

The tax years 2009 to 2012 remain open to examination by the major taxing jurisdictions to which we are subject. The statute of limitations for tax years 1999 to 2008 has expired, except that the tax year 1999 is subject to adjustment of net operating losses by the Internal Revenue Service. We are subject to taxation in the United States and various state jurisdictions. The Company is currently subject to one state tax examination for the tax year of 2009. The outcome of the examination cannot be predicted with certainty; however, we believe that the ultimate resolution will not have a material effect on our consolidated financial position, results of operations, or cash flows.

We make our best estimate of the tax rate expected to be applicable for the full fiscal year. The rate so determined is used to compute our income tax expense for an interim period.

Note 6. Stock-Based Compensation

At March 31, 2014, we had a stock-based employee compensation program, for which we had reserved a total of 4,943,170 common shares for issuance. Under our 2012 Equity Participation Plan (Equity Plan), which was approved by our stockholders on June 7, 2012, a total of 1,422,130 shares of our common stock were available for issuance and no new awards will be issued under any previous equity participation plans. As of March 31, 2014, there were 894,596 shares of our common stock available for future grants under our Equity Plan, which included the canceled and forfeited shares issued under previous equity participation plans.

All option awards granted during the three months ended March 31, 2014 were issued with exercise prices equal to the closing price of our common stock on the NASDAQ Global Select Market on the dates of the grant. The options under the Equity Plan generally vest over a four-year period from date of grant, and options terminate on the 10th anniversary of the agreement date for all grants issued before January 1, 2013 and on the 7th anniversary of the agreement date for all grants issued after December 31, 2012. Restricted stock awards generally vest over a four-year period from date of the award. Performance stock awards generally vest over two to three years from date of the award based on the expected level of achievement of certain operational goals that will be obtained and adjusted as appropriate to reflect actual shares issued.

Stock-based compensation expense is recognized over the period when the options, restricted stock awards, performance stock awards and our employee stock purchase plan shares vest, which is included in total general and administrative expenses as follows (in thousands):

 

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		Three months ended March 31,
		2014				2013
Total stock-based compensation expense		$	1,965			$	1,735
Tax benefit from stock-based compensation expense			(753	)			(665	)
Total stock-based compensation expense, net of tax		$	1,212			$	1,070

As of March 31, 2014, total unrecognized compensation costs related to non-vested stock-based compensation arrangements granted under our Equity Plan and previous equity participation plans and the weighted-average period of years expected to recognize those costs are as follows (dollars in thousands):

 

		Total Unrecognized Compensation Cost				Weighted -average Remaining Recognition Period
						(Years)
Stock option		$	3,790				1.77
Restricted/Performance stock		$	9,757				2.46

The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model based on the following weighted-average assumptions:

 

		Three months ended March 31,
		2014				2013
Risk-free interest rate			1.03	%			0.66	%
Expected volatility			37.05	%			40.09	%
Expected option life (in years)			4.39				4.42
Expected dividend yield			0.00	%			0.00	%

The risk-free interest rate is based on the implied yield currently available on U.S. Treasury zero coupon issues. The expected volatility is largely based on the volatility of our stock price. The expected option life of each award granted was calculated using the “simplified method” in accordance with GAAP.

The grant date fair value of each restricted stock award or performance stock award is based on the closing stock price on the grant date of the award as reported by NASDAQ Global Select Market.

 

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The following table summarizes the stock option activities in our Equity Plan during the three months ended March 31, 2014.

 

		Shares				Weighted- Average Exercise Price				Weighted- Average Remaining Contractual Term				Aggregate Intrinsic Value				Weighted- Average Fair Value
										(Years)				(in 000s)
Options outstanding as of December 31, 2013			1,380,425			$	30.12											$	12.56
Changes during period:
Granted			39,138				55.12												17.49
Exercised			(34,129	)			29.81												12.88
Cancelled			(9,638	)			43.34												18.11
Options outstanding as of March 31, 2014			1,375,796			$	30.74				5.68			$	25,475			$	12.66
Options exercisable as of March 31, 2014			1,139,101			$	28.24				5.35			$	23,781			$	11.80

The following table summarizes the restricted stock award and performance stock award activities in our Equity Plan during the three months ended March 31, 2014.

 

		Shares				Weighted- Average Remaining Contractual Term				Aggregate Intrinsic Value				Weighted- Average Fair Value
						(Years)				(in 000s)
Restricted/performance stock awards outstanding as of December 31, 2013			212,413											$	40.29
Changes during period:
Granted			111,360												52.50
Released			(53,080	)											38.69
Forfeited			(5,402	)											40.97
Restricted/performance stock awards outstanding as of March 31, 2014			265,291				1.88			$	12,184			$	45.72

Note 7. Earnings Per Share

Basic net income per share is calculated by dividing net income for the period by the weighted-average number of common shares outstanding during the period. Diluted net income per share is calculated by dividing net income for the period by the weighted average number of shares outstanding during the period plus the dilutive effect of our outstanding stock awards and shares issuable under our employee stock purchase plan using the treasury stock method.

 

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The calculations of basic and diluted net income per share for the three months ended March 31, 2014 and 2013 are as follows (dollars in thousands, except for per share data):

 

		Three Months Ended March 31,
		2014				2013
Basic:
Net income attributable to common stockholders		$	10,274			$	10,505
Weighted average number of common shares outstanding			17,054,598				16,703,369
Basic net income per share attributable to common stockholders		$	0.60			$	0.63
Diluted:
Net income attributable to common stockholders		$	10,274			$	10,505
Weighted average number of common shares outstanding			17,054,598				16,703,369
Weighted average number of dilutive common share equivalents from options to purchase common stock			512,985				422,571
Common shares and common share equivalents			17,567,583				17,125,940
Diluted net income per share		$	0.58			$	0.61

Outstanding stock options that have an above-market exercise price or that are anti-dilutive under the treasury stock method, are excluded from our diluted computation. As of March 31, 2014, the total number of excluded stock options was 41,254.

Note 8. Commitments and Contingencies

Legal

In the ordinary course of our business, we become involved in pending and threatened legal actions and proceedings, most of which involve claims of medical malpractice related to medical services provided by our affiliated hospitalists. We may also become subject to other lawsuits, which could involve significant claims and/or significant defense costs.

We believe, based upon our review of pending actions and proceedings, that the outcome of such legal actions and proceedings will not have a material adverse effect on our business, financial condition, results of operations, or cash flows. The outcome of such actions and proceedings, however, cannot be predicted with certainty and an unfavorable resolution of one or more of them could have a material adverse effect on our business, financial condition, results of operations, or cash flows in a future period.

Government Inquiry

On June 7, 2010, we received a civil investigative demand (CID) issued by the Department of Justice (DOJ), U.S. Attorney’s Office for the Northern District of Illinois. The CID requested information concerning claims that we have submitted to Medicare and Medicaid. The CID covered the period from January 1, 2003, through June 4, 2010, and requested production of a range of documents relating to our Medicare and Medicaid participation, physician arrangements, operations, billings and compliance programs. We believe we have a strong compliance focus, and that we operate with appropriate billing policies, procedures, provider training, and compliance programs and controls. We produced responsive documents and have been in contact with representatives of the DOJ who informed us that the inquiry related to a qui tam whistleblower action filed under court seal in the U.S. District Court for the Northern District of Illinois (Chicago). We also were informed that several state attorneys general were examining our Medicaid claims in coordination with the DOJ.

On December 6, 2013, the U.S. District Court partially lifted the seal on the civil False Claims Act case related to this investigation. The unsealed portions of the Court docket include the whistleblower’s Complaint, which contains allegations of improper billing to Medicare and Medicaid, a Notice of Election to Intervene filed by the federal government and a Notice of Election to Decline Intervention filed by the State of Illinois and 12 other states that participated in the investigation. We have cooperated with the government’s investigation and continue to have discussions with the federal government regarding its investigation and the related case.

 

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It is not possible to predict when this matter may be resolved or what impact, if any, the outcome of this matter might have on our consolidated financial position, results of operations, or cash flows.

 

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following management’s discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and the notes thereto included in this Quarterly Report. In addition, reference is made to our audited consolidated financial statements and notes thereto and related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our most recent Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission (SEC) on February 26, 2014.

The following discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding future events and the future results of IPC that are based on management’s current expectations, estimates, projections, and assumptions about our business. Words such as “may,” “will,” “could,” “should,” “target,” “potential,” “project,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “sees,” “estimates” and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements due to numerous factors, including, but not limited to, those discussed in our most recent Annual Report on Form 10-K, including the section entitled “Risk Factors,” as well as those discussed from time to time in the Company’s other SEC filings and reports. In addition, such statements could be affected by general industry and market conditions. Such forward-looking statements speak only as of the date of this Quarterly Report or, in the case of any document incorporated by reference, the date of that document, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this Report, or for changes made to this document by wire services or internet service providers. If we update or correct one or more forward-looking statements, investors and others should not conclude that we will make additional updates or corrections with respect to other forward-looking statements.

Company Overview and Recent Developments

We are a leading provider of hospitalist services in the United States. Hospitalist medicine is organized around inpatient care and is primarily focused on providing, managing and coordinating the care of hospitalized patients. Hospitalists practice in inpatient facilities, including acute care hospitals, long-term care facilities, specialty hospitals, psychiatric facilities and post-acute care facilities. We believe we are the largest dedicated hospitalist company in the United States based on revenues, patient encounters and number of affiliated hospitalists. Our early entry into the emerging hospitalist industry has permitted us to establish a reputation and leadership position that we believe is closely identified with hospitalist medicine.

Business Acquisitions

During the three months ended March 31, 2014, we acquired three hospitalist physician practices for a total estimated purchase price of $5,917,000. In connection with these acquisitions, we recorded goodwill of $5,799,000 and identifiable intangible assets of $118,000. Total transaction costs of $41,000 for our acquisition activities during the three months ended March 31, 2014 were expensed as incurred.

In connection with these three acquisitions, we recorded liabilities of $2,892,000 representing the fair value of future contingent consideration to be paid based upon the estimated achievement of certain operating results of the acquired practices as of certain measurement dates. The contingent consideration for the three acquisitions completed during the three months ended March 31, 2014 was recorded on a provisional basis pending completion of the valuation studies as of the acquisition dates. The finalized fair value of contingent considerations is re-evaluated on a quarterly basis based on changes in our estimate of the operating results of future payments. The changes, if any, in fair value are recognized in our results of operations.

Rate Changes by Government Sponsored Programs

The Medicare program reimburses for our services based upon the rates set forth in the annually updated Medicare Physician Fee Schedule, which relies, in part, on a target-setting formula system called the Sustainable Growth Rate (SGR). Many private payors use the Medicare Physician Fee Schedule to determine their own reimbursement rates. On December 10, 2013, the Centers for Medicare and Medicaid Services (CMS) published its final Medicare Physician Fee Schedule for calendar year 2014. Effective January 1, 2014, the Medicare update resulted in a slight increase in our net patient revenue per encounter.

 

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The annual Medicare Physician Fee Schedule update, based on the SGR, is adjusted to reflect the comparison of actual expenditures to target expenditures. Because one of the factors for calculating the SGR is linked to the growth in the U.S gross domestic product (GDP), the SGR formula may result in a negative payment update if growth in Medicare beneficiaries’ use of services exceeds GDP growth, a situation which has occurred every year since 2002 and the reoccurrence of which we cannot predict.

Congress has repeatedly intervened to delay the implementation of the negative SGR payment update. For example, with the enactment of the Bipartisan Budget Act of 2013 on December 26, 2013, the 20.1 percent cut that was to occur was replaced with a 0.5 percent increase for services provided through March 31, 2014. More recently, on April 1, 2014, with the enactment of the Protecting Access to Medicare Act of 2014, Congress prevented the 24 percent cut that was to occur by continuing the previously implemented 0.5 percent payment increase through December 31, 2014 and maintaining a zero percent payment update from January 1, 2015 through March 31, 2015. There is, however, no guarantee that Congress will continue to postpone implementation of the negative SGR payment in the future. Moreover, the existing methodology may result in significant yearly fluctuations in the Medicare Physician Fee Schedule amounts, which may be unrelated to changes in the actual costs of providing physician services. Unless Congress enacts a permanent change in the SGR methodology, the uncertainty regarding reimbursement rates and fluctuation will continue to exist.

Another provision that affects physician payments is an adjustment under the Medicare statute to reflect the geographic variation in the cost of delivering physician services, by comparing those costs to the national average. This concerns the “work” component of the Geographic Practice Cost Indices (GPCI). If Congress does not block this adjustment, payments would be decreased to any geographic area with an index of less than 1.0. Although Congress has delayed the GPCI payment adjustment several times, most recently in the Protecting Access to Medicare Act of 2014, which blocks the GPCI payment adjustment until April 1, 2015, there is no guarantee that Congress will block the adjustment in the future, which could result in a decrease in the payments we receive for physician services.

The Budget Control Act of 2011 (BCA) established a Joint Select Committee on Deficit Reduction, which was tasked with achieving a reduction in the federal debt level of at least $1.2 trillion. That Committee did not draft a proposal by the BCA’s deadline. As a result, automatic cuts (sequestration) in various federal programs were scheduled to take place, beginning in January 2013. The American Taxpayer Relief Act of 2012 delayed implementation of the BCA’s automatic cuts until March 1, 2013, but, on March 1, 2013, President Obama signed a sequestration order that triggered the BCA’s automatic cuts, including a two percent cut in Medicare payments to providers that was implemented effective April 1, 2013 through 2021. The Bipartisan Budget Act of 2013 extended sequestration cuts for Medicare through fiscal year 2023, and a bill signed by the President on February 15, 2014 further extended these cuts for an additional year, through fiscal year 2024. The Protecting Access to Medicare Act of 2014 realigned the fiscal year 2024 Medicare sequestration amounts so that there will be a 4.0 percent sequester for the first six months and a zero percent sequester for the second six months, instead of a 2.0 percent sequester for the full twelve-month period. Thus far, this 2.0 percent net reduction in Medicare reimbursement rates for the codes applicable to the services performed by our affiliated hospitalists reduced our net patient revenue per encounter by approximately 1.0 percent.

Several rules recently released by CMS are also likely to have implications on provider reimbursement. For example, on August 19, 2013, CMS published a final rule establishing that Medicare Part A payment for hospital inpatient services provided is generally inappropriate when a patient enters a hospital for a surgical procedure that is not specified by Medicare as inpatient only and the physician expects the patient to stay in the hospital for less than two midnights. In addition, on December 10, 2013, in its final Medicare Physician Fee Schedule for calendar year 2014, CMS finalized its proposal to, among other things, increase the number of quality measures that eligible professionals must report for claims- and registry-based reporting to receive the incentive payments and adjustments available under the Physician Quality Reporting System (PQRS). The impact of such modified measures on PQRS-based payment adjustments for hospitalists cannot be determined at this time.

In addition to these regulatory changes affecting government reimbursement for health care services, the instability of the federal budget may lead to legislation that could result in further cuts in Medicare and Medicaid payments to providers. From October 1, 2013 through October 16, 2013, the U.S. federal government ceased the majority of its operations after Congress failed to enact legislation appropriating funds for fiscal year 2014. On October 17, 2013, President Obama signed into law the Continuing Appropriations Act of 2014, which included a continuing resolution to fund the government until January 15, 2014 and suspended the statutory debt ceiling until February 7, 2014. On January 17, 2014, President Obama signed into law a $1.1 trillion spending bill that funds the government through September 30, 2014. However, this new law is a temporary measure that does not resolve the debt-limit issue, and the Medicare program is frequently mentioned as a target for spending cuts.

 

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Healthcare Reform

In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, ACA) was enacted. The ACA includes a number of provisions that may affect our Company, although the impact of many of the changes will be unknown until they are fully implemented, which in some cases will not occur for a couple of years. The impact of some of these provisions have already proven to be positive, such as the Primary Care Incentive Payment Program (PCIP), which makes a ten percent Medicare bonus payment for primary care services (including outpatient and nursing home visits) furnished on or after January 1, 2011 and before January 1, 2016 to primary care practitioners for whom primary care services represented a minimum of 60 percent of Medicare allowed charges in a prior period, and the increase in Medicaid rates up to the level of Medicare rates (Medicaid parity) in 2013 and 2014 for primary care services. Another positive provision is the expansion in the number of individuals with health insurance starting in January 2014.

The impact of other provisions is unknown at this time, such as the establishment of an Independent Payment Advisory Board—a fifteen-member board which is tasked with making proposals to Congress and the U.S. Department of Health and Human Services (HHS), as early as 2014, to reduce the per capita rate of growth in Medicare spending in years when that growth exceeds established targets. HHS generally will be required to implement these proposals unless Congress enacts superseding legislation. Fraud and abuse penalty increases and the expansion in the scope of the reach of the federal False Claims Act and other government enforcement tools may adversely impact entities in the healthcare industry, including our Company.

The impact of certain provisions will depend upon the ultimate method of implementation. For example, the ACA requires HHS to develop a budget neutral, value-based payment modifier that provides for differential payment under the Medicare Physician Fee Schedule for physicians or groups of physicians that is linked to quality of care furnished compared to cost. CMS has continued to implement the modifier through the Medicare Physician Fee Schedule rulemaking for 2014, by, among other things, finalizing its proposal to apply the value-based payment modifier to groups of physicians with 10 or more eligible professionals in calendar year 2016 and to expand the modifier to all physicians in calendar year 2017. The impact of this payment modifier cannot be determined at this time.

In addition, certain provisions of the ACA authorize voluntary demonstration projects, which include the development of bundling payments for acute, inpatient hospital services, physician services, and post-acute services for episodes of hospital care. The Medicare Bundled Payments for Care Improvement Initiative is currently underway and assesses four models of care linking payments for multiple services provided to beneficiaries during an episode of care. The impact of these projects on our Company cannot be determined at this time.

Seasonality and Quarterly Fluctuations

We have historically experienced and expect to continue to experience quarterly fluctuations in net revenue and income from operations. Absent the impact and timing of acquisitions, our net revenue has historically been higher in the first and fourth quarters of the year primarily due to the following factors:

 

•

the number of physicians we have on staff during the quarter, which may fluctuate based upon the timing of hires due to the end of the academic year for graduating resident physicians, the schedule of the Internal Medicine Board exams and terminations in our existing practices; and

 

•

fluctuations in patient encounters, which are impacted by hospital census, which can be volatile, and physician productivity and often reflect seasonality due to the higher occurrence of illnesses such as flu and pneumonia in patient populations in the first quarter.

We have significant fixed operating costs, including physician practice salaries and benefits and, as a result, are highly dependent on patient encounters and the productivity of our affiliated hospitalists to sustain profitability. Additionally, quarterly results may be affected by the timing of practice acquisitions and the hiring and termination of our affiliated hospitalists.

 

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Results of Operations and Operating Data

The following table sets forth operating data and selected consolidated statement of income information stated as a percentage of net revenue:

 

		Three Months Ended March 31,
		2014				2013
Operating data – patient encounters			1,764,000				1,576,000
Net revenue			100.0	%			100.0	%
Operating expenses:
Cost of services—physician practice salaries, benefits and other			73.7	%			73.2	%
General and administrative			16.0	%			15.6	%
Net change in fair value of contingent consideration			(0.2	)%			(0.7	)%
Depreciation and amortization			0.7	%			0.7	%
Total operating expenses			90.2	%			88.8	%
Income from operations			9.8	%			11.2	%
Investment income			—	%			—	%
Interest expense			(0.2	)%			(0.1	)%
Income before income taxes			9.6	%			11.1	%
Income tax provision			3.7	%			4.2	%
Net income			5.9	%			6.9	%

Three months ended March 31, 2014 compared with three months ended March 31, 2013

Our patient encounters for the three months ended March 31, 2014 increased by 188,000 encounters or 11.9% to 1,764,000, compared with 1,576,000 for the same period in the prior year. Net revenue for the three months ended March 31, 2014 was $172.7 million, an increase of $19.6 million, or 12.8%, from $153.1 million for the same period in 2013. Of this $19.6 million increase, 63% was attributable to same-market area growth, including tuck-in acquisitions and new hires, and 37% was attributable to revenue generated from operations in new markets. Same-market revenue increased 8.1%, same-market encounters increased 6.5% and same-market patient revenue per encounter decreased 0.8%. The 0.8% decrease was largely due to the automatic cut in Medicare payments triggered by sequestration effective April 1, 2013. The remaining increase in same-market revenue was attributable to an increase in hospital stipends and medical directorship revenues. Same-market areas are those geographic areas in which we have had operations for the entire current period and the entire comparable prior period. Because in-market area acquisitions are often small practice groups which become subsumed within our existing practice groups and are managed by our existing regional management staff, we consider these as part of our same-market area growth.

Physician practice salaries, benefits and other expenses increased by $15.2 million or 13.6% to $127.3 million, or 73.7% of net revenue, for the three months ended March 31, 2014, as compared with $112.1 million, or 73.2% of net revenue, for the same period in the prior year. As a percentage of revenue, physician costs increased by 50 basis points compared to the prior year quarter. This increase is largely the result of the ongoing integration of 2013 acquisitions, the exit from certain contracted facilities and the impact of certain underperforming practices. The dollar increase in practice costs is largely related to the increase in the number of hospitalists added through hiring and acquisitions during the period. Same-market area physician costs increased a total of $10.1 million, which was primarily the result of increased costs related to our new hires or acquired physician practices. In addition, $5.1 million of the $15.2 million overall cost increase is attributable to physician costs associated with our entrance into new markets.

General and administrative expenses include all salaries, benefits and operating expenses not specifically related to the day-to-day operations of our physician group practices, including billing and collections functions, our regional and market-area administrative offices and our corporate management and overhead. General and administrative expenses increased $3.8 million, or 15.9%, to $27.6 million, or 16.0% of net revenue, for the three months ended March 31, 2014, as compared with $23.8 million, or 15.6% of net revenue, for the same period in the prior year. The increase in expense was primarily the result of increased costs to support the continuing growth of our operations and acquisitions, including new regional office costs,

 

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incremental costs of supporting our post-acute business, expansion of our recruiting resources and other expenses. Excluding stock based compensation, general and administrative expenses were 14.8 % and 14.4% of net revenue for the three months ended March 31, 2014 and 2013, respectively.

The net change in fair value of contingent consideration (“net change in fair value”) for acquisitions was a reduction to expense of $0.4 million and $1.1 million for the three months ended March 31, 2014 and 2013, respectively. Because the fair value of contingent consideration is generally based on a certain multiple of operating results of the acquired practices during a measurement period, a moderate change in projected operating results can result in a large change to the fair value of such contingent consideration.

Income from operations decreased $0.2 million, or 1.0%, to $17.0 million from $17.1 million for the same period in 2013. Our operating margin was 9.8% and 11.2% for the three months ended March 31, 2014 and 2013, respectively. Excluding the net change in fair value, income from operations for the three months ended March 31, 2014 increased 3.3% to $16.6 million, or an operating margin of 9.6%, compared with income from operations of $16.0 million, or an operating margin of 10.5% for the same period in the prior year.

Our effective tax rate for the three months ended March 31, 2014 and 2013 was 38.3%. The effective tax rate differs from the statutory U.S. federal rate of 35.0% due primarily to state income taxes.

Net income for the three months ended March 31, 2014 decreased 2.2% to $10.3 million from $10.5 million for the same period in the prior year, and our net income margin was 5.9% for the three months ended March 31, 2014, compared with 6.9% for the same period in the prior year. Diluted earnings per share for the three months ended March 31, 2014 was $0.58, compared with $0.61 for the same period in the prior year. Excluding the net change in fair value, net income for the three months ended March 31, 2014 increased 2.1% to $10.0 million, or $0.57 diluted earnings per share, compared with net income of $9.8 million, or $0.57 diluted earnings per share for the same period in the prior year.

Liquidity and Capital Resources

As of March 31, 2014, we had approximately $63.0 million in liquidity, which is composed of $23.3 million in cash and cash equivalents and an available line of credit of $39.7 million. We had borrowings of $85.0 million from our revolving line of credit outstanding at March 31, 2014, which was used to fund our practice acquisitions.

Net cash provided by operating activities was $10.2 million and $13.9 million for the three months ended March 31, 2014 and 2013, respectively. The changes in working capital during the three months ended March 31, 2014 was largely related to an increase in accounts receivable of $14.1 million, a decrease in prepaid expenses and other current assets of $4.3 million, an increase in accounts payable and accrued liabilities of $4.3 million and an increase in accrued compensation of $2.8 million primarily related to timing of payrolls and physician bonus payments.

Our days sales outstanding (DSO), which we use to measure the effectiveness of our collections, was 58 DSO as of March 31, 2014 as compared with 56 DSO as of December 31, 2013. We calculate our DSO using a three-month rolling average of net revenues. The increase in DSO is primarily related to delayed Medicaid parity payments and a buildup of receivables from acquired practices. Medicaid parity represents an increase in Medicaid payments up to Medicare reimbursement levels for 2013 and 2014 in accordance with the Patient Protection and Affordable Care Act of 2010, as amended.

Net cash used in investing activities was $9.5 million for the three months ended March 31, 2014, compared with $10.8 million for the same period in 2013. Cash of $8.7 million was used in the three months ended March 31, 2014 for physician practice acquisitions and contingent consideration payments on prior acquisitions, compared with $9.7 million in the same period in 2013. The remainder of cash used in investing activities was for purchases of computer hardware and software, and office furnishings.

For the three months ended March 31, 2014, net cash used in financing activities was $2.4 million, compared with net cash provided by financing activities of $1.7 million for the same period in 2013. In January 2014, we repaid $5.0 million of our outstanding revolving line of credit with cash generated from our operating activities.

Credit Facility and Liquidity

Our secured revolving credit agreement (Credit Facility) provides a revolving line of credit of $125.0 million and contains an “accordion” feature that allows an increase of up to $25.0 million to the Credit Facility with lender approval. The Credit Facility has a maturity date of August 4, 2016 and is available for working capital, practice acquisitions, capital expenditures and general business expenses. As of March 31, 2014, we had borrowings of $85.0 million and letters of credit of $0.3 million outstanding, and $39.7 million available under the Credit Facility.

 

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The revolving line of credit is limited by a formula based on a certain multiple times the trailing twelve months of earnings before interest, taxes, depreciation, amortization and certain non-cash items. Interest rate options for each borrowing under the Credit Facility, to be selected by us at the time of each borrowing, include either LIBOR plus 0.75% to 1.75%, or the lender’s prime rate plus 0% to 0.75%, both based on a leverage ratio. We pay an unused commitment fee equal to 0.25% per annum on the difference between the revolving line capacity and the average balance outstanding during the year. Outstanding amounts advanced to us under the revolving line of credit are repayable on or before the maturity date. The interest rate for our borrowings under the Credit Facility at March 31, 2014 was 1.4375% per annum.

The Credit Facility is guaranteed by our subsidiaries and affiliated Professional Medical Corporations and limited liability companies, and is secured by substantially all of our and our guarantors’ tangible and intangible assets. The Credit Facility includes various customary financial covenants and restrictions, as well as customary remedies for our lenders following an event of default. As of March 31, 2014, we were in compliance with such financial covenants and restrictions.

We anticipate that funds generated from operations, together with our current cash on hand and funds available under our Credit Facility will be sufficient to finance our working capital requirements and fund anticipated acquisitions, contingent acquisition consideration and capital expenditures.

Off Balance Sheet Arrangements

As of March 31, 2014, we had no off-balance sheet arrangements.

 

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ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to changes in interest rate as a result of our Credit Facility. At our option, the interest rate on outstanding borrowings under our Credit Facility is either LIBOR plus 0.75% to 1.75% or the lender’s prime rate plus 0% to 0.75%, both based on a leverage ratio. The lender’s prime rate is a daily floating rate most recently announced by our lender, whether or not such announced rate is the lowest rate available from our lender. LIBOR is either the 30, 60, 90 or 180 day LIBOR. Historically, we have chosen not to use interest rate derivatives to manage our exposure to changes in interest rates. We had long-term borrowings of $85.0 million bearing an annual interest of 1.4375% under our Credit Facility at March 31, 2014. A 1.0% change in interest rate on our borrowings of $85.0 million would result in an impact to income before income taxes of approximately $850,000 on an annual basis.

Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities with shorter maturities may produce less income if interest rates fall. As of March 31, 2014, all of our short-term investments were invested in money market funds with less than 90-day maturities and are classified as cash equivalents.

 

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain controls and procedures designed to ensure that we are able to collect the information we are required to disclose in the reports we file with the Securities and Exchange Commission (SEC), and to process, summarize and disclose this information within the time periods specified in the rules of the SEC. Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has conducted an evaluation of the design and operation of our “disclosure controls and procedures” as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting during the three months ended March 31, 2014 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

 

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PART II – OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

Legal

In the ordinary course of our business, we become involved in pending and threatened legal actions and proceedings, most of which involve claims of medical malpractice related to medical services provided by our affiliated hospitalists. We may also become subject to other lawsuits, which could involve significant claims and/or significant defense costs.

We believe, based upon our review of pending actions and proceedings that the outcome of such legal actions and proceedings will not have a material adverse effect on our business, financial condition, results of operations, or cash flows. The outcome of such actions and proceedings, however, cannot be predicted with certainty and an unfavorable resolution of one or more of them could have a material adverse effect on our business, financial condition, results of operations, or cash flows in a future period.

Government Inquiry

On June 7, 2010, we received a civil investigative demand (CID) issued by the Department of Justice (DOJ), U.S. Attorney’s Office for the Northern District of Illinois. See the discussion of the CID in Note 8 to the accompanying financial statements.

ITEMS 1A, 2, 3, 4 AND 5 ARE NOT APPLICABLE

 

ITEM 6.

EXHIBITS

(a) Exhibits

Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index on page 24 of this report.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on the 25^th day of April, 2014.

 

 

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EXHIBIT INDEX

 

Exhibit Number		Description of Document
31.1		Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes Oxley Act.
31.2		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes Oxley Act.
32.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act.
32.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act.
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

 

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