Addus HomeCare Corporation

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ADUS

US0067391062

Healthcare Facilities & Services

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ADDUS HOMECARE : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

August 10, 2020 at 04:12 pm EDT

You should read the following discussion together with our Consolidated
Financial Statements and the related notes included elsewhere in this Annual
Report on Form 10-K. This discussion contains forward-looking statements about
our business and operations. Our actual results may differ materially from those
we currently anticipate as a result of the factors we describe under "Risk
Factors" and elsewhere in this Annual Report on Form 10-K and other risks as
well as other factors that are not currently known to us, that we currently
consider immaterial or that are not specific to us, such as general economic
conditions.

Overview

The consolidated financial statements for the years ended December 31, 2018,
December 31, 2017 and each of the interim periods of 2018 and the first three
quarters of 2019 have been revised to correct prior period errors as discussed
in Note 2, "Revision of Previously Issued Financial Statements" and Note 17,
"Unaudited Summarized Quarterly Financial Information" to our consolidated
financial statements included in this Annual Report on Form 10-K. Accordingly,
this MD&A reflects the impact of those revisions.

We are a home care services provider operating in three segments: personal care,
hospice and home health. Our services are principally provided in-home under
agreements with federal, state and local government agencies, managed care
organizations, commercial insurers and private individuals. Our consumers are
predominantly "dual eligible," meaning they are eligible to receive both
Medicare and Medicaid benefits. Managed care revenues accounted for 37.8%, 33.9%
and 33.1% of our revenue during the years ended December 31, 2019, 2018 and
2017, respectively.

A summary of our financial results for 2019, 2018 and 2017 is provided in the
table below.



                                                   For the Years Ended December 31,
                                                  2019           2018 (1)      2017 (1)
                                                        (Amounts in Thousands)

Net service revenues - continuing operations $ 648,791 $ 516,647

    $ 425,994
Net income from continuing operations               25,811          16,307

11,806


(Loss) earnings from discontinued operations          (574 )           126           147
Net income                                     $    25,237       $  16,433     $  11,953
Total assets                                   $   636,748       $ 348,094     $ 265,837

(1) Net service revenues and net income from continuing operations, net income

and total assets have been updated to reflect the immaterial error described

in Note 2 to the Notes to Consolidated Financial Statements.




As of December 31, 2019, we provided our services in 26 states through
approximately 198 offices. Our payor clients include federal, state and local
governmental agencies, managed care organizations, commercial insurers and
private individuals. For the years ended December 31, 2019, 2018 and 2017, we
served approximately 61,000, 57,000 and 51,000 discrete individuals,
respectively. Our personal care segment also includes staffing services, with
clients including assisted living facilities, nursing homes and hospice
facilities.

COVID-19 Pandemic



On January 31, 2020, the HHS Secretary declared a national public health
emergency due to a novel coronavirus. In March 2020, the World Health
Organization declared the outbreak of COVID-19, the disease caused by this novel
coronavirus, a pandemic. This disease continues to spread throughout the United
States and other parts of the world. It is impossible to predict the effect and
ultimate impact of the COVID-19 pandemic as the situation is rapidly evolving.
The spread of COVID-19 has caused many states and cities to declare states of
emergency or disaster proclamations, including the state of Texas and the city
of Frisco, where we are headquartered. State and local governments, together
with public health officials, have recommended and mandated precautions to
mitigate the spread of the virus, including the closure of public facilities and
parks, schools, restaurants, many businesses and other locations of public
assembly. As a result, COVID-19 is significantly affecting overall economic
conditions in the United States. Although many of the restrictions have eased
across the country, some areas are re-imposing closures and other restrictions
as a result of increasing rates of COVID-19 infection. There are no reliable
estimates of how long the pandemic will last, how many people are likely to be
affected by it or the duration or types of restrictions that will be imposed.
For that reason, we are unable to predict the long-term impact of the pandemic
on our business at this time.

For the three and six months ended June 30, 2020, COVID-19 related costs were
approximately $2.0 million and $2.3 million, respectively, which were mostly
offset by temporary rate increases from certain payors in our personal care
segment of $1.7 million during the three and six months ended June 30, 2020. As
of June 30, 2020, $1.6 million of payments received from payors for COVID-19
reimbursements have been recorded as deferred revenue and will be recognized as
we incur related expenses on behalf of the payor. Two of our primary markets,
New York and Illinois, have been significantly affected by the pandemic, with
high numbers of cases reported. However, relevant authorities have universally
designated our services as "essential services," exempting our

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services and service providers from many of the restrictions described above. In
addition, the impact of the restrictions on the Company's operations for our
consumer population has been minimal. For example, in our personal care services
segment, we provide non-medical assistance with activities of daily living,
primarily to persons who are at increased risk of hospitalization or
institutionalization, such as the elderly, chronically ill or disabled. Most of
these consumers are largely confined to their homes, and a significant number of
our caregivers provide services to only one consumer, often a family member.
Because our top priority is to protect our consumers and their families, and our
caregivers and their families, we have implemented several new procedures to
further reduce the risk of COVID-19 transmission, including a new screening
process for both the caregiver and the consumer and the expansion of the use of
PPE from our hospice and home health segments to also include our personal care
segment. We are not able to reasonably predict the total amount of costs we will
incur related to the COVID-19 pandemic, and such costs could be substantial.
According to the Centers for Disease Control and Prevention, older adults and
people with certain underlying medical conditions are at a higher risk for
serious illness from COVID-19.

Prior to the widespread impacts of COVID-19, the primary limitation on our
growth had been the difficulty to attract and retain sufficient caregivers in an
environment of very low unemployment rates. With the widespread adverse impacts
of the COVID-19 pandemic on the hospitality and other labor-intensive
industries, however, we have had, and believe we will continue to have,
opportunities to recruit new caregivers. Further, CMS and many states (including
New York and Illinois) have granted temporary blanket waivers of certain
onboarding requirements for new caregivers, significantly shortening the
onboarding process.

The COVID-19 pandemic has had a limited impact on our reimbursements. Although
we experienced some consumers suspending their personal care services due to
health concerns, many of these consumers resumed our services within weeks. This
reduction was partially offset by an increase in demand for our services by
patients recovering from COVID-19 who have been released from the hospital but
are still suffering lingering effects of the virus.

The economic slowdown caused by the COVID-19 pandemic poses significant risks to
states' budgets for the 2021 fiscal year, which began July 1 in most states.
Depending on the severity and length of a downturn, sales tax collections and
income tax withholdings could continue to be depressed in fiscal 2021 and,
potentially, future fiscal years. States could face significant fiscal
challenges and may have no choice but to revise their revenue forecasts and
adjust their budgets for fiscal 2021 and, potentially, future fiscal years,
accordingly. Indeed, Illinois, New York and New Mexico, our top three markets,
have revised revenue estimates down for the 2021 fiscal year. In New York, which
started its fiscal year April 1, the state comptroller recently estimated that
the state would collect at least $10 billion less than originally forecasted,
the first year-to-year cut since 2011. The current New York fiscal plan
authorizes the state of New York to issue up to $8 billion in short-term bonds
to provide funds in case of reduced revenues during the fiscal year, tentatively
scheduled for October 2020, December 2020 and March 2021. It also allows two
state authorities to provide the state with a $3 billion line of credit in the
new fiscal year. Congress could provide additional relief with additional
stimulus and relief legislation, including extension of unemployment benefits
and relief for states. We cannot determine the impact that COVID-19 may have on
states budgets for 2021 or beyond, however, such impacts could have a material
adverse effect on our financial condition, results of operations and cash flows.

At December 31, 2019, we had $111.7 million of cash on hand and $191.4 million
of available, unused committed capacity under our credit facility. Our credit
facility requires us to maintain a total net leverage ratio not exceeding
3.75:1.00. As of December 31, 2019, our total net leverage ratio was zero.
Further, we were unable to timely file this Annual Report on Form 10-K, which
would have included our audited financial statements for the year ended December
31, 2019. The Company is required to deliver annual audited financial statements
under the affirmative covenants of its Credit Agreement. The Company obtained
consent from the Required Lenders (as defined in the Credit Agreement) to extend
the timeline of the audited financials for the year ended December 31, 2019 to
not later than October 31, 2020. Although we believe our liquidity position
remains strong, we can provide no assurance that we will remain in compliance
with the covenants in our Credit Agreement, and in the future, it may prove
necessary to seek an amendment with the bank lending group under our credit
facility. The COVID-19 pandemic has resulted in, and may continue to result in,
significant disruption of financial and capital markets, and there can be no
assurance that we will be able to raise additional funds on terms acceptable to
us, if at all.

The impact of the COVID-19 pandemic is fluid and continues to evolve, and,
therefore, we cannot currently predict with certainty the extent to which our
business, results of operations, financial condition or liquidity will
ultimately be impacted. Given the dynamic nature of these circumstances, the
related financial effect cannot be reasonably estimated at this time but is not
expected to materially adversely impact our business. See Part I, Item 1A-"Risk
Factors - The COVID-19 pandemic could negatively affect our operations, business
and financial condition, and our liquidity could also be negatively impacted,
particularly if the U.S. economy remains unstable for a significant amount of
time" of this Annual Report on Form 10-K.

In recognition of the significant threat to the liquidity of financial markets
posed by the COVID-19 pandemic, the Federal Reserve and Congress have taken
dramatic actions to provide liquidity to businesses and the banking system in
the U.S. For example, on March 27, 2020, the President signed into law the CARES
Act, a sweeping stimulus bill intended to bolster the U.S. economy. On April 24,
2020, the PPPHCE Act was enacted, an expansion of the CARES Act. Together, the
CARES Act and the PPPHCE Act authorize $175 billion in funding to be distributed
to health care providers through Relief Fund. This funding is intended to
support healthcare providers by reimbursing them for healthcare-related expenses
or lost revenues attributable to COVID-19. In addition to relief funding, the
CARES Act includes temporary changes to Medicare and Medicaid payment rules and
relief from certain accounting provisions. There can be no assurance that these
governmental interventions will ultimately be successful or that any future
interventions will prove successful, and the financial markets may experience
significant contractions in available liquidity. In April 2020, the Company
received grants in an aggregate principal amount of $6.9 million, for which it
did not apply, from the Relief Fund

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as part of the automatic general distributions by HHS. The Company returned
these funds in June 2020. While we may receive further financial, tax or other
relief and other benefits under and as a result of the CARES Act, the PPPHCE Act
and other stimulus measures, it is not possible to estimate at this time the
need, availability, extent or impact of any such relief.

Acquisitions

In addition to our organic growth, we have grown through acquisitions that have expanded our presence in current markets or facilitated our entry into new markets where in-home care has been moving to managed care organizations.



On January 1, 2018, we acquired certain assets of LifeStyle in order to expand
private pay services in Illinois. The total consideration for the transaction
was $4.1 million. On April 1, 2018, we completed the acquisition of certain
assets of Arcadia for approximately $18.9 million. Arcadia provides home care
services through 26 offices in 10 states. We funded this acquisition through the
delayed draw term loan portion of our credit facility. In September 2018, we
acquired certain affiliate branches of Arcadia for $0.6 million using cash on
hand.

On May 1, 2018, we completed the acquisition of all of the issued and
outstanding stock of Ambercare for approximately $39.6 million plus the amount
of excess cash held by Ambercare at closing (approximately $12.0 million). With
the purchase of Ambercare, we expanded our personal care operations and entered
into our hospice and home health operations in the state of New Mexico. We
funded this acquisition through the delayed draw term loan portion of our credit
facility.

On June 1, 2019, we completed the acquisition of VIP for approximately $29.9
million. With the purchase of VIP, we expanded our personal care services in the
state of New York and into the New York City metropolitan area. We funded this
acquisition through the delayed draw term loan portion of our credit facility
and cash on hand.

On August 1, 2019, we completed the acquisition of Alliance for approximately
$23.5 million. Additionally, on August 1, 2019, we acquired the assets of
Foremost for approximately $1.4 million. We funded these acquisitions through a
combination of our revolving credit facility and available cash. With the
purchase of Alliance, we expanded our personal care, home health and hospice
operations in the state of New Mexico. The addition of Foremost will support our
growth strategy in the New York City market area.

On October 1, 2019, we completed the acquisition of Hospice Partners for
approximately $135.6 million. We funded the acquisition with a portion of the
net proceeds of our Public Offering. With the purchase of Hospice Partners, we
expanded our hospice operations through 21 locations in Idaho, Kansas, Missouri,
Oregon, Texas and Virginia. Hospice Partners also launched a palliative care
program in Texas in 2018.

On July 1, 2020, we completed the acquisition of A Plus for approximately $12.2
million, with funding provided by cash on hand. With the purchase of A Plus, we
expanded our personal care services in the state of Montana.

While we continue to identify and pursue acquisition opportunities, we are doing so with additional caution and diligence due to COVID-19 considerations.

Revenue by Payor and Significant States



Our payor clients are principally federal, state and local governmental agencies
and managed care organizations. The federal, state and local programs under
which the agencies operate are subject to legislative, budgetary and other risks
that can influence reimbursement rates. We are experiencing a transition of
business from government payors to managed care organizations, which we believe
aligns with our emphasis on coordinated care and the reduction of the need for
acute care.

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For the years ended December 31, 2019, 2018 and 2017, our revenue by payor and significant states by segment were as follows:





                                                                            Personal Care
                                          2019                                 2018 (1)                               2017 (1)
                                                    % of                                   % of                                   % of
                                                   Segment                                Segment                                Segment
                                                     Net                                    Net                                    Net
                                 Amount            Service              Amount            Service              Amount            Service
                             (in Thousands)       Revenues          (in Thousands)       Revenues          (in Thousands)       Revenues
State, local and other
governmental programs       $        303,479            52.2   %   $        285,973            58.2   %   $        273,525            64.2   %
Managed care
organizations                        239,559            41.3                173,391            35.3                140,993            33.1
Private pay                           21,765             3.7                 20,003             4.1                  8,739             2.1
Commercial insurance                   9,204             1.6                  6,173             1.3                  2,737             0.6
Other                                  6,721             1.2                  5,401             1.1                      -               -
Total personal care
segment net service
revenues                    $        580,728           100.0   %   $        490,941           100.0   %   $        425,994           100.0   %




                                                                            Personal Care
                                          2019                                 2018 (1)                               2017 (1)
                                                    % of                                   % of                                   % of
                                                   Segment                                Segment                                Segment
                                                     Net                                    Net                                    Net
                                 Amount            Service              Amount            Service              Amount            Service
                             (in Thousands)       Revenues          (in Thousands)       Revenues          (in Thousands)       Revenues
Illinois                    $        247,524            42.6   %   $        232,518            47.3   %   $        224,257            52.6   %
New York                             108,403            18.7                 65,117            13.3                 58,360            13.7
New Mexico                            75,666            13.0                 58,914            12.0                 37,588             8.8
All other states                     149,135            25.7                134,392            27.4                105,789            24.9
Total personal care
segment net service
  revenues                  $        580,728           100.0   %   $        490,941           100.0   %   $        425,994           100.0   %

(1) Net service revenues have been updated to reflect the immaterial error


    described in Note 2 to the Notes to Consolidated Financial Statements.




                                                               Hospice
                                            2019                                    2018
                                                  % of Segment                            % of Segment
                                  Amount           Net Service            Amount           Net Service
                              (in Thousands)        Revenues          (in Thousands)        Revenues
Medicare                      $        49,649              92.6   %   $        17,652              93.6   %
Managed care organizations              2,768               5.2                 1,047               5.6
Other                                   1,184               2.2                   151               0.8
Total hospice segment net
service revenues              $        53,601             100.0   %   $        18,850             100.0   %
New Mexico                    $        38,790              72.4   %   $        18,850             100.0   %
All other states                       14,811              27.6                     -                 -
Total revenue by state        $        53,601             100.0   %   $        18,850             100.0   %




                                                             Home Health
                                            2019                                     2018
                                                  % of Segment                             % of Segment
                                  Amount           Net Service             Amount           Net Service
                              (in Thousands)        Revenues           (in Thousands)        Revenues
Medicare                      $        11,218              77.6   %   $          6,034              88.0   %
Managed care organizations              2,942              20.3                    752              11.0
Other                                     302               2.1                     70               1.0
Total home health segment
net service
  revenues                    $        14,462             100.0   %   $          6,856             100.0   %
New Mexico                    $        14,462             100.0   %   $          6,856             100.0   %




We derive a significant amount of our net service revenues in Illinois, which
represented 38.2%, 45.0% and 52.6% of our net service revenues for the years
ended December 31, 2019, 2018 and 2017, respectively.

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A significant amount of our net service revenues are derived from one payor
client, the Illinois Department on Aging, the largest payor program for our
Illinois personal care operations, which accounted for 25.3%, 31.7% and 36.5% of
our net service revenues for the years ended December 31, 2019, 2018 and 2017,
respectively. The Illinois Department on Aging's payments for non-Medicaid
consumers have been delayed in the past and may continue to be delayed in the
future due to budget disputes. The state of Illinois did not adopt comprehensive
budgets for fiscal years 2016 or 2017, ended June 30, 2016 and June 30, 2017,
respectively. On July 6, 2017, the state of Illinois passed a budget for the
state fiscal year 2018, which began on July 1, 2017, authorizing the Illinois
Department on Aging to pay for our services rendered to non-Medicaid consumers
provided in prior fiscal years. On June 4, 2018, the state of Illinois passed a
budget for state fiscal year 2019, which began on July 1, 2018. On June 6, 2019,
the state of Illinois passed a budget for state fiscal year 2020, which began on
July 1, 2019.

In December 2014, the Chicago City Council passed an ordinance that, over a
period of years, raised the minimum wage for Chicago workers, resulting in an
increase equal to $13 per hour on July 1, 2019, with increases adjusted based on
the Consumer Price Index in subsequent years.

The State of Illinois finalized its fiscal year 2020 budget with the inclusion
of an appropriation to raise in-home care rates to offset the costs of previous
minimum wage increases in Chicago and other areas of the state that were imposed
beginning on July 1, 2018. These rates were originally set to be effective July
1, 2019, with in-home care rates to be initially increased by 10.9% to $20.28
from $18.29 to partially offset the costs of the minimum wage hikes. Rates were
then further increased on January 1, 2020 by an additional 7.7% to $21.84,
providing full funding for both the Chicago minimum wage increases and a
statewide raise for all current in-home caregivers. The State of Illinois
finalized its fiscal year 2021 budget, with in-home care rates to be increased
by 7.1% to $23.40 from $21.84, effective January 1, 2021, contingent upon
federal CMS approval.

On November 15, 2019, the State of Illinois received and announced official CMS
approval for both rate increases, with the first increase to be effective on
December 1, 2019, and the second increase to be effective on January 1, 2020. In
addition, the Illinois Department on Aging, in conjunction with Illinois' Health
Care and Family Services, announced that the new rates would become effective
retroactive to July 1, 2019 for services covered by managed care organizations.
On January 15, 2020, the Department on Aging announced confirmation that a
one-time bonus payment would be paid to providers who have provided services to
clients not enrolled in a managed care organization, for the time period of July
1, 2019 through November 30, 2019 using an updated hourly rate of $20.28. The
bonus payment of $6.8 million was recognized as net service revenues during the
year ended December 31, 2019, and was received in May of 2020.

On November 26, 2019, the Chicago City Council voted to approve additional
increases in the Chicago minimum wage to $14 per hour beginning July 1, 2020 to
$15 per hour beginning July 1, 2021. The Company and its trade association will
be looking for additional funding in the State of Illinois fiscal year 2021
budget to offset the cost of these additional minimum wage increases.

Our business will benefit from the rate increases noted above, but there is no
assurance that additional offsetting rate increases will be adopted in Illinois
for fiscal years beyond fiscal year 2020, and our financial performance will be
adversely impacted for any periods in which an additional offsetting
reimbursement rate increase is not in effect.

Impact of Changes in Medicare and Medicaid Reimbursement

Home Health



CMS has issued final rules and policy updates that allow Medicare Advantage
insurers to offer beneficiaries more options and new types of benefits.
Effective January 1, 2019, CMS expanded the scope of its "primarily
health-related" supplemental benefit standard, permitting plans to cover a
broader array of services that increase health and improve quality of life,
including coverage of non-skilled in-home care. This policy change, emphasizing
improving quality and reducing costs, aligns with our overall approach to care,
and we believe the increased demand for personal care from the Medicare
Advantage population represents a potentially significant upside opportunity
over the next several years.

In June 2019, CMS began the Review Choice Demonstration for Home Health Services
demonstration in Illinois to identify and prevent fraud, reduce the number of
Medicare appeals, and improve provider compliance with Medicare program
requirements. Home health agencies may initially select from the following
claims review and approval processes: pre-claim review, post-payment review, or
a minimal post-payment review with a 25% payment reduction. Home health agencies
that maintain high compliance levels will be eligible for additional, less
burdensome options. Beginning in March 2020, CMS paused certain claims
processing for the Review Choice Demonstration due to the COVID-19 pandemic.
However, the agency expects to discontinue exercising enforcement discretion
beginning in August 2020, regardless of the status of the public health
emergency. Following the resumption of the demonstration, MACs will conduct
post-payment review on claims that were submitted and paid during the pause.
Further, CMS plans to expand the Review Choice Demonstration to certain other
states, including Ohio and Florida, in August 2020. We are currently unable to
predict what impact, if any, this program may have on our result of operations
or financial position.

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Home health services provided to Medicare beneficiaries are paid under the
Medicare Home Health Prospective Payment System ("HHPPS"). Historically, the
HHPPS was based on 60-day episodes of care and used a case-mix system that
relied on the number of visits to determine payment. Effective January 1, 2020,
CMS began using a 30-day episode of care for home health payments and
implemented the Patient-Driven Groupings Model ("PDGM") as part of the shift
toward value-based care. The PDGM classifies patients based on clinical
characteristics and other patient information into payment categories and
eliminates the use of therapy service thresholds. Also effective January 1,
2020, CMS finalized a policy allowing therapy assistants to provide maintenance
therapy services in the home and modified certain requirements relating to the
home health plan of care.

CMS updates the HHPPS payment rates each calendar year. Effective January 1,
2020, HHPPS rates increased by 1.3%, which reflects a 1.5% payment update as
mandated by the Bipartisan Budget Act of 2018, offset by a 0.2 percentage point
decrease in payments to home health agencies due to changes in the rural add-on
percentages also mandated by the Bipartisan Budget Act of 2018, among other
adjustments. CMS requires both home health and hospice providers to submit
quality reporting data each year. Home health providers that do not comply are
subject to a 2 percentage point reduction to their market basket update.

Historically, CMS has paid home health providers 50% to 60% of anticipated
payment at the beginning of a patient's care episode through a request for
anticipated payment ("RAP"). However, to address potential program integrity
risks, CMS is currently phasing out RAP payments. For calendar year 2020, CMS
reduced RAP payments to 20% of the anticipated payment and limited those
payments to existing home health providers. In calendar year 2021, CMS will not
provide any up-front payments in response to a RAP but will continue to require
home health providers to submit streamlined RAPs as notice that a beneficiary is
under a home health period of care. CMS will further reduce the administrative
burden on providers in calendar year 2022, replacing the RAP with a "Notice of
Admission."

Hospice

Hospice services provided to Medicare beneficiaries are paid under the Medicare
Hospice Prospective Payment System, under which CMS sets a daily rate for each
day a patient is enrolled in the hospice benefit. CMS updates these rates each
fiscal year. Effective October 1, 2019, CMS increased hospice payment rates by
2.6%. This reflected a 3.0% market basket increase reduced by the multifactor
productivity adjustment of 0.4 percentage points as required by the ACA.
Additionally, the aggregate cap, which limits the total Medicare reimbursement
that a hospice may receive based on an annual per-beneficiary cap amount and the
number of Medicare patients served, was updated to $29,964.78 for fiscal year
2020. This amount reflects the hospice payment update of 2.6%. If a hospice's
Medicare payments exceed its aggregate cap, it must repay Medicare the excess
amount.

COVID-19 Relief

As a result of the COVID-19 pandemic, federal and state governments have passed
legislation, promulgated regulations, and taken other administrative actions
intended to assist healthcare providers in providing care to COVID-19 patients
and other patients during the public health emergency. These temporary measures
include relief from Medicare conditions of participation requirements for
healthcare providers, relaxation of licensure requirements for healthcare
professionals, relaxation of privacy restrictions for telehealth remote
communications, promoting use of telehealth by expanding the scope of services
for which Medicare reimbursement is available, and limited waivers of fraud and
abuse laws for activities related to COVID-19 during the emergency period. The
current federal public health emergency declaration expires October 23, 2020.
The HHS Secretary may renew the declaration for successive 90-day periods for as
long as the emergency continues to exist and may terminate the declaration
whenever he determines that the emergency no longer exists.

One of the primary sources of relief for healthcare providers is the CARES Act,
which was expanded by the PPPHCE Act. Together, the CARES Act and the PPPHCE Act
include $175 billion in funding to be distributed through the Relief Fund to
eligible providers, including public entities and Medicare- and/or
Medicaid-enrolled providers. Relief Fund payments are intended to compensate
healthcare providers for lost revenues and health care related expenses incurred
in response to the COVID-19 pandemic and are not required to be repaid, provided
that recipients attest to and comply with certain terms and conditions,
including limitations on balance billing and not using funds received from the
Relief Fund to reimburse expenses or losses that other sources are obligated to
reimburse. In addition, the CARES Act expands the Medicare Accelerated and
Advance Payment Program to increase cash flow to providers impacted by the
COVID-19 pandemic. Hospice and home health providers may request an advance or
accelerated payment of up to 100% of the Medicare payment amount for a
three-month period (not including Medicare Advantage payments). The Medicare
Accelerated and Advanced Payment Program payments are a loan that providers must
pay back. CMS must recoup the advance payments beginning 120 days after receipt
by the provider by withholding future Medicare payments for claims. However, in
April 2020, CMS suspended the Advance Payment Program, which is applicable to
Part B providers, and announced it would reevaluate pending and new applications
from Part A providers for the Accelerated Payment Program in light of the direct
payments made available through the Relief Fund. The CARES Act also includes
other provisions offering financial relief, for example temporarily lifting the
Medicare sequester from May 1 through December 31, 2020, which would have
otherwise reduced payments to Medicare providers by 2% (but also extending
sequestration through 2030). The Medicare sequester relief resulted in a $0.3
million and $0.1 million increase to hospice and home health net service
revenues for the three and six months ended June 30, 2020.

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Due to the recent enactment of the CARES Act, the PPPHCE Act and other enacted
legislation, there is still a high degree of uncertainty surrounding their
implementation. Further, the federal government is considering additional
stimulus measures, federal agencies continue to issue related regulations and
guidance, and the public health emergency continues to evolve. We continue to
assess the potential impact of the CARES Act, the PPPHCE Act and other laws,
regulations, and guidance related to COVID-19 on our business, results of
operations, financial condition and cash flows.

Components of our Statements of Income

Net Service Revenues



We generate net service revenues by providing our services directly to consumers
and primarily on an hourly basis. We receive payment for providing such services
from our payor clients, including federal, state and local governmental
agencies, managed care organizations, commercial insurers and private consumers.
Net service revenues are principally provided based on authorized hours,
determined by the relevant agency, at an hourly rate which is either contractual
or fixed by legislation and are recognized at the time services are rendered. We
also record estimated implicit price concessions (based primarily on historical
collection experience) related to uninsured accounts to record self-pay revenues
at the estimated amounts we expect to collect.

On January 1, 2018, we adopted Accounting Standards Update ("ASU") 2014-09,
Revenue from Contracts with Customers, ("ASU 2014-09") which requires an entity
to recognize the amount of revenue to which it expects to be entitled for the
transfer of promised goods or services to customers. We adopted the standard
using the modified retrospective approach and did not record a cumulative
catch-up adjustment as the timing and measurement of revenue for our customers
consistent with our prior revenue recognition model. However, the majority of
what historically was classified as provision for doubtful accounts under
operating expenses is now treated as an implicit price concession factored into
net service revenues.

Cost of Service Revenues

We incur direct care wages, payroll taxes and benefit-related costs in
connection with providing our services. We also provide workers' compensation
and general liability coverage for our employees. Employees are also reimbursed
for their travel time and related travel costs in certain instances.

General and Administrative Expenses



Our general and administrative expenses from continuing operations include our
costs for operating our network of local agencies and our administrative
offices. Our agency expenses from continuing operations consist of costs for
supervisory personnel, our community care supervisors and office administrative
costs. Personnel costs include wages, payroll taxes, and employee benefits.
Facility costs include rents, utilities, and postage, telephone and office
expenses. Our support center expenses include costs for accounting, information
systems, human resources, billing and collections, contracting, marketing and
executive leadership. These expenses consist of compensation, including
stock-based compensation, payroll taxes, employee benefits, legal, accounting
and other professional fees, travel, general insurance, rents, provision for
doubtful accounts and related facility costs. Expenses related to streamlining
our operations such as costs related to terminated employees, termination of
professional services relationships, other contract termination costs and asset
write-offs are also included in general and administrative expenses.

Depreciation and Amortization Expenses



Depreciable assets consist principally of furniture and equipment, network
administration and telephone equipment, and operating system software.
Depreciable and leasehold assets are depreciated or amortized on a straight-line
method over their useful lives or, if less and if applicable, their lease terms.
We amortize our intangible assets with finite lives, consisting of customer and
referral relationships, trade names, trademarks and non-competition agreements,
principally using accelerated methods based upon their estimated useful lives.

Provision for Doubtful Accounts



For 2017, we established our allowance for doubtful accounts to the extent it
was probable that a portion or all of a particular account will not be
collected. We established our provision for doubtful accounts primarily by
reviewing the creditworthiness of significant customers and through evaluations
over the collectability of the receivables. An allowance for doubtful accounts
was maintained at a level that our management believed was sufficient to cover
potential losses.

For 2018 and subsequent periods, subsequent adjustments that are determined to
be the result of an adverse change in the payor's ability to pay are recognized
as provision for doubtful accounts with the adoption of ASU 2014-09, Revenue
from Contracts with Customers. The majority of what historically was classified
as provision for doubtful accounts under operating expenses is now treated as an
implicit price concession factored into net service revenues.

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Interest Income

Illinois law entitles designated service program providers to receive a prompt
payment interest penalty based on qualifying services approved for payment that
remain unpaid after a designated period of time. As the amount and timing of the
receipt of these payments are not certain, the interest income is recognized
when received. For the years ended December 31, 2019 and 2018, we received $0.7
million and $2.3 million, respectively, in prompt payment interest. For the year
ended December 31, 2017, we did not receive any prompt payment interest. While
we may be owed additional prompt payment interest, the amount, timing, and
intent to provide such payments remains uncertain, and we will continue to
recognize prompt payment interest income upon satisfaction of these constraints

Interest Expense



Interest expense is reported in the Consolidated Statements of Income when
incurred and consists of (i) interest and unused credit line fees on the credit
facility evidenced by the Credit Agreement, and the credit facility evidenced by
the 2017 Credit Agreement, as defined under "Liquidity and Capital Resources,"
(ii) interest on our financing lease obligations and (iii) amortization and
write-off of debt issuance costs.

Other Income



For the year ended December 31, 2017, other income of $0.2 million consisted of
income distributions received from investments in joint ventures, which were
sold on October 1, 2017. We accounted for this income in accordance with ASC
Topic 325, "Investments-Other" and recognized the net accumulated earnings only
to the extent distributed by the joint ventures on the date received.

Income Tax Expense



All of our income is from domestic sources. We incur state and local taxes in
states in which we operate. For the years ended December 31, 2019, 2018 and
2017, our federal statutory rate was 21.0%, 21.0% and 35.0%, respectively. The
effective income tax rate was 22.2%, 20.1% and 44.0% for the years ended
December 31, 2019, 2018 and 2017, respectively. The difference between our
federal statutory and effective income tax rates is principally due to the
inclusion of state taxes and non-deductible compensation, offset by an excess
tax benefit and the use of federal employment tax credits.

Discontinued Operations



Effective March 1, 2013, we sold substantially all of the assets used in our
2013 Home Health Business as described in Part I, Item 1-"Business." Therefore,
we have segregated the 2013 Home Health Business operating results and presented
them separately as discontinued operations for all periods presented, see Note 1
to the Notes to Consolidated Financial Statements for additional information.





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Results of Operations

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018



The following table sets forth, for the periods indicated, our consolidated
results of operations.



                                    2019                            2018 (1)                         Change
                                        Net Service                       Net Service
                          Amount         Revenues           Amount         Revenues           Amount          %
Net service revenues     $ 648,791             100.0   %   $ 516,647             100.0   %   $ 132,144         25.6   %
Cost of service
revenues                   469,553              72.4         379,843              73.5          89,710         23.6
Gross profit               179,238              27.6         136,804              26.5          42,434         31.0
General and
administrative
  expenses                 133,569              20.6         105,025              20.3          28,544         27.2
Loss on sale of assets           -                 -              38                 -             (38 )     (100.0 )
Depreciation and
amortization                10,574               1.6           8,642               1.7           1,932         22.4
Provision for doubtful
accounts                       343               0.1             272               0.1              71         26.1
Total operating
expenses                   144,486              22.3         113,977              22.1          30,509         26.8
Operating income from
continuing
  operations                34,752               5.4          22,827               4.4          11,925         52.2
Interest income             (1,523 )            (0.2 )        (2,592 )            (0.5 )         1,069        (41.2 )
Interest expense             3,105               0.5           5,016               1.0          (1,911 )      (38.1 )
Total interest
expense, net                 1,582               0.2           2,424               0.5            (842 )      (34.7 )
Income from continuing
operations
  before income taxes       33,170               5.1          20,403               3.9          12,767         62.6
Income tax expense           7,359               1.1           4,096               0.8           3,263         79.7
Net income from
continuing
  operations                25,811               4.0          16,307               3.2           9,504         58.3
Discontinued
operations:
(Loss) earnings from
discontinued
  operations                  (574 )            (0.1 )           126                 -            (700 )     (555.6 )
Net income               $  25,237               3.9   %   $  16,433               3.2   %   $   8,804         53.6   %

(1) For the year ended December 31, 2018, net service revenues, gross profit,

operating income from continuing operations, income tax expense, net income

from continuing operations and net income have been updated to reflect the

immaterial error, as discussed in Note 2 to the Notes to Consolidated

Financial Statements.




Net service revenues increased by 25.6% to $648.8 million for the year ended
December 31, 2019 compared to $516.6 million in 2018. The increase was due to a
10.4% increase in billable hours and a 7.0% increase in revenues per billable
hour in 2019 in our personal care segment. Billable hours increased in our
personal care segment in 2019 compared to 2018, partially due to the acquisition
of VIP on June 1, 2019 and the acquisition of Alliance on August 1, 2019, as
well as an increase in same store billable census. Revenues per billable hour
increased due to rate increases in several states. In addition, net service
revenue increased by $34.8 million and $7.6 million from our hospice and home
health segments, respectively, during 2019 compared to 2018, as further
discussed below.

Gross profit, expressed as a percentage of net service revenues, increased to
27.6% for 2019, from 26.5% in 2018. The increase was due to a decrease in direct
service employee wages, taxes and benefit costs of 1.5%, partially offset by an
increase in hospice supplies and equipment of 0.4%, as a percentage of net
service revenues.

General and administrative expenses increased to $133.6 million for the year
ended December 31, 2019 compared to $105.0 million in 2018. The increase in
general and administrative expenses was primarily due to acquisitions that
resulted in an increase in administrative employee wages, taxes and benefit
costs of $20.0 million, an increase in data processing of $1.3 million and an
increase in rent expense of $1.3 million. In addition, professional fees
increased by $1.0 million and stock based compensation increased by $1.7 million
in 2019 compared to 2018. General and administrative expenses, expressed as a
percentage of net service revenues increased to 20.6% for 2019, from 20.3% in
2018. The increase was primarily due to an increase in administrative employee
wages, taxes and benefit costs.

Depreciation and amortization increased to $10.6 million for the year ended December 31, 2019 from $8.6 million in 2018, primarily due to the increase of intangible assets related to the fiscal year 2019 acquisitions.

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Interest Income

Interest income decreased by $1.1 million to $1.5 million for the year ended
December 31, 2019 from $2.6 million in 2018. For the years ended December 31,
2019 and 2018, we received $0.7 million and $2.3 million, respectively, in
prompt payment interest.

Interest Expense



Interest expense decreased to $3.1 million for the year ended December 31, 2019
from $5.0 million in 2018. The decrease in interest expense was primarily due to
a lower outstanding loan balance under our credit facility in 2019 compared to
2018.

Income Tax Expense

All of our income is from domestic sources. We incur state and local taxes in
states in which we operate. For the years ended December 31, 2019 and 2018, our
federal statutory rate was 21.0%. The effective income tax rate was 22.2% and
20.1% for the years ended December 31, 2019 and 2018, respectively. The
difference between the federal statutory rate and our effective income tax rates
is principally due to the inclusion of state taxes and non-deductible
compensation, offset by an excess tax benefit and the use of federal employment
tax credits.



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Results of Operations - Segments



The following tables and related analysis summarize our operating results and
business metrics by segment:

Personal Care Segment



                                                             For the Years Ended December 31,
                                            2019                            2018 (1)                        Change
                                                   % of                              % of
                                                  Segment                           Segment
                                                Net Service                       Net Service
Personal Care Segment             Amount         Revenues           Amount         Revenues           Amount         %
                                                        (Amounts in Thousands, Except Percentages)
Operating Results
Net service revenues             $ 580,728             100.0   %   $ 490,941             100.0   %   $ 89,787        18.3   %
Cost of services revenues          432,413              74.5         365,264              74.4         67,149        18.4
Gross profit                       148,315              25.5         125,677              25.6         22,638        18.0
General and administrative
expenses                            56,645               9.8          44,463               9.1         12,182        27.4
Provision for doubtful
accounts                               242                 -             265               0.1            (23 )      (8.7 )
Segment operating income         $  91,428              15.7   %   $  80,949              16.4   %   $ 10,479        12.9   %

Business Metrics (Actual
Numbers, Except
  Billable Hours in Thousands)
Locations at period end                152

148


Average billable census * (2)       39,188                            37,597                            1,591         4.2   %
Billable hours * (3)                29,732                            26,934                            2,798        10.4
Average billable hours per
census per month * (3)                  63                                59                                4         6.8
Billable hours per business
day * (3)                          113,915                           103,195                           10,720        10.4
Revenues per billable hour *
(3)                              $   19.50                         $   18.23                         $   1.27         7.0   %
Same store growth revenue % *
(4)                                    8.2

2.8



Segment Revenue by Payor
State, local and other
governmental programs            $ 303,479              52.2   %   $ 285,973              58.2   %
Managed care organizations         239,559              41.3         173,391              35.3
Private pay                         21,765               3.7          20,003               4.1
Commercial insurance                 9,204               1.6           6,173               1.3
Other                                6,721               1.2           5,401               1.1
Total segment net service
revenues                         $ 580,728             100.0   %   $ 490,941             100.0   %

Segment Revenue by Significant
States
Illinois                         $ 247,524              42.6   %   $ 232,518              47.3   %
New York                           108,403              18.7          65,117              13.3
New Mexico                          75,666              13.0          58,914              12.0
All other states                   149,135              25.7         134,392              27.4
Total segment net service
revenues                         $ 580,728             100.0   %   $ 490,941             100.0   %

(1) For the year ended December 31, 2018, net service revenues, gross profit and

segment operating income have been updated to reflect the immaterial error,

as discussed in Note 2 to the Notes to Consolidated Financial Statements.

(2) Average billable census is the number of unique clients receiving a billable

service during the year and is the total census divided by months in

operation during the period.

(3) Billable hours is the total number of hours served to clients during the

period. Average billable hours per census per month is billable hours divided

by average billable census. Billable hours per day is total billable hours

divided by the number of business days in the period. Revenues per billable


    hour is revenue attributed to billable hours divided by billable hours.


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(4) Same store growth reflects the change in year-over-year revenue for the same

store base. We define the same store base to include those stores open for at

least 52 full weeks. This measure highlights the performance of existing

stores, while excluding the impact of acquisitions, new store openings and

closures.

* Management deems these metrics to be key performance indicators. Management

uses these metrics to monitor our performance, both in our existing

operations and acquisitions. Many of these metrics serve as the basis of

reported revenues and assessment of these, provide direct correlation to the

results of operations from period to period and facilitate comparison with

the results of our peers. Historical trends established in these metrics can

be used to evaluate current operating results, identify trends affecting our

business, determine the allocation of resources and assess the quality and

potential variability of our cash flows and earnings. We believe they are

useful to investors in evaluating and understanding our business but should

not be used solely in assessing the Company's performance. These key

performance indicators should not be considered superior to, as a substitute

for or as an alternative to, and should be considered in conjunction with,

the GAAP financial measures presented herein to fully evaluate and understand

the business as a whole. These measures may not be comparable to

similarly-titled performance indicators used by other companies.




We derive a significant amount of our net service revenues from operations in
Illinois, which represented 42.6% and 47.3% of our net service revenues for the
years ended December 31, 2019 and 2018, respectively.

Net service revenues from state, local and other governmental programs accounted
for 52.2% and 58.2% of net service revenues for the years ended December 31,
2019 and 2018, respectively. Managed care organizations accounted for 41.3% and
35.3% of net service revenues for the years ended December 31, 2019 and 2018,
respectively, with commercial insurance, private pay and other payors accounting
for the remainder of net service revenues. One payor client, the Illinois
Department on Aging, accounted for 25.3% and 31.7% of net service revenues for
the years ended December 31, 2019 and 2018, respectively.

Net service revenues increased by 18.3% for the year ended December 31, 2019
compared to the year ended December 31, 2018. Net service revenues increased
primarily as a result of a 10.4% increase in billable hours and 7.0% increase in
revenues per billable hour in the year ended December 31, 2019 as compared to
the year ended December 31, 2018. The increases were partially due to the
acquisition of Ambercare on May 1, 2018, the acquisition of VIP on June 1, 2019
and acquisition of Alliance on August 1, 2019.

Gross profit, expressed as a percentage of net service revenues, decreased from
25.6% for the year ended December 31, 2018 to 25.5% for the year ended
December 31, 2019 due to an increase in direct service employee wages, taxes and
benefit costs of 0.1%.

General and administrative expenses increased by approximately $12.2 million for
the year ended December 31, 2019. The increase in general and administrative
expenses was primarily due to acquisitions that resulted in a $8.2 million
increase in administrative employee wages, taxes and benefit costs, a
$1.7 million increase in state license fees and costs and a $1.2 million
increase in rent expenses for the year ended December 31, 2019.


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Hospice Segment





                                                            For the Years Ended December 31,
                                          2019                              2018                           Change
                                             % of Segment                      % of Segment
                                              Net Service                       Net Service
Hospice Segment                 Amount         Revenues           Amount         Revenues           Amount           %
                                                       (Amounts in Thousands, Except Percentages)
Operating Results
Net service revenues           $  53,601             100.0   %   $  18,850             100.0   %   $  34,751         184.4   %
Cost of services revenues         27,203              50.8          10,010              53.1          17,193         171.8
Gross profit                      26,398              49.2           8,840              46.9          17,558         198.6
General and administrative
expenses                          12,304              23.0           3,737              19.9           8,567         229.2
Provision for doubtful
accounts                              95               0.2               5                 -              90       1,800.0
Segment operating income       $  13,999              26.0   %   $   5,098              27.0   %   $   8,901         174.6   %

Business Metrics (Actual
Numbers)
Locations at period end               35                                13
Admissions * (1)                   3,095                             1,061                             2,034         191.7   %
Average daily census * (2)         1,783                               528                             1,255         237.7
Average length of stay * (3)         107                               136                               (29 )       (21.3 )
Patient days * (4)               349,866                           128,819                           221,047         171.6
Revenue per patient day *
(5)                            $  153.20                         $  146.33                         $    6.87           4.7   %

Segment Revenue by Payor
Medicare                       $  49,649              92.6   %   $  17,652              93.6   %
Managed care organizations         2,768               5.2           1,047               5.6
Other                              1,184               2.2             151               0.8
Total segment net service
revenues                       $  53,601             100.0   %   $  18,850             100.0   %

Segment revenue by
significant states
New Mexico                     $  38,790              72.4   %   $  18,850             100.0   %
All other states                  14,811              27.6               -                 -
Total segment net service
revenues                       $  53,601             100.0   %   $  18,850             100.0   %

(1) Represents referral process and new patients on service during the period.

(2) Average daily census is total patient days divided by the number of days in

the period.

(3) Average length of stay is the average number of days a patient is on service,

calculated upon discharge, and is total patient days divided by total

discharges in the period.

(4) Patient days is days of service for all patients in the period.

(5) Revenue per patient day is hospice revenue divided by the number of patient

days in the period.