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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED APRIL 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM __________ TO ___________
COMMISSION FILE NO. 0-20488
PMR CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 23-2491707
State or other jurisdiction of I.R.S. Employer Identification No.
incorporation or organization
501 WASHINGTON STREET, 5TH FLOOR 92103
SAN DIEGO, CALIFORNIA (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (619) 610-4001
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X]
As of July 24, 1998, the approximate aggregate market value of the
Common Stock held by non-affiliates of the registrant was $44,582,569, based
upon the closing price of the Common Stock reported on the Nasdaq National Stock
Market of $9.3125 per share. See footnote (1) below.
The number of shares of Common Stock outstanding as of July 24, 1998
was 6,959,810.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's definitive Proxy Statement, to be
filed not later than 120 days after April 30, 1998 in connection with the
registrant's 1998 Annual Meeting of Stockholders, are incorporated by reference
into Part III of this Form 10-K.
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(1) The information provided shall in no way be construed as an admission that
any person whose holdings are excluded from the figure is not an affiliate
or that any person whose holdings are included is an affiliate and any such
admission is hereby disclaimed. The information provided is included solely
for record keeping purposes of the Securities and Exchange Commission.
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PART I
ITEM 1. BUSINESS
GENERAL
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed below. Factors that could cause or contribute to such differences
include without limitation, those discussed in the description of the Company's
business below and the section entitled "Risk Factors," in Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere in this Annual Report, as well as those discussed in documents
incorporated herein by reference.
OVERVIEW
PMR Corporation and its subsidiaries ("PMR" or the "Company") is a
leading manager of specialized mental health care programs and disease
management services designed to treat individuals diagnosed with a serious
mental illness ("SMI"), primarily schizophrenia and bi-polar disorder (i.e.,
manic-depressive illness). PMR manages the delivery of a broad range of
outpatient and community-based psychiatric services for SMI patients, consisting
of 37 intensive outpatient programs (the "Outpatient Programs"), two case
management programs (the "Case Management Programs") and four chemical
dependency and substance abuse programs (the "Chemical Dependency Programs"). In
June 1998, the Company announced an agreement to form a new company to be called
Stadt Solutions, LLC ("Stadt Solutions") that will be jointly owned by the
Company and Stadtlander Drug Distribution Co., Inc. ("Stadtlander"). Stadt
Solutions will offer a specialty pharmacy program for individuals with an SMI,
initially serving approximately 6,000 individuals through fourteen pharmacies in
thirteen states.
PMR, with Stadt Solutions, will operate in twenty-three states and
is expected to employ or contract with more than 400 mental health and
pharmaceutical industry professionals and currently provides services to
approximately 11,000 individuals diagnosed with SMI. PMR believes it is the only
private sector company focused on providing an integrated mental health disease
management model to the SMI population.
A four-decade old public policy trend of de-institutionalizing the
mentally ill from long-term care hospitals into the community has resulted in a
deterioration in SMI patient care. In response to this trend, a fragmented,
community-based system of care has evolved that does not adequately provide the
patient management or coordination of benefits required by the medically complex
SMI patient population. SMI patients typically enter the health care system
through multiple, uncoordinated points of care where services are provided in
reaction to patient crises rather than proactively to manage patient care.
Multiple physicians, case workers and other care providers handle patients in
various sites across the spectrum of care with little or no coordination. This
disjointed system of care results in low levels of patient monitoring and
medication compliance among the SMI population, which increases the incidence
rate of high-cost catastrophic events. Coordination and monitoring of patient
services is essential to avoid the debilitating effects of fragmented care
delivered by diverse outpatient providers which are reimbursed by disparate,
uncoordinated funding sources. PMR's clinical philosophy focuses on improving
outcomes and lowering costs by utilizing intensive, community-based treatment of
the SMI population in outpatient settings.
PMR's Outpatient Programs serve as a comprehensive alternative to
inpatient hospitalization and include partial hospitalization and lower
intensity outpatient services. The Case Management Programs provide an
intensive, individualized primary care service which consists of a proprietary
case management model utilizing clinical protocols for delivering care to SMI
patients. The Company also provides Chemical Dependency Programs to patients
affiliated with managed care organizations and government-funded programs.
During fiscal 1998, the Company continued to establish the initial
infrastructure and relationships for its site management and clinical
information initiative. The Company believes that its access to a large SMI
patient base provides it with a unique opportunity to collect, process and
analyze clinical and pharmacoeconomic data on schizophrenia and bi-polar
disorder. In January 1997, PMR entered into a collaborative agreement with
United HealthCare Corporation and its Applied HealthCare Informatics division
("Applied Informatics") to assist in
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developing this initiative. In November 1997, the Company established a
strategic relationship with InSite Clinical Trials to assist in the training and
development of clinical research sites. In June 1998, PMR entered into an
agreement with Stadtlander to form Stadt Solutions and to contribute the site
management and clinical information initiative to the new venture.
PMR's objective is to be the leader in the management of cost-effective
programs which provide quality care and foster the successful recovery of
individuals from the devastating effects of SMI. The Company intends to achieve
this objective by (i) obtaining new contracts for its Outpatient and Case
Management Programs, (ii) expanding Stadt Solutions, a new specialty pharmacy
program, (iii) establishing new programs and ancillary services, and (iv)
combining its outpatient, case management and chemical dependency capabilities
into a fully-integrated mental health disease management model. PMR believes
that its proprietary mental health disease management model will position it to
accept risk for SMI benefits and directly manage the costs associated with
providing care to the SMI population.
PMR was incorporated in the State of Delaware in 1988. The operations
of the Company include the operations of the Company's wholly owned
subsidiaries, Psychiatric Management Resources, Inc., Collaborative Care
Corporation, Collaborative Care, Inc., and PMR-CD, Inc. The principal executive
offices of the Company are located at 501 Washington Street, 5th Floor, San
Diego, California 92103. The Company's telephone number is (619) 610-4001.
THE MARKET AND INDUSTRY BACKGROUND
According to the National Institute of Mental Health (the "NIMH") and
its National Advisory Mental Health Council (the "NAMHC"), serious mental
illnesses are neurobiological disorders of the brain and include schizophrenia,
schizoaffective disorder, manic-depressive illness and autism, as well as severe
forms of other disorders such as major depression, panic disorder and
obsessive-compulsive disorder. These diseases are chronic and represent one of
the highest cost segments of the health care system. Industry sources indicate
that approximately 2.8% of the adult population and 3.2% of children ages 9-17
are affected by SMI, for a total SMI population in the United States of
approximately 5.6 million people. According to industry sources, in 1995,
individuals diagnosed with SMI consumed $27 billion in direct medical costs
relating to the provision of mental health services and consumed more than $74
billion in total costs, including estimates of lost productivity. Based on
industry data, the Company estimates that the direct medical expenditures
associated with SMI represent in excess of 25% of total direct mental health
care costs. However, the potential costs of direct medical care may exceed these
levels due to the approximately 2.2 million Americans estimated to be suffering
from untreated SMI. Substantially all costs of treating and managing the SMI
population are borne by federal, state and local programs, including Medicare
and Medicaid. The SMI population accesses care primarily through community
mental health centers ("CMHCs") and other community-based health care facilities
such as psychiatric and acute care hospitals and nursing homes. CMHCs typically
are not-for-profit organizations which lack access to capital, sophisticated
management information and financial systems, and comprehensive programs for
treating SMI patients.
Since 1955, the SMI population in the United States has experienced
extensive de-institutionalization resulting in the public psychiatric hospital
census declining from approximately 560,000 individuals in 1955 to approximately
72,000 individuals in 1994. The effect of de-institutionalization is exacerbated
by the fact that the general population grew 58% over this same period, while
the SMI incidence rate remained stable. Industry sources estimate that there are
approximately 763,000 individuals in the United States currently diagnosed with
SMI who otherwise would have received inpatient treatment prior to
de-institutionalization, of which 60%-75% are patients with schizophrenia or
bi-polar disorder. The result of this trend has been increased rates of
transinstitutionalism and homelessness among SMI patients. Transinstitutionalism
is a term utilized to describe the mechanism by which de-institutionalized
individuals receive care in one or more alternate settings such as nursing
homes, general hospitals, jails and prisons. Industry estimates indicate that
23% of nursing home residents have a mental disorder and that more than 98,000
acute care hospital beds are occupied by SMI patients. Furthermore,
approximately 10% of all prison and jail inmates are SMI diagnosed and 35% of
the approximately 350,000 homeless individuals in the United States are
currently suffering from SMI disorders.
The most frequently occurring primary diagnosis of the SMI population
treated by PMR is schizophrenia, an incurable biological disorder which affects
approximately 1% of the general population. Approximately 70% of
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the patients treated at the Company's programs are diagnosed with schizophrenia
or schizoaffective disorder. The remainder are afflicted with bi-polar disorder,
major depression, or other personality disorders. Industry sources indicate that
up to 50% of patients suffering from schizophrenia receive no treatment for
symptoms. In addition, due to the stigma and social constraints that accompany
schizophrenia, 25% of schizophrenics attempt to end their lives through suicide.
In general, each year a significant percentage of individuals with schizophrenia
are admitted for an inpatient hospitalization and virtually all of the diagnosed
population is prescribed a chronic medication regimen. It is not uncommon that
these individuals also suffer from a substance abuse or chemical dependency
diagnosis. Based on industry data, the Company estimates that schizophrenia
consumes approximately $20 billion in annual mental health care expenditures.
The direct medical costs of schizophrenia are consumed primarily in CMHCs,
nursing homes and acute care hospitals.
Since the introduction of Clozaril in the United States in 1989,
several pharmaceutical products have been developed for SMI patients that have
resulted in significant improvements in treatment. Although the specific
biological causes of SMI remain unknown, the efficacy of many treatment regimens
has been found to be comparable to that in other branches of medicine. For
example, with the exception of autism, medications exist which generate medical
responses in 60%-90% of patients with SMI. For schizophrenia and schizoaffective
disorder, research has shown that standard anti-psychotic medication will reduce
psychotic symptoms in 60% of patients and in 70%-85% of those experiencing
symptoms for the first time. These newer medications, with proper compliance,
offer significant potential for recovery to individuals afflicted with SMI.
PROGRAMS AND OPERATIONS
OUTPATIENT PROGRAMS
PMR's Outpatient Programs are operated under management or
administrative contracts with acute care hospitals, psychiatric hospitals and
CMHCs, and consist principally of intensive outpatient programs which serve as
alternatives to inpatient care. These programs target patients in crisis or
those recovering from crisis and thus provide more intensive clinical services
than those generally available in a traditional outpatient setting. The Company
currently manages 37 Outpatient Programs in Arizona, Arkansas, California,
Colorado, Hawaii, Illinois, Kentucky, Michigan, North Carolina, Ohio, Tennessee,
Texas and Washington. The Company contracts with 27 separate providers including
Scripps Health, Sutter Health System, St. Luke's Hospital of San Francisco and
the University of California, Irvine. Typically, the Company's contracts are two
to five years in length. While contract expirations occur from time to time in
the ordinary course of business, the Company vigorously attempts to extend and
renew existing contracts and to maintain its market share through the addition
of new contracts.
The Outpatient Programs consist principally of psychiatric partial
hospitalization programs which are ambulatory in nature and provide intensive,
coordinated clinical services to patients diagnosed with SMI. In 1996, the
Company introduced its structured outpatient clinic which is a lower intensity
"step-down" outpatient service designed to continue the care, maintain the gains
achieved and prevent the relapse of patients who have completed the partial
hospitalization program. To further expand the Company's potential client
population, in August 1997, the Company broadened its structured outpatient
program to include clients who are at a lower level of clinical risk.
Patients admitted to the Outpatient Programs undergo a complete
assessment and treatment planning process that includes psychiatric,
psycho-social, medical and other specialized evaluations. Each SMI individual is
assigned a care coordinator responsible for managing the comprehensive treatment
available to the patient, which includes specialty services for geriatric and
dually diagnosed patients. All Outpatient Programs provide programming five or
six days a week. Treatments include daily group psychotherapy and individual
therapy conducted by therapists, nurses and mental health specialists who are
supervised by the appropriate department of the hospital or CMHC and by senior
clinical managers in the programs. In Outpatient Programs where the Company
retains designated staffing responsibilities, the Company provides program
administrators, and medical directors, and may provide nurses, community
liaisons and other clinical personnel. In these cases, the program administrator
generally has a degree in psychology or social work and several years of
experience in health care administration. Typically, the medical director is a
board-eligible or certified psychiatrist and the other professionals have
various levels of training in nursing, psychology or social work.
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Through its Outpatient Programs, the Company brings management
expertise to the health care provider with respect to the establishment,
development and operation of an outpatient program for SMI patients that is not
usually available on an in-house basis. Services provided under Outpatient
Program management contracts include complete program design and administration
from start-up through ongoing program operation. These programs are intended to
enhance the delivery of outpatient mental health services by introducing
proprietary clinical protocols and procedures, conducting quality assurance and
utilization reviews, advising on compliance with government regulations and
licensure requirements, supplying highly trained personnel, and expanding the
range of services provided. In addition, the programs also enhance the
management of financial and administrative services by providing support to the
providers and performing budget, financial and statistical analyses designed to
monitor facility performance. The Company believes these comprehensive features
enhance the efficiency and quality of care provided by its Outpatient Programs.
CASE MANAGEMENT PROGRAMS
PMR's Case Management Programs were created in 1993 to treat the SMI
population in a managed care environment. The case management model was
developed in part from proprietary clinical protocols and assessment tools which
were purchased in 1993 from leading researchers in the field of psychiatric
rehabilitation. Specifically, the Company's programs provide SMI individuals
with personalized, one-on-one services designed to stabilize their daily lives
and provide early intervention in crisis situations, thereby limiting the
catastrophic events which lead to inpatient hospitalizations. The Case
Management Programs utilize comprehensive protocols based upon a specific model
of intensive service coordination in conjunction with a case manager whose
responsibilities include consumer education, the development of crisis plans,
responding to crisis events, linking patients to emergency services, assessing
patient needs, reviewing patient treatment plans, and authorizing and reviewing
services. Case management services vary by market and need of the population and
may include 24-hour case management, crisis intervention, respite services,
housing assistance, medication management and routine health screening. PMR
believes that its Case Management Programs represent the core clinical tool for
managing the SMI population in either a capitated or fee-for-service environment
and enable its patients to live more healthy, independent, productive and
satisfying lives in the community.
PMR offers its case management services through long-term exclusive
management agreements with leading independent case management agencies or
CMHCs. Pursuant to those agreements, the Company contributes its proprietary
protocols and management expertise and, when necessary, negotiates case
management rates and contracts on behalf of the providers. The Company also
provides training, management information systems support, and accounting and
financial services. Presently, the Company has management agreements with two
case management agencies in Tennessee.
PMR provides its Case Management services principally in Davidson
County, Tennessee, presently serving approximately 2,200 consumers located
primarily in Nashville, Tennessee. The Company is in the process of terminating
or substantially restructuring its relationship with a case management agency in
Memphis due to contractual disputes and differences in operating philosophy.
During fiscal 1998, the Company reached agreement with its CMHC providers in
Arkansas to terminate Case Management services due to the repeated delays in
transitioning the Arkansas Medicaid program to a managed care environment.
In 1998, the Company introduced an additional service in Tennessee,
known as Urgent Care. Urgent Care is a high acuity, crisis intervention service
designed for triage and stabilization of a patient at the time of highest
clinical need. The service involves a physician intervention and thus combines a
medical model at crises and assessment with the case management model for
on-going maintenance. The Company anticipates introducing this service into
additional markets in Tennessee in fiscal 1999.
CHEMICAL DEPENDENCY PROGRAMS
Through a wholly-owned subsidiary, the Company operates and manages
programs devoted exclusively to substance abuse and rehabilitation in ambulatory
settings, primarily to patients of managed care organizations in Southern
California. The Company's chemical dependency and substance abuse programs are
operated both as free-standing treatment services or as part of a Management
Services Agreement with health care providers. All programs have received
accreditation by the Joint Commission of American Health Organizations
("JCAHO").
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The Company also offers chemical dependency programs that have been
specially developed with application to public sector clients. Public sector
clients with chemical dependency problems often are also dually diagnosed with a
mental illness. Bridging the gap between the two systems (i.e. chemical abuse
and mental health) is often difficult due to different funding streams,
treatment philosophies and regulations pertaining to Medicaid and other public
sector payors. Meeting the needs of the public sector dually diagnosed client
requires cross training of staff and development of linkage between traditional
chemical dependency providers and providers of behavioral health services.
The Company operates four outpatient programs in southern California
under the name of Twin Town Treatment.
SITE MANAGEMENT AND CLINICAL INFORMATION
In January 1997, the Company began the development of a site management
and clinical information division. This division seeks to participate in
clinical trials and collect clinical information related to pharmaceutical and
non-pharmaceutical clinical practice. The Company's objective is to build a
business model that contributes to the Company's revenues and earnings and to
develop an information asset that can improve and define "best practices" for
the SMI patient population. On January 24, 1997, the Company signed an agreement
with the Applied Healthcare Informatics division of United Healthcare with
respect to developing this business.
The Company believes that its expanding service base is an excellent
platform for the development of research and clinical information business
lines. Key to that assumption is the Company's direct access to a large number
of individuals with SMI. Presently, the Company believes that it has access,
through programs it manages and through contracts providers, to more than 20,000
individuals diagnosed with SMI. In November 1997 the Company signed an agreement
with Insite Clinical Trials, Inc. for the specific development and training of
Company sites for participation in clinical trials, as well as the marketing of
those sites to sponsors of clinical trials. InSite Clinical Trials is now a
wholly owned subsidiary of United Healthcare, Inc.
The genetic and neurobiological bases of severe mental disorders will
continue to be the focus of intensive research attention in the field.
Presently, numerous pharmaceutical companies and drug development companies have
compounds in various stages of development which are targeted for the treatment
of these disorders. The development of these compounds requires extensive
pre-clinical and clinical testing phases, many aspects of which are outsourced
to global contract research organizations ("CROs"). The Company's current
research network includes six locations with qualified investigators and study
coordinators. The Company plans to expand the network to between ten and twelve
locations by the end of fiscal 1999. The Company anticipates that the site
management and clinical information initiative will be contributed to Stadt
Solutions as part of the venture between the Company and Stadtlander.
STADT SOLUTIONS
The Company and Stadtlander have entered into a binding subscription
agreement to form Stadt Solutions, a Delaware limited liability company. Stadt
Solutions will offer specialty pharmaceutical services to individuals with SMI.
The joint venture will also offer site management and clinical information
services to pharmaceutical companies, health care providers and public sector
purchasers. It is expected that ownership of Stadt Solutions will be held 50.1%
by PMR and 49.9% by Stadtlander. Following formation, Stadtlander will be
entitled to receive a priority distribution approximately equivalent to the
operating income Stadtlander expected to be generated by Stadtlander's existing
base of approximately 6,000 clients whom the parties expect will choose to
receive services from the venture. The incremental operating income in excess of
this base, if any, will be distributed equally to the Company and Stadtlander.
The venture will commence business with operations serving clients
through fourteen pharmacies in thirteen states serving approximately 6,000
clients. These individuals are presently receiving the drug clozaril, an
anti-psychotic for schizophrenia, as well as blood monitoring services. Stadt
Solutions will seek to offer patients expanded services, including dispensing of
all of the pharmaceuticals needed by these individuals and providing disease
management services to improve compliance and education for the patient, the
physician and family
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members. The Company believes that Stadt Solutions will be the first specialty
pharmacy company devoted to serving the needs of individuals with an SMI.
PROGRAM LOCATIONS
<TABLE>
<CAPTION>
LOCATION (STATE, CITY) SERVICE PROVIDED
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<S> <C>
California San Diego Outpatient, Clinical Research
Culver City Outpatient
Santee Outpatient
San Francisco Outpatient
Los Angeles Outpatient
Studio City Outpatient
Oakland Outpatient
Santa Ana Outpatient
Vista Outpatient
Union City Outpatient
Riverside Outpatient
San Bernardino Outpatient
Rosemead Outpatient
Sacramento Outpatient, Clinical Research
Orange Outpatient, Chemical Dependency
San Jose Outpatient
La Jolla Outpatient
Burbank Chemical Dependency
Los Alamitos Chemical Dependency
Torrance Chemical Dependency
Encinitas Clinical Research
Alabama Birmingham Pharmacy*
Arizona Phoenix Outpatient
Tempe Outpatient
Arkansas Little Rock Outpatient (2), Clinical Research
Colorado Denver Outpatient (2)
Georgia Atlanta Pharmacy*
Hawaii Honolulu Outpatient, Pharmacy*
Illinois Chicago Outpatient, Pharmacy*
Kentucky Frankfort Outpatient
Bowling Green Outpatient
Mayfield Outpatient
Maine Portland Pharmacy*
Massachusetts Boston Pharmacy*
Michigan Detroit Outpatient (2), Clinical Research
Minnesota Minneapolis Pharmacy*
Missouri St. Louis Pharmacy*
New York Long Island Pharmacy*
North Carolina Charlotte Outpatient
Ohio Cleveland Outpatient
Pennsylvania Pittsburgh Pharmacy*
Philadelphia Pharmacy*
South Carolina Columbia Pharmacy*
Tennessee Kingsport Outpatient
Madison Outpatient
Nashville Outpatient, Case Management, Clinical Research
Memphis Case Management
Texas Austin Outpatient
Utah Salt Lake City Pharmacy*
Washington Bellevue Outpatient
</TABLE>
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<TABLE>
<CAPTION>
LOCATION (STATE, CITY) SERVICE PROVIDED
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<S> <C>
Seattle Pharmacy*
</TABLE>
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* Anticipated service and location upon formation of Stadt Solutions.
CONTRACTS
OUTPATIENT PROGRAMS
Each Outpatient Program is generally administered and operated pursuant
to the terms of written management or administrative contracts with providers.
These contracts generally govern the term of the program, the method by which
the program is to be managed by the Company, the responsibility of the provider
for licensure, billing, insurance and the provision of health care services, and
the methods by which the Company will be compensated. The contracts are
generally for a stated term between two and five years. Generally, contracts may
only be terminated with cause or upon the occurrence of certain material events
including changes in applicable laws, rules or regulations.
Revenues derived by the Company under these contracts generally fit
within three types of arrangements: (i) an all-inclusive fee arrangement based
on fee-for-service rates which provides that the Company is responsible for
substantially all program costs; (ii) a fee-for-service arrangement whereby
substantially all program costs are the responsibility of the provider; and
(iii) a fixed fee arrangement. The all-inclusive arrangements were in effect at
34 of the 39 Outpatient Programs operated during fiscal 1998 and constituted
approximately 62.4% of the Company's revenues for the year ended April 30, 1998.
Typical contractual agreements with these providers, primarily acute care
hospitals or CMHCs, require the Company to provide, at its own expense, specific
management personnel for each program site. Regardless of the type of
arrangement with the provider, all medical services rendered in the programs are
provided by the provider.
A significant number of the Company's contracts require the Company to
indemnify the provider for some or all of the management fee paid to the Company
if either third-party reimbursement for mental health services provided to
patients of the programs is denied or if the management fee paid to the Company
is not reimbursable by Medicare. See "Risk Factors -- Dependence Upon Medicare
Reimbursement," "-- Sufficiency of Existing Reserves to Cover Reimbursement
Risks," "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Business -- Regulatory Matters."
In February 1998, the Company announced that Scripps Health had
received a letter from an official at Region IX of HCFA, informing Scripps
Health that its partial hospitalization programs managed by the Company could no
longer be considered "provider based" for Medicare reimbursement purposes. In
July 1998, HCFA notified Scripps Health that certain of the programs are
approved as "provider based" and that certain other program locations are not
"provider based" because they did not meet HCFA's service area requirements. As
a result of HCFA's notice, the Company and Scripps Health amended their
contract, Scripps Health reconfigured certain of its partial hospitalization
programs and one of the locations was acquired by another provider who engaged
the Company to manage the program. While to the Company's knowledge, no other
Company programs have received provider based challenges to date, it is possible
that these challenges will emerge with other providers and that the Company may
not be able to amend its contracts to satisfy HCFA or its provider customers.
As the Outpatient Programs mature and increase in number, the Company
anticipates that as a matter of normal business development, contract
terminations may occur on a periodic basis. In the past, if a contract was
terminated, the Company has been successful in contracting with another provider
in the program's geographic area. There can be no assurance that the Company
will be able to successfully replace such terminated contracts or programs in
the future.
The Company's Outpatient Program contracts covering sites operated by
hospitals operating under Scripps Health, a San Diego provider, accounted for
approximately 13.9% and 12.6% of the Company's revenues for fiscal
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1998 and fiscal 1997, respectively. No other provider accounted for more than
10% of the Company's revenues for fiscal 1998.
CASE MANAGEMENT PROGRAMS
Each Case Management Program is generally administered pursuant to a
management and affiliation agreement with a contracting provider and operates
through a wholly owned subsidiary of the Company. The Company is responsible for
developing and implementing detailed operating protocols relating to training
procedures, management information systems, utilization review, coordination of
quality assurance, contract development and other management and administrative
services, and, under certain contracts, the provision of mental health services.
Pursuant to the terms of the management and affiliation agreements, the Company
manages and operates, on behalf of each case management provider, the delivery
of case management and other covered psychiatric services. The case management
provider is responsible for staff personnel and program facilities, and retains
final discretionary authority to approve the related policy manual, staffing
issues and overall program operations.
The terms of the management and affiliation agreements are six years
and may only be terminated for cause upon the occurrence of such events as (i) a
loss of accreditation or other required licensing or regulatory qualifications,
(ii) material breach by either party, (iii) certain legislative or
administrative changes that may adversely affect the continued operation of the
program and (iv) failure to achieve certain performance targets after designated
notice and cure periods. In the Fall of 1995, the Company commenced the
operation of its Case Management Programs with two case management agencies in
Nashville, Tennessee and Memphis, Tennessee. In March and April of 1996, the
Company also executed management and affiliation agreements with three CMHCs in
Arkansas, which became operational in 1996. In September 1997 and in May 1998
the Company reached agreement with its CMHC providers to close its Case
Management Programs in Arkansas. The Company is engaged in arbitration with a
case management agency in Memphis regarding disputes involving the management
and affiliation agreement. The Company cannot predict the outcome of the
arbitration. The Company expects to terminate or substantially restructure the
relationship with the case management agency in fiscal 1999. See "Risk Factors
- --Concentration of Revenues" and "-- Limited Operating History of Case
Management Programs."
Commencing in July 1996, two managed care consortiums became the payors
for mental health care services under the Tennessee Tenncare Partners State
Medicaid Managed Care Program ("TennCare"). These consortiums, known as
Tennessee Behavioral Health ("TBH") and Premier Behavioral Health ("Premier"),
were fully at-risk for the approximately 1.2 million individuals who qualified
for coverage based on Medicaid eligibility or other indigency standards. The
Company has a contract for a Case Management Program with Premier. The Company
received notice of termination of its contract with TBH effective December 10,
1997. The parties were unable to negotiate a new contract, however, the Company
has continued to provide services to, and receive payments from, TBH at reduced
rates. In February 1998, Magellan Health Services, Inc. acquired Merit
Behavioral Health Care, Inc. and thus became the managing shareholder of TBH.
Magellan, through its Green Spring subsidiary, is also the managing shareholder
of Premier. The Company is presently renegotiating its rates with Premier and
anticipates that Premier will take over TBH's business, which may result in the
Company's contract with Premier applying to all the Company's case management
services in Tennessee. Some uncertainty exists as to the future structure of
TennCare. See "Risk Factors -- Potential Changes in TennCare."
Case management contracts in Tennessee accounted for 21.6% and 23.7% of
the Company's revenues for fiscal 1998 and fiscal 1997, respectively.
MARKETING AND DEVELOPMENT
PMR's principal marketing efforts with respect to its Outpatient and
Case Management Programs are concentrated in the identification of prospective
hospitals, CMHCs and case management agencies which may be suitable providers.
Providers that may contract for the Company's services are identified through an
analysis of market need, discussions with key individuals in the prospective
area, and an assessment of the financial and clinical profile of the provider.
The Company also markets the benefits of its Outpatient, Case Management and
Urgent Care Programs to managed care organizations and their provider networks
as public sector contracts are awarded. The development of the Chemical
Dependency Programs focuses on expanding current contractual relationships,
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obtaining new provider contracts and marketing primarily to at-risk payors where
ambulatory chemical dependency services are of significant value.
The Company's marketing efforts with providers are undertaken by its
own marketing and development personnel who focus upon the dissemination of
information about the benefits of the Company's programs. The Company believes
that its ability to secure new contracts with providers is based on its
reputation for quality and the uniqueness of its services in its market areas.
REGULATORY MATTERS
COMPLIANCE WITH MEDICARE GUIDELINES; REIMBURSEMENT FOR PARTIAL HOSPITALIZATION
PROGRAMS
A significant component of the Company's revenues are derived from
payments made by providers to the Company for the management and administration
by the Company of Outpatient Programs managed for providers. The Company bills
its management fee to the provider as a purchased management and administrative
support service. Substantially all of the patients admitted to these programs
are eligible for Medicare coverage and thus, the providers rely upon payment
from Medicare. The providers are reimbursed their costs on an interim basis by
Medicare fiscal intermediaries and the providers submit annual cost
reimbursement reports to the fiscal intermediaries for audit and payment
reconciliation. The providers seek reimbursement of the Company's management
fees from these fiscal intermediaries as part of their overall payments from
Medicare. Under certain of the Company's contracts the Company is obligated to
indemnify the provider for all or some portion of the Company's management fees
that may be disallowed to the provider. In the event a significant amount of
such fees are disallowed for providers, there could be a material adverse effect
upon the Company's financial condition and results of operations. In addition,
to the extent that providers who contract with the Company for management
services suffer material losses in Medicare payments, there is a greater risk of
non-payment by the providers, and a risk that the providers will terminate or
not renew their contracts with the Company. Thus, even though the Company is not
paid by Medicare, it may be adversely affected by reductions in Medicare
payments or other Medicare policies. See "Risk Factors-Dependence Upon Third
Party Reimbursement" below and "Item 7. Management's Discussion And Analysis Of
Financial Condition And Results Of Operations."
The Medicare Program is part of a federal health program created in
1965 as part of the federal social security system. It is administered by the
U.S. Department of Health and Human Services which has established Health Care
Financing Administration ("HCFA") to promulgate rules and regulations governing
the Medicare program and the benefits associated therewith.
Medicare guidelines indicate that, subject to certain regulatory
requirements relating to reasonable costs imposed upon a Provider, contract
management services may be used in lieu of or in support of in-house staff of
the provider and are reimbursable by Medicare. As a general rule, Medicare
guidelines indicate that contract management services costs related to
furnishing services covered by Medicare are reasonable if the costs incurred are
comparable with marketplace prices for similar services. Management of the
Company believes that the value of the Company's services is comparable with
marketplace prices for similar services.
HCFA has published criteria which partial hospitalization services must
meet in order to qualify for Medicare funding. In transmittal number 1303
(effective January 2, 1997) and in subsequent criteria published in Section
230.50 of the Medicare Coverage Manual, HCFA requires partial hospitalization
services to be: (i) incident to a physician's service; (ii) reasonable and
necessary for the diagnosis or treatment of the patient's conditions; and (iii)
provided by a physician with a reasonable expectation of improvement of the
patient from the treatment. The Medicare criteria for coverage, specifically
what is "reasonable and necessary" in particular cases is a subjective
determination on which health care professionals may disagree. Moreover, the
fiscal intermediaries which administer the Medicare program and evaluate and
process claims for payment, establish local medical review policies which may
have a material adverse effect on the Company's results of operations. How
Medicare applies its "reasonable and necessary" standard is not always
consistent, and that standard may be interpreted in the future in a manner which
is more restrictive than currently prevailing interpretations. The Company and
its providers have quality assurance and utilization review programs to monitor
partial hospitalization programs managed by the Company to ensure that such
programs operate in compliance with the Company's understanding of all Medicare
coverage requirements.
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All of the partial hospitalization programs managed by the Company are
required to be "provider based" programs by HCFA, which administers the Medicare
program. This designation is important since partial hospitalization services
are covered only when furnished by or "under arrangement" with, a "provider",
i.e., a hospital or a CMHC. To the extent that partial hospitalization programs
are not operated in a manner which is deemed by HCFA to satisfy its "provider
based" criteria, there would not be Medicare coverage for the services furnished
at that site under Medicare's partial hospitalization benefit. In August 1996,
HCFA published (and in 1998 substantially reissued) criteria for determining
when programs operated in facilities separate from a hospital's or CMHC's main
premises may be deemed to be "provider based" programs. The proper
interpretation and application of these criteria are not entirely clear, and are
applied on a case by case basis, thereby creating a risk that some of the sites
managed by the Company will be found not to be "provider based." If such a
determination is made, HCFA may cease reimbursing for the services of the
provider and has not ruled out, in some situations, the possibility that it
would seek retrospective recoveries from providers. Any such cessation of
reimbursement for services or retrospective recoveries could result in
non-payment by providers and have a material adverse effect on the Company's
business, financial condition and results of operations. See "Risk Factors -
Dependence Upon Third Party Reimbursement."
In February 1998, the Company announced that Scripps Health had
received a letter from an official at Region IX of HCFA, informing Scripps
Health that its partial hospitalization programs managed by the Company could no
longer be considered "provider based" for Medicare reimbursement purposes. In
July 1998, HCFA notified Scripps Health that certain of the programs were
approved as "provider based" and that certain other program locations are not
"provider based" because they did not meet HCFA's service area requirements. As
a result of HCFA's notice, the Company and Scripps Health amended their
contract, Scripps Health reconfigured certain of its partial hospitalization
programs and one of the locations was acquired by another provider who engaged
the Company to manage the program. While to the Company's knowledge, no other
Company programs have received provider based challenges to date, it is possible
that these challenges will emerge with other providers and that the Company may
not be able to amend its contracts to satisfy HCFA or its provider customers.
See "Business - Contracts - Outpatient Programs."
Historically, CMHCs, unlike hospitals, were not surveyed by a Medicare
contractor before being permitted to participate in the Medicare program.
However, HCFA is now in the process of surveying all CMHCs to confirm that they
meet all applicable Medicare conditions for furnishing partial hospitalization
programs. Management believes that all the CMHCs which contract with the Company
should be found to be in compliance with the applicable requirements, but it is
possible that some CMHCs contracting with the Company will be terminated from
the Medicare program. It is also possible that the government will attempt to
recover payments made to such CMHCs for services which had been furnished by the
Company and paid for by Medicare.
CHANGES IN MEDICARE'S COST BASED REIMBURSEMENT FOR PARTIAL HOSPITALIZATION
SERVICES
The Balanced Budget Act of 1997 requires the implementation of a
prospective payment system ("PPS") for all outpatient hospital services,
including partial hospitalization, for the calendar year beginning January 1,
1999. Under such a system, a predetermined rate would be paid to providers
regardless of the provider's reasonable costs. While the actual reimbursement
rates have not been determined and thus their effect, positive or negative, is
unknown, the Company anticipates that it may need to negotiate modifications to
its contracts with providers if the system is implemented. The initial date for
publishing the proposed PPS rates was May 1998. Recent concerns over HCFA's
compliance with year 2000 computer issues have raised the possibility of
significant delays in such implementation. The uncertainty regarding PPS has
negatively effected the Company's marketing of new programs due to provider's
uncertainty regarding the economic impact of the new rates. While the Company
cannot predict the impact of continued delays on the Company's marketing
program, it could have a material adverse effect on the Company's ability to
sign new contracts and retain existing contracts.
The Medicare partial hospitalization benefit has a coinsurance feature,
which means that the amount paid by Medicare is the provider's reasonable cost
less "coinsurance" which is ordinarily to be paid by the patient. The
coinsurance amount is 20% of the charges for the services and must be charged to
the patient by the provider unless the patient is indigent. If the patient is
indigent or if the patient does not pay the provider the billed coinsurance
amounts after reasonable collection efforts, the Medicare program has
historically paid those amounts as "allowable Medicare bad debts." The
allowability of Medicare bad debts to providers for whom the Company manages
partial
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<PAGE> 12
hospitalization programs is significant since most of the patients in programs
managed by the Company are indigent or have very limited resources. The Balanced
Budget Act of 1997 reduces the amount of Medicare allowable bad debts payable to
hospital providers, as follows: 25% for provider fiscal years beginning on or
after October 1, 1997; 40% for provider fiscal years beginning on or after
October 1, 1998; and 45% for provider fiscal years beginning on or after October
1, 1999. The reduction in "allowable Medicare bad debts" could have a materially
adverse effect on Medicare reimbursement to the Company's hospital providers and
could further result in the restructuring or loss of Provider contracts with the
Company. It is also possible that the reduction in reimbursable allowable bad
debt by Medicare could be extended to CMHC providers.
COMPLIANCE WITH MEDICAID REGULATIONS AND POTENTIAL CHANGES
Since the Company is involved with state Medicaid agencies and with
providers whose clients are covered by Medicaid, the Company must comply with
the laws and regulations governing such reimbursement. Medicaid is a joint state
and federally funded program established as part of the Social Security Act in
the mid-1960s to provide certain defined health care benefits to poor, indigent
or otherwise eligible general welfare recipients. As states consider methods to
control the cost of health care services generally, and behavioral health
services specifically, to Medicaid recipients, and because such recipients are,
as a group, heavy users of the type of services which the Company offers, the
effect of Medicaid reimbursement and regulatory compliance with its rules could
be material to the Company's financial condition and results of operations.
Medicaid funding and the methods by which services are supplied to
recipients are changing rapidly. Many states have "carved out" behavioral health
services from the delivery of other health services to Medicaid recipients and
are separately procuring such services on a capitated basis requiring the
contractor, and permitting subcontracted providers, to assume risk.
The Company cannot predict the extent or scope of changes which may
occur in the ways in which state Medicaid programs contract for and deliver
services to Medicaid recipients. All Medicaid funding is generally conditioned
upon financial appropriations to state Medicaid agencies by the state
legislatures and there are ever-increasing uncertain political pressures on such
legislatures in terms of controlling and reducing such appropriations. The
overall trend is generally to impose lower reimbursement rates and to negotiate
reduced contract rates with providers, including incentives to assume risk not
only by licensed managed care organizations with whom state Medicaid agencies
contract, but by subcontracted providers, such as the Company. Part of the
Company's strategy for growth depends upon obtaining continued and increased
contracts with managed care organizations to provide behavioral health managed
care services to Medicaid recipients. Consequently, any significant reduction in
funding for Medicaid programs could have a material adverse effect on the
Company's business, financial condition and results of operations.
The United States Congress continues to consider legislation to
substantially alter the overall Medicaid program, to give states greater
flexibility in the design and operation of their individual Medicaid program,
and to stabilize federal spending for such benefits. Various states are also
considering substantial health care reform measures which could modify the
manner in which all health services are delivered and reimbursed, especially
with respect to Medicaid recipients and with respect to other individuals funded
by public resources. The reduction in other public resources could have an
impact upon the delivery of services to Medicaid recipients.
Many of the patients served in the Outpatient Programs managed by the
Company are indigent or have very limited resources. Accordingly, many of those
patients have Medicaid coverage in addition to Medicare coverage. In some of the
states where the Company furnishes services, the state Medicaid plans have paid
the Medicare coinsurance amount. However, under the Balanced Budget Act of 1997,
states will no longer have to pay such amounts if the amount paid by Medicare
for the service equals or exceeds what Medicaid would have paid had it been the
primary insurer. To the extent that states take advantage of this new
legislation and refuse to pay the Medicare coinsurance amounts on behalf of the
Outpatient Program patients to the extent that they had in the past, it will
have an adverse effect on the providers with whom the Company contracts, and
thus, may have a material adverse effect on the Company's business, financial
condition and results of operations.
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COMPLIANCE WITH OTHER STATE REGULATORY CONSIDERATIONS
The Company is also sensitive to the particular nature of the delivery
of behavioral health services and various state and federal requirements with
respect to confidentiality and patient privacy. Indeed, federal and state laws
require providers of certain behavioral health services to maintain strict
confidentiality as to treatment records and, the fact of treatment. There are
specific requirements permitting disclosure, but inadvertent or negligent
disclosure can trigger substantial criminal and other penalties.
SPECIFIC LICENSING OF PROGRAMS
The Company's Outpatient Programs are operated as outpatient
departments of hospitals or CMHCs, thus subjecting such programs to regulation
by federal, state and local agencies. These regulations govern licensure and
conduct of operations at the facilities, review of construction plans, addition
of services and facilities and audit of cost allocations, cost reporting and
capital expenditures. The facilities occupied by the programs must comply with
the requirements of municipal building, health and fire codes. Inclusion of
hospital space where the Outpatient Programs are furnished within the hospitals'
license, when required under applicable state laws, is a prerequisite to
participation in the Medicare programs. Additionally, the Provider's premises
and programs are subject to periodic inspection and recertification.
FALSE CLAIMS INVESTIGATIONS AND ENFORCEMENT OF HEALTH CARE FRAUD LAWS
The Office of the Inspector General within the U.S. Department of
Health and Human Services, as well as other federal, state, and private
organizations, are aggressively enforcing their interpretation of Medicare and
Medicaid laws and policies, and other applicable standards. Often in such
enforcement efforts, the government has relied on the Federal False Claims Act.
Under that law, if the government prevails in a case, it is entitled to treble
damages plus not less than $5,000 nor more than $10,000 per claim, plus
reasonable attorney fees and costs. In addition, a person found to have
submitted false claims can be excluded from governmental health care programs
including Medicare and Medicaid. If a provider contracting with the Company were
excluded from governmental health programs, no services furnished by that
provider would be covered by any governmental health program. Some of the
providers contracting with the Company are reported to be under active
investigation for health care fraud, although the Company is not aware of those
investigations relating to programs with which the Company is involved. If the
Company were excluded from governmental health programs, providers contracting
with the Company could not be reimbursed for amounts paid to the Company.
To prevail in a False Claims Act case, the government need show only
that incorrect claims were submitted with "reckless disregard" or in "deliberate
ignorance" of the applicable Medicare law. The government does not have to prove
that the claims were submitted with the intent to defraud a governmental or
private health care payor. The qui tam provisions of the Federal False Claims
Act permit individuals also to bring suits under the False Claims Act. The
incentive for an individual to do so is that he or she will usually be entitled
to approximately 15% to 30% of any ultimate recovery. Under the Federal False
Claims Act, the Office of the Inspector General, in conjunction with the
Department of Justice, have successfully made demands on thousands of providers
to settle alleged improper billing disputes at double damages or more. Although
the Company does not bill governmental programs directly, it could possibly be
liable under the False Claims Act to the extent that it is found to have
"caused" false claims to have been presented.
In February 1998, the Company announced that an Outpatient Program that
it formerly managed in Dallas, Texas was the subject of a civil investigation
conducted by the U.S. Department of Health and Human Services' Office of
Inspector General and the U.S. Attorney's office in Dallas, Texas. See "Item 3.
Legal Proceedings."
In addition, the Company was informed on July 20, 1998 that a qui tam
suit had been filed by a former employee of the Company against a subsidiary of
the Company. See "Item 3. Legal Proceedings."
There are many other civil and criminal statutes at the federal and
state levels that may penalize conduct related to submitting false claims for
health care services or for offering or receiving anything of value in exchange
for the referral of patients. The penalties under many of those statutes are
severe, and the government often need not
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prove intent to defraud in order to prevail. Management believes that the
Company is in material compliance with applicable regulatory and industry
standards. However, in light of the complexity of the policies governing
governmental health care programs together with changing and uncertain
interpretations of those policies, it is impossible to be absolutely assured
that the government (or a qui tam relator in the name of the government) will
not assert that some conduct by the Company has given rise to potentially a
large liability.
In the past, there have been occasions when Medicare fiscal
intermediaries have denied coverage for all or substantially all of the claims
submitted by the providers where the Company had a management contract. Such
denials have occurred even though a physician has certified that the Outpatient
Program services were medically necessary. Notwithstanding the Company's ongoing
efforts to assure that the Outpatient Program services furnished by it under
contract are consistent with its understanding of the Medicare coverage
criteria, it is possible that there will be future occasions when a substantial
number of services furnished at a site managed by the Company will be denied
coverage. The Health Insurance Portability and Accountability Act of 1996 grants
the U.S. Department of Health and Human Services broad authority to impose civil
monetary penalties on providers for certain activities. Among those activities
are the repeated submission of claims for services which are not medically
necessary. If there were again to be occasions when a Medicare fiscal
intermediary denied a large number of claims for a site managed by the Company,
it is possible that the government would seek sanctions from the provider and
possibly from the Company. While the Company believes that it would be
inappropriate for the government to seek such sanctions for services for which
the coverage criteria are interpreted differently at different times and which
have been ordered by a physician, it is not clear at this time how the
government will apply this new authority.
COMPETITION
In general, the operation of psychiatric programs is characterized by
intense competition. General, community and specialty hospitals, including
national companies and their subsidiaries, provide many different health care
programs and services. The Company anticipates that competition will become more
intense as pressure to contain the rising costs of health care continues to
intensify, particularly as programs such as those operated by the Company are
perceived to help contain mental health care costs. Many other companies engaged
in the management of outpatient psychiatric programs compete with the Company
for the establishment of affiliations with acute care hospitals. Furthermore,
while the Company's existing competitors in the case management business are
predominantly not-for-profit CMHCs and case management agencies, the Company
anticipates that other health care management companies will eventually compete
for this business. Many of these present and future competitors are
substantially more established and have greater financial and other resources
than the Company. In addition, the Company's current and potential providers may
choose to operate mental health programs themselves rather than contract with
the Company. There can be no assurance that the Company will be able to compete
effectively with its present or future competitors, and any such inability could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company believes that the proprietary nature of its policy and
procedures manuals as well as the level of service it provides and the expertise
of its management and field personnel provides it with a leading position in the
development and management of Outpatient Programs. The Company believes that the
Case Management Programs provide the means to effectively control costs in a
managed, public-sector mental health system by reducing the costs for the
population that consumes the largest portion of the treatment dollars, the SMI
population. In addition, the Company believes that the Company's case management
model provides state-of-the-art treatment and rehabilitation services which
serve to upgrade the existing provider network in a community. The Company
believes the benefits of its case management model are recognized as a
distinguishing feature for public-sector managed care efforts.
The Company's primary existing competitors in the case management
business are predominantly not for profit CMHCs and case management agencies.
The Company anticipates that mental health managed care companies will
eventually compete for this business. There can be no assurances that the
Company will be able to compete successfully with its present or future
competitors.
The specialty pharmacy business is intensely competitive. There are
numerous local, regional and national companies which can dispense
pharmaceuticals locally or through the mail. There are also numerous companies
which provide lab work and analysis services necessary for blood monitoring.
Many of these companies have
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substantially greater resources than Stadt Solutions. While the Company believes
that Stadt Solutions will be the first specialty pharmacy company to focus on
SMI and further believes that Stadt Solutions will offer value added disease
management services not typically provided by competitors, there can be no
assurance that Stadt Solutions will be able to compete successfully with its
present or future competitors.
EMPLOYEES
As of July 15, 1998, PMR employed approximately 818 employees, of which
397 are full-time employees. Approximately 713 employees staff clinical programs
and approximately 105 are in corporate management including finance, accounting,
development, utilization review, training and education, information systems,
human resources and legal areas. None of the Company's employees are subject to
a collective bargaining agreement and the Company believes that its employee
relations are good.
RISK FACTORS
The Company's business is subject to a number of risks, including the
risks described in this section and elsewhere in this Annual Report on Form
10-K. The Company's actual results could differ materially from the results
projected in this Report or in any other forward-looking statements presented by
management from time to time, due to some or all of such risks.
Dependence Upon Medicare Reimbursement. A significant component of the
Company's revenues is derived from payments made by providers to the Company for
managing and administering Outpatient Programs for providers. Substantially all
of the patients admitted to the Outpatient Programs are eligible for Medicare
coverage. A provider's Medicare payments can be adversely affected by actions of
HCFA or fiscal intermediaries in several ways including: (i) denials of coverage
on claims for services furnished to Medicare eligible patients; (ii)
disallowances of costs claimed on the annual cost report on the grounds that
such costs are unreasonable, relate to uncovered services or are otherwise
non-allowable; or (iii) changes in the law or interpretation of the law
governing Medicare coverage and payment. Providers generally seek reimbursement
of the Company's management fees from the fiscal intermediaries as part of their
overall payments from Medicare, and payment of the Company's management fee may
be directly affected by the reimbursement experience of the provider.
In certain instances, providers are not obligated to pay the Company's
management fee if coverage for claims submitted by the provider related to
services furnished by the Company are denied by Medicare's fiscal intermediary.
In other instances, the Company may be obligated to indemnify a provider to the
extent the Company's management fee charged to the provider is disallowed by
Medicare's fiscal intermediary for reimbursement. The occurrence of either of
these events with respect to a significant number of providers or a significant
amount of fees could have a material adverse effect upon the Company's business,
financial condition and results of operations. See "Business -- Regulatory
Matters -- Compliance With Medicare Guidelines; Reimbursement For Partial
Hospitalization Programs."
The Company's programs have in the past, and may in the future, from
time to time, be subject to Focused Medical Reviews. A "Focused Medical Review"
consists of an intensive review by fiscal intermediaries of HCFA, on an
industry-wide basis, of certain targeted claims. Focused Medical Reviews may
occur for a number of reasons including, without limitation, an intermediary's
concern about coverage for claims at a specific site or because HCFA has
identified certain services as being at risk of inappropriate program payment.
This generally occurs when HCFA identifies significant industry-wide increases
in payments for certain types of services, as had been the case with partial
hospitalization benefits.
During 1997 and 1998, HCFA has increased its scrutiny of outpatient
psychiatric services due to a significant increase in charges to Medicare for
outpatient partial hospitalization and other mental health services. The Company
believes that Focused Medical Reviews and related denials are increasing
throughout the industry, including at programs managed by the Company. Any
denied claims resulting from future Focused Medical Reviews could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business --Regulatory Matters -- Compliance With
Medicare Guidelines; Reimbursement For Partial Hospitalization Programs."
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All of the partial hospitalization programs managed by the Company are
required under HCFA's current interpretation of the Medicare regulations, to be
"provider based" programs by HCFA. This designation is important since partial
hospitalization services are covered only when furnished by or "under
arrangement" with, a "provider", i.e., a hospital or a CMHC. To the extent that
partial hospitalization programs are not deemed by HCFA to be "provider based"
under HCFA's current interpretation of the Medicare regulations, there would not
be Medicare coverage for the services furnished at that site under Medicare's
partial hospitalization benefit. HCFA has published criteria for determining
when programs operated in facilities separate from a hospital's or CMHC's main
premises may be deemed to be "provider based" programs. The proper
interpretation and application of these criteria are not entirely clear, and
there is a risk that some of the sites managed by the Company will be found not
to be "provider based". If such a determination is made, HCFA may cease
reimbursing for the services at the provider, and HCFA has not ruled out the
possibility that, in some situations, it would seek retrospective recoveries
from providers. Any such cessation of reimbursement for services or
retrospective recoveries could result in non-payment by providers and have a
material adverse effect on the Company's business, financial condition and
results of operations.
In February 1998, the Company announced that Scripps Health had
received a letter from an official at Region IX of HCFA, informing Scripps
Health that its partial hospitalization programs managed by the Company could no
longer be considered "provider based" for Medicare reimbursement purposes. In
July 1998, HCFA notified Scripps Health that certain of the programs are
approved as "provider based" and that certain other program locations were not
"provider based" because they did not meet HCFA's service area requirements. As
a result of HCFA's notice, the Company and Scripps Health amended their
contract, Scripps Health reconfigured certain of its partial hospitalization
programs and one of the locations was acquired by another provider who engaged
the Company to manage the program. While to the Company's knowledge, no other
Company programs have received provider based challenges to date, it is possible
that these challenges will emerge with other providers and that the Company may
not be able to amend its contracts to satisfy HCFA or its provider customers. In
addition, there can be no assurance that HCFA will not challenge the "provider
based" status of the Scripps Health program in the future. If the Company is
unable to amend its contracts to satisfy any "provider based" challenge in the
future, the potential termination of any such contracts could have a material
adverse effect upon the Company's business, financial condition and results of
operations.
See "Business -- Contracts -- Outpatient Programs," "-- Regulatory
Matters -- Compliance with Medicare Guidelines; Reimbursement for Partial
Hospitalization Programs."
Impact of Health Care Reform and the Balanced Budget Act of 1997.
Political, economic and regulatory influences are subjecting the health care
industry in the United States to fundamental change. Changes in the law, new
interpretations of existing laws, or changes in payment methodology or amounts
may have a dramatic effect on the relative costs associated with doing business
and the amount of reimbursement provided by government or other third-party
payors. In addition to specific health care legislation, both the Clinton
Administration and various federal legislators have considered health care
reform proposals intended to control health care costs and to improve access to
medical services for uninsured individuals. These proposals have included
cutbacks to the Medicare and Medicaid programs and steps to permit greater
flexibility in the administration of the Medicaid program. In addition, some
states in which the Company operates are considering various health care reform
proposals. The Company anticipates that federal and state governments will
continue to review and assess alternative health care delivery systems and
payment methodologies, and that public debate on these issues will likely
continue in the future. Due to uncertainties regarding the ultimate features of
reform initiatives and their enactment, implementation and interpretation, the
Company cannot predict which, if any, of such reform proposals will be adopted,
when they may be adopted or what impact they may have on the Company.
Accordingly, there can be no assurance that future health care legislation or
other changes in the administration or interpretation of governmental health
care programs will not have a material adverse effect on the Company's business,
financial condition and results of operations.
The Balanced Budget Act of 1997 could adversely affect reimbursements
to certain providers and payments to the Company. The Medicare partial
hospitalization benefit has a coinsurance feature, which means that the amount
paid by Medicare is the provider's reasonable cost less "coinsurance" which is
ordinarily to be paid by the patient. The Medicare program has historically paid
amounts designated as the patient's coinsurance obligation where the patient is
indigent or if the patient does not pay the provider the billed coinsurance
amounts after reasonable collection efforts. Those amounts are characterized as
"allowable Medicare bad debts." The allowability of bad debts to providers is
significant because most of the patients in programs managed by the Company are
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<PAGE> 17
indigent or have very limited resources. The Balanced Budget Act of 1997 reduces
the amount of allowable Medicare bad debts payable to hospital providers, as
follows: 25% for provider fiscal years beginning on or after October 1, 1997;
40% for provider fiscal years beginning on or after October 1, 1998; and 45% for
provider fiscal years beginning on or after October 1, 1999. The reduction in
"allowable Medicare bad debts" could have a material adverse impact on Medicare
reimbursement to the Company's hospital Providers and could further result in
the restructuring or loss of provider contracts with the Company. It is also
possible that the reduction in reimbursable allowable bad debt by Medicare could
be expanded to CMHC providers. An adverse effect on Medicare reimbursement to
the Company's hospital providers, and if so expanded, on reimbursement to CMHC
providers, could have a material adverse effect upon the Company's business,
financial condition and results of operations. See "Business -- Regulatory
Matters -- Compliance With Medicare Guidelines; Reimbursement For Partial
Hospitalization Programs."
In addition, under the Balanced Budget Act of 1997, state Medicaid
plans that have historically paid the Medicare coinsurance amount will no longer
have to pay such amounts if the amount paid by Medicare for the service equals
or exceeds what Medicaid would have paid had it been the primary insurer. To the
extent that states take advantage of this new legislation and refuse to pay the
Medicare coinsurance amounts on behalf of the Outpatient Program patients to the
degree that they had in the past, it will have an adverse impact on the
providers with whom the Company contracts, and thus may have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Regulatory Matters -- Changes In Medicare's Cost Based
Reimbursement For Partial Hospitalization Services" and "-- Compliance With
Medicaid Regulations and Potential Changes."
The PPS to be implemented under the Balanced Budget Act of 1997 could
have an adverse effect on the business of certain providers and the Company.
While the actual reimbursement rates and methodology for the PPS have not been
determined and thus their effect is unknown, the Company may need to negotiate
modifications to its contracts with providers, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. Recent concerns over HCFA's compliance with year 2000 computer
issues have raised the possibility of significant delays in the implementation
of PPS. The uncertainty regarding PPS has negatively effected the Company's
marketing of new programs due to provider's uncertainty regarding the economic
impact of the new rates. While, the Company cannot predict the impact of
continued delays on the Company's marketing program, it could have a material
adverse impact on the Company's ability to sign new contracts and retain
existing contracts. See "Business -- Regulatory Matters -- Changes in Medicare's
Cost Based Reimbursement For Partial Hospitalization Services."
Sufficiency of Existing Reserves to Cover Reimbursement Risks. The
Company maintains significant reserves to cover the potential impact of two
primary uncertainties: (i) the Company may have an obligation to indemnify
certain providers for some portions of its management fee which may be subject
to disallowance upon audit of a provider's cost report by fiscal intermediaries;
and (ii) the Company may not receive full payment of the management fees owed to
it by a provider during the periodic review of the provider's claims by the
fiscal intermediaries. The Company has been advised by HCFA that certain
program-related costs are not allowable for reimbursement. The Company may be
responsible for reimbursement of the amounts previously paid to the Company that
are disallowed pursuant to obligations that exist with certain providers.
Although the Company believes that its potential liability to satisfy such
requirements has been adequately reserved in its financial statements, there can
be no assurance that such reserves will be adequate. The obligation to pay the
amounts estimated within the Company's financial statements (or such greater
amounts as are due), if and when they become due, could have a material adverse
effect upon the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business - Regulatory Matters - Compliance with
Medicare Guidelines; Reimbursement for Partial Hospitalization Programs.
Continuity of Management Contracts. Substantially all of the revenues
of the Company are derived from contracts with providers, behavioral health
organizations and case management agencies. The continued success of the Company
is subject to its ability to maintain, renew, extend or replace existing
management contracts and obtain new management contracts. These contracts
generally have defined terms of duration and many have automatic renewal
provisions. The contracts often provide for early termination either by the
provider if specified performance criteria are not satisfied or by the Company
under various other circumstances.
17.
<PAGE> 18
Contract renewals and extensions are likely to be subject to competing
proposals from other contract management companies as well as consideration by
certain providers to terminate their mental health programs or convert their
mental health programs from independently managed programs to programs operated
internally. There can be no assurance that any provider or case management
agency will continue to do business with the Company following expiration of its
management contract or that such management contracts will not be terminated
prior to expiration. In addition, any changes in the Medicare or Medicaid
program which have the effect of limiting or reducing reimbursement levels for
mental health services provided by programs managed by the Company could result
in the early termination of existing management contracts and could adversely
affect the ability of the Company to renew or extend existing management
contracts and to obtain new management contracts. The termination or non-renewal
of a significant number of management contracts could result in a significant
decrease in the Company's net revenues and could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business -- Contracts."
Potential Changes in TennCare. The Company has a contract for a Case
Management Program with Premier. In addition, the Company is presently
renegotiating its rates with Premier. The Company previously received a notice
of termination of its contract with TBH. The Company anticipates that Premier
may take over TBH's business, possibly resulting in the Company's contract with
Premier applying to all of the Company's case management services in Tennessee.
However, there can be no assurance that the Company's relationship with Premier
and TBH will be resolved as currently anticipated by the Company, and there can
be no assurance that the ultimate resolution of such matters will not have a
material adverse effect on the Company's business, financial condition and
results of operations. The TennCare program has been subjected to substantial
criticism which could result in structural changes which the Company cannot
predict with any degree of certainty, and which could have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, the Company is in the process of arbitrating its agreement
with a case management agency in Memphis and anticipates terminating or
substantially restructuring the agreement. See "Business -- Contracts -- Case
Management Programs." While the Company does not anticipate that
the outcome of this arbitration will have a material adverse effect on the
Company's business, the Company cannot predict the outcome of this matter or
other potential related changes or outcomes, with any degree of certainty, and
such results could individually or in the aggregate have a material adverse
effect on the Company's business, financial condition and results of operations.
Concentration of Revenues. For fiscal 1998, only one provider accounted
for more than 10% of the Company's revenue. In addition, although not attributed
to a particular "customer," the Case Management Programs accounted for 22.4% of
the Company's revenue for fiscal 1998. These programs were largely operated
under contracts with two managed care consortiums in the State of Tennessee and
management agreements with two case management agencies. A termination or
non-renewal of any of these contracts could have a material adverse effect on
the Company's business, financial condition and results of operations. See " --
Potential Changes in TennCare," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business --Programs and
Operations" -- Case Management Programs" and "Contracts -- Case Management
Programs."
Limited Operating History of Case Management Programs. The operations
of the Company's Case Management Programs are subject to limited operating
history. Thus, the success of these programs will be dependent upon the
Company's ability to manage and expand operations effectively, control costs and
recognize operating efficiencies. By virtue of the lack of operating history,
there can be no assurance that the Company will be able to maintain these
operations at their current level or expand these programs in the future. See
"Risk Factors -- Potential Changes in TennCare," "-- Concentration of Revenues"
and "Business -- Programs and Operations" "-- Case Management Programs" and
"Contracts -- Case Management Programs."
Government Regulation. Mental health care is an area subject to
extensive regulation and frequent changes in those regulations. Changes in the
laws or new interpretations of existing laws can have a significant effect on
the methods of doing business, costs of doing business and amounts of
reimbursement available from governmental and other payors. In addition, a
number of factors, including changes in the healthcare industry and the
availability of investigatory resources, have resulted in increased scrutiny,
inquiry and investigations by various federal and state regulatory agencies
relating to the operation of healthcare companies, including the Company. The
Company is and will continue to be subject to varying degrees of regulation,
licensing, inquiry and investigation by
18.
<PAGE> 19
health or social service agencies and other regulatory and enforcement
authorities in the various states and localities in which it operates or intends
to operate. The Company's business is subject to a broad range of federal, state
and local requirements including, but not limited to, fraud and abuse laws,
licensing and certification standards, and regulations governing the scope and
quality of care. Violations of these requirements may result in civil and
criminal penalties and exclusions from participation in federal and state-funded
programs. The Company at all times attempts to comply with all such laws
including applicable Medicare and Medicaid regulations; however, there can be no
assurance that the expansion or interpretation of existing laws or regulations,
or the imposition of new laws or regulations, will not have a material adverse
effect on the Company's provider relationships or the Company's business,
financial condition and results of operations.
The U.S. Department of Health and Human Services has established HCFA
to administer and interpret the rules and regulations governing the Medicare
program and the benefits associated therewith. Applicable Medicare guidelines
permit the reimbursement of contracted management services provided that, among
other things, the associated fees are "reasonable." As a general rule, Medicare
guidelines indicate that the costs incurred by a provider for contract
management services relating to furnishing Medicare-covered services are deemed
"reasonable" if the costs incurred are comparable with marketplace prices for
similar services. Although management believes that the Company's charges for
its services are comparable with marketplace prices for similar services, the
determination of reasonableness may be interpreted by HCFA or a fiscal
intermediary in a manner inconsistent with the Company's belief. Notwithstanding
the Company's belief, a determination that the Company's management fees may not
be "reasonable" may have a material adverse effect on the Company's business,
financial condition and results of operations.
HCFA requires that partial hospitalization programs must meet certain
published criteria to qualify for Medicare funding, including that the partial
hospitalization services be reasonable and necessary for the diagnosis or
treatment of the patient's condition. The Medicare criteria for coverage,
specifically what is "reasonable and necessary" in particular cases, is a
subjective determination on which health care professionals may disagree.
Moreover, the fiscal intermediaries which administer the Medicare program and
evaluate and process claims for payment, establish local medical review policies
which may have a material adverse effect on the Company's results of operations.
Medicare does not always apply its "reasonable and necessary" standard
consistently, and that standard may be interpreted in the future in a manner
which is more restrictive than currently prevailing interpretations. Although
the Company and its providers have quality assurance and utilization review
programs to ensure that the partial hospitalization programs managed by the
Company are operating in compliance with the Company's understanding of all
Medicare coverage requirements, there can be no assurance that in the future
certain aspects of the Company's programs will not be found to have failed to
satisfy all applicable criteria for Medicare eligibility. See "Business --
Regulatory Matters -- Compliance With Medicare Guidelines; Reimbursement For
Partial Hospitalization Programs."
In February 1998, the Company announced that an Outpatient Program that
it formerly managed in Dallas, Texas was the subject of a civil investigation
conducted by the U.S. Department of Health and Human Services' Office of
Inspector General and the U.S. Attorney's office in Dallas, Texas. The
investigation resulted from a HCFA review of certain partial hospitalization
services rendered by the program. As of July 27, 1998, no formal complaint,
demand, or additional request for information has been made by the investigating
agencies. The Company is unable to predict the impact, if any, on the Company's
business, financial condition or results of operations, which may result from
the investigation or any claim or demand which may arise therefrom. See
"Business -- Regulatory Matters -- False Claims Investigations And Enforcement
Of Health Care Fraud Laws."
The Company was informed that a qui tam suit had been filed by a former
employee of the Company against a subsidiary of the Company. The Company is
unable to predict the impact, if any, that the claim and ultimate resolution
thereof may have on the Company's business, financial condition or results of
operations. See "Item 3. Legal Proceedings."
Historically, CMHCs, unlike hospitals, were not surveyed by a Medicare
contractor before being permitted to participate in the Medicare program.
However, HCFA is now in the process of surveying all CMHCs to confirm that they
meet all applicable Medicare conditions for furnishing partial hospitalization
programs. Management believes that all the CMHCs that contract with the Company
should be found in compliance with the applicable requirements. However, there
can be no assurance that some CMHCs contracting with the Company will not be
19.
<PAGE> 20
terminated from the Medicare program or that the government will not attempt to
recover payments made to such CMHCs for services, including payments relating to
the Company's services, which had been furnished and paid for by Medicare. See
"Business -- Regulatory Matters."
Risks Associated with Acquisitions. The Company currently intends as
part of its business strategy to pursue acquisitions of complementary businesses
as it seeks to compete in the rapidly changing healthcare industry. Acquisitions
involve numerous risks, including difficulties in assimilation of the operations
and personnel of the acquired business, the integration of management
information and accounting systems of the acquired business, the diversion of
management's attention from other business concerns, risks of entering markets
in which the Company has no direct prior experience, and the potential loss of
key employees of the acquired business. The Company's management will be
required to devote substantial time and attention to the integration of any such
businesses and to any material operational or financial problems arising as a
result of any such acquisitions. There can be no assurance that operation or
financial problems will not occur as a result of any such acquisitions. Failure
to effectively integrate acquired businesses could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company intends to continue to evaluate potential acquisitions of,
or investments in, companies which the Company believes will complement or
enhance its existing business. Future acquisitions by the Company may result in
potentially dilutive issuances of equity securities, the incurrence of
additional debt and amortization expenses related to goodwill and other
intangible assets which could adversely affect the Company's business, financial
condition and results of operations. There can be no assurance that the Company
will consummate any acquisition in the future or if consummated, that any such
acquisition will ultimately be beneficial to the Company.
Management of Rapid Growth. The Company expects that its outpatient
psychiatric management services business and the number of its Outpatient, Case
Management and Chemical Dependency Programs may increase significantly as it
pursues its growth strategy. If it materializes, this rapid growth will place
significant demands on the Company's management resources. The Company's ability
to manage its growth effectively will require it to continue to expand its
operational, financial and management information systems, and to continue to
attract, train, motivate, manage and retain key employees. If the Company is
unable to manage its growth effectively, its business, financial condition and
results of operations could be adversely affected.
Dependence on Key Personnel. The Company depends, and will continue to
depend, upon the services of its current senior management for the management of
the Company's operations and the implementation of its business strategy. In
addition, the Company's success is also dependent upon its ability to attract
and retain additional qualified management personnel to support the Company's
growth. The loss of the services of any or all such individuals or the Company's
inability to attract additional management personnel in the future may have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company presently has no employment agreements with
any of its senior executive officers.
The Company's success and growth strategy also will depend on its
ability to attract and retain qualified clinical, marketing and other personnel.
The Company competes with general acute care hospitals and other health care
providers for the services of psychiatrists, psychologists, social workers,
therapists and other clinical personnel. Demand for such clinical personnel is
high and they are often subject to competing offers. There can be no assurance
that the Company will be able to attract and retain the qualified personnel
necessary to support its business in the future. Any such inability may have a
material adverse effect on the Company's business, financial condition and
results of operations.
Competition. In general, the operation of psychiatric programs is
characterized by intense competition. General, community and specialty
hospitals, including national companies and their subsidiaries, provide many
different health care programs and services. The Company anticipates that
competition will become more intense as pressure to contain the rising costs of
health care continues to intensify, particularly as programs such as those
operated by the Company are perceived to help contain mental health care costs.
Many other companies engaged in the management of outpatient psychiatric
programs compete with the Company for the establishment of affiliations with
acute care hospitals. Furthermore, while the Company's existing competitors in
the case management business are predominantly not-for-profit CMHCs and case
management agencies, the Company anticipates that other health care management
companies will eventually compete for this business. Many of these present and
future
20.
<PAGE> 21
competitors are substantially more established and have greater financial
and other resources than the Company. In addition, the Company's current and
potential providers may choose to operate mental health programs themselves
rather than contract with the Company. There can be no assurance that the
Company will be able to compete effectively with its present or future
competitors, and any such inability could have a material adverse effect on the
Company's business, financial condition and results of operations.
The specialty pharmacy business is intensely competitive. There are
numerous local, regional and national companies which can dispense
pharmaceuticals locally or through the mail. There are also numerous companies
which provide lab work and analysis services necessary for blood monitoring.
Many of these companies have substantially greater resources than Stadt
Solutions. While the Company believes that Stadt Solutions will be the first
specialty pharmacy company to focus on SMI and further believes that Stadt
Solutions will offer value added disease management services not typically
provided by competitors, there can be no assurance that Stadt Solutions will
be able to compete successfully with its present or future competitors.
Availability and Adequacy of Insurance. The provision of mental health
care services entails an inherent risk of liability. In recent years,
participants in the industry have become subject to an increasing number of
lawsuits alleging malpractice or related legal theories, many of which involve
large claims and significant defense costs. The Company currently maintains
annually renewable liability insurance intended to cover such claims and the
Company believes that its insurance is in conformity with industry standards.
There can be no assurance, however, that claims in excess of the Company's
insurance coverage or claims not covered by the Company's insurance coverage
(e.g., claims for punitive damages) will not arise. A successful claim against
the Company not covered by, or in excess of, the Company's insurance coverage
could have a material adverse effect upon the Company's business, financial
condition and results of operations. In addition, claims asserted against the
Company, regardless of their merit or eventual outcome, could have a material
adverse effect upon the Company's reputation and ability to expand its business,
and could require management to devote time to matters unrelated to the
operation of the Company's business. There can be no assurance that the Company
will be able to obtain liability insurance coverage on commercially reasonable
terms in the future or that such insurance will provide adequate coverage
against potential claims.
Shares Eligible For Sale. Sales by holders of substantial amounts of
Common Stock could adversely affect the prevailing market price of the Common
Stock. The number of shares of Common Stock available for sale in the public
market is limited by restrictions under the Securities Act of 1933, as amended
(the "Securities Act"), including Rule 144 ("Rule 144") under the Securities
Act. As of July 24, 1998, the Company had 6,959,810 shares of Common Stock
outstanding. Of these shares, the officers and directors of the Company and
their affiliates own 2,172,420 shares and may acquire up to 768,175 shares that
may be issued upon the exercise of outstanding stock options and warrants. These
outstanding shares and shares issued upon the exercise of the options and
warrants are considered "restricted securities" and may be sold, subject to the
volume limitations under Rule 144.
Possible Volatility of Stock Price. The market price of the Common
Stock could be subject to significant fluctuations in response to various
factors and events, including, but not limited to, the liquidity of the market
for the Common Stock, variations in the Company's quarterly results of
operations, revisions to existing earnings estimates by research analysts and
new statutes or regulations or changes in the interpretation of existing
statutes or regulations affecting the health care industry generally or mental
health services in particular, some of which are unrelated to the Company's
operating performance. In addition, the stock market in recent years has
generally experienced significant price and volume fluctuations that often have
been unrelated to the operating performance of particular companies. These
market fluctuations also may adversely affect the market price of the Common
Stock.
Concentration of Ownership, Anti-Takeover Provisions. The officers and
directors of the Company and their affiliates own over 20% of the Company's
issued and outstanding Common Stock (and over 30% including shares issuable upon
currently exercisable stock options and warrants). Although the officers and
directors do not have any arrangements or understandings among themselves with
respect to the voting of the shares of Common Stock beneficially owned by such
persons, such persons acting together could elect a majority of the Company's
Board of Directors and control the Company's policies and day-to-day management.
The Company's Board of Directors has the authority, without action by the
stockholders, to issue shares of preferred stock and to fix the rights and
preferences of such shares. The ability to issue shares of preferred stock,
together with certain provisions of Delaware law and certain provisions of the
Company's Restated Certificate of Incorporation, such as staggered
21.
<PAGE> 22
terms for directors, limitations on the stockholders' ability to call a meeting
or remove directors and the requirement of a two-thirds vote of stockholders for
amendment of certain provisions of the Restated Certificate of Incorporation or
approval of certain business combinations, may delay, deter or prevent a change
in control of the Company, may discourage bids for the Common Stock at a premium
over the market price of the Common Stock and may adversely affect the market
price of, and the voting and other rights of the holders of, the Common Stock.
Year 2000 Compliance. The year 2000 issue is the result of computer
applications being written using two digits rather than four to define the
applicable year. Computer applications may recognize a date using "00" as the
year 1900 rather than the year 2000, resulting in system failures or
miscalculations causing disruption of operations. The Company has reviewed its
material computer applications for year 2000 compliance and is working with
vendors and suppliers to make its computer applications year 2000 compliant.
However, if any such corrections cannot be completed on a timely basis, the year
2000 issue could have a material adverse impact on the Company's business,
financial condition and results of operations. Because of the many uncertainties
associated with year 2000 compliance issues, and because the Company's
assessment is necessarily based on information from third party vendors and
suppliers, there can be no assurance that the Company's assessment is correct or
as to the materiality or effect of any failure of such assessment to be correct.
The Company has not determined whether and to what extent computer
applications of contract providers and Medicare and other payors will be year
2000 compliant. In addition, the Company has not determined the extent to which
any disruption in the billing practices of providers or the payment practices of
Medicare or other payors caused by the year 2000 issues will affect the
Company's operations. However, any such disruption in the billing or
reimbursement process could have a substantial adverse impact on Medicare or
Medicaid payments to providers and, in turn, payments to the Company. Any such
disruption could have a material adverse effect upon the Company's business,
financial condition and results of operations. See "Management's Discussion And
Analysis of Financial Condition And Results of Operations -- Impact of Year 2000
Computer Issues."
ITEM 2. PROPERTIES
The Company owns no real property, but currently leases and subleases
approximately 205,000 square feet comprised of (i) a lease for the Company's
corporate headquarters expiring on April 3, 2002, (ii) two leases for regional
administration offices expiring in July 2001 and September 2001, respectively,
and (iii) thirty (30) leases for program sites, averaging three years duration,
none of which extend beyond 2002. The Company carries property and liability
insurance where required by lessors and sublessors. The Company believes that
its facilities are adequate for its short term needs. Leases and sub-leases,
other than the short-term and month-to-month leases, generally provide for
annual rental adjustments which are either indexed to inflation or have been
agreed upon, and typically provide for termination on not less than ninety (90)
days' written notice.
ITEM 3. LEGAL PROCEEDINGS
In February 1998, the Company announced that it had been informed that
the Outpatient Program that it formerly managed in Dallas, Texas is the subject
of a civil investigation being conducted by the U.S. Department of Health and
Human Services' Office of inspector General and the U.S. Attorney's office in
Dallas, Texas (collectively the "Agencies"). The investigation resulted from a
HCFA review of the eligibility for payment under Medicare's coverage guidelines
of certain partial hospitalization services rendered by the program. As of July
27, 1998, no formal complaint, demand, or additional request for information has
been made by the investigating agencies.
A representative of the Agencies has indicated that the investigation
is civil in nature and focuses on eligibility of patients for partial
hospitalization services. The eligibility determinations for participation at
the Dallas program were made by board certified or board eligible psychiatrists.
The Company is cooperating fully with the Agencies.
Due to the preliminary nature of the investigation, the Company is
unable to predict the ultimate outcome of the investigation, or the material
impact, if any, on the Company's business, financial condition or results of
operations. See "Risk Factors -- Government Regulation."
22.
<PAGE> 23
The Company is engaged in disputes with TBH regarding certain payments
made to the Company for case management services provided by the case management
agencies. TBH has made a claim based on a sample audit, for approximately $4.2
million relating to payments made to the Company for case management services.
The Company believes that the claim is without merit and is in the process of
discussing the issue with TBH. The matter may be referred to arbitration if the
parties do not resolve the dispute.
The Company is engaged in arbitration with a case management agency in
Memphis regarding disputes involving the management and affiliation agreement.
The Company cannot predict the outcome of the arbitration. The Company expects
to terminate or restructure substantially the relationship with the case
management agency in fiscal 1999. See "Risk Factors -- Potential Changes in
TennCare."
A qui tam suit has been filed by Anastasios Giorgiadis, a former
employee of the Company, against a subsidiary of the Company in Federal District
Court in the Southern District of California. This suit was filed under seal and
the Company was first informed of it on July 20, 1998. The suit alleges a broad
range of improper conduct relating to the quality of services furnished by the
Company, the medical necessity of the services furnished by the Company, and the
accuracy of billing for services furnished by the Company and by physicians who
admit patients to the programs managed by the Company, and other matters. The
suit was filed by a former employee who previously had filed a separate action
for wrongful termination. The Company prevailed in that wrongful termination
case when the court dismissed the case by granting the Company's motion for
summary judgment. The allegations in the wrongful termination case were very
similar to the allegations in the pending qui tam case. Notwithstanding the
similarity between the allegations in the wrongful termination case and the qui
tam case, the Company cannot give any assurances with respect to the ultimate
outcome of the qui tam case or its effect on the Company's business, financial
condition or results of operations.
Under the False Claims Act, the Department of Justice must inform the
court whether it will intervene and take control of the qui tam suit. In this
case, the Department of Justice has not yet made that decision, but rather is
conducting an investigation. The Company has met with the Assistant United
States Attorney who is coordinating the government's investigation of this case,
and the Company has agreed to furnish certain documentation to the government.
The Company is unable to predict the impact, if any, on the Company's business,
financial condition, or results of operations which may result from the
investigation, or any claims which may arise therefrom. See "Risk Factors --
Government Regulation."
The Company is not a party to any other material legal proceedings
required to be reported hereunder.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
The Company held a special meeting of the stockholders on March 5, 1998
to approve an amendment to the Company's Restated Certificate of Incorporation
(the "Restated Certificate") to increase the authorized number of shares of
Common Stock and to clarify certain provisions of the Restated Certificate
relating to the Board of Directors' authority to issue preferred stock, the
limitation of directors' personal liability under the Delaware General
Corporation Law and indemnification of officers, directors, employees and agents
of the Company (collectively the "Amendment").
The Amendment was approved with 4,927,085 votes in favor, 93,335 votes
against and 32,448 abstentions.
23.
<PAGE> 24
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company and their ages and positions at
April 30, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Allen Tepper.................... 50 Chief Executive Officer
Fred D. Furman.................. 50 President
Mark P. Clein................... 39 Executive Vice President and Chief
Financial Officer
Susan D. Erskine................ 46 Executive Vice President-
Development, Secretary and
Director
Daniel L. Frank................. 41 President of Disease Management
Division
Charles E. Galetto.............. 47 Senior Vice President - Finance and
Treasurer
</TABLE>
- ------------
Allen Tepper co-founded the Company in 1988, has served as Chairman and
Chief Executive Officer of the Company since October 1989 and previously served
as President from October 1989 to April 1997. Mr. Tepper co-founded Consolidated
Medical Corp., which was engaged in out-patient clinic management for acute care
hospitals in the Philadelphia area. The company was subsequently sold to the
Berwind Corporation in 1984 and Mr. Tepper remained with the company until
December 1986 as Senior Vice President. Mr. Tepper holds a Masters of Business
Administration degree from Northwestern University and a Bachelors degree from
Temple University.
Fred D. Furman has served as President of the Company since April 1997.
Previously, he held the position of Executive Vice President -- Administration
and General Counsel from March 1995 to April 1997. Prior to joining the Company,
Mr. Furman was a partner at Kleinbard, Bell and Brecker, a Philadelphia law firm
from 1980 to March 1995. Mr. Furman is a member of the National Health Lawyers
Association. He holds a Juris Doctor degree and a Bachelors degree from Temple
University.
Mark P. Clein has served as Executive Vice President and Chief
Financial Officer of the Company since May 1996. Prior to joining the Company,
Mr. Clein was a Managing Director of Health Care Investment Banking for
Jefferies & Co., an investment banking firm, from August 1995 to May 1996, a
Managing Director of Rodman & Renshaw, Inc., an investment banking firm, from
March 1995 to August 1995, a Managing Director of Mabon Securities Corp., an
investment banking firm, from March 1993 to March 1995, a Vice President with
Sprout Group, an affiliate of Donaldson, Lufkin and Jenrette, Inc., from May
1991 to March 1993, and a Vice President and partner with Merrill Lynch Venture
Capital, Inc. from 1982 to February 1990 and from August 1990 to February 1991.
Mr. Clein holds a Masters of Business Administration degree from Columbia
University and a Bachelors degree from the University of North Carolina.
Susan D. Erskine co-founded the Company in 1988 and has served as
Executive Vice President, Secretary and a director of the Company since October
1989. Ms. Erskine previously served in several operational and marketing
management positions with acute care hospitals and health care management
organizations. Ms. Erskine holds a Masters in Health Science degree and
completed post-graduate work at Stanford University in Education and Psychology,
and she holds a Bachelors degree from the University of Miami.
Daniel L. Frank has served as President of the Disease Management
division of the Company since April 1998. This division is responsible for the
development of Stadt Solutions and its integrated managed care initiative. Mr.
Frank has also served as a director of the Company since 1992. Previously, Mr.
Frank was President of Coram Healthcare's Lithotripsy division from 1996 until
its sale in 1997. Prior to that, Mr. Frank was Chief Executive Officer of
Western Medical Center - Anaheim and Santa Ana Health, Inc. from 1993 to 1996.
From 1991 to 1993, he was President of Summit Ambulatory Network.
24.
<PAGE> 25
Charles E. Galetto has served as Senior Vice President-Finance and
Treasurer of the Company since August 1997. Prior to joining the Company, Mr.
Galetto was Vice President-Corporate Controller of Medtrans, a medical
transportation company, from June 1996 to July 1997 and Vice President, Chief
Financial Officer, Treasurer and Secretary of Data/Ware Development, Inc., a
computer hardware and software developer, from 1989 to May 1996. Mr.
Galetto holds a Bachelors degree from Wayne State University.
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
(a) MARKET INFORMATION
The Company's Common Stock (NASDAQ symbol "PMRP") is traded publicly
through the NASDAQ National Market System. The following table represents
quarterly information on the price range of the Company's Common Stock. This
information indicates the high and low sale prices reported by the NASDAQ
National Market System. These prices do not include retail markups, markdowns or
commissions:
<TABLE>
<CAPTION>
QUARTERS FOR THE YEAR ENDED APRIL 30, 1998 HIGH LOW
---- ---
<S> <C> <C>
FIRST QUARTER $24.13 $16.88
SECOND QUARTER $24.50 $19.13
THIRD QUARTER $23.63 $17.00
FOURTH QUARTER $19.50 $10.50
QUARTERS FOR THE YEAR ENDED APRIL 30, 1997
FIRST QUARTER $15.50 $8.50
SECOND QUARTER $35.25 $14.13
THIRD QUARTER $31.44 $20.25
FOURTH QUARTER $29.75 $16.75
</TABLE>
(b) HOLDERS
As of July 23, 1998 there were 89 holders of record of the Company's
Common Stock.
(c) DIVIDENDS
It is the policy of the Company's Board of Directors to retain earnings
to support operations and to finance continued growth of the Company rather than
to pay dividends. The Company has never paid or declared any cash dividends on
its Common Stock and does not anticipate paying any cash dividends in the
foreseeable future. The Company's credit facility contains certain restrictions
and limitations, including the prohibition against payment of dividends on
Common Stock.
(d) RECENT SALES OF UNREGISTERED SECURITIES
From May 1, 1997 to April 30, 1998, the Company has sold and issued
(without payment of any selling commission to any person) the following
unregistered securities:
On May 1, 1997, the Company issued a Warrant to purchase up to 5,000
shares of Common Stock to each of Case Management, Inc. and Mental Health
Cooperative, Inc. in connection with Management and Affiliation Agreements with
each of them. The Warrants were issued in connection with services provided
under Management and Affiliation Agreements, based on the program's satisfaction
of certain revenue-based threshold requirements. Each Warrant is exercisable for
5 years at an exercise price equal to the average closing price of the
Company's common
25.
<PAGE> 26
stock on the Nasdaq National Market for the 10 trading days prior to April 30,
1997 (subject to adjustment upon certain events as described in the Warrants.)
The proceeds to be received, if any, upon exercise of the warrant are
anticipated to be used for operating capital. The issuance of the Warrants were
deemed to be exempt from registration under the Securities Act by virtue of
Section 4(2) thereunder.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with the Company's consolidated financial statements and the accompanying notes
included elsewhere herein.
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30
----------------------------------------------------------------
1998 1997 1996 1995 1994
------- -------- ------- -------- --------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT INFORMATION
Revenues $ 67,524 $ 56,637 $ 36,315 $ 21,747 $ 22,786
Net Income (loss) 1,458 3,107 918 (2,352) 825
Net Income (loss) per share
Basic .24 .66 .26 (.71) .25
Diluted .22 .55 .23 (.71) .25
WEIGHTED SHARES OUTSTANDING
Basic 6,053 4,727 3,484 3,336 3,228
Diluted 6,695 5,646 4,471 3,336 3,347
</TABLE>
<TABLE>
<CAPTION>
AS OF APRIL 30
----------------------------------------------------------------
1998 1997 1996 1995 1994
------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET INFORMATION
Working Capital $ 51,820 $ 17,036 $ 10,911 $ 8,790 $ 7,705
Total Assets 70,449 32,450 21,182 14,811 13,671
Long Term Debt 392 0 0 126 320
Total Liabilities 16,903 16,202 12,070 7,749 5,972
Stockholders' Equity 53,546 16,248 9,112 7,062 7,699
</TABLE>
<TABLE>
<CAPTION>
QUARTERS FOR THE YEARS ENDED
------------------------------------------------------------------------------------------------------
APRIL 30, 1998 APRIL 30, 1997
------------------------------------------------ -----------------------------------------------
7/31/97 10/31/97 1/31/98 4/30/98 7/31/96 10/31/96 1/31/97 4/30/97
--------- -------- ------- ------- ------- -------- ------- -------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES 16,177 17,561 16,522 17,264 13,028 14,293 14,190 15,126
NET INCOME (LOSS) 970 1,162 1,327 (2,001) 583 799 831 894
NET INCOME (LOSS) PER
SHARE
Basic .19 .22 .19 (.29) .14 .16 .17 .19
Diluted .17 .19 .18 (.29) .12 .14 .14 .15
</TABLE>
26.
<PAGE> 27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the more
detailed information and consolidated financial statements and accompanying
notes, as well as the other financial information appearing elsewhere in this
document. Except for historical information, the following discussion contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from those discussed herein. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed in "Risk Factors," as well as those discussed elsewhere in this
document.
OVERVIEW
PMR is a leading manager of specialized mental health care programs and
disease management services designed to treat individuals diagnosed with SMI.
PMR manages the delivery of a broad range of outpatient and community-based
psychiatric services for SMI patients, consisting of 37 Outpatient Programs, two
Case Management Programs and four Chemical Dependency Programs. Stadt Solutions,
upon formation, will offer a specialty pharmacy program for individuals with
SMI, initially serving approximately 6,000 individuals through fourteen
pharmacies in thirteen states. Stadt Solutions will also receive the Company's
clinical research and information business upon formation. Including Stadt
Solutions, PMR will operate in approximately twenty-three states and is expected
to employ or contract with more than 400 mental health and pharmaceutical
professionals and provide services to approximately 11,000 individuals diagnosed
with SMI. PMR believes it is the only private sector company focused on
providing an integrated mental health disease management model to the SMI
population.
PMR's Outpatient Programs serve as a comprehensive alternative to
inpatient hospitalization and include partial hospitalization and lower
intensity outpatient services. The Case Management Programs provide an
intensive, individualized primary care service which consists of a proprietary
case management model utilizing clinical protocols for delivering care to SMI
patients. The Company also provides Chemical Dependency Programs to patients
affiliated with managed care organizations and government-funded programs.
SOURCES OF REVENUE
Outpatient Programs. Outpatient Programs operated by PMR are the
Company's primary source of revenue. Revenue under these programs is derived
primarily from services provided under three types of agreements: (i) an
all-inclusive fee arrangement based on fee-for-service rates which provides that
the Company is responsible for substantially all program costs; (ii) a
fee-for-service arrangement under which substantially all program costs are the
responsibility of the provider; and (iii) a fixed fee arrangement. The
all-inclusive arrangements are in effect at 34 of the 39 Outpatient Programs
operated during fiscal 1998 and constituted 62.4% of the Company's revenue for
the year ended April 30, 1998. Typical contractual agreements with these
providers, primarily acute care hospitals or CMHCs, require the Company to
provide, at its own expense, specific management personnel for each program
site. Patients served by the Outpatient Programs typically are covered by
Medicare.
Revenue under the Outpatient Program is recognized at estimated net
realizable amounts when services are rendered based upon contractual
arrangements with providers. Under certain of the Company's contracts, the
Company is obligated to indemnify the provider for all or some portion of the
Company's management fees that may not be deemed reimbursable to the provider by
Medicare's fiscal intermediaries. As of April 30, 1998, the Company had recorded
$7.5 million in contract settlement reserves to provide for possible amounts
ultimately owed to its provider customers resulting from disallowance of costs
by Medicare and Medicare cost report settlement adjustments. Such reserves are
classified as non-current liabilities because ultimate determination of
substantially all of the potential contract disallowances is not anticipated to
occur during fiscal 1998. See "Risk Factors -- Dependence Upon Medicare
Reimbursement" and "-- Sufficiency of Existing Reserves to Cover Reimbursement
Risks."
Case Management Programs. For its Case Management Programs in
Tennessee, the Company receives a monthly case rate payment from the managed
care consortiums responsible for managing the TennCare program and is
responsible for planning, coordinating and managing psychiatric case management
services for its consumers who are eligible to participate in the TennCare
program. The Company also is responsible for providing a portion of the
27.
<PAGE> 28
related outpatient clinical care under certain of the agreements. Revenue under
the TennCare program is recognized in the period in which the related service is
to be provided. These revenues represent substantially all of the Company's case
management revenues. The urgent care program receives interim payments which are
adjusted based on inpatient utilization statistics which are compared to a
baseline. Revenues are recognized based on the quarterly calculation of the
statistical trends. See "Risk Factors -- Potential Changes in TennCare," "--
Concentration of Revenues" and "-- Limited Operating History of Case Management
Programs."
Chemical Dependency Programs. In Southern California, the Company
contracts primarily with managed care companies and commercial insurers to
provide its outpatient chemical dependency services. The contracts are
structured as fee-for-service or case rate reimbursement and revenue is
recognized in the period in which the related service is delivered. In Arkansas,
the Company managed detoxification and dual diagnosis programs for individuals
eligible for public sector reimbursement. The Company generated revenue based on
a combination of state-funded grants and Medicaid fee-for-service reimbursement.
Revenue was recognized in the period in which the related service was delivered.
The Arkansas programs were terminated as of June 30, 1998.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage of revenue represented by the respective financial items:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-------------------------------
1998 1997 1996
---- ---- -----
<S> <C> <C> <C>
Revenue..................................... 100.0% 100.0% 100.0%
Operating expenses.......................... 71.5 73.7 78.4
Marketing, general and administrative....... 13.6 10.7 11.1
Provision for bad debts..................... 7.6 5.4 4.0
Depreciation and amortization............... 1.6 1.2 1.6
Special Charge 3.8 - -
Interest (income), expense.................. (1.8) (0.4) 0.0
---- ---- ----
Total expenses.............................. 96.3 90.6 95.1
----- ---- ----
Income before income taxes 3.7% 9.4% 4.9%
===== ==== ====
</TABLE>
YEAR ENDED APRIL 30, 1998 COMPARED TO YEAR ENDED APRIL 30, 1997
REVENUE. Revenue increased from $56.6 million for the year ended April
30, 1997 to $67.5 million for the year ended April 30, 1998, an increase of
$10.9 million, or 19.2%. The Outpatient Programs recorded revenue of $49.4
million, an increase of 23.5% as compared to fiscal 1997. The growth in
Outpatient Programs was the result of the addition of nine new programs in
fiscal 1998 and increases in "same-site" revenues of 11.7% compared to fiscal
1997. The remainder of the increase in revenue came from the growth in Case
Management Programs in Tennessee and Arkansas, which recorded revenue of $15.1
million, an increase of $1.4 million or 10.4% as compared to fiscal 1997.
Revenue from the Chemical Dependency Programs was $3.0 million, an increase of
1.0% as compared to fiscal 1997. The Company is currently in the process of
terminating or restructuring its relationship with a Tennessee case management
agency and during fiscal 1998 terminated its Arkansas Case Management Programs.
See "Business -- Programs and Operations -- Case Management Programs."
OPERATING EXPENSES. Operating expenses consist of costs incurred at the
program sites and costs associated with the field management responsible for the
administering the programs. Operating expenses increased from $41.7 million for
the year ended April 30, 1997 to $48.2 million for the year ended April 30,
1998, an increase of $6.5 million, or 15.6%. As a percentage of revenue,
operating expenses were 71.5%, down from 73.7% for the year ended April 30,
1997. The improvement in the operating expense ratio was due to reductions in
certain
28.
<PAGE> 29
expenses as well as operating leverage realized as a result of revenue growth in
the Outpatient and Case Management Programs which was spread across existing
fixed and semi-variable cost structures.
MARKETING, GENERAL AND ADMINISTRATIVE. Marketing, general and
administrative expenses increased from $6.0 million for the year ended April 30,
1997 to $9.2 million for the year ended April 30, 1998, an increase of $3.2
million, or 53.3%. The increase was due to investment in both the regional and
home offices to support existing and anticipated programs. As a percentage of
revenue, marketing, general and administrative expenses were 13.6% for the year
ended April 30, 1998, as compared to 10.7% for the year ended April 30, 1997.
PROVISION FOR BAD DEBTS. Provision for bad debt expense increased from
$3.1 million for the year ended April 30, 1997 to $5.1 million for the year
ended April 30, 1998, an increase of $2.0 million, or 64.5%. The increase was
due to anticipated difficulties associated with collection of receivables
relating to program locations closed in the fourth quarter of fiscal 1998. As
part of a special charge in the fourth quarter of fiscal 1998, the Company
recorded approximately $2.4 million in additional bad debt expenses associated
with the closed programs.
SPECIAL CHARGE. A Special Charge of $5.0 million was recorded in the
fourth quarter to provide for costs associated with closing several programs,
resolving the provider based status associated with the Scripps Health programs
and resolving other regulatory matters. Included in this charge is a $2.4
million bad debt expense which was recorded in provision for bad debts. The
remaining $2.6 million was allocated to program closing costs which were $1.4
million and costs associated with noncancelable contract obligations which were
$1.2 million.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased from $701,000 for the year ended April 30, 1997 to $1,065,000 for the
year ended April 30, 1998, an increase of $364,000 or 51.9%. The increase was
due to additional capital expenditures associated with the start-up of new
programs during fiscal 1998 and as well as equipment and leasehold improvements
associated with the Company's corporate office.
INTEREST (INCOME), EXPENSE. Interest income increased from $217,000 for
the year ended April 30, 1997 to $1,187,000 for the year ended April 30, 1998,
an increase of $970,000 or 447.0%. This increase resulted from higher cash and
cash equivalent and short-term investment balances resulting from the completion
of the Company's common stock offering in October 1997.
INCOME BEFORE INCOME TAXES. Income before income taxes decreased from
$5.3 million for the year ended April 30, 1997 to $2.5 million for the year
ended April 30, 1998, a decrease of $2.8 million, or 52.8%. Income before income
taxes as a percentage of revenue decreased from 9.4% to 3.7% over this period of
time.
YEAR ENDED APRIL 30, 1997 COMPARED TO YEAR ENDED APRIL 30, 1996
REVENUE. Revenue increased from $36.3 million for the year ended April
30, 1996 to $56.6 million for the year ended April 30, 1997, an increase of
$20.3 million, or 56.0%. The Outpatient Programs recorded revenue of $40.0
million, an increase of 49.3% as compared to fiscal 1996. This increase was the
result of same-site increases in revenue of 40.0% compared to fiscal 1996 and
the gross addition of eight new programs in fiscal 1997. The remainder of the
increase in revenue came predominantly from the growth in Case Management
Programs in Tennessee and the introduction of Case Management Programs in
Arkansas, which recorded revenue of $13.7 million, an increase of 80.3% as
compared to fiscal 1996. Revenue from the Chemical Dependency Programs was $2.9
million, an increase of 54.4% as compared to fiscal 1996. This increase was
attributable to a full year of operation of the Little Rock public sector
program in Arkansas and to growth in the managed care business in California.
OPERATING EXPENSES. Operating expenses increased from $28.5 million for
the year ended April 30, 1996 to $41.7 million for the year ended April 30,
1997, an increase of $13.2 million, or 46.3%. Of this increase, $5.4 million, or
40.9%, resulted from the effect of a full year of operations of the Case
Management Programs in Tennessee and the launch of the Case Management Programs
in Arkansas. The remainder of the increase in operating expenses was associated
primarily with increased costs to support the revenue growth at existing
Outpatient Programs and the net addition of six Outpatient Programs during
fiscal 1997.
29.
<PAGE> 30
MARKETING, GENERAL AND ADMINISTRATIVE. Marketing, general and
administrative expenses increased from $4.0 million for the year ended April 30,
1996 to $6.0 million for the year ended April 30, 1997, an increase of $2.0
million, or 50.0%. The increase was related to the following factors: (i) the
reorganization of the Company into three regions; (ii) the significant
investment in the Mid-America region to prepare for anticipated growth
associated with an enabling agreement with Columbia/HCA Healthcare Corporation;
(iii) the start-up of the site management and clinical information initiative;
and (iv) increases in personnel associated with information systems, development
and utilization review.
PROVISION FOR BAD DEBTS. Provision for bad debt expense increased from
$1.4 million for the year ended April 30, 1996 to $3.1 million for the year
ended April 30, 1997, an increase of $1.7 million, or 121.4%. This increase was
due to an increase in the percentage for bad debt from 4.0% in fiscal 1996 to
5.4% in fiscal 1997, which resulted in part from higher rates of indigent
clients in the Case Management Programs, limited collection experience in the
Case Management Programs and in the Chemical Dependency Programs in Arkansas,
and a more conservative percentage for denials by third-party payors.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased from $596,000 for the year ended April 30, 1996 to $701,000 for the
year ended April 30, 1997, an increase of $105,000, or 17.6%. The increase was
due to additional capital expenditures associated with the start-up of eight new
Outpatient Programs and increased capital expenditures for information systems.
INTEREST (INCOME), EXPENSE. Interest expense decreased from $2,000 for
the year ended April 30, 1996 to interest income of $217,000 for the year ended
April 30, 1997, an increase of $219,000. The improvement was due to higher cash
and cash equivalent balances and the absence of bank debt in fiscal 1997.
INCOME BEFORE INCOME TAXES. Income before income taxes increased from
$1.8 million for the year ended April 30, 1996 to $5.3 million for the year
ended April 30, 1997, an increase of $3.5 million, or 194.4%. Income before
income taxes as a percentage of revenue increased from 4.9% to 9.4% over this
period of time.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended April 30, 1998, net cash used in operating
activities was $3.0 million. Working capital at April 30, 1998 was $51.8
million, an increase of $34.8 million, or 204.2%, as compared to working capital
at April 30, 1997. Cash and cash equivalents and short-term investments at April
30, 1998 were $38.8 million, an increase of $28.7 million, or 286.0% as compared
to April 30, 1997. The increase in working capital, cash and cash equivalents
and short-term investments was due to the completion of a public offering of
shares of common stock of the Company during October 1997, which resulted in net
proceeds of $33.1 million, which was offset by cash used to finance operating
activities.
The use of cash for operating activities during the year ended April
30, 1998 was due to delayed collections of accounts receivable. Accounts
receivable growth was a result of significant revenue increases combined with an
increase in days revenue outstanding to 88 at April 30, 1998 (versus 67 at April
30, 1997). The increase in days revenue outstanding was due to focused reviews
of claims by fiscal intermediaries at several Outpatient Programs. The other
significant use of cash was the purchase of equipment and leasehold improvements
associated with recently opened sites and investment in information technology.
During fiscal 1999, working capital is expected to be realized
principally from operations, as well as from a $10 million line of credit from
Sanwa Bank which became effective November 1, 1996. Interest is payable under
this line of credit at a rate of either the bank's reference rate or the
Eurodollar rate plus 2%. As of April 30, 1998 no balance was outstanding under
the line of credit. Working capital is anticipated to be utilized during fiscal
1999, to continue expansion of the Company's Outpatient and Case Management
Programs, for expansion of Stadt Solutions and the site management and clinical
information business, and for the development of a risk based managed care
project. The Company also anticipates using working capital and, if necessary,
incurring indebtedness in connection with, selective acquisitions.
The opening of a new Outpatient Program site typically requires $45,000
to $150,000 for office equipment, supplies, lease deposits, leasehold
improvements and the hiring and training of personnel prior to opening. These
30.
<PAGE> 31
programs generally experience operating losses through an average of the first
four months of operation. The Company expects to provide cash for the start up
of the site management and clinical information business as part of the
formation of Stadt Solutions. The Company also is in the process of refining the
specifications for the purchase and development of a new care management
information system which will be a state of the art data collection and
repository system for the Company's clinical information. The Company
anticipates investing approximately $1,000,000 in this system during fiscal
1999.
From time to time, the Company recognizes charges to operations as a
result of particular uncertainties associated with the health care reimbursement
rules as they apply to the Outpatient Programs. During fiscal 1997 and fiscal
1998, a substantial majority of the Company's revenue was derived from the
management of the Outpatient Programs. Since substantially all of the patients
of the Outpatient Programs are eligible for Medicare, collection of a
significant component of the Company's management fees is dependent upon
reimbursement of claims submitted to fiscal intermediaries by the hospitals or
Community Mental Health Centers on whose behalf these programs are managed.
Under the Company's contracts with its providers, the Company may be responsible
to indemnify providers for the portion of the Company's management fee
disallowed for reimbursement pursuant to warranty obligations that exist with
certain providers. Although the Company believes that its potential liability to
satisfy such requirements has been adequately reserved in its financial
statements, the obligation to pay such amounts, if and when they become due,
could have a material adverse effect on the Company's short term liquidity.
Certain factors are, in management's view, likely to lessen the impact of any
such effect, including the expectation that, if claims arise, they will arise on
a periodic basis over several years and that any disallowance will merely be
offset against obligations already owed by the provider to the Company.
The Company maintains significant reserves to cover the potential
impact of two primary uncertainties: (i) the Company may have an obligation to
indemnify certain providers for some portions of its management fee which may be
subject to disallowance upon audit of a provider's cost report by fiscal
intermediaries; and (ii) the Company may not receive full payment of the
management fees owed to it by a provider during the periodic review of the
provider's claims by the fiscal intermediaries.
The Company has been advised by HCFA that certain program-related costs
are not allowable for reimbursement. The Company may be responsible for
reimbursement of the amounts previously paid to the Company that are disallowed
pursuant to obligations that exist with certain providers. Although the Company
believes that its potential liability to satisfy such requirements has been
adequately reserved in its financial statements, there can be no assurance that
such reserves will be adequate. The obligation to pay the amounts estimated
within the Company's financial statements (or such greater amounts as are due),
if and when they become due, could have a material adverse effect upon the
Company's business, financial condition and results of operations. See "Risk
Factors -- Sufficiency of Existing Reserves to Cover Reimbursement Risks,"
"Business -- Contracts" and "-- Regulatory Matters."
IMPACT OF INFLATION
A substantial portion of the Company's revenue is subject to
reimbursement rates that are regulated by the federal and state governments and
that do not automatically adjust for inflation. As a result, increased operating
costs due to inflation, such as labor and supply costs, without a corresponding
increase in reimbursement rates, may adversely affect the Company's earnings in
the future.
IMPACT OF YEAR 2000 COMPUTER ISSUES
The year 2000 issue is the result of computer applications being
written using two digits rather than four to define the applicable year. The
Company's computer applications (and computer applications used by any of the
Company's customers, vendors, payors or other business partners) may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in system failures or miscalculations causing disruption of operations.
The Company has completed a thorough review of its material computer
applications and has identified and scheduled necessary corrections for its
computer applications. Corrections are currently being made and are expected to
be substantially implemented by the third quarter of fiscal 1999. The Company
expects that the total cost associated with these revisions will not be
material. These costs will be primarily incurred during fiscal 1999
31.
<PAGE> 32
and be charged to expense as incurred. For externally maintained systems, the
Company has begun working with vendors to ensure that each system is currently
year 2000 compliant or will be made year 2000 compliant during 1998 or 1999. The
cost to be incurred by the Company related to externally maintained systems is
expected to be minimal. The Company believes that by completing its planned
corrections to its computer applications, the year 2000 issue with respect to
the Company's systems can be mitigated. However, if such corrections cannot be
completed on a timely basis, the year 2000 issue could have a material adverse
impact on the Company's business, financial condition and results of operations.
Because of the many uncertainties associated with year 2000 compliance issues,
and because the Company's assessment is necessarily based on information from
third party vendors and suppliers, there can be no assurance that the Company's
assessment is correct or as to the materiality or effect of any failure of such
assessment to be correct.
The Company has initiated a program to determine whether the computer
applications of its significant payors and contract providers will be upgraded
in a timely manner. The Company has not completed this review and it is unknown
whether computer applications of contract providers and Medicare and other
payors will be year 2000 compliant. The Company has not determined the extent to
which any disruption in the billing practices of providers or the payment
practices of Medicare or other payors caused by the year 2000 issues will affect
the Company's operations. However, any such disruption in the billing or
reimbursement process could have a substantial adverse impact on Medicare or
Medicaid payments to providers and, in turn, payments to the Company. Any such
disruption could have a material adverse effect upon the Company's business,
financial condition and results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements and supplementary data of the Company are provided
at the pages indicated in Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has not been any change of accountants or any disagreements with
the Company's accountants on any matter of accounting practice or financial
disclosure during the reporting periods.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this item with respect to Directors is
incorporated by reference from the information under the caption "Election of
Directors" contained in the Company's definitive proxy statement in connection
with the solicitation of proxies for the Company's 1998 Annual Meeting of
Stockholders to be held on October 15, 1998 (the "Proxy Statement"). See "Item
4A. Executive Officers of the Company" with regard to Executive Officers.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from
the information under the caption "Executive Compensation" contained in the
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from
the information under the caption "Security Ownership of Certain Beneficial
Owners and Management" contained in the Proxy Statement.
32.
<PAGE> 33
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from
the information under the caption "Certain Relationships and Related
Transactions" contained in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on Form
10-K:
1. Financial Statements: The financial statements of PMR are
included as Appendix F of this report. See Table of Contents
to Financial Statements in Appendix F.
2. Financial Statement Schedules: Schedule II - PMR Corporation
Valuation and Qualifying Accounts is included in Appendix F of
this report. See Table of Contents to Financial Statements in
Appendix F.
3. The exhibits which are filed with this Report or which are
incorporated herein by reference are set forth in the Exhibit
Index on page 33.
(b) Reports on Form 8-K:
During the fourth quarter of fiscal 1998, the Company filed the
following report on Form 8-K:
1. Report on Form 8-K dated February 19, 1998, and filed on or about
February 25, 1998, announcing the third quarter results, regulatory challenges
and the signing of a letter of intent to acquire the provider division of
American Psych Systems.
2. Report on Form 8-K dated May 12, 1998, and filed on or about May 13,
1998, announcing the Company's plan to take a special change and preliminary
estimates of fourth quarter results.
3. Report on Form 8-K dated June 9, 1998 and filed on or about June 11,
1998 announcing a preliminary resolution of the provider-based challenge and a
proposed joint venture with Stadtlander.
(c) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ ---------------------------------------------------------
<S> <C>
3.1 The Company's Restated Certificate of Incorporation,
filed with the Delaware Secretary of State on March 9,
1998.
3.2 The Company's Amended and Restated Bylaws.*
4.1 Common Stock Specimen Certificate.**
10.1 The Company's 1997 Equity Incentive Plan (filed as
Exhibit 10.1).*
10.2 Form of Incentive Stock Option Agreement under the 1997
Plan (filed as Exhibit 10.2).*
10.3 Form of Nonstatutory Stock Option Agreement under the
1997 Plan (filed as Exhibit 10.).*
10.4 Outside Directors' Non-Qualified Stock Option Plan of
1992 (the "1992 Plan") (filed as Exhibit 10.4).*
10.5 Form of Outside Directors' Non-Qualified Stock Option
Agreement (filed as Exhibit 10.5).*
10.6 Amended and Restated Stock Option Agreement dated April
30, 1996, evidencing award to Allen Tepper (filed as
Exhibit 10.6).*
</TABLE>
33.
<PAGE> 34
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ ---------------------------------------------------------
<S> <C>
10.7 Amended and Restated Stock Option Agreement dated April
30, 1996, evidencing award to Susan Erskine (filed as
Exhibit 10.7).*
10.8 Amended and Restated Stock Option Agreement dated
February 1, 1996, evidencing award to Mark Clein (filed
as Exhibit 10.8).*
10.9 Amended and Restated Stock Option Agreement dated
February 1, 1996, evidencing award to Mark Clein (filed
as Exhibit 10.9).*
10.10 Amended and Restated Warrant dated July 9, 1997,
evidencing award to Fred Furman (filed as Exhibit
10.11).*
10.11 Restated Management Agreement dated April 11, 1997 with
Scripps Health (filed as Exhibit 10.12).*
10.12 Amendment to Restated Management Agreement dated July
15, 1998 with Scripps Health.
10.13 Sublease dated April 1, 1997 with CMS Development and
Management Company, Inc. (filed as Exhibit 10.13).*
10.14 Management and Affiliation Agreement dated April 13,
1995, between Mental Health Cooperative, Inc. and
Tennessee Mental Health Cooperative, Inc. with Addendum
(filed as Exhibit 10.14). (Tennessee Mental Health
Cooperative, Inc. subsequently changed its name to
Collaborative Care Corporation.)*
10.15 Second Addendum to Management and Affiliation Agreement
dated November 1, 1996 between Mental Health Cooperative,
Inc. and Collaborative Care Corporation (filed as Exhibit
10.15).***
10.16 Provider Services Agreement dated April 13, 1995, between
Tennessee Mental Health Cooperative, Inc. and Mental
Health Cooperative, Inc. (filed as Exhibit 10.15).
(Tennessee Mental Health Cooperative, Inc. subsequently
changed its name to Collaborative Care Corporation.)*
10.17 Management and Affiliation Agreement dated April 13,
1995, between Case Management, Inc. and Tennessee Mental
Health Cooperative, Inc. with Addendum (filed as Exhibit
10.16). (Tennessee Mental Health Cooperative, Inc.
subsequently changed its name to Collaborative Care
Corporation.)*
10.18 Provider Services Agreement dated April 13, 1995, between
Tennessee Mental Health Cooperative, Inc. and Case
Management, Inc. (filed as Exhibit 10.17). (Tennessee
Mental Health, Cooperative, Inc. subsequently changed its
name to Collaborative Care Corporation.)*
10.19 Provider Agreement dated December 4, 1995, between
Tennessee Behavioral Health, Inc. and Tennessee Mental
Health Corporations, Inc.
10.20 Addendum No. 1 to Provider Agreement dated December 4,
1995, between Tennessee Behavioral Health, Inc. and
Tennessee Mental Health Cooperative, Inc.
10.21 Addendum No. 2 to Provider Agreement dated February 4,
1996, between Tennessee Behavioral Health, Inc. and
Tennessee Mental Health Cooperative, Inc.
10.22 Provider Participation Agreement dated December 1, 1995,
among Green Spring Health Services, Inc., AdvoCare, Inc.
and Tennessee Mental Health Cooperative, Inc.
10.23 Amendment to Provider Participation Agreement dated
February 13, 1996, among Green Spring Health Services,
Inc., AdvoCare of Tennessee, Inc. and Tennessee Mental
Health Cooperative, Inc.
</TABLE>
34.
<PAGE> 35
<TABLE>
<S> <C>
10.24 Subscription Agreement dated June 8, 1998, between the
Company and Stadtlander Drug Distribution Co., Inc.
10.25 Sanwa Bank California Credit Agreement dated February 2,
1996, as amended on October 31, 1996.***
21.1 List of Subsidiaries.
23.1 Consent of Ernst & Young LLP.
27.1 Financial Data Schedule.
</TABLE>
- -------------
* Incorporated by reference to exhibits filed with the SEC in the
Company's Annual Report on Form 10-K for the year ended April 30, 1997.
** Incorporated by reference to the Company's Registration Statement on
Form S-18 (Reg. No. 23-20095-A).
*** Incorporated by reference to exhibits filed with the SEC in the
Company's Registration Statement on Form S-2 (Reg. No. 333-36313).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, on July 27, 1998.
PMR CORPORATION
By: /s/ Allen Tepper
-------------------------------------------
Allen Tepper
Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1934, this Form 10-K has
been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Allen Tepper Chairman, Chief Executive July 27, 1998
- ------------------------- Officer and Director
Allen Tepper
/s/ Susan D. Erskine Secretary, Treasurer and July 27, 1998
- ------------------------- Director
Susan D. Erskine
/s/ Daniel L. Frank President of Disease Management July 27, 1998
- ------------------------- Division and Director
Daniel L. Frank
/s/ Charles McGettigan Director July 27, 1998
- -------------------------
Charles C. McGettigan
/s/ Richard A. Niglio Director July 27, 1998
- -------------------------
Richard A. Niglio
/s/ Eugene D. Hill Director July 27, 1998
- -------------------------
Eugene D. Hill
</TABLE>
35.
<PAGE> 36
PMR Corporation
Consolidated Financial Statements
and Schedules
Years ended April 30, 1998 and 1997
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
Report of Independent Auditors..........................................................................F-1
Consolidated Financial Statements
Consolidated Balance Sheets.............................................................................F-2
Consolidated Income Statements..........................................................................F-3
Consolidated Statements of Shareholders' Equity.........................................................F-4
Consolidated Statements of Cash Flows...................................................................F-5
Notes to Financial Statements...........................................................................F-6
Schedules
Schedule II - Valuation and Qualifying Accounts........................................................S-1
</TABLE>
36.
<PAGE> 37
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
PMR Corporation
We have audited the accompanying consolidated balance sheets of PMR Corporation
as of April 30, 1998 and 1997, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the three years in the
period ended April 30, 1998. Our audits also included the financial statement
schedule listed in the index at item 14(a). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of PMR Corporation
at April 30, 1998 and 1997, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended April 30, 1998,
in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
San Diego, California
June 12, 1998
except for paragraph four of Note 13, as to which the date is
July 24, 1998
F-1
<PAGE> 38
PMR Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
APRIL 30,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $18,522,859 $10,048,203
Short-term investments, available for sale 20,257,045 --
Accounts receivable, net of allowance for uncollectible amounts of
$9,081,610 in 1998 and $5,081,177 in 1997 16,655,759 11,268,962
Prepaid expenses and other current assets 1,192,144 572,136
Deferred income tax benefits 4,136,000 2,464,000
----------- -----------
Total current assets 60,763,807 24,353,301
Furniture and office equipment, net of accumulated depreciation of
$1,727,040 in 1998 and $1,175,980 in 1997 3,492,449 1,263,743
Long-term receivables 2,976,918 2,360,872
Deferred income tax benefit 2,080,000 2,970,000
Other assets 1,135,880 1,501,622
----------- -----------
Total assets $70,449,054 $32,449,538
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 469,462 $ 753,660
Accrued expenses 3,534,400 981,998
Accrued compensation and employee benefits 2,178,693 2,951,867
Advances from case management agencies 1,686,477 926,712
Income taxes payable 1,074,360 1,703,000
----------- -----------
Total current liabilities 8,943,392 7,317,237
Note payable 392,024 --
Deferred rent expense 87,566 92,822
Contract settlement reserve 7,479,993 8,791,928
Commitments
Stockholders' equity:
Convertible preferred stock, $.01 par value, authorized shares - 1,000,000;
Series C - issued and outstanding shares - none in 1998 and 1997
Common Stock, $.01 par value, authorized shares - 19,000,000; issued and
outstanding shares - 6,949,650 in 1998 and 5,033,507
in 1997 69,496 50,334
Additional paid-in capital 47,959,557 12,138,569
Retained earnings 5,517,026 4,058,648
----------- -----------
Total stockholders' equity 53,546,079 16,247,551
----------- -----------
$70,449,054 $32,449,538
=========== ===========
</TABLE>
See accompanying notes.
F-2
<PAGE> 39
PMR Corporation
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenue $ 67,523,950 $ 56,636,902 $ 36,315,921
Expenses:
Operating expenses 48,255,459 41,738,298 28,471,644
Marketing, general and administrative 9,186,401 6,034,960 4,018,685
Provision for bad debts 5,148,580 3,084,166 1,447,983
Depreciation and amortization 1,064,873 700,734 595,896
Special charge 2,582,896 -- --
Interest (income) expense (1,186,637) (217,297) 2,174
Minority interest in loss of subsidiary -- -- (524)
------------ ------------ ------------
65,051,572 51,340,861 34,535,858
------------ ------------ ------------
Income before income taxes 2,472,378 5,296,041 1,780,063
Income tax expense 1,014,000 2,172,000 730,000
------------ ------------ ------------
Net income 1,458,378 3,124,041 1,050,063
Less dividends on:
Series C Convertible Preferred Stock -- 17,342 131,686
------------ ------------ ------------
Net income available to common stockholders $ 1,458,378 $ 3,106,699 $ 918,377
============ ============ ============
Earnings per common share
Basic $ .24 $ .66 $ .26
============ ============ ============
Diluted $ .22 $ .55 $ .23
============ ============ ============
Shares used in computing earnings per share
Basic 6,053,243 4,727,124 3,484,172
============ ============ ============
Diluted 6,695,321 5,645,947 4,470,980
============ ============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 40
4
PMR Corporation
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
SERIES C
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
--------------------------------------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at April 30, 1995 700,000 $ 7,000 3,338,656 $ 33,385 $ 7,050,262
Issuance of common stock under stock
option plans -- -- 17,174 172 61,202
Issuance of common stock for
non-compete agreements and
acquisition of minority interest -- -- 197,087 1,971 1,029,279
Issuance of common stock for a note
receivable -- -- 25,000 250 118,500
Accrued interest on stockholder notes -- -- -- -- --
Dividend payable on Series C preferred
stock -- -- -- -- --
Proceeds from payment of stockholder
notes -- -- -- -- --
Net income -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at April 30, 1996 700,000 7,000 3,577,917 35,778 8,259,243
Issuance of common stock under stock
option plans including realization
of income tax benefit of $369,000 -- -- 96,016 960 729,189
Dividend payable on Series C preferred
stock -- -- -- -- --
Proceeds from payment of stockholder
notes -- -- -- -- --
Exercise of warrants to purchase
common stock -- -- 657,524 6,575 3,104,801
Issuance of common stock for
consulting services -- -- 2,050 21 45,336
Conversion of Series C convertible
preferred stock (700,000) (7,000) 700,000 7,000 --
Net income -- -- --
------------ ------------ ------------ ------------ ------------
Balance at April 30, 1997 -- -- 5,033,507 50,334 12,138,569
Issuance of common stock under stock
option plans including realization
of income tax benefit of $1,687,355 -- -- 226,143 2,262 2,717,694
Issuance of common stock in secondary
offering, net of offering costs of
$637,556 -- -- 1,690,000 16,900 33,103,294
Net income -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at April 30, 1998 -- $ -- 6,949,650 $ 69,496 $ 47,959,557
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
NOTES RECEIVABLE TOTAL
FROM RETAINED STOCKHOLDERS'
STOCKHOLDERS EARNINGS EQUITY
------------ ------------ ------------
<S> <C> <C> <C>
Balance at April 30, 1995 $ (62,626) $ 33,572 $ 7,061,593
Issuance of common stock under stock
option plans 1,184 -- 62,558
Issuance of common stock for
non-compete agreements and
acquisition of minority interest -- -- 1,031,250
Issuance of common stock for a note
receivable (118,750) -- --
Accrued interest on stockholder notes (4,507) -- (4,507)
Dividend payable on Series C preferred
stock -- (131,686) (131,686)
Proceeds from payment of stockholder
notes 43,152 -- 43,152
Net income -- 1,050,063 1,050,063
------------ ------------ ------------
Balance at April 30, 1996 (141,547) 951,949 9,112,423
Issuance of common stock under stock
option plans including realization
of income tax benefit of $369,000 -- -- 730,149
Dividend payable on Series C preferred
stock -- (17,342) (17,342)
Proceeds from payment of stockholder
notes 141,547 -- 141,547
Exercise of warrants to purchase
common stock -- -- 3,111,376
Issuance of common stock for
consulting services -- -- 45,357
Conversion of Series C convertible
preferred stock -- -- --
Net income -- 3,124,041 3,124,041
------------ ------------ ------------
Balance at April 30, 1997 -- 4,058,648 16,247,551
Issuance of common stock under stock
option plans including realization
of income tax benefit of $1,687,355 -- -- 2,719,956
Issuance of common stock in secondary
offering, net of offering costs of
$637,556 -- -- 33,120,194
Net income -- 1,458,378 1,458,378
------------ ------------ ------------
Balance at April 30, 1998 $ -- $ 5,517,026 $ 53,546,079
============ ============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE> 41
PMR Corporation
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,458,378 $ 3,124,041 $ 1,050,063
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Special charge 2,582,896 -- --
Depreciation and amortization 1,064,873 700,734 595,896
Issuance of stock for consulting services -- 45,357 --
Provision for bad debts 5,148,580 3,084,166 1,447,983
Accrued interest income on notes receivable from
stockholders -- -- (4,507)
Deferred income taxes (782,000) (3,834,000) (841,000)
Minority interest in loss of joint venture -- -- (524)
Changes in operating assets and liabilities:
Accounts and notes receivable (11,151,423) (4,980,050) (3,778,660)
Refundable income tax -- -- 817,165
Prepaid expenses and other assets (620,008) (250,630) (88,487)
Accounts payable and accrued expenses (404,697) 212,937 474,124
Accrued compensation and employee benefits (773,174) 675,058 1,415,780
Advances from case management agencies 759,765 (86,135) 1,012,847
Other liabilities -- (127,213) (205,034)
Contract settlement reserve (1,311,935) 3,292,908 1,975,797
Income taxes payable 1,058,715 1,394,511 308,489
Deferred rent expense (5,256) (56,709) (60,331)
------------ ------------ ------------
Net cash (used in) provided by operating activities (2,975,286) 3,194,975 4,119,601
INVESTING ACTIVITIES
Purchases of short-term investments, available-for-sale (20,257,045) -- --
Purchases of furniture and office equipment (2,927,837) (958,685) (179,281)
Acquisition of Twin Town minority interest -- -- (185,000)
------------ ------------ ------------
Net cash used in investing activities (23,184,882) (958,685) (364,281)
FINANCING ACTIVITIES
Proceeds from secondary offering, net of offering costs 33,120,194 -- --
Proceeds from sale of common stock and notes receivable from
stockholders 1,032,601 3,983,072 105,710
Proceeds from note payable to bank 517,397 -- 800,000
Payments on note payable to bank (35,368) -- (2,000,000)
Cash dividend paid -- (89,081) (125,484)
------------ ------------ ------------
Net cash provided by (used in) financing activities 34,634,824 3,893,991 (1,219,774)
------------ ------------ ------------
Net increase (decrease) in cash 8,474,656 6,130,281 2,535,546
Cash at beginning of year 10,048,203 3,917,922 1,382,376
------------ ------------ ------------
Cash at end of year $ 18,522,859 $ 10,048,203 $ 3,917,922
============ ============ ============
SUPPLEMENTAL INFORMATION:
Taxes paid $ 1,330,725 $ 4,611,489 $ 380,735
============ ============ ============
Interest paid $ 20,936 $ 17,612 $ 129,108
============ ============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE> 42
PMR Corporation
Notes to Consolidated Financial Statements
April 30, 1998
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION, BUSINESS AND PRINCIPLES OF CONSOLIDATION
PMR Corporation ("the Company") develops, manages and markets acute outpatient
psychiatric programs, psychiatric case management programs and substance abuse
treatment programs. The Company operates in the healthcare industry segment. The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries, Psychiatric Management Resources, Inc., Collaborative
Care Corporation, PMR-CD, Inc., Aldine - CD, Inc. and Twin Town Outpatient.
LEGISLATION, REGULATIONS AND MARKET CONDITIONS
The Company is subject to extensive federal, state and local government
regulation relating to licensure, conduct of operations, ownership of
facilities, expansion of facilities and services and reimbursement for services.
As such, in the ordinary course of business, the Company's operations are
continuously subject to state and federal regulator scrutiny, supervision and
control. Such regulatory scrutiny often includes inquires, investigations,
examinations, audits, site visits and surveys, come of which may be non-routine.
The Company believes that it is in substantial compliance with the applicable
laws and regulations. However, if the Company is ever found to have engaged in
improper practices, it could be subjected to civil, administrative or criminal
fines, penalties or restitutionary relief.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of highly liquid investments with maturities,
when acquired, of three months or less. Investments with original maturities of
three months or less that were classified as cash equivalents totaled $7,816,828
and $58,342 as of April 30, 1998 and 1997, respectively.
SHORT-TERM INVESTMENTS
Marketable equity securities and debt securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value with
unrealized gains and losses reported in a separate component of stockholders'
equity. The costs of debt securities in this category is adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization along with realized gains and losses, interest and dividends are
included in interest income. The cost of securities sold is based on the
specific identification method.
F-6
<PAGE> 43
PMR Corporation
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK
The Company grants credit to contracting providers in various states without
collateral. Losses resulting from bad debts have traditionally not exceeded
management's estimates. The Company has receivables, aggregating $10,258,000 at
April 30, 1998, from four providers, each of which comprise more than 10% of
total receivables. The Company monitors the credit worthiness of these customers
and believes the balances outstanding, net of allowance at April 30, 1998, are
fully collectible.
Substantially all of the Company's cash and cash equivalents is deposited in two
banks. The Company monitors the financial status of these banks and does not
believe the deposits are subject to a significant degree of risk.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and related disclosures at
the date of the financial statements and the amounts of revenues and expenses
reported during the period. Actual results could differ from those estimates.
The Company's significant accounting estimates are the allowance for
uncollectible accounts and the contract settlement reserve.
FURNITURE AND OFFICE EQUIPMENT
Furniture and office equipment are stated at cost and are depreciated over their
estimated useful lives using the straight-line method. Depreciation expense for
each of the three years ended April 30, 1998 was $709,932, $344,254 and
$320,212, respectively.
OTHER ASSETS
Other assets are comprised of the following at April 30:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Proprietary information and covenants not to compete $1,118,753 $1,118,753
Goodwill 978,858 978,858
Other 282,176 282,176
---------- ----------
2,379,787 2,379,787
Less accumulated amortization 1,243,907 878,165
---------- ----------
$1,135,880 $1,501,622
========== ==========
</TABLE>
F-7
<PAGE> 44
PMR Corporation
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Other assets are being amortized using the straight-line method over their
estimated useful lives. The estimated useful life of proprietary information and
covenants not to compete is five to nine years and goodwill is 15 years.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
Earnings per Share. SFAS No. 128 is effective for financial statements issued
for periods ending after December 15, 1997 and replaces APB Opinion 15, Earnings
per Share ("EPS"). SFAS No. 128 requires dual presentation of basic and diluted
earnings per share by entities with complex capital structures. Basic EPS
includes no dilution and is computed by dividing net income by the weighted
average number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution of securities that could share in the earnings of the
entity. The Company has adopted SFAS No. 128 in the third fiscal quarter ending
January 31, 1998 and has calculated its earnings per share in accordance with
SFAS No. 128 for all periods presented. As required by SFAS 128, all prior
periods presented have been restated.
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
--------------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Numerator:
Net income available to common stockholders $1,458,378 $3,106,699 $ 918,377
Preferred stock dividends -- 17,342 131,686
========== ========== ==========
Net income available to common stockholders after
assumed conversion of preferred stock $1,458,378 $3,124,041 $1,050,063
========== ========== ==========
Denominator:
Weighted average shares outstanding for basic
earning per share 6,053,243 4,727,124 3,484,172
---------- ---------- ----------
Effects of dilutive securities:
Employee stock options 596,008 707,368 158,317
Warrants 46,070 119,825 128,491
Convertible preferred stock -- 91,630 700,000
---------- ---------- ----------
Dilutive potential common shares 642,078 918,823 986,808
Shares used in computing diluted net income per
common share 6,695,321 5,645,947 4,470,980
========== ========== ==========
Earnings per common share, basic $ .24 $ .66 $ .26
========== ========== ==========
Earnings per common share, diluted $ .22 $ .55 $ .23
========== ========== ==========
</TABLE>
F-8
<PAGE> 45
PMR Corporation
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION AND CONTRACT SETTLEMENT RESERVE
The Company's acute outpatient psychiatric program customers are primarily acute
care hospitals or community mental health centers ("Providers"). Typical
contractual agreements with providers require the Company to provide, at its own
expense, specific management personnel for each program site. Revenue under
these programs is primarily derived from services provided under three types of
agreements: 1) an all inclusive fee arrangement based on fee-for-service rates
which provide that the Company is responsible for substantially all program
costs, 2) a fee-for-service arrangement whereby substantially all of the program
costs are the responsibility of the Provider, and 3) a fixed fee arrangement. In
all cases, the Company provides on-site managerial personnel.
Patients served by the acute outpatient psychiatric programs typically are
covered by the Medicare program.
The Company has been retained to manage and provide the outpatient psychiatric
portion of a managed health care program funded by the State of Tennessee
("TennCare"). Under the terms of its agreements, the Company receives a monthly
case rate payment from the managed care consortium responsible for managing the
TennCare program, and is responsible for planning, coordinating and managing
psychiatric case management to residents of Tennessee who are eligible to
participate in the TennCare program using the proprietary treatment programs
developed by the Company. The Company is also responsible for providing the
related clinical care under the agreements. The Company has signed six-year
contracts with two case management agencies to provide the clinical network
necessary for the Company to meet its obligations under the TennCare program.
Revenue under this program was approximately $14,607,000, $13,429,000, and
$7,600,000 for the years ended April 30, 1998, 1997 and 1996, respectively.
The Company also operates chemical dependency rehabilitation programs. Revenue
from these programs for the years ended April 30, 1998, 1997 and 1996 was
$2,828,000, $1,673,000 and $1,898,000, respectively.
Revenue under the Acute Outpatient Psychiatric Programs is recognized when
services are rendered based upon contractual arrangements with Providers at the
estimated net realizable amounts. Under certain management contracts, the
Company is obligated under warranty provisions to indemnify the Providers for
all or some portions of the Company's management fees that may be disallowed as
reimbursable to the Providers by Medicare's fiscal intermediaries. The Company
has recorded contract settlement reserves
F-9
<PAGE> 46
PMR Corporation
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
to provide for possible amounts ultimately owed to its Providers resulting from
disallowance of costs by Medicare and Medicare cost report settlement
adjustments. Such reserve is classified as a non-current liability as ultimate
resolution of substantially all of these issues is not expected to occur during
fiscal 1999.
Revenue under the TennCare managed care program is recognized in the period in
which the related service is to be provided.
INSURANCE
The Company carries "occurrence basis" insurance to cover general liability,
property damage and workers' compensation risks. Medical professional liability
risk is covered by a "claims made" insurance policy that provides for guaranteed
tail coverage.
STOCK OPTIONS
Financial Accounting Standards Board Statement No. 123, Accounting for
Stock-Based Compensation (SFAS No. 123), establishes the use of the fair value
based method of accounting for stock-based compensation arrangements, under
which compensation cost is determined using the fair value of stock-based
compensation determined as of the grant date, and is recognized over the periods
in which the related services are rendered. In accordance with the provisions of
SFAS No. 123, the Company has elected to follow Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related
Interpretations in accounting for its employee stock options. Under APB 25, when
the purchase price of restricted stock or the exercise price of the Company's
employee stock options equals or exceeds the fair value of the underlying stock
on the date of issuance or grant, no compensation expense is recognized. In
accordance with SFAS No. 123, the Company will present pro forma disclosures of
net income and earnings per share as if SFAS No. 123 had been applied.
LONG-LIVED ASSETS
Effective May 1, 1996, the Company adopted Financial Accounting Standards Board
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of (SFAS No. 121) which requires impairment
losses to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less
F-10
<PAGE> 47
PMR Corporation
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
than the assets' carrying amount. Statement 121 also addresses the accounting
for long-lived assets that are expected to be disposed of. Any impairment losses
identified will be measured by comparing the fair value of the asset to its
carrying amount. The Company has recognized all known material impairment losses
on long-lived assets used in operations.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS 130,
Reporting Comprehensive Income and SFAS 131, Segment Information. Both of these
standards are effective for the fiscal years beginning after December 15, 1997.
SFAS 130 requires that all components of comprehensive income, including net
income, be reported in the financial statements in the period in which they are
recognized. SFAS 131 amends the requirements for public enterprise to report
financial and descriptive information about its reportable operating segments.
The Company currently operates in one business and three operating segments. The
adoption of this standard will require the Company to disclose additional
financial and descriptive information about the operating segments.
In April 1998, the Accounting Standards Executive Committee issued Statement of
Position 98-5 Reporting on Costs of Start-Up Activities, (SOP 98-5) which is
effective for fiscal years beginning after December 15, 1998. SOP 98-5 requires
costs of start-up activities and organization costs to be expensed as incurred.
In addition, all start-up costs and organization costs previously capitalized
must be written off. Initial application of this SOP 98-5 will be reported as
the cumulative effect of a change in accounting principle. The Company plans to
adopt this change in accounting principle in the first quarter of fiscal 1999,
and anticipates writing off approximately $1,000,000 in previously capitalized
start-up costs.
RECLASSIFICATION
Certain classifications of accounts in the prior year have been reclassified to
reflect current year classifications.
F-11
<PAGE> 48
PMR Corporation
Notes to Consolidated Financial Statements (continued)
2. OTHER AFFILIATIONS
In October 1995, the Company entered into exclusive affiliation agreements with
two case management agencies in Tennessee (see Note 1). As part of these
agreements, the Company issued 50,000 shares each of the Company's common stock
for an aggregate value of $481,250. The agreements also provide for the Company
to grant warrants to the two agencies for the purchase of up to an aggregate
550,000 shares of common stock at fair value over a six year period if certain
performance criteria are met. During fiscal 1997, warrants for the purchase of
30,000 shares of the Company's common stock at the fair market value at the date
of grant were earned by the case management agencies.
3. INVESTMENTS
At April 30, 1998, the fair market value of the marketable securities
approximates cost. The following is a summary of available-for-sale securities:
<TABLE>
<CAPTION>
APRIL 30, 1998
--------------
<S> <C>
U.S. government securities $16,752,478
U. S. corporate securities 2,005,187
Commercial paper 1,000,000
Certificate of Deposit 499,380
-----------
Total debt securities $20,257,045
===========
</TABLE>
At April 30, 1998, all short-term investments mature in one year or less.
4. LONG-TERM RECEIVABLES
Long-term receivables at April 30, 1998 consist primarily of amounts due from
contracting Providers for which the Company has established specific payment
terms for receivable amounts which were past due or for which payment, due to
contract terms, is expected to exceed one year. Management expects to receive
payment on the long-term receivables as contract terms are met, none of which
are expected to exceed two years.
F-12
<PAGE> 49
PMR Corporation
Notes to Consolidated Financial Statements (continued)
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at April 30:
<TABLE>
<CAPTION>
1998 1997
----------- ------------
<S> <C> <C>
Furniture and fixtures $ 1,975,766 $ 847,863
Leasehold improvements 1,133,641 532,966
Software 365,625 54,987
Start-up costs 1,744,457 1,003,907
----------- -----------
5,219,489 2,439,723
Accumulated depreciation (1,727,040) (1,175,980)
----------- -----------
$ 3,492,449 $ 1,263,743
=========== ===========
</TABLE>
6. LINE OF CREDIT
The Company has a credit agreement with a bank that permits borrowings of up to
the lesser of 50% of the aggregate amount of eligible accounts receivable of the
Company or $10,000,000 for working capital needs. The credit agreement expires
on August 30, 1999 and is collateralized by substantially all of the Company's
assets. Interest on borrowings is payable monthly at either the Bank's reference
rate or at the Bank's Eurodollar rate plus 2%. There were no borrowings
outstanding at April 30, 1998.
EQUIPMENT LINE OF CREDIT
The Company has a credit agreement with a bank that permits borrowings for the
purchase of equipment for up to $3,000,000. The credit agreement expires on
September 30, 1998, and is collateralized by the assets acquired with the
proceeds from the loan. Interest at 8.36% and principle payments on borrowings
are payable monthly over five years from the time of purchase. There was
$482,028 outstanding under this credit agreement at April 30, 1998.
7. STOCKHOLDERS' EQUITY
In June 1996, the Company called for redemption of all outstanding shares of
Series C Convertible Preferred Stock. Holders of all the Series C shares
exercised their options to convert such shares to Common Stock and accordingly,
in July 1996, the Company issued 700,000 shares of Common Stock. In conjunction
with the conversion, the Series C shareholders also exercised warrants to
purchase 525,000 shares of the Company's Common Stock for net proceeds of
$2,362,500.
F-13
<PAGE> 50
PMR Corporation
Notes to Consolidated Financial Statements (continued)
8. STOCK OPTIONS AND WARRANTS
During 1997, the Company amended its Employees' Incentive Stock Option Plan of
1990 which was renamed as the 1997 Equity Incentive Plan (the "1997 Plan") that
provides for the granting of options to purchase up to 2,000,000 shares of
common stock to eligible employees. Under the 1997 plan, options may be granted
for terms of up to ten years and are generally exercisable in cumulative annual
increments of 20 percent each year, commencing one year after the date of grant.
The 1997 Plan also provides for the full vesting of all outstanding options
under certain change of control events. Option prices must equal or exceed the
fair market value of the common shares on the date of grant.
The Company has a non qualified stock option plan for its outside directors
("the 1992 Plan"). The 1992 Plan provides for the Company to grant each outside
directors options to purchase 15,000 shares of the Company's common stock
annually, at the fair market value at the date of grant. Options for a maximum
of 525,000 shares may be granted under this plan. The options vest 30%
immediately and in ratable annual increments over the three year period
following the date of grant. In 1997, the board of directors amended the 1992
Plan to provide for full vesting of all outstanding options under certain change
of control events.
Warrants to purchase shares of the Company's common stock were issued in each of
the two years in the period ended April 30, 1997 to brokers in connection with
financing transactions (see Note 8). No warrants were issued in the year ended
April 30, 1998. As of April 30, 1998, broker warrants to purchase 53,000 shares
of the Company's common stock at $2.50 per share were outstanding. These
warrants expire on October 31, 1999.
F-14
<PAGE> 51
PMR Corporation
Notes to Consolidated Financial Statements (continued)
8. STOCK OPTIONS AND WARRANTS (CONTINUED)
A summary of the Company's stock option activity and related information is as
follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
---------- ---------------
<S> <C> <C>
Outstanding April 30, 1995 707,124 $ 4.41
Granted 897,526 7.57
Exercised (17,174) 3.40
Forfeited (32,423) 4.11
---------- ---------
Outstanding April 30, 1996 1,555,053 6.63
Granted 486,837 20.50
Exercised (96,016) 5.17
Forfeited (160,268) 8.44
---------- ---------
Outstanding April 30, 1997 1,785,606 14.72
Granted 105,000 19.78
Exercised (226,143) 4.42
Forfeited (60,855) 13.00
---------- ---------
Outstanding April 30, 1998 1,603,608 $ 10.86
========== =========
</TABLE>
At April 30, 1998 options and warrants to purchase 929,859 and 53,000 shares of
common stock, respectively, were exercisable and 899,181 shares and 165,000
shares were available for future grant under 1997 Plan and the 1992 Plan,
respectively.
The weighted-average fair value of options granted was $12.37, $15.21 and $4.48
in fiscal years 1998, 1997 and 1996, respectively.
A summary of options outstanding and exercisable as of April 30, 1998 follows:
<TABLE>
<CAPTION>
WEIGHTED-
WEIGHTED- AVERAGE WEIGHTED
OPTIONS AVERAGE REMAINING OPTIONS -AVERAGE
OUTSTANDING (IN EXERCISE PRICE EXERCISE CONTRACTUAL EXERCISABLE (IN EXERCISE
THOUSANDS) RANGE PRICE LIFE THOUSANDS) PRICE
--------------- -------------- --------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
156,247 $2.37 - $3.50 $ 3.13 5.0 103,247 $ 3.13
595,129 $3.75 - $6.00 $ 4.38 4.2 488,262 $ 4.44
300,091 $9.75 - $11.38 $ 9.86 7.2 156,593 $ 9.90
552,141 $18.88 - $28.50 $ 20.57 7.7 181,757 $ 20.61
</TABLE>
F-15
<PAGE> 52
PMR Corporation
Notes to Consolidated Financial Statements (continued)
9. STOCK OPTIONS AND WARRANTS (CONTINUED)
Adjusted pro forma information regarding net income and net income per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options and stock purchase plan under the fair value
method of SFAS 123. The fair value for these options was estimated at the date
of grant using the "Black-Scholes" method for option pricing with the following
weighted-average assumptions for fiscal 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
----- ---- ----
<S> <C> <C> <C>
Expected life (years) 5.0 6.0 6.0
Risk-free interest rate 6.34% 6.5% 6.5%
Annual dividend yield -- -- --
Volatility 69% 88% 88%
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the options
granted is amortized to expense over the options' vesting period. The Company's
pro forma information for the years ended April 30, 1998, 1997 and 1996,
follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------------- ----------
<S> <C> <C> <C>
Pro forma net income (in thousands) $24,335 $ 1,967,939 $ 98,037
Pro forma earnings per share, basic $ -- $ .34 $ .02
Pro forma earnings per share, diluted $ -- $ .34 $ .02
</TABLE>
10. INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Federal:
Current $ 1,404,000 $ 4,868,000 $ 1,220,000
Deferred (612,000) (3,009,000) (685,000)
----------- ----------- -----------
792,000 1,859,000 535,000
State:
Current 392,000 1,138,000 351,000
Deferred (170,000) (825,000) (156,000)
----------- ----------- -----------
222,000 313,000 195,000
----------- ----------- -----------
$ 1,014,000 $ 2,172,000 $ 730,000
=========== =========== ===========
</TABLE>
F-16
<PAGE> 53
PMR Corporation
Notes to Consolidated Financial Statements (continued)
10. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
<TABLE>
<CAPTION>
APRIL 30,
1998 1997
---------- ----------
<S> <C> <C>
Deferred tax assets:
Contract settlement reserve $3,048,000 $3,609,000
Accrued compensation and employee benefits 405,000 531,000
Allowance for bad debts 3,704,000 1,979,000
State income taxes 55,000 280,000
Depreciation and amortization 254,000 163,000
Special Charge 885,000 --
Other 179,000 159,000
---------- ----------
Total deferred tax assets 8,530,000 6,721,000
Deferred tax liabilities:
Non-accrual experience method 913,000 326,000
Contractual retainers 1,401,000 961,000
---------- ----------
Total deferred tax liabilities 2,314,000 1,287,000
---------- ----------
Net deferred tax assets $6,216,000 $5,434,000
========== ==========
</TABLE>
A reconciliation between the federal income tax rate and the effective income
tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate 35% 35% 34%
State income taxes, net of federal tax benefit 6 6 7
-- -- --
Effective income tax rate 41% 41% 41%
== == ==
</TABLE>
F-17
<PAGE> 54
PMR Corporation
Notes to Consolidated Financial Statements (continued)
11. CUSTOMERS
Approximately 47% of the Company's revenues are derived from contracts with
providers in the State of California. The remainder of the Company's revenue is
derived from contracts with providers in Arizona, Arkansas, Colorado, Hawaii,
Indiana, Michigan, Tennessee, and Texas. The following table summarizes the
percent of revenue earned from any individual or agency which was responsible
for ten percent or more of the Company's consolidated revenues. There is more
than one program site for some providers.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30
Provider 1998 1997 1996
-------- ---- ---- ----
<S> <C> <C> <C>
A 22% 23% 21%
B 14 13 11
</TABLE>
12. EMPLOYEE BENEFITS
The Company maintains a tax deferred retirement plan under Section 401(k) of the
Internal Revenue Code for the benefit of all employees meeting minimum
eligibility requirements. Under the plan, each employee may defer up to 15% of
pre-tax earnings, subject to certain limitations. The Company will match 50% of
an employee's deferral to a maximum of 3% of the employee's gross salary. The
Company's matching contributions vest over a five year period. For the years
ended April 30, 1998, 1997 and 1996, the Company contributed $265,000, $186,000
and, $138,000, respectively, to match employee deferrals.
13. COMMITMENTS AND CONTINGENCIES
The Company leases its administrative facilities and certain program site
facilities under both cancelable and non-cancelable leasing arrangements.
Certain non-cancelable lease agreements call for annual rental increases based
on the consumer price index or as otherwise provided in the lease. The Company
also leases certain equipment under operating lease agreements. Future minimum
lease payments for all leases with initial terms of one year or more at April
30, 1998 are as follows: 1999 - $3,000,348; 2000 - $2,029,999; 2001 -
$1,540,147; 2002 - $887,277 and 2003 - $162,009.
Rent expense totaled $3,140,000, $2,690,800 and $1,950,000 for the years ended
April 30, 1998, 1997 and 1996, respectively.
F-18
<PAGE> 55
PMR Corporation
Notes to Consolidated Financial Statements (continued)
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LITIGATION
The Company is a party to various legal proceedings arising in the normal course
of business. In management's opinion, except as otherwise noted below, the
outcome of these proceedings will not have a material adverse effect on the
Company's consolidated financial position, results of operations or cash flows.
In February 1998, the Company announced that the outpatient program that it
formerly managed in Dallas, Texas is subject to a civil investigation being
conducted by the U.S. Department of Health and Human Services' Office of
Inspector General and the U.S. Attorney's office in Dallas, Texas (collectively,
the "Agencies"). The investigation is a result of a Health Care Financing
Administration (""HCFA") review of partial hospitalization services rendered to
63 patients at this location. The Dallas program was operational from January
1996 to February 6, 1998. A representative of the Agencies has indicated that
the investigation is civil in nature and focuses on eligibility of patients for
partial hospitalization services. The eligibility determinations for
participation at the Dallas program were made by board certified or board
eligible psychiatrists. The Company is cooperating fully with the Agencies and,
to date, no formal complaint or demand has been made by the Agencies.
On July 20, 1998, the Company was informed that a qui tam suit had been filed
against a subsidiary of the Company. The suit alleges a broad range of improper
conduct relating to the quality of services furnished by the Company, the
medical necessity of such services furnished by the Company and by physicians
who admit patients to the program managed by the Company, and other matters. The
suit was filed by a former employee who previously had filed a separate action
for wrongful termination. The Company prevailed in that wrongful termination
case when the court dismissed the case granting the Company's motion for summary
judgment. Notwithstanding the similarity between the allegations in the wrongful
termination case and the qui tam case, the Company cannot give any assurances
with respect to the ultimate outcome of the qui tam case or its effect on the
Company's business, financial condition or results of operations. Under the
False Claims Act, the Department of Justice must inform the court whether it
will intervene and take control of the qui tam suit. In this case, the
Department of Justice has not yet made that decision, but rather is conducting
an investigation. The Company has met with the Assistant United States Attorney
who is coordinating the government's investigation of this case, and the Company
has agreed to furnish certain documentation to the government.
Due to the preliminary nature of these investigations, the Company is unable to
predict the ultimate outcome of the investigations, or the material impact, if
any, on the Company's business, financial condition or results of operations.
14. SPECIAL CHARGE
During the fourth quarter of fiscal 1998, the Company recorded a special charge
of $4,991,588. The charge resulted from management's decision to close ten
program locations in the Mid-America Region, and costs to be incurred in
connection with noncancelable operating commitments resulting from the HCFA
withdrawal of provider status for the Company's largest partial hospitalization
program.
The components of the impairment and exit costs resulting from closing program
locations consist of severance, noncancelable facility lease commitments,
related legal costs, write-off of furniture and office equipment and intangible
assets, other related costs, and additional allowances or uncollectible accounts
due to anticipated difficulties associated with collection of receivables from
closed locations.
F-19
<PAGE> 56
PMR Corporation
Notes to Consolidated Financial Statements (continued)
14. SPECIAL CHARGE (CONTINUED)
In February 1998, HCFA notified Scripps Health that the "provider based" status
of its programs would be withdrawn on March 1, 1998. As a result of the notice
of withdrawal of the provider based status, the Company recorded a charge for
the costs to be incurred by the Company under the noncancelable operating
commitment provision of its management contract with Scripps Health. Subsequent
to the withdrawal, HCFA granted an extension to the program through April 15,
1998 and in June 1998, granted an additional extension of provider based status
to July 15, 1998 in order for Scripps Health and the Company to implement
certain agreed upon changes. However, there is no assurance that Scripps Health
and the Company will be able to implement the agreed upon changes required by
HCFA or that HCFA will grant additional extensions.
Following is a summary of the components of the special charge by income
statement line item:
<TABLE>
<S> <C>
Provision for bad debts $2,408,692
Special charge:
Location closure related costs 1,402,896
Contract losses 1,180,000
----------
2,582,896
----------
$4,991,588
==========
</TABLE>
At April 30, 1998, special charges totaling $2,229,741 are included in accrued
liabilities in the consolidated balance sheet.
15. SUBSEQUENT EVENT
On June 10, 1998, the Company signed a subscription agreement with Stadtlander
Drug Distribution Co., Inc. to form a new disease management company to provide
pharmaceutical care for individuals with serious mental illness. The joint
venture is expected to begin operations in July 1998.
F-20
<PAGE> 57
Schedule II
PMR Corporation
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
- ------------------------------------------------- ---------------- ----------------- -------------------- ----------------
COL. A COL. B COL. C COL. D COL. E
- ------------------------------------------------- ---------------- ----------------- -------------------- ----------------
ADDITIONS
-----------------
DESCRIPTION BALANCE AT CHARGED TO BALANCE AT END
BEGINNING OF COSTS AND DEDUCTIONS - OF PERIOD
PERIOD EXPENSES DESCRIBE
- ------------------------------------------------- ---------------- ----------------- -------------------- ----------------
<S> <C> <C> <C> <C> <C>
Year ended April 30, 1998
Allowance for doubtful accounts $5,081,177 $5,148,580 $ 1,148,147 (1) $ 9,081,610
Contract settlement reserve $8,791,928 $2,349,382 $ 3,661,317 (2) $ 7,479,993
Year ended April 30, 1997
Allowance for doubtful accounts $1,759,182 $3,084,166 $ (237,829) (1) $ 5,081,177
Contract settlement reserve $5,499,020 $3,927,371 $ 634,463 (2) $ 8,791,928
Year ended April 30, 1996
Allowance for doubtful accounts $1,423,054 $1,447,983 $ 1,111,855 (1) $ 1,759,182
Contract settlement reserve $3,523,223 $2,390,196 $ 414,399 (2) $ 5,499,020
</TABLE>
(1) Uncollectible accounts written off, net of recoveries
(2) Write off of hospital receivables based on disallowance of the
Company's management fee on Provider's cost reimbursement report and
the Company's indemnity obligation
S-1
<PAGE> 1
Exhibit 3.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
PMR CORPORATION
PMR CORPORATION, a corporation organized and existing under the laws of
the state of Delaware, hereby certifies as follows:
1. The name of the corporation is PMR Corporation (the "Corporation").
2. The date of the filing of the Corporation's original Certificate of
Incorporation with the Secretary of State of Delaware was January 8, 1988 under
the name Zaron Capital, Inc.
3. The Certificate of Incorporation of this Corporation is hereby
amended and restated to read as follows:
ARTICLE I.
The name of this Corporation is PMR CORPORATION.
ARTICLE II.
The address, including street, number, city, and county, of the
registered office of the Corporation in the State of Delaware is 1209 Orange
Street, Wilmington, New Castle County, Delaware 19801.
ARTICLE III.
The name of the registered agent in Delaware at such address is The
Corporation Trust Company.
ARTICLE IV.
The purposes of the Corporation are to engage in any lawful act or
activity for which corporations may be organized under the Delaware General
Corporation Law.
1.
<PAGE> 2
ARTICLE V.
A. This Corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total number
of shares of stock which the Corporation is authorized to issue is twenty
million (20,000,000) shares, of which nineteen million (19,000,000) shares shall
be Common Stock, each having a par value of one cent ($.01) per share and one
million (1,000,000) shares shall be Preferred Stock, each having a par value of
one cent ($.01) per share.
B. The Preferred Stock may be issued from time to time in one or more series.
The Board of Directors is hereby authorized, by filing a certificate (a
"Preferred Stock Designation") pursuant to the Delaware General Corporation Law,
to fix or alter from time to time the designation, powers, preferences and
rights of the shares of each such series and the qualifications, limitations or
restrictions of any wholly unissued series of Preferred Stock, and to establish
from time to time the number of shares constituting any such series or any of
them; and to increase or decrease the number of shares of any series subsequent
to the issuance of shares of that series, but not below the number of shares of
such series then outstanding. In case the number of shares of any series shall
be decreased in accordance with the foregoing sentence, the shares constituting
such decrease shall resume the status that they had prior to the adoption of the
resolution originally fixing the number of shares of such series.
ARTICLE VI.
All of the powers of this Corporation, insofar as the same may be
lawfully vested by this Certificate of Incorporation in the Board of Directors
are hereby conferred upon the Board of Directors of this Corporation. In
furtherance and not in limitation of that power, the Board of Directors shall
have the power to make, adopt, alter, amend and repeal from time to time Bylaws
of this Corporation, subject to the right of stockholders entitled to vote with
respect thereto to adopt, alter, amend and repeal Bylaws by the Board of
Directors; provided, however, that Bylaws shall not be adopted, altered, amended
or repealed by the stockholders of the Corporation except by the affirmative
vote of the holders of two-thirds of the combined voting power of the then
outstanding shares of stock entitled to vote on any proposed amendment to the
Bylaws.
ARTICLE VII.
A. No director shall be personally liable to the Corporation or its
stockholders for monetary damages for any breach of fiduciary duty by such
director as a director, except (i) for breach of the director's duty of loyalty
to the Corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) pursuant to Section 174 of the Delaware General Corporation Law, or (iv)
for any transaction from which the director derived an improper personal
benefit. If the Delaware General Corporation Law is amended after
2.
<PAGE> 3
approval by the stockholders of this Article VII to authorize corporate action
further eliminating or limiting the personal liability of directors, then the
liability of a director shall be eliminated or limited to the fullest extend
permitted by Delaware General Corporation Law, as so amended.
B. Any repeal or modification of this Article VII shall be prospective
and shall not affect the rights under this Article VII in effect at the time of
the alleged occurrence of any act or omission to act giving rise to liability or
indemnification.
ARTICLE VIII.
The Corporation may indemnify any person who is or was a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that the person is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against any and all expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement or
incurred in connection with the investigation, preparation to defend or defense
of such action, suit, proceeding or claim, to the fullest extent permitted by
the Delaware General Corporation Law, as amended from time to time. The
Corporation may purchase and maintain insurance, at its expense, to protect
itself and any director, officer, employee or agent of the Corporation or
another corporation, partnership, joint venture, trust or other enterprise,
against any such expense, liability or loss, to the fullest extent permitted by
the Delaware General Corporation Law.
ARTICLE IX.
Amendments to the Certificate of Incorporation of the Corporation shall
require the affirmative vote of the holders of two-thirds of the combined voting
power of the then outstanding shares of stock entitled to vote on any proposed
amendment to the Certificate of Incorporation. Notwithstanding the foregoing, in
the event that a resolution to amend the Certificate of Incorporation of the
Corporation is adopted by the affirmative vote of at least eighty percent (80%)
of the Board of Directors, approval of the amendment shall only require the
affirmative vote of the holders of a majority of the combined voting power of
the then outstanding shares of stock entitled to vote generally on such
amendment, voting together as a single class.
ARTICLE X.
A. Except as otherwise fixed by or pursuant to provisions hereof
relating to the rights of the holders of any class or series of stock having a
preference over common stock as to dividends or upon liquidation to elect
additional Directors under specified circumstances, the number of Directors of
the Corporation shall be fixed from time to
3.
<PAGE> 4
time by affirmative vote of a majority of the Directors then in office. The
Directors, other than those who may be elected by the holders of any classes or
series of stock having a preference over the common stock as to dividends or
upon liquidation, shall be classified, with respect to the time for which they
severally hold office, into three classes, as nearly equal in number as
possible, as shall be provided in the manner specified in the Bylaws of the
Corporation, one class to be originally elected for a term expiring at the
annual meeting of stockholders to be held in 1997, another class to be
originally elected for a term expiring at the annual meeting of stockholders to
be held in 1998, and another class to be originally elected for a term expiring
at the annual meeting of stockholders to be held in 1999, with each class to
hold office until its successor is elected and qualified. At each annual meeting
of the stockholders of the Corporation after 1996, the successors of the class
of Directors whose term expires at that meeting shall be elected to hold office
for a term expiring at the annual meeting of stockholders held in the third year
following the year of their election. Election of directors need not be by
written ballot unless so provided in the Bylaws of the Corporation.
B. Except as otherwise fixed by or pursuant to provisions hereof
relating to the rights of the holders of any class or series of stock having a
preference over common stock as to dividends or upon liquidation to elect
additional Directors under specified circumstances, newly created directorships
resulting from any increase in the number of directors and any vacancies on the
Board of Directors resulting from death, resignation, disqualification, removal
or other cause shall be filled by the affirmative vote of a majority of the
remaining Directors then in office, even though less than a quorum of the Board
of Directors. Any Director elected in accordance with the preceding sentence
shall hold office for the remainder of the full term of the class of Directors
in which the new directorship was created or the vacancy occurred and until such
Director's successor shall have been elected and qualified. No decrease in the
number of Directors constituting the Board of Directors shall shorten the term
of any incumbent director.
C. Except as otherwise fixed by or pursuant to provisions hereof
relating to the rights of the holders of any class or series of stock having a
preference over common stock as to dividends or upon liquidation to elect
additional Directors under specified circumstances, any Director may be removed
from office only for cause and only by the affirmative vote of the holders of
two-thirds of the combined voting power of the then outstanding shares of stock
entitled to vote generally in the election of Directors, voting together as a
single class.
D. Notwithstanding anything contained in this Certificate of
Incorporation to the contrary, the consent of the Board of Directors shall be
required to alter, amend, or adopt any provisions inconsistent with or repeal
this Article X.
* * *
4.
<PAGE> 5
4. This Amended and Restated Certificate of Incorporation has
been duly adopted by the Board of Directors of this Corporation.
5. This Amended and Restated Certificate of Incorporation has
been duly adopted in accordance with the provisions of Sections 228, 242 and 245
of the Delaware General Corporation Law by the board of directors and the
stockholders of the Corporation. The total number of outstanding shares entitled
to vote or act by written consent was 6,925,819 shares of Common Stock. A
majority of the outstanding shares of Common Stock approved this Amended and
Restated Certificate of Incorporation by written consent in accordance with
Section 228 of the Delaware General Corporation Law and written notice of such
was given by the Corporation in accordance with said Section 228.
5.
<PAGE> 6
IN WITNESS WHEREOF, said PMR Corporation has caused this Certificate to
be signed by its Chief Executive Officer, Allen Tepper, and attested to by its
Secretary, Susan D. Erskine, this 6th day of March, 1998.
/s/ Allen Tepper
--------------------------------
Allen Tepper
Chief Executive Officer
Attest:
/s/ Susan Erskine
- --------------------------
Susan D. Erskine
Secretary
6.
<PAGE> 1
Exhibit 10.12
AMENDMENT TO
RESTATED MANAGEMENT AGREEMENT
This Amendment to Restated Management Agreement ("Amendment") is made
effective as of July 15, 1998 ("Effective Date"), between Scripps Health, a
California non-profit public benefit corporation, ("Hospital") with an address
of 9888 Genesee Avenue, Post Office Box 28, La Jolla, California 92038, and PMR
Corporation, a Delaware Corporation, with an office at 501 Washington Street,
5th Floor, San Diego, California 92103 ("PMR"). This Amendment shall be
incorporated into the Agreement (as defined hereunder) by reference and shall
amend and supplement the terms and conditions of the Agreement. In the event any
of the terms and conditions of this Amendment contradict the terms of the
Agreement or render any provisions ambiguous, the terms and conditions of this
Amendment shall supersede and be controlling.
RECITALS
1. Hospital and PMR entered into a Restated Management Agreement
("Agreement") dated April 11, 1997 and wish to amend certain terms of the
Agreement to enable Hospital to comply with HCFA's interpretation of the
Medicare provider-based designation rules and to maintain the provider-based
designation status of its Programs under the Agreement, as mandated by HCFA's
Region IX, by entering into this Amendment.
AGREEMENT
NOW, THEREFORE, Hospital and PMR, intending to be legally bound hereby,
agree as follows:
1. Common Ownership and Control. The Programs' operation under the Agreement
is subject to the ultimate control of the Hospital's Board of Trustees. The
Programs shall be operated in accordance with Hospital's governing
policies, bylaws, practices and procedures. This provision does not change
the parties' initial agreement since the parties have always understood
that the Hospital has had control over the Programs and that PMR was bound
to manage the Programs in accordance with the Hospital's governing
policies, bylaws, practices and procedures.
2. Program Premises. Hospital shall be assigned or sublet the leases of the
Program premises (as defined under the Agreement) and shall lease directly,
or otherwise own or control, the premises at which all Program services are
furnished. Hospital shall be responsible for all costs associated with
occupying the Program premises for operation of the Programs.
Page 1
<PAGE> 2
3. Personnel. Hospital shall employ personnel consisting of therapists,
nurses, community liaison/intake workers, and care coordinators
(collectively, "Personnel") who provide direct patient care to patients of
the Program. Personnel shall be subject to the ultimate supervision and
complete control of the Administrator of the Hospital and shall be subject
exclusively to Hospital's disciplinary process, bylaws, policies and
procedures, rules and regulations and all human resource requirements of
the Hospital. PMR shall assist Hospital in the transfer to the Hospital of
existing Personnel of the Programs who are currently employed by PMR, to
the extent the Hospital independently decides to hire such persons.
Hospital shall maintain files of the credentials of the Personnel showing
an active review of the person's credentials by a person experienced in
behavioral health employed by the Hospital. To the extent applicable, those
Personnel who are allied health practitioners shall maintain membership in
Hospital's allied health practitioner staff. In addition, Personnel shall
wear the Hospital's identification badges to the same extent required of
other personnel employed by the Hospital (although such badges may be
distinguished from employee badges to the extent that the Hospital
uniformly gives its personnel distinctive badges). Hospital shall ensure
that a copy of the Hospital's rules governing conduct of personnel and
other Hospital manuals on premises are maintained at the Program sites and
that such rules and manuals are made available to Personnel of the
Programs. PMR shall continue to employ or engage the Program Administrator
and administrative personnel not involved in the delivery of direct patient
care to patients of the Program.
4. Medical Staff Oversight. Hospital shall approve the Programs' Medical
Directors who were previously, and continue to be, duly licensed
psychiatrists who are active members of the Hospital's medical staff and
shall report as necessary or appropriate to the Chief of the Section of
Psychiatry, Department of Medicine, of the Hospital. All attending
physicians at the Program shall be, as required in the past, members in
good standing on the active medical staff of the Hospital. Through the
Hospital's organizational structure, which is the same throughout the
Hospital's system, the medical staff has ultimate oversight of the
Department of Medicine, and controls the quality and credentials of its
members who head its inpatient and outpatient departments.
5. Program Administrator. The Program Administrator shall report to and be
accountable to the Administrator of the Hospital who is responsible for the
Program and other patient care departments of the Hospital and who reports
to the Scripps Health Management Team, which includes the Chief Executive
Officer, and shall report through the Administrator of the Hospital to the
governing body of the Hospital. The Program Administrator shall continue to
submit daily reports by facsimile to the Administrator of the Hospital. The
Program Administrators shall be required, as required in the past, to
attend meetings of the Hospital's department managers and to attend
meetings of the behavioral health managers of the Hospital and Scripps
Health.
Page 2
<PAGE> 3
6. Medical Records. All patient medical records shall continue to be
integrated into the unified records system of the Hospital. Medical records
shall be compiled, checked for completeness and retained in accordance with
Hospital's policies. The medical record number shall be issued by the
Hospital upon a patient's admission to the Program. Medical record forms
shall be provided by or approved by the Hospital's Medical Records
Committee.
7. Indemnification.
(a) Hospital agrees to indemnify, defend and hold PMR (together with
its officers, directors, agents, employees and representatives)
harmless from and against all claims, demands, causes of action,
judgments, damages, costs and expenses (including without limitation,
reasonable attorneys' fees and court costs), deficiencies and
settlements which relate to matters, actions or omissions arising or
occurring as a result of any activity (or lack thereof) of the Hospital
or Personnel under this Agreement to the extent that the Personnel or
any employee of Hospital is/are responsible for or the cause of such
activity (or lack thereof). Hospital agrees to add PMR as an additional
insured under its workers compensation, comprehensive general liability
and property insurance policies.
(b) PMR agrees to indemnify, defend and hold Hospital (together with
its officers, directors, agents, employees and representatives)
harmless from and against all claims, demands, causes of action,
judgments, damages, costs and expenses (including without limitation,
reasonable attorneys' fees and court costs), deficiencies and
settlements which relate to matters, actions or omissions arising or
occurring as a result of any activity (or lack thereof) of PMR under
this Agreement to the extent that PMR or any employee of PMR is
responsible for or the cause of such activity (or lack thereof). PMR
agrees to add Hospital as an additional insured under its workers
compensation and comprehensive general liability insurance policies.
8. Paragraph 7.1 of the Agreement regarding limitations on hiring is hereby
void and of no force and effect; provided however, that the Hospital shall
not hire, offer employment or engage any Program Administrator or PMR
management personnel during the term of the Agreement and any extension or
renewal thereof and for a period of one (1) year thereafter.
9. Paragraph 4 of the Agreement regarding compensation to PMR is amended such
that PMR's fee is reduced, as reflected in the revised Exhibit C attached
hereto, as a result of the changes set forth in Sections 2 and 3 of this
Amendment.
10. The Agreement terminates with respect to the Program sites located in
Vista, Chula Vista, and El Centro, California, as of the close of business
on July 14, 1998.
Page 3
<PAGE> 4
All other terms and provision of the Agreement shall remain in full
force and effect, except as modified herein.
Page 4
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
effective as of the day and year noted above as the Effective Date.
SCRIPPS HEALTH PMR CORPORATION
By:/s/ E. J. Rood By:/s/ Fred Furman
------------------------------- ---------------------------------
Printed Name: E.J. Rood Printed Name: Fred D. Furman
-------------------- ----------------------
Title: Chief Financial Officer Title: President
-------------------------- -----------------------------
Page 5
<PAGE> 6
[EXHIBITS EXCLUDED]
<PAGE> 1
EXHIBIT 10.19
TENNESSEE BEHAVIORAL HEALTH, INC.
TENNESSEE MENTAL HEALTH COOPERATIVE, INC.
PROVIDER AGREEMENT
THIS AGREEMENT is made between TENNESSEE BEHAVIORAL HEALTH, INC., a
Tennessee corporation ('TBH'), and TENNESSEE MENTAL HEALTH COOPERATIVE, INC., a
Tennessee corporation ("Provider").
RECITALS
A. Provider manages the Mental Health Cooperative, Inc., a Tennessee
not-for-profit corporation ("MHC") and Case Management, Inc., a Tennessee
not-for-profit corporation ("CMI") who are behavioral health providers who are
duly licensed, trained and/or certified under the laws of the State to provide
Designated Covered Services to Enrollees and have authorized Provider to enter
into this Agreement on their behalf. Reference to "Provider" herein shall mean
MHC and CMI with respect to the provision of Designated Covered Services by
Provider to Enrollees and any licensing requirements.
B. TBH is organized to arrange on behalf of Payors for the provision of
Covered Services to Enrollees under Payor Plans sponsored, maintained or
administered by such Payors.
C. TBH also contracts with other managed care organizations to arrange
for the provision of Covered Services to Enrollees under Payor Plans sponsored,
maintained or administered by such organizations.
D. TBH and Provider mutually desire to arrange for the provision of
Designated Covered Services by Provider to Enrollees under such Payor Plans.
NOW, THEREFORE, in consideration of the above recitals and the mutual
covenants of the parties set forth below, it is agreed as follows:
ARTICLE 1
DEFINITIONS
The following definitions shall be used in the interpretation and
implementation of this Agreement.
1.1 "ADDENDUM" means any amendment or supplement to this Agreement
identifying a Payor Plan and setting forth certain essential provisions of the
Payor Plan that are necessary for Provider to provide and bill for Designated
Covered Services provided to Enrollees covered under the Plan Contract in a
manner permitted by this Agreement and such Plan Contract. All provisions of
each Addendum are incorporated herein by reference and shall be deemed a part of
this Agreement. A list of all Addenda attached to this Agreement as of the time
of its execution by the parties is set forth on the List of Addenda attached to
this Agreement as Exhibit 2. Addenda may be deleted of added to this Agreement
by TBH as provided in Section 13.2 of this Agreement.
1.
<PAGE> 2
1.2 "AGREEMENT" means this Agreement, all Exhibits and Addenda and all
applicable State or federal requirements that are required by law or contract to
be incorporated as a part of this Agreement
1.3 "CASE MANAGER" means the Participating Provider to whom TRH has
given all or some of those duties and responsibilities described in Article IV
of this Agreement.
1.4 "CLEAN CLAIM" means a properly completed claim for payment for
Designated Covered Services received by TBH from Provider that, in the
reasonable determination of TBH, is complete (i.e. requires no further
information, documentation, adjustment or alteration by Provider in order to be
processed and paid by TBH or any Contract MCO), that is not contested or denied
by TBH or the Contract MCO (i.e. not reasonably believed to be incorrect or
fraudulent) and that is not subject to appeal or grievance procedures.
1.5 "CONTRACT MCO" mean a managed care organization that provides or
arranges for the provision of health care services to Enrollees and who
contracts with TBH for TBH to arrange for the provision of behavioral health
care services to such Enrollees under one or more Plan Contracts which the
Contract MCO sponsors, maintains or administers.
1.6 "COORDINATION OF BENEFITS" means allocation of responsibility to
pay for health care services between two or more Payors covering the same
Enrollee.
1.7 "COPAYMENT" means an Enrollee's share of costs for Covered Services
under a Plan Contract, including cost sharing expressed as coinsurance and
deductibles under such Plan Contract. Copayment varies in amount according to
the terms of the applicable Plan Contract.
1.8 "COVERED SERVICES" means those behavioral health care services and
supplies that are both Medically/Psychologically Necessary and covered and to be
provided by Participating Providers under a Plan Contract. Coverage of Covered
Services; under a Plan Contract is limited to the least intensive and/or
expensive alternative treatment, supply or level of care that is consistent with
professionally recognized standards of medical practice within the community and
TBH Policies.
1.9 "CPT" means the appropriate published edition of Current Procedural
Terminology, a listing of descriptive terms and identifying codes for reporting
medical services and procedures performed by health care providers, including
all updates to such listing.
1.10 "CREDENTIALING" means the process by which TBH or a Contract MCO
certifies or recertifies the clinical credentials of Participating Providers or
Provider Affiliates.
1.11 "DESIGNATED COVERED SERVICES" means those Covered Services
identified in Exhibit 1 and in any Addenda as Covered Services to be provided by
Provider or Provider Affiliates to Enrollees under this Agreement.
1.12 "DRUG FORMULARY" means the applicable listing of medications
eligible for coverage as Covered Service under any prescription medication
benefit offered in conjunction with a Plan Contract that is created, published
and updated by TBH or a Contract MCO. A copy of the most current applicable Drug
Formulary will be delivered to Provider by TBH from time to time. Each Drug
Formulary will include a summary of important procedural requirements and other
relevant information applicable to such benefit.
1.13 "DSM" means the latest published edition of Diagnostic and
Statistical Manual of Mental Disorders a listing of diagnostic categories and
criteria that provides guidelines for making diagnoses of behavioral and
substance abuse disorders. A DSM diagnosis of
2.
<PAGE> 3
a behavioral disorder is a minimum requirement for the determination of
Medical/Psychological Necessity for behavioral health care.
1.14 "EMERGENCY CARE" means a Covered Service rendered by a Mobile
Crisis Unit or in an inpatient facility that is Medically/Psychologically
Necessary for the stabilization of behavioral disorders which, if not
immediately diagnosed and treated, would result in danger to the patient or
others. The attending health care provider is exclusively responsible for making
medical determinations and treatment decisions; however, payment for behavioral
health care services rendered will be conditioned on (a) whether Prior
Authorization has been obtained, if required under the applicable Payor Plan or
Plan Contract and (b) TBH's subsequent review and determination as to whether
such services constitute Covered Services under the applicable Plan Contract and
are consistent with professionally recognized standards of practice and TBH's
Policies. Provider may appeal claims for payment of such services that are
denied by TBH through those TBH Procedures related to Participating Provider
appeals.
1.15 "ENROLLEE" means a person covered under a Plan Contract for the
provision of Covered Services.
1.16 "EXHIBIT 1" means the exhibit marked as such that is attached to
this Agreement and that describes those Designated Covered Services to be
provided to Enrollees by Provider under this Agreement as of the time of the
execution of this Agreement. Exhibit 1 may be revised or amended from time to
time by agreement of the parties as provided in Section 13.1 of this Agreement
and shall be amended to the extent provided in any Addendum.
1.17 "EXCLUDED SERVICES" means (i) all medical/surgical services, (ii)
those behavioral health services and other services and supplies which are not
Covered Services and (iii) those Covered Services that are not Designated
Covered Services. Excluded Services rendered by Provider to Enrollees are not
compensated under this Agreement.
1.18 "LIST OF ADDENDA" means the list of Addenda attached to and made a
part of this Agreement as Exhibit 2.
1.19 "MEDICAL DIRECTOR" means a physician duly licensed to practice
medicine in the State who is employed by or under contract with TBH to monitor
the provision of Covered Services to Enrollees.
1.20 "MEDICALLY/PSYCHOLOGICALLY NECESSARY" means behavioral health
services which TBH reasonably determines are necessary and appropriate for
treatment of those symptoms and behaviors of an Enrollment. demonstrate the
presence of a behavioral disorder as described in the DSM. The terms "necessary"
and "appropriate" as used in this definition are determined by TBH according to
professionally recognized standards of practice and TBH Policies. The attending
health care provider is exclusively responsible for making all medical
determinations and treatment decisions. However, payment of Provider for
behavioral health care services rendered will be conditioned on TBH's subsequent
review and determination as to whether such services were Designated Covered
Services that were Medically/Psychologically Necessary. Such determination shall
be based on TBH's review of the applicable Plan Contract and its determination
of whether such services were consistent with professionally recognized
standards of practice and TBH's Policies, subject to the provider grievance and
appeal procedure set forth in TBH Procedures. The fact that a health care
provider, including, where appropriate, Provider, may prescribe, order,
recommend or approve a behavioral health care service does not, in itself, make
such service Medically/Psychologically Necessary or make the service a
Designated Covered Service even though it is not specifically listed as an
exclusion or limitation. Provider may appeal claims for payment which have been
denied by TBH through TBH's provider appeal procedures.
3.
<PAGE> 4
1.21 "MOBILE CRISIS UNIT" means any Participating Provider(s) designed
by TBH or State to respond to calls relating to the evaluation, treatment and/or
Referral of Enrollment who may be or are in need of immediate Covered Services
or other behavioral health services. Each Mobile Crisis Unit designated by TBH
will respond to calls, evaluate Enrollees and make Referrals in accordance with
TBH Policies and TBH procedures.
1.22 "PARTICIPATING PROVIDER" means a physician, other individual
health care provider, hospital or facility credential, trained and/or licensed,
as appropriate, to provide one or more Covered Services, or an independent
practice association or medical group, whose members are licensed, trained or
certified to provide one or more Covered Services, who contracts with TBH to
provide one or more Covered Services to Enrollees.
1.23 "PAYOR" means an employer, insurance company, health maintenance
organization, third party administrator, health plan, managed care organization,
the State or other person, group or entity that contracts or arranges for the
provision of health care services to Enrollees pursuant to one or more Plan
Contracts.
1.24 "PAYOR PLAN" means any benefit plan or program adopted,
implemented, established or by a Payor or Contract MCO for the purpose of
providing, arranging for the provision of or making available Covered Services
to Enrollees.
1.25 "PLAN CONTRACT" means the contract between TBH and a Payor or
Contract MCO pursuant to which TBH has agreed to arrange for the provision of
Covered Services to Enrollees. Each Plan Contract that is covered by this
Agreement shall be identified by an Addendum that describes the essential
provisions of the Plan Contract that are necessary for Provider to provide and
bill for Designated Covered Services provided to Enrollees covered by such Plan
Contract in a manner permitted by this Agreement and such Plan Contract.
1.26 "PRIOR AUTHORIZATION" means authorization of behavioral health
care services for coverage as Designated Covered Services by TBH prior to the
Enrollee obtaining such services. Requests for Prior Authorization will be
denied if TBH reasonably determines that the behavioral health care services
that are proposed for coverage are (a) not included as Covered Services under
the applicable Plan Contract, (b) not Medically/Psychologically Necessary, (c)
not Designated Covered Services or (d) in conflict with TBH Policies.
1.27 "PROVIDER" means collectively Tennessee Mental Health Cooperative,
Inc. and MHC and CMI with respect to the provision of Designated Covered
Services and licensing requirements.
1.28 "PROVIDER AFFILIATE" mean MHC, CMI and any health care provider
that is (i) employed by or under contract with Provider (ii) licensed, trained,
certified or otherwise qualified to provide Designated Covered Services to
Enrollees pursuant to this Agreement, (iii) Credentialed to provide Designated
Covered Services by TBH and (iv) authorized by TBH to provide Designated Covered
Services to Enrollees on behalf of Provider under this Agreement.
1.29 "QUALITY MANAGEMENT PLAN" means those quality procedures and
information TBH determines are necessary and appropriate to measure and/or
ensure quality of clinical and non clinical services required by TennCare. The
terms "necessary" and "appropriate", as used in this definition, are determined
by TBH according to the State quality and performance standards.
1.30 "REFERRAL" means the act and process through which TBH or a Case
Manager refers an Enrollee to Provider to obtain Designated Covered Services.
1.31 "STATE" means the State of Tennessee and, where appropriate, a
department, agency, bureau or other subdivision thereof.
4.
<PAGE> 5
1.32 "TBH" means Tennessee Behavioral Health. Inc. and its successors
and assigns.
1.33 "TBH POLICIES" means those behavioral health care rules and
policies adopted by TBH that are utilized by TBH for the purpose of determining
whether any behavioral health care service provided by a Participating Provider
to an Enrollee is a Medically/Psychologically Necessary Designated Covered
Service. TBH shall have the right to amend or revoke TBH Policies from time to
time in its discretion. Provider may object to any amendments in which case the
parties shall meet to resolve their differences and, if no resolution occurs,
Provider may terminate this Agreement on 90 days prior written notice to TBH.
1.34 "TBH PROCEDURES" means those rules, regulations and procedures
adopted by TBH that must be followed by Participating Providers when providing
and billing for Covered Services under this Agreement and which address, among
other things, obtaining Prior Authorization, billing for Covered Services and
appealing any TBH decision regarding whether a behavioral health care service is
a Covered Service or is Medically/Psychologically Necessary. TBR shall have the
right to amend TBH Procedures from time to time in its discretion.
1.35 "TBH PROVIDER MANUAL" means the manual, prepared by TBH and
distributed to Participating Providers, that contains those current TBH Policies
and TBH Procedures that must be readily accessible to Provider in order to carry
out Provider's duties under this Agreement. TBH shall be responsible for
updating the TBH Provider Manual to reflect all revisions or changes to TBH
Policies or TBH Procedures and for distributing such changes or revisions to
Provider.
1.36 "TENNCARE" means the program administered by the State (currently
pursuant to waiver granted by the Health Care Financing Administration, United
States Department of Health and Human Services) under which the State pays a
monthly prepaid capitated amount to managed care organizations and behavioral
health organizations for rendering or arranging necessary health care services
to eligible persons, and any successor program implemented by the State.
ARTICLE 2
OBLIGATIONS OF PROVIDER
2.1 DESIGNATED COVERED SERVICES. Provider shall provide
Medically/Psychologically Necessary Designated Covered Services to all Enrollees
entitled to coverage for such services under a Plan Contract. Provider warrant
that the Designated Covered Services described in Exhibit 1 and all Addenda are
within the scope of Provider's license and/or training and that Provider is
professionally or otherwise qualified to provide such Designated Covered
Services to Enrollees. Provider shall provide Designated Covered Services to
Enrollees in accordance with a plan of care that has been approved by TBH and
shall assist TBH and the Case Manager, as requested, in the establishment of
such plan of care. If so indicated in Exhibit 1, Provider will serve as a Case
Manager or provide one or more Mobile Crisis Units to perform those functions
required under TBH Policies and TBH Procedures.
5.
<PAGE> 6
2.2 PROVIDER AFFILIATES.
2.2.1 SERVICES. Provider shall have the right to provide
Designated Covered Services to Enrollees through one or more Provider Affiliates
subject to the terms of this Agreement. Provider shall permit Provider
Affiliates to provide Designated Covered Services under this Agreement only if
such Provider Affiliate agrees in writing to comply with, observe and be bound
by the terms of this Agreement that are applicable to Provider. Where
appropriate, all references to Provider in this Agreement shall be deemed to
include all Provider Affiliates. Provider shall not authorize, permit or allow
any Designated Covered Service to be delivered or provided by anyone other than
Provider or a Provider Affiliate meeting the requirements of this Section 2.2.
2.2.2 PAYMENT OF PROVIDER AFFILIATES. Provider shall be solely
and exclusively responsible for compensating all Provider Affiliates who provide
Designated Covered Services to Enrollees under this Agreement and shall
indemnify and hold TBH and the applicable Payor harmless from any liability,
cost or expense related to or arising from any claim for payment or other
compensation by a Provider Affiliate made against TBH or any Payor. The sale and
exclusive obligation of TBH or any Payor to pay for Designated Covered Services
rendered by Provider or any Provider Affiliate under this Agreement shall be to
make payments directly to Provider pursuant to Section 3.1.
2.2.3 PROVIDER RESPONSIBILITY FOR PROVIDER AFFILIATES.
Provider shall be solely and legally liable for the quality of Designated
Covered Services or any other health care service that any related Provider
Affiliate renders to Enrollees and for ensuring that Designated Covered Services
provided by any related Provider Affiliate are within the scope of the related
Provider Affiliate's license and training and meet professionally recognized
standards of practice within the community. For purposes of this subsection, the
term "related Provider Affiliate" shall mean a Provider Affiliate who is
employed by Provider, or, in the case of a Provider that is an institution or
facility, who is authorized by the rules, bylaws or regulations of such
institution or facility to provide professional services to Enrollees at or on
behalf of such institution or facility.
2.3 REFERRAL, PRIOR AUTHORIZATION AND MANAGED CARE REQUIREMENTS. To the
extent applicable to Provider, compensation for behavioral health care services
is limited to Designated Covered Services rendered by Provider which have been
authorized by Referral and, when required under a Plan Co., have been rendered
after Prior Authorization has been given by TBH. Provider shall abide by TBH
Policies and TBH Procedures governing Referrals, Prior Authorization,
utilization management, and concurrent, retrospective and prospective review of
Designated Covered Services. It is Provider's responsibility to follow TBH
Policies and TBH Procedures and to provide sufficient information and reports in
a timely manner for TBH to complete its reviews. Prior Authorization shall only
apply to Designated Covered Services to be rendered by Provider that are payable
on a fee-for-service basis.
2.4 EXCLUDED SERVICES. Provider must advise the Enrollee in writing,
prior to providing Excluded Services to the Enrollee, that the services are not
covered by this Agreement, will not be paid for by TBH or any Contract MCO or
Payor and that the Enrollee will be responsible for paying Provider directly for
such services. Further, if an Enrollee requests such Excluded Services, Enrollee
must acknowledge in writing, in advance of the provision of services, that
neither TBH nor any Contract MCO or Payor shall be responsible for the payment
of such services.
2.5 DRUG FORMULARY. Provider shall comply with the medication
dispensing guidelines set forth in the Drug Formulary applicable to each Payor
Plan.
6.
<PAGE> 7
2.6 ACCESSIBILITY OF DESIGNATED COVERED SERVICES. Designated Covered
Services shall be available and accessible to Enrollees from Provider during
reasonable hours of operation, with provision for after-hour services, if
applicable. If Provider is required to provide Emergency Care or any other
Designated Covered Service as a full-time service, Emergency Care or such
service shall be available and accessible 24 hours a day, 7 days a week.
Provider shall monitor the accessibility of Designated Covered Services to
Enrollees and shall comply with TBH's efforts to monitor and evaluate same and
TRH Policies and TBH Procedures.
2.7 TREATMENT OF ENROLLEES. Provider, Provider Affiliates and
Provider's staff and administrative personnel shall treat Enrollees promptly,
fairly and courteously by phone, in person or in writing. Provider, Provider
Affiliates and TBH, and their respective employees, shall portray each other at
all times in a positive light in their interactions with Enrollees and the
public.
2.8 REPORTING OF ACTIONS AGAINST PROVIDER OR A PROVIDER AFFILIATE.
Provider shall notify TBH within five (5) calendar days of the occurrence of any
of the following of which Provider has knowledge, such notice to include a brief
description of such occurrence and the reasons therefor:
2.8.1 any action taken to restrict, suspend or revoke
Provider's and/or a Provider Affiliate's license to provide any Designated
Covered Service required by this Agreement;
2.8.2 any suit or arbitration action brought against Provider
and/or a Provider Affiliate for malpractice;
2.8.3 any felony information or indictment or investigation
instituted by the State or any federal agency with regulatory authority naming
Provider and/or a Provider Affiliate;
2.8.4 any disciplinary proceeding or action naming Provider
and/or a Provider Affiliate before an administrative agency of the State or any
federal agency with regulatory authority over Provider or any Provider
affiliate;
2.8.5 any cancellation or material modification of the
professional liability insurance required to be carried by Provider or any
Provider Affiliate;
2.8.6 any action taken to restrict, suspend or revoke the
participation of Provider or any provider Affiliate in Medicare, CHAMPUS or
TennCare;
2.8.7 any Enrollee written complaints against Provider or any
Provider Affiliate,
2.8.8 any disciplinary action or action to terminate or
restrict privileges at any hospital or other health care facility taken by such
facility against Provider or any Provider Affiliate; and
2.8.9 any other event or situation which might materially
affect the ability of Provider or any Provider Affiliate to carry out Provider's
duties and obligations under this Agreement.
Provider shall, provide TBH with a summary of the final disposition of any such
occurrence.
2.9 QUALITY OF COVERED SERVICES. Provider shall, be solely and legally
responsible for the quality of Designated Covered Services or any other health
care service that Provider renders to Enrollees. Said services shall meet
professionally recognized standards of practice. TBH's professional review and
credentialing committees shall monitor the quality of Designated Covered
Services rendered. Provider shall cooperate and comply, and shall cause all
Provider Affiliates to cooperate and comply, with TBH's Quality Management Plan
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and internal quality of care review system and the reasonable decisions of the
Medical Director. Provider and all Provider Affiliates shall abide by TBH
Policies and TBH Procedures for Credentialing, Prior Authorization, utilization
review, utilization management and quality management. Provider acknowledges
that TBH's quality management program includes provisions for provider
reporting, records audit, peer review, provider appeals and a grievance process
for Enrollees. The minutes of the quality management committee shall be
available for review by the applicable Payor or Contract MCO and State and
federal regulatory agencies if required by law or contract. Provider and all
Provider Affiliates shall comply with all final determinations of TBH's peer
review, provider appeal and Enrollee grievance process, subject to Provider's
rights of grievance and appeal under TBH Policies and TBH Procedures.
2.10 COORDINATION OF BENEFITS. Provider shall cooperate with TBH with
respect to the administration of Coordination of Benefits required under a Plan
Contract or Article X of this Agreement. Provider and Provider Affiliates shall
consent to such release of information by TBH to other Payors as is necessary
and lawful to accomplish Coordination of Benefits and will assign right to
payment or bill the primary Payor as required by TBH.
2.11 THIRD PARTY LIABILITY AND WORKERS' COMPENSATION RECOVERIES.
Provider shall cooperate with TBH to procure third party liability and workers'
compensation recoveries. The proceeds of such recoveries shall be the exclusive
property of TBH provided Provider is paid by TBH for Designated Covered Services
rendered.
2.12 RECORD KEEPING AND REPORTING REQUIREMENTS.
2.12.1 RECORDS. Provider shall maintain current medical and
other records in accordance with accepted standards of all information relevant
to Designated Covered Services provided to Enrollees, including, but not limited
to services performed, charges, day of services, medical/patient charts,
prescription orders, diagnoses, documentation of orders for laboratory and other
tests and rest results, Referrals and other information necessary for the
evaluation of the nature, necessity, quality, quantity, appropriateness and
timeliness of such services.
2.12.2 MAINTENANCE OF RECORDS. Provider shall maintain for at
least five, (5) years after the date of the delivery of services and readily
make available to TBH, the State, the United States Department of Health and
Human Services, and any other government agency with regulatory authority,
medical and behavioral health records of Enrollees receiving Designated Covered
Services and all related administrative records. Upon request, TBH and such
agencies shall have access at reasonable times to the books, records and papers
of Provider relating to Designated Covered Services, to the cost thereof and
Copayments received from Enrollees.
2.12.3 REPORTING REQUIREMENTS. Provider shall comply with the
encounter, clinical information or other reporting requirements of each Plan
Contract and Payor Plan and shall utilize such reporting forms as required by
TBH or the Payor.
2.12.4 CONFIDENTIALITY OF INFORMATION. Provider shall assure
that all material and information, in particular information relating to
Enrollees, which is provided to or obtained by or through Provider's performance
under this Agreement, whether verbal, written, taped, computerized or otherwise,
shall be maintained and treated as confidential information to the extent
confidential treatment is required under State and federal laws. Provider shall
not use any such information in any manner except as necessary for the proper
discharge of its obligations and securement of its rights under this Agreement.
Except as expressly authorized by this Agreement, all information as to personal
facts and circumstances concerning Enrollees obtained by Provider shall be
treated as privileged communications shall be held confidential and shall not be
divulged without the written consent of the Enrollee, provided
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that nothing stated herein shall prohibit the disclosure of information in
summary, statistical or other form which does not identify particular Enrollees.
The use or disclosure of information concerning Enrollees by Provider, any
Provider Affiliate or TBH shall be limited to purposes directly connected with
the administration of this Agreement.
2.12.5 ACCESS TO CONFIDENTIAL INFORMATION. Subject to all
applicable privacy and confidentiality laws, rules and regulations, the medical
records of Enrollees and administrative records related thereto shall be made
available to each Participating Provider and to TBH, any appropriate Contract
MCO or Payor, and their respective agents and representatives. Provider shall
allow TBH inspection, audit and duplication of any and all data, billings and
other records maintained on Enrollees. Inspection, audit and duplication shall
occur after reasonable notice during regular working hours. Ownership and access
to Provider's records of Enrollees shall be controlled by applicable laws of the
State and this Agreement. TBH and State and federal regulatory agencies shall
also have access to such records as required by law and pursuant to the terms of
Article 7 of this Agreement. Each Enrollee and his or her authorized
representatives shall be given access to such Enrollee's medical records, to the
extent and in the manner provided by Tenn. Code Ann. Section 33-3-104(10),
Section 63-2-101, Section 63-2-102 and 42 C.F.R. 2, and, subject to reasonable
charges, be given copies thereof upon request.
2.13 INSURANCE.
2.13.1 PROFESSIONAL LIABILITY. During the term of this
Agreement and for a period of three (3) years after termination, Provider shall
maintain (through regular or tail coverage) professional liability insurance
covering Provider and all Provider Affiliates in amounts equal to $1,000,000 per
claim and $3,000,000 in the aggregate of all claims per policy year. Upon
execution of this Agreement, Provider will deliver to TBH certificates of
insurance or other evidence of insurance reasonably satisfactory to TBH
indicating that this insurance is in effect. TBH shall be provided not less than
30 days' advance written notice prior to any cancellation, non-renewal or
material change in this coverage and may require a certificate from the insuror
to such effect.
2.13.2 GENERAL LIABILITY. During the term of this Agreement,
Provider shall maintain general liability insurance with reasonable limits
against claims for damages arising as a result of personal injury or death
caused, in whole or in part, by any act or omission of Provider of any of its
agents, servants and employees.
2.14 NON-DISCRIMINATION. Neither Provider nor any Provider Affiliate
shall discriminate against any Enrollee solely on the grounds that the Enrollee
files a complaint against Provider, a Provider Affiliate or TBH, or because of
the Enrollee's race, color, national origin, ancestry, religion, sex, marital
status, sexual orientation, age, physical handicap, or medical or behavioral
health condition
2.15 REPORTING CHANGES OF PROVIDER INFORMATION. Provider shall notify
TBH, in writing, at least 30 calendar days prior to any known or anticipated
change and within ten (10) days after any unanticipated change in the address,
business telephone number, business hours, tax identification number, license
number and, if applicable, Drug Enforcement Agency registration number of
Provider or any Provider Affiliate.
2.16 CREDENTIALING REQUIREMENTS. Each Provider Affiliate shall, prior
to providing Designated Covered Services under this Agreement, meet TBH's
Credentialing requirements for each Plan Contract and Payor Plan.
2.17 LICENSE REQUIREMENTS. Each Provider Affiliate shall maintain all
appropriate licenses, certifications, training and standards required by
applicable state and federal laws for the providing of Designated
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Covered Services under this Agreement. Tennessee Mental Health Cooperative, Inc.
shall not be authorized to and shall not provide Designated Covered Services to
Enrollees.
2.18 NON-SOLICITATION. Neither Provider, any Provider Affiliate nor any
entity or person associated with Provider or any Provider Affiliate shall use
any membership lists or other information obtained as a Participating Provider
to solicit Enrollees in any way on behalf of any health plan other than the
Contact Plan in which the Enrollee is enrolled. Such solicitation shall be a
material breach of this Agreement. TBH acknowledges that Provider has had
complete access to the identities of the Enrollee and has treated the Enrollees
prior to entering into this Agreement and Provider is unrestricted in the use of
any information secured prior to entering into this Agreement.
2.19 REQUIREMENTS FOR SUBMISSION OF CLAIMS BY PROVIDER. With respect to
those Designated Covered Services that Provider is to be compensated for based
on the submission of a Clean Claim, claims for payment shall be paid only if
submitted to TBH or its designee within 60 days after the date the Designated
Covered Services were rendered and only after TBH has determined that a claim is
a Clean Claim. Provider shall not seek payment from Enrollees for claims for
Designated Covered Services submitted to TBH except with respect to the
applicable Copayment amount. Forms, used in submitting claims shall be in a
format approved by TBH (generally, HCFA 1500 and UB-92 forms are in an approved
format). Claim shall include, at a minimum, the following information if
applicable: date of service, patient name, Enrollee identification number, Plan
Contract identification number, Referring Case Manager's name and identification
number, number of service units, diagnosis, billed dollar amount, Copayment
amount (if applicable), CPT and DSM codes and procedure description. This
Section shall only apply to claims submitted on a fee-for-service basis.
2.20 LEGAL AND PROFESSIONAL RESPONSIBILITY. Provider shall perform all
of Provider's duties and obligations under this Agreement in accordance with all
applicable laws, rules and regulations, including those made applicable by
reason of any Contract Plan or Addendum. To the extent Provider is an individual
practitioner, Provider acknowledges that he/she has an independent professional
responsibility to his/her patient/Enrollee, and agrees that no action by TBH
pursuant to either this Agreement or TBH Policies or TBH Procedures shall in any
way absolve Provider or any Provider Affiliate from, or in any way restrict or
inhibit his/her performance of professional duties and obligations due a
patient/Enrollee.
2.21 TRANSFER. If Provider is an individual practitioner, then, if
after reasonable efforts a satisfactory Provider-patient relationship is not
established and maintained between Provider and any Enrollee, either Provider,
such Enrollee or TBH may request that the Enrollee's care be transferred to
another Participating Provider. No such change shall be effective, however,
without the prior express approval of TBH which shall not be reasonably delayed
or withheld.
2.22 CONFIDENTIALITY AND RETURN, OF PROPRIETARY INFORMATION. Provider
covenants to maintain the confidentiality of any information and documents
relating to or prepared pursuant to this Agreement or any Plan Contract and all
information or documents supplied to Provider by TBH pursuant to this Agreement,
and shall not copy such documents or use such information or documents for any
purpose other than discharging Provider's duties under this Agreement. Provider
shall take reasonable precautions to prevent the unauthorized disclosure of all
such information and documents. TBH consents to such disclosure to Provider
Affiliates to the extent necessary for Provider to arrange coverage by or
otherwise engage Provider Affiliates to provide Designated Covered Services in
accordance with this Agreement. Provider agrees to promptly return the TBH
Provider Manual and any other TBH proprietary documents or material upon
termination of this Agreement, including any copies thereof, in Provider's or
Provider Affiliate's possession or control.
2.23 HOLD HARMLESS. Provider agrees that in no event, including but not
limited to nonpayment of Provider by TBH, shall any Enrollee be liable for any
amounts owed to Provider or any Provider Affiliate for any
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Designated Covered Service provided by Provider to Enrollees under this
Agreement, except to the extent Provider shall be permitted to bill for and
collect a Copayment from the Enrollee pursuant to the applicable Plan Contract.
Provider shall not maintain any action at law or take any action against any
Enrollee to collect sums owed or allegedly owed to Provider by TBH or any Payor
or Contract MCO with respect to any Designated Covered Service. Provider shall
not charge, collect or seek to collect from any Enrollee any surcharge or other
amount for Designated Covered Services other than applicable Copayments nor
shall Provider solicit or accept any surety or guarantee of payment from the
Enrollee in excess of the amount of such Copayments. The term Enrollee, as used
in this Section 2.23, includes the patent and the parent(s), guardian, spouse or
any other person legally responsible for the patient.
2.24 REFERRALS. To the extent required by the Plan Contract or TBH
Policies or TBH Procedures, Provider shall Refer Enrollees only to other
Participating Providers and shall comply with all requirements of such Plan
Contract, TBH Policies and TBH Procedures for notification of TBH or the Case
Manager with respect to Referrals for Emergency Care or other Covered Services
to a health care provider that is not a Participating Provider.
2.25 NO RIGHT TO REFUSE DESIGNATED COVERED SERVICES. Provider shall not
refuse to provide Medically/Psychologically Necessary Designated Covered
Services to any Enrollee provided the Enrollee has been certified by TBH as
eligible to receive such Designated Covered Services and TBH has given its Prior
Authorization for the provision of such Designated Covered Services when
required under the terms of the Contract Plan or this Agreement. An individual
Provider shall not be required to accept or continue treatment of an Enrollee
with whom the Provider cannot, after reasonable efforts, establish or maintain a
professional relationship.
2.26 MARKETING. TBH and any Contract MCO may include references to
Provider, Provider Affiliates and their business addresses and telephone numbers
in any Payor Plan materials provided to Enrollees, in any marketing or
solicitation campaigns initiated by TBH or by any Contract MCO, and in any
materials used by TBH in informing other Participating Providers of network
affiliations. All marketing, advertising and publicity relative to the
solicitation of Plan Contracts will be conducted by TBH and its designees.
2.27 ADDENDA. To the extent any of the obligations, responsibilities or
rights of either of the parties under this Agreement shall be expanded, limited
or otherwise affected by the terms of any Addendum, then the terms of such
Addendum shall control, and, in the event any of the provisions or terms of an
Addendum shall conflict with or be inconsistent with the terms and conditions of
this Agreement, the terms and provisions of such Addendum shall control.
2.28 COMPLIANCE WITH PAYOR PLANS. Provider will comply with all
requirements imposed on providers under Payor Plans and will not implement any
policy or practice designed or intended to circumvent the obligation of any
Enrollee to pay any Copayment.
2.29 CREDENTIALING REQUIREMENTS. Provider acknowledges that pursuant to
the execution of this Agreement, it shall be necessary for TBH to perform
Credentialing of Provider and Provider Affiliates, and each individual Provider
and Provider Affiliate shall be required to execute a form of release and
immunity authorizing TBH to obtain Credentialing information from third parties
in the form of Exhibit 3 attached to this Agreement.
2.30 REPRESENTATIONS AND WARRANTIES OF PROVIDER. Provider hereby
represents and warrants to TBH as follows:
2.30.1 Provider has the legal right, power and authority to
execute and deliver this Agreement on behalf of MHC and CMI and to legally bind
MHC and CMI to the terms, conditions and obligations
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of this Agreement as the authorized agent for MHC and CMI, to the same exam as
if this Agreement had been executed and delivered by MHC and CMI.
2.30.2 Under the term of its agreement with MHC and CMI,
Provider is authorized to receive payment from TBH for all Designated Covered
Services provided by MHC and CMI to Enrollees and Provider shall indemnify and
hold TBH, its officers, employees and agents, harmless from and against any
claims made by MHC and CMI for payment for services rendered pursuant to this
Agreement.
2.30.3 MHC and CMI have such licenses, certifications and
other qualifications as are necessary to meet TBH's Credentialing requirements
and will maintain all such licenses, certifications and qualifications for so
long as MHC and CMI are providing Designated Covered Services under the terms of
this Agreement.
2.30.4 MHC and CMI have appointed Provider as its agent to
exercise, waive and represent the rights and interests of MHC and CNU under this
Agreement including without limitation, exercising the following rights on
behalf of MHC and CMI: (i) pursue grievance procedures, (ii) accept and execute
Addenda adding Payor Plans or amending this Agreement, (Iii) pursue arbitration
remedies and (iv) exercise rights of extension or termination of the Agreement.
All rights of MHC and CMI under the Agreement shall be exercisable solely by
Provider on behalf of MHC and CM1.
2.30.5 Provider shall maintain a network of MHC and CMI
throughout the term of this agreement sufficient for meeting all requirements
for the provision of Designated Covered Services to Enrollees imposed on TBH by
reason of all Plan Contracts in effect during the term of this Agreement.
ARTICLE 3
TBH'S OBLIGATIONS
3.1 COMPENSATION TO PROVIDER. In consideration for the Designated
Covered Services which Provider readers to Enrollees pursuant to this Agreement,
TBH shall reimburse Provider or any Provider Affiliate in accordance with the
following provisions and all Addenda. Where any Addendum sets forth a
compensation arrangement which is inconsistent with the following provisions,
the terms of the Addendum shall govern.
3.1.1 METHOD AND AMOUNT OF COMPENSATION. Provider shall accept
as payment in full for Designated Covered Services rendered to Enrollees under a
Payor Plan and Plan Contract based upon and in accordance with the method and
amounts, payable by TBH set forth in the Addendum) referencing such Payor Plan
and Plan Contract, plus Copayments payable solely by Enrollees in accordance
with such Payor Plan.
3.1.2 EXCLUSIVE COMPENSATION BY TBH. In the event that TBH
fails, for any reason, to pay for Designated Covered Service, neither the
Enrollee receiving such Designated Covered Services nor the Contract MCO or
Payor sponsoring, maintaining or administering such Plan Contract shall be
liable to Provider for sums owed by TBH under this Agreement and Provider shall
not maintain an action at law or initiate collection efforts against such
Enrollee or Contract MCO or Payor to collect such sum.
3.1.3 NO PAYMENT FOR EXCLUDED SERVICES. Except as provided in
Section 2.4, neither an Enrollee, any Payee, any Contract MCO nor TBH shall be
liable for payment for (1) any Designated Covered Service determined by TBH to
be not Medically/Psychologically Necessary, (2) any Designated
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Covered Service for which Prior Authorization and/or Case Manager Referral is
required under the applicable Plan Contract as a prerequisite of coverage but
which is not obtained, or (3) Excluded Services.
3.1.4 TIME REQUIREMENTS FOR PAYMENT OF CLAIMS. To the extent
an Addendum shall require that TBH compensate Provider on a fee for service or
other basis requiring the submission of claims by Provider, TBH or its designee
shall process and reimburse Provider's claims for Designated Covered Services
provided to Enrollees consistent with TBH Policies and TBH Procedures and in
accordance with terms of the pertinent Plan Contract. TBH shall pay ninety-five
percent (95%) of Clean Claims within 30 calendar days of receipt of such claim
by TBH and will pay the remaining five percent (5%) of Clean Claims within forty
(40) calendar days of receipt by TBH. TBH shall process within sixty (60)
calendar days of receipt all claims submitted by Provider. The term "process"
means that TBH will make a determination as to whether the submitted claim is a
Clean Claim or advise Provider that a submitted claim is (i) a denied claim and
specify all reasons for denial or (ii) not a "Clean Claim" due to insufficient
information and/or documentation and specify in detail all information and/or
documentation that is needed from the Provider in order to allow or deny the
claim. Resubmission of a claim with further information and/or documentation
shall constitute a new claim for purposes of establishing the timeframe for
claim processing and payment under this Subsection 3.1.4.
3.1.5 TIME REQUIREMENTS FOR PAYMENT OF CAPITATED PAYMENT BY
TBH. To the extent an Addendum shall require that TBH compensate Provider on a
capitated rate method or any other method that does not require the submission
of a claim by Provider, TBH shall pay the capitated amount to Provider by no
later than (i) the tenth (10th) day of the calendar month or (11) if such
Addendum refers to a Plan Contract sponsored, maintained or administered by a
Contract MCO or by the State, within five (5) business days after receipt of the
capitation payment or other compensation payment by TBH from such Contract MCO
or the State, as appropriate.
3.1.6 PAYMENT OF PROVIDER AFFILIATES. All payments due
Provider and all Provider Affiliates under this Agreement shall be made directly
to Provider, and Provider shall be solely responsible for paying or otherwise
compensating all Provider Affiliates, as provided in Subsection 2.2.2.
3.1.7 LIMITATION ON COMPENSATION OBLIGATION. Notwithstanding
any provision in the Agreement to the contrary, where TBH pays another
Participating Provider on an all-inclusive per diem, percentage of premium,
program or capitated rate basis, and such Participating Provider is responsible
for payment of Provider's services, Provider shall look only to such
Participating Provider for payment of Designated Covered Services rendered to
Enrollees.
3.1.8 OTHER PAYMENT REQUIREMENTS. Other billing, claim
submission and payment requirements may be included in any provider manual
provided to Provider by TBH.
3.2 MONITOR QUALITY MANAGEMENT. TBH shall monitor Provider's quality
management activities and compliance with TBH's quality management policies and
procedures. TBH shall also monitor Provider's compliance with its Credentialing
and disciplinary policies and procedures. Provider shall comply with any
reasonable corrective action plans implemented by TBH.
3.3 ENROLLEE GRIEVANCES. TBH shall have primary and final
responsibility for administering Enrollee grievance procedures. Provider shall
be given notice of and the right to participate in any Enrollee grievance
procedure.
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ARTICLE 4
CASE MANAGEMENT
4.1 CASE MANAGER DESIGNATION. If Provider is designated as a Case
Manager under any Addendum, Provider shall provide the case management services
described in Section 4.2 to those Enrollees who are covered by the Plan Contract
described in such Addendum and who are assigned to Provider by TBH. TBH may
request, in its discretion, that Provider provide some but not all case
management services described in Section 4.2 depending upon the requirements of
the Plan Contract. TBH shall compensate Provider for rendering such case
management services in the amount and manner set forth in such Addendum, such
compensation to be in addition to any amounts owing to Provider under this
Agreement for providing Designated Covered Services to Enrollees.
4.2 CASE MANAGEMENT SERVICES. Case management services shall include
the following services which shall be available 24 hours a day, 7 days a week:
4.2.1 serving as an intake center, identifying the health care
needs of the Enrollee and developing a plan of care for such Enrollee, which
includes the identification of long term and short term goals with respect to
those Enrollees assigned to Case Manager pursuant to Section 4.1;
4.2.2 making Referrals and assisting the Enrollee and his or
her family in accessing Covered Services and other behavioral health services in
the least restrictive and most efficient and cost-effective environment;
4.2.3 processing requests from Participating Providers for the
delivery of Covered Services to Enrollees and making recommendations to TBH with
respect to Prior Authorization decisions relating to such proposed Covered
Services;
4.2.4 monitoring the Enrollee's care to evaluate progress and
advocating for the Enrollee with other Participating Providers;
4.2.5 communicating and discussing with Participating
Providers the effectiveness of the plan of care for the Enrollee, any Covered
Services provided to the Enrollee, any Emergency Care provided and/or
notifications thereof required by this Agreement and helping TBH assure that the
plan of care that has been approved by TBH is implemented and followed by
Participating Providers;
4.2.6 reviewing with TBH the efficiency and effectiveness of
care provided to the Enrollee by Participating Providers;
4.2.7 assisting TBH in the coordination and provision of all
Covered Services to be provided to Enrollees under the Plan Contract;
4.2.8 developing linkages with the Contract MCO and with other
agencies and individuals involved in the Enrollee's case; and
4.2.9 carrying out such other reasonable case management
responsibilities or duties as may be delegated or assigned to Case Managers
under TBH Policies or TBH Procedures and agreed by Provider, which agreement
shall not be unreasonably withheld.
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ARTICLE 5
TERM
This Agreement will have an initial term of one (1) year and will
renew automatically for Successive one-year terms, unless earlier terminated as
provided in Article VI.
ARTICLE 6
TERMINATION PROVISIONS
6.1 TERMINATION BY EITHER PARTY WITHOUT CAUSE. After the initial
one-year term of this Agreement, this Agreement may be terminated without cause
by either party at any time upon ninety (90) calendar days' prior written notice
to the other party.
6.2 IMMEDIATE TERMINATION. This Agreement shall terminate upon TBH's
notice to Provider in the event of the occurrence of any of the following:
6.2.1 violation by Provider or any Provider Affiliate of any
law, rule or regulation pertinent to this Agreement;
6.2.2 any act or conduct for which any of Provider's licenses
or certifications to provide Designated Covered Services may be revoked or
suspended or for which Provider's or any Provider Affiliate's ability to provide
Designated Covered Services in accordance with this Agreement is otherwise
materially impaired,
6.2.3 failure by Provider or any Provider Affiliate to comply
with TBH's quality management policies, utilization management policies,
Credentialing criteria, TBH Policies or TBH Procedures that is not cured within
30 days after notice from TBH;
6.2.4 any misrepresentation or fraud by Provider, or any
Provider Affiliate;
6.2.5 any action by Provider or any Provider Affiliate which,
in the reasonable judgment of TBH, constitutes professional misconduct;
6.2.6 Provider's failure to maintain professional liability
insurance in accordance with this Agreement; or
6.2.7 If Provider is an individual, the death or disability of
Provider.
6.3 TERMINATION BY EITHER PARTY DUE TO MATERIAL BREACH OF AGREEMENT.
This Agreement may be terminated by either party upon thirty (30) days' prior
written notice to the other party if the party to whom notice is given is in
material breach of any provisions of this Agreement. The party claiming the
right to terminate will set forth in the notice of intended termination the
facts underlying the claim that the other is in breach of this Agreement. Remedy
of the breach to the satisfaction of the party giving notice, within 30 days of
receipt of notice, will nullify the intended termination notice.
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6.4 TERMINATION BY CHANGE IN LAW OR REGULATION. This Agreement may be
terminated by a change in law or regulation or a judicial interpretation
thereof, which renders any material term or provision of this Agreement illegal,
invalid or unenforceable. Termination under this section shall be effective on
the effective date of the change in law or regulation, or judicial
interpretation thereof.
6.5 TERMINATION BY TBH ON REJECTION OF AMENDMENT. If Provider rejects
an amendment submitted to Provider by TBH pursuant to Article XIII of this
Agreement and the amendment has been submitted by TBH to all Participating
Providers similar to Provider, the parties will meet within ten (10) days after
rejection by Provider to resolve any differences or problems related to the
amendment. If the parties fail to agree at such meeting, TBH may elect, in its
discretion, to terminate this Agreement upon written notice to Provider setting
forth the date of termination.
6.6 NO FURTHER FORCE OR EFFECT AFTER TERMINATION. Except as otherwise
specified in Section 6.9, following the effective date of termination, this
Agreement will be of no further force or effect.
6.7 CONTINUATION OF CERTAIN SERVICES. If any Enrollees are receiving
Designated Covered Services as of the date of termination of this Agreement
(with or without cause), Provider will continue to provide Designated Covered
Services to those Enrollees in accordance with the terms of this Agreement until
TBH arranges for alternative care or treatment, which will be arranged as soon
as practicable, but in no event beyond the termination date of the Enrollee's
coverage under the applicable Plan Contract. TBH shall continue to compensate
Provider for such services in accordance with the terms of this Agreement until
the Enrollee is transferred to another Participating Provider.
6.8 TRANSFER OF ENROLLEES AFTER TERMINATION. Upon notice of termination
of this Agreement, Provider agrees to cooperate in an orderly transfer of
Enrollees to other Participating Providers to protect and meet the behavioral
health care needs of Enrollees in the transfer.
6.9 SURVIVABILITY. Notwithstanding any other provisions of this
Agreement to the contrary, upon termination of this Agreement for any reason,
each party will remain liable for any obligations or liabilities arising from
activities occurring prior to the effective date of termination. The covenants
and obligations of the parties set forth in Articles VIII, X and XX, Sections
2.10, 2.12, 2.18, 2.22, 2.23, 2.28, 6.7, 6.8 and Subsection 2.13.1, and all
other covenants or obligations which by their terms or by implication are
intended by the parties to continue in effect after termination of this
Agreement, shall survive termination and shall remain in effect and enforceable
by the parties.
ARTICLE 7
AUDIT RIGHTS
7.1 AUDIT AND INSPECTION. TBH, any Contract MCO and State and federal
regulatory agencies with regulatory jurisdiction have the right to conduct, or
have conducted by a third party, medical. financial and other audits,
inspections and evaluations of Provider's records and facilities, with respect
to Designated Covered Services provided to Enrollees under this Agreement
including quality appropriateness and timeliness of services. Audits and
inspections by the State or federal agencies may be announced or unannounced,
but other audits or inspections shall be at reasonable times, upon reasonable
advance notice. Any such party or entity shall be allowed access to Provider's
place of business and to all appropriate records during normal business hours,
except under special circumstances (as determined by State and federal
regulatory agencies) when after hour admission shall be allowed. Such audit
rights shall not apply to confidential corporate information of Provider that is
16.
<PAGE> 17
unrelated to this Agreement or the provision of Designated Covered Services. In
conducting any medical audit, neither TBH nor the Contract MCO shall be entitled
to examine medical or behavioral health records of patients who are not
Enrollees. Provider shall cooperate fully with the auditing or inspecting party
and furnish copies of medical and behavioral health records, when requested by
TBH, the Contract MCO or any State or federal regulatory agency for the purpose
of an audit, inspection or evaluation at no charge. TBH or the Contract MCO, as
appropriate, shall be responsible for providing Provider with copies of all
releases or consent from Enrollees necessary for TBH or Contract MCO to have
access to such records.
7.2 MONITORING. TBH, any Contract MCO and State and federal regulatory
agencies with regulatory jurisdiction shall have the right to monitor, whether
on an announced or unannounced basis, all services rendered to Enrollees by
Provider.
ARTICLE 8
DISPUTE RESOLUTION AND ARBITRATION
8.1 DISPUTES. Except as provided in Section 8.3, if any dispute arises
between the parties involving a contention by one party that the other has
failed to perform it obligations and responsibilities under this Agreement, then
the party making such contention shall, prior to initiating any action
authorized in the Agreement, promptly give written notice to the other party
pursuant to Article XVI. Such notice shall set forth in detail the basis for the
party's contention. The other party shall, within thirty (30) calendar days
after receipt of the notice, provide a written response seeking to satisfy the
party that gave notice regarding the matter as to which notice was given.
Following such response, or the failure of the second party to respond to the
complaint of the first party within thirty (30) calendar days if the party that
gave notice of dissatisfaction remains dissatisfied, then that party shall so
notify the other party and the matter shall be promptly submitted to binding
arbitration, with the cost of establishing any arbitration.
8.2 ARBITRATION. Except as provided in Section 8.3, all claims,
disputes, and other matters in question arising out of or relating to this
Agreement or any breach of this Agreement shall be decided by arbitration in
accordance with the rules of the American Arbitration Association, then
obtaining, unless the parties mutually agree otherwise in writing. This
agreement to arbitrate shall be specifically enforceable pursuant to the
Tennessee Uniform Arbitration Act as codified in Tenn. Code Ann. SectionSection
29-5-301, et seq. The award rendered by the arbitrator shall be final and a
judgment may be entered upon it in accordance with the applicable State law. The
responsibility for any legal fees and/or costs incurred by such action shall be
borne by the party designated by the arbitrator.
8.3 TBH POLICIES OR TBH PROCEDURES. The provisions of Section 8.1 and
8.2 shall not apply to (i) any determination made by TBH pursuant to TBH
Policies or TBH Procedures that are subject to appeal by Provider under appeal
and grievance procedures contained in TBH Policies or TBH Procedures or (ii) any
decision made by Payor or TBH that may be made at the discretion of such party
by the terms of this Agreement. Such appeal or grievance procedures shall be the
sole remedy of Provider in such instance, and the determination resulting from
such procedures shall be binding on Provider.
17.
<PAGE> 18
ARTICLE 9
RELATIONSHIPS OF PARTIES
TBH and Provider are independent contractors in relation to one another
and no joint venture, partnership, employment, agency or other relationship is
intended or created by this Agreement. Neither TBH nor Provider is authorized to
represent or bind the other for any purposes. Neither of the parties hereto, nor
any of their respective officers, agents or employees, shall be construed to be
the officer, agent or employee of any other party.
ARTICLE 10
COORDINATION OF BENEFITS
Coordination of Benefits shall be administered in accordance with the
requirements of the applicable Plan Contract. Right of subrogation and to the
proceeds or savings derived from Coordination of Benefits shall be governed by
the terms of the applicable Plan Contract. If a Plan Contract fails to address
Coordination of Benefits or any issue related thereto, TBH shall administer
Coordination of Benefits in compliance with applicable laws, and all proceeds
and savings derived from Coordination of Benefits shall be the exclusive
property of TBH. If Provider should receive any payment from a Payor that should
have been paid to TBH or any Contract MCO under the Coordination of Benefits
requirements of a Contract Plan or this Article X, Provider shall, without
demand, promptly pay over such amount to TBH or the Contract MCO, as
appropriate.
ARTICLE 11
NO THIRD PARTY BENEFICIARY
Nothing in this Agreement is intended to be construed or deemed to
create any rights or remedies in any third party beneficiary, including an
Enrollee, Payor or Contract MCO. Notwithstanding the preceding, a Plan Contract
may, by its express terms, grant a Payor or Contract MCO rights to enforce the
terms of this Agreement and other third party beneficiary rights with respect to
those Payor Plans adopted, sponsored, maintained or administered by such Payor
or Contract MCO.
ARTICLE 12
GOVERNING LAW AND VENUE
This Agreement shall be governed by the laws of the State of Tennessee,
without regard to conflict of laws principles, except where otherwise required
by federal law or by the laws of any State in which Provider provides Designated
Covered Services to Enrollees. Any arbitration proceedings instituted under this
Agreement shall be in Knox County, Tennessee, and each party hereby waives any
other right of venue such party may have.
18.
<PAGE> 19
ARTICLE 13
AMENDMENTS
13.1 RIGHT OF APPROVAL AND EFFECTIVE DATE. All amendments to this
Agreement proposed by Provider must be agreed to in writing in advance of the
effective date by TBH. TBH reserves the right to reject any proposed amendment
in its absolute discretion. Any amendments to this Agreement proposed by TBH
must be proposed in the form of an Addendum forwarded to Provider in the manner
specified in Section 13.2 and will be deemed effective upon the expiration of
twenty (20) calendar days after receipt of such Addendum (determined under
Article XVI unless, within such 20-day period, Provider notifies TBH in writing
of Provider's rejection of the requested amendment. Amendments required because
of legislative, regulatory or legal requirements do not require the consent of
Provider or TBH and will be effective immediately on the effective date thereof.
13.2 ADDENDA. In the event TBH desires to amend this Agreement for any
reason, including, without limitation, adding an additional Payor Plan and Plan
Contract not listed on the List of Addenda, such amendment shall be proposed by
TBH to Provider in the form of a written Addendum which shall be sent to
Provider in accordance with the provisions of Article XVI, and such amendment
shall become effective as provided in Section 13. 1. In the event Provider
rejects such amendment within the twenty (20) day period described in Section
13.1, TBH shall have the right, exercisable at its option, to terminate this
agreement as provided in Section 6.5 or to continue this Agreement in effect
without such Addendum. If such Addendum does not become effective and this
Agreement is continued, Provider shall not be required to comply with the
Addendum or to be a Provider under the Payor Plan described in the Addendum.
13.3 OTHER CHANGES. Any amendment to a Payor Plan, Plan Contract, TBH
Policies or TBH Procedures shall not be deemed an amendment to this Agreement
and may be agreed to and implemented by TBH, any Payor or Contract MCO without
the consent of Provider.
ARTICLE 14
ENTIRE AGREEMENT
This Agreement supersedes any and all other agreement , either oral or
written, between the parties with respect to the subject matter hereof, and no
other agreement, statement or promise relating to the subject matter of this
Agreement will be valid or binding.
ARTICLE 15
ASSIGNMENT
The services provided under this Agreement by Provider are unique, and
Provider may not assign this Agreement, or delegate or subcontract any duties,
rights and obligations under this Agreement, to any other person or entity
without the prior written consent of TBH. The consent of TBH to one assignment
shall not constitute a waiver of the requirement for consent of any subsequent
assignment. The assigning party shall not be released or relieved from any of
its obligations under this Agreement by reason of such assignment. TBH shall
have the unrestricted right to assign its rights and delegate its duties and
responsibilities under this Agreement. Notwithstanding the foregoing. Provider
may assign its rights and obligations under this Agreement to MHC
19.
<PAGE> 20
and/or CMI with the prior consent of TBH; however, no further or other
assignment shall be permitted without the consent of TBH.
ARTICLE 16
NOTICES
Any notice or other communication required under this Agreement will be
given in writing and sent by certified mail, return receipt requested, by
overnight courier or by facsimile transmission, and will be deemed received
either three (3) business days after being deposited in The United States mail,
or one (1) day after delivery to any overnight courier addressed to the
applicable address appearing on the signature page of this Agreement or on the
date of facsimile transmission to the facsimile number set forth on such
signature page. Any changes to these addresses shall be designated by notice
given in accordance with this Article XVI.
ARTICLE 17
SEVERABILITY
The provisions of this Agreement are severable. If any provision of
this Agreement is held to be invalid, illegal or otherwise unenforceable in any
jurisdiction, the holding shall not affect the remaining provisions of this
Agreement and shall not in any other jurisdiction, unless the effect of the
severance would be to alter the obligations of a party in any material respect,
in which case, this Agreement may be immediately terminated by the affected
party pursuant to Section 6.4.
ARTICLE 18
WAIVER OF BREACH
Any waiver of any provision or right by a party must be in writing. The
waiver of any breach of this Agreement by either party hereto will not
constitute a continuing waiver or a waiver of any subsequent breach of either
the same or any other provision of this Agreement.
ARTICLE 19
NON-INDUCEMENT WARRANTY
19.1 PROVIDER WARRANT. Provider warrants and covenants he/she/it has
not paid and shall not pay, either directly or indirectly, any compensation to
any officer or employee of the State, or any employee or member of a federal
agency, as wages, compensation, or gifts in exchange for action as an officer,
agent, employee, subcontractor or consultant to Provider in connection with any
work contemplated or performed in connection with this Agreement.
20.
<PAGE> 21
19.2 TBH WARRANTY. TBH warrants and covenants it has not paid and shall
not pay, either directly or indirectly, any compensation to any officer or
employee of the State, or any employee or member of a federal agency, as wages,
compensation, or gift in exchange for action as officer, agent employee,
subcontractor or consultant to TBH in connection with any work contemplated or
performed in connection with this Agreement.
ARTICLE 20
LEGAL RESPONSIBILITIES
20.1 LEGAL DEFENSE. The defense of any legal action instituted on a
claim of malpractice against Provider relating to services provided pursuant to
this Agreement shall not be an obligation of TBH. TBH shall not be responsible
for any legal expenses including, without limitation, reasonable attorney's
fees, costs and necessary disbursements, in connection with any such legal
action against Provider. TBH shall, however, fully cooperate with Provider by
furnishing such material or information as it has available in connection with
the defense of any such action.
20.2 INDEMNIFICATION. If either party is without fault and is held
liable for the acts or omissions of the other party, its employees or agents,
the party not at fault shall have such rights of indemnity or contribution
against the party at fault as are provided by the applicable laws of the State.
ARTICLE 21
NON-EXCLUSIVE AGREEMENT
21.1 PROVIDER RIGHTS. Nothing contained in this Agreement shall
preclude Provider from participating in or contracting with any other Payor or
other person, group or entity, whether before, during or subsequent to the term
of this Agreement, with regard to the provision by Provider of any health care
services.
21.2 RIGHTS OF TBH. Nothing contained in this Agreement shall preclude
TBH from contracting with one or more other health care providers for services
under any other contracts, agreements or arrangements, or any other business
operations of TBH. Nothing in this Agreement shall be construed as imposing any
duty on or otherwise requiring TBH to assign Provider to any Provider Panel, the
determination of such assignment to be made solely in the discretion of TBH
and/or the applicable Payor.
ARTICLE 22
EFFECTIVE DATE
This Agreement shall become effective on the later of:
(a) the date of execution of this Agreement by the last party to
execute this Agreement or
(b) the date that the Plan Contract referenced in Addendum No. 1
attached to this Agreement becomes effective.
21.
<PAGE> 22
If TBH has not entered into the Plan Contract with the State referenced
in Addendum No. 1 by July 1, 1996 (or such later date as may be agreed upon by
the parties), this Agreement shall automatically become null and void without
becoming effective and each party shall be released from its obligations under
this Agreement.
22.
<PAGE> 23
IN WITNESS WHEREOF, the parties have executed this Agreement in
multiple counterparts (including the use of counterparts signature pages if
necessary) as of the dates set forth below each party's signature.
ADDRESS: TBH:
1830 White Avenue TENNESSEE BEHAVIORAL HEALTH, INC.
Knoxville, TN 37910
By: /s/ Rocky Davis
-------------------------------------
Phone: (615) 541-2101
Title: Chief Executive Officer
Fax: (615) 541-2118
Date: 12/4/95
ADDRESS: PROVIDER:
275 Cumberland Blvd. /s/ Pam Womack, President
Nashville, TN 37228 -----------------------------------------
Tennessee Mental Health Cooperative
Phone: (615) 259-9225
Fax: (615) 726-4843
By:
-------------------------------------
Title:
----------------------------------
Date: 12/2/95
23.
<PAGE> 24
ADDRESS: IF AN INDIVIDUAL:
- -----------------------------------
- ----------------------------------- -----------------------------------------
Type or Print Name
- -----------------------------------
Phone: ( )
- ----------------------------------- -----------------------------------------
Signature
Date:
-----------------------------------------
24.
<PAGE> 25
[EXHIBITS EXCLUDED]
1.
<PAGE> 1
EXHIBIT 10.20
ADDENDUM NO. 1
TENNESSEE BEHAVIORAL HEALTH, INC.
PROVIDER AGREEMENT
PAYOR PLAN: The TennCare Partners Program
PLAN CONTRACT: Agreement for Behavioral Health Services to Enrollees under The
TennCare Partners Program between TBH and the Tennessee Department of Mental
Health and Mental Retardation.
EFFECTIVE DATE: This Addendum shall become effective as of the later of (i) the
date the Plan Contract between the State and TBH referenced above becomes
effective or (ii) the date this ADDENDUM NO. 1 is executed by the parties.
COVERED SERVICES: All services described in Attachment I.
PRIOR AUTHORIZATION REQUIREMENTS: All Designated Covered Services require Prior
Authorization with the exception of Emergency Care or care rendered by Providers
to their assigned enrollees at their discretion. Emergency Care is not subject
to Prior Authorization; however, Provider is required to give notice to TBH
within twenty-four (24) hours after the provision of Emergency Care or any
Referral for Emergency Care. Once the Enrollee has been stabilized, any
subsequent care is subject to Prior Authorization requirements.
ENROLLEE ASSIGNMENT: Each enrollee will be assigned to a provider by TBH.
COMPENSATION: TBH shall compensate Provider for providing
Medically/Psychologically Necessary Designated Covered Services to Enrollees of
the above-referenced plan as follows:
As described in Attachment I.
COPAYMENT: In accordance with terms of Payor Plan.
WITHHOLDS: TBH reserves the right to institute withholds for any Participating
Provider failing to meet performance standards as outlined by TBH Policies, TBH
Procedures, TennCare, or any other regulatory or government body associated with
the administration of the TennCare Program.
ISSUE RESOLUTION: To the extent not specifically addressed by the terms of this
Addendum, all compensation issues shall be resolved in accordance with TBH
Policies and TBH Procedures.
SPECIAL TERMS, CONDITIONS OR OBLIGATIONS: The following terms, conditions,
covenant and obligations shall, apply to TBH or Provider, as appropriate,
notwithstanding any terms or conditions of the Agreement to the contrary.
A1-1
<PAGE> 2
1. DEFINITIONS. To the extent the Plan Contract contains definitions of
terms identical, similar or comparable to the terms defined in Article I of the
Agreement, the definition in the Plan Contract shall control the meaning of such
terms. References to the State shall mean the Tennessee Department of Mental
Health and Mental Retardation and, where appropriate, the Bureau of TennCare,
Tennessee Department of Finance and Administration and the Tennessee Department
of Commerce and Insurance. The term "MCO" refers to each managed care
organization that has entered into a Risk Agreement with the State for the
provision of certain health care services to TennCare enrollees.
2. THIRD PARTY BENEFICIARY. Enrollees are the intended third party
beneficiary of the Plan Contract and this Agreement and, as such, are entitled
to remedies accorded to third party beneficiaries under the laws of the State.
3. CASE MANAGEMENT. If Provider is designated as a Case Manager,
Provider shall not only perform the functions described in Article IV of the
Agreement, but will also assist and cooperate with State and TBH in performing
case management functions under the Plan Contract.
4. LABORATORY TESTING. If Provider is to provide laboratory testing as
a Designated Covered Service, all laboratory testing sites utilized to provide
such services must have either a Clinical Laboratory Improvement Act (CLIA)
Certificate of Waiver or a Certificate of Registration along with a CLIA
identification number. Those laboratories with a Certificate of Waiver may
provide only the types of tests permitted under the terms of the waiver.
5. COORDINATION OF BENEFITS. TBH shall be the Payor of last resort for
Designated Covered Services. TBH shall be entitled to full subrogation rights
and shall be responsible for determining the legal liability of third parties to
pay for Designated Covered Services and to recover any such amounts from the
third party. If TBH has determined that third party liability exists for part or
all of Designated Covered Services provided to an Enrollee, and the third party
will make payment to Provider in a reasonable time, TBH may pay Provider only
the amount, if any, by which the Provider's Clean Claim exceeds the amount of
third party liability, or TBH may pay the full amount due Provider under this
Agreement and assume full responsibility for collection from such third party.
TBH shall not withhold payment to Provider if third party liability or the
amount of liability cannot be determined or payment will not be made to Provider
within a reasonable time. Provider shall make such assignment and pay over such
amounts to TBH as shall be required by this paragraph or any applicable
provision of TBH Policies or TBH Procedures.
6. PROVIDER WARRANTIES. Provider warrants that Provider has not been
excluded from participation in the Medicare or Medicaid programs pursuant to
Sections 1128 or 1156 of the Social Security Act and is in good standing with
TennCare.
7. MAINTENANCE OF RECORDS. Medical health and behavioral records of
Enrollees and all related administrative records shall be maintained under
Section 2.12.2 of the Agreement for five (5) years after termination of the
Agreement and further if the records are under review or audit until the review
or audit is complete. Prior approval for the disposition of records must be
requested from the State.
8. CLAIMS SUBMISSION. The time period for the submission of claims
under Section 2.19 of the Agreement shall bc no less than one hundred twenty
(120), and no more than one hundred eighty (180), calendar days from the date of
rendering services rather than (60) days.
A1-2
<PAGE> 3
9. INDEMNIFICATION. At all times during the term of this Agreement,
Provider shall indemnify and hold harmless the State as well as its officers,
agents and employees (hereinafter the "Indemnified Parties") from all claims,
losses or suits incurred by or brought against the Indemnified Parties as a
result of failure of Provider to comply with the terms of this Agreement or the
Plan Contract.
10. COMPLIANCE WITH LAWS. TBH and Provider agree to recognize and abide
by all State and federal laws, regulations and guidelines applicable to
TennCare, including The TennCare Partners Program, and the Plan Contract.
11. INCORPORATION OF LEGAL OR CONTRACT REQUIREMENTS. The parties hereby
incorporate by reference all applicable federal and State laws or regulations
and agree that revisions of such laws or regulations shall automatically be
incorporated into this Addendum as they became effective. In the event the
changes in this Agreement or this Addendum as a result of revision in applicable
federal or State laws materially affect the position of either party, TBH and
Provider agree to negotiate such further amendments as may be necessary to
correct any inequities.
12. SPECIAL TERMINATION PROVISIONS. In the event of a termination of
the Parties' obligations pursuant to Article VI with respect to this Addendum,
Provider shall immediately make available to the State, or its designated
representative, in usable form, any or all records, whether medical or
financial, related to the Provider's activities undertaken pursuant to this
Agreement with respect to this Addendum No. 1. Provision of such records shall
be at no expense to the State.
13. OTHER CONTRACTS. Provider is required to accept compensation for
Designated Covered Services provided under this Agreement as set forth above,
but shall not be required to accept TennCare reimbursement amounts for services
to Enrollees who are covered under any other Plan Contract.
14. QUALITY COMPLIANCE. In addition to all other requirements of this
Agreement, Provider must adhere to the quality of care monitors required by the
terms of the Plan Contract.
15. ARBITRATION. The State shall have no involvement in arbitration
under Section 8.2 of the Agreement except to (i) enforce Section 8.2, (ii)
approve the arbitration procedure proposed by TBH and (iii) to voluntarily
intervene if the State deems intervention to be in the best interest of
TennCare; provided, however, that the State shall not be bound by said
arbitration. If at any time, the State decides that a particular dispute should
be in a court of competent jurisdiction, the State shall notify the parties to
the dispute of its decision to refer the dispute to a court of competent
jurisdiction and said arbitration process shall cease and the dispute shall be
heard in said court. The only exception to the arbitration process shall be
resolution of the cost of Emergency Care and providers of services under TENN.
CODE ANN. Section 33-2-601. The cost of establishing any arbitration procedure
shall be borne by TBH. If a dispute between the parties involving a claim
submitted by Provider to TBH is not resolved prior to entry of a final decision
by the arbitrator(s), then the prevailing party at the arbitration shall be
entitled to award of reasonable attorneys' fees and expenses from the
non-prevailing Party. Reasonable attorneys' fees means the number of hours
reasonably expended on the dispute multiplied by a reasonable hourly rate but
shall not exceed ten percent (10%) of the total monetary amount in dispute or
$500.00, whichever amount is greater.
16. COORDINATION OF HEALTH CARE SERVICES. To the extent and in the
manner required by the terms of the Plan Contract, Provider will cooperate with
each MCO and the primary care providers under contract with or employed by such
MCO who provide medical services, to Enrollees in an effort to (i) coordinate
and integrate health care services provided to each Enrollee by such providers
and Provider, (ii) help ensure the appropriateness of all health care services
provided to the Enrollee and (iii) help ensure that such health care services
are. provided in a manner that allows the most efficient use of resources and
the achievement of quality health outcomes.
A1-3
<PAGE> 4
17. AMENDMENT TO ADDENDUM. Notwithstanding the provision of Article XII
to this Agreement, in the event this Agreement and Addendum No. 1 are executed
by the parties prior to execution of the Plan Contract, this Addendum No. 1
shall automatically be amended to conform to the requirements of the Plan
Contract and the State under The TennCare Partners Program. Any amendments
required after execution of the Plan Contract shall, be made in accordance with
the provisions of Article XIII of the Agreement. The terms of any amendment that
becomes effective by reason of the first sentence of this Paragraph shall be
provided to Provider by TBH within thirty (30) days after execution of the Plan
Contract by TBH and the State.
18. ASSIGNMENT TO STATE. TBH shall have the right to assign to the
State its rights and delegate its duties and responsibilities under this
Agreement with respect to the Payor Plan and Plan Contract described in this
Addendum to the extent required by the terms of the Plan Contract.
A1-4
<PAGE> 5
IN WITNESS WHEREOF, the parties have executed this Addendum No. 1 in
multiple counterparts (including the use of counterpart signature pages if
necessary) as of the dates set forth below each party's signature.
TBH:
TENNESSEE BEHAVIROAL HEALTH, INC.
By: /s/ Rocky Davis
----------------------------------------------
Title: Chief Executive Officer
Date: December 4, 1995
PROVIDER:
IF AN ENTITY:
/s/ Pam Womack, President
----------------------------------------------
TENNESSEE MENTAL HEALTH COOPERATIVE
By:
------------------------------------------
Title:
---------------------------------------
Date: December 4, 1995
IF AN INDIVIDUAL:
----------------------------------------------
Type or Print Name
----------------------------------------------
Type or Print Name
Date:
----------------------------------------
A1-5
<PAGE> 6
[EXHIBITS EXCLUDED]
A1-6
<PAGE> 1
EXHIBIT 10.21
ADDENDUM NO. 2
TENNESSEE BEHAVIORAL HEALTH, INC.
PROVIDER AGREEMENT (ENTITY)
This Addendum No. 2 to that certain Provider Agreement ("Agreement")
between Tennessee Behavioral Health, Inc. ("TBH") and the undersigned health
care provider ("Provider"), with an effective date of December 11, 1995, is
entered into as of the date set forth below in order to amend the Agreement to
comply with the requirements of The TennCare Partners Program of the State of
Tennessee, Department of Mental Health and Mental Retardation ("State") defined
in Addendum No. 1 to the Agreement as the Plan Contract. All capitalized terms
used in this Addendum No. 2 shall have the same meaning as used in the Agreement
and Addendum No. 1.
Pursuant to Article XIII of the Agreement, the parties hereby agree to
amend Addendum No. 1 and the Agreement as follows:
1. AMENDMENT TO EXHIBIT 1. Exhibit 1 to the Agreement is deleted in its
entirety and a new Exhibit 1 in the form attached to this Addendum No. 2 as
Exhibit 1 shall be substituted in lieu thereof.
2. DELETION OF ATTACHMENT 1. All references in Addendum No. 1 to
Covered Services, including any reference to Attachment 1, are hereby deleted in
their entirety from the Agreement and Attachment 1 is deleted from the
Agreement.
3. CLAIMS INFORMATION. Provider shall submit to TBH all necessary
information to permit TBH, when determining liabilities on its annual report and
quarterly financial reports, to include an amount estimated in the aggregate to
provide for any unearned premium and for the payment of all claims for health
care expenditures that have been incurred pursuant to or under the Plan
Contract, whether reported, unreported or unpaid or for which TBH is or may be
liable, and to provide for the expense, adjustment or settlement of such claims.
Provider acknowledges that such liabilities must be computed by TBH in
accordance with procedures to be established by the State upon reasonable
consideration of the ascertained experience and character of TBH.
4. CONFLICT OF INTEREST. Provider warrants that no part of any payments
made pursuant to the Agreement shall be paid directly or indirectly to any
officer, employee, delegate or member of the legislative body of the State or of
the United States Government as wages, compensation, or gifts in exchange for
acting as officer, agent, employee, subcontractor or consultant to Provider in
connection with any work contemplated or performed relative to the Agreement.
Provider shall be declared in default by TBH if it is determined that Provider,
its officers, agents, employees, subcontractors or consultants offered or gave
gratuities of any kind to any official, employee or delegate or member of any
legislative body of the State or the United States Government.
5. TERM. The provisions of Article V of the Agreement are deleted in
their entirety and the following language is substituted in lieu thereof:
"This Agreement shall have an initial term of two (2) years
beginning December 11, 1995, and ending December 10, 1997.
This Agreement shall automatically renew for successive
one-year terms, unless and until terminated by either party
pursuant to Article VI."
6. TERMINATION. Section 6.2 of the Agreement is amended by adding the
following new subsection; deleting the word "or" from Subsection 6.2.6 and
deleting the "," from Subsection 6.2.7 and adding "; or" to the end of such
subsection:
"6.2.8 TBH shall fail to enter a Provider Risk Contract with
the State for the TennCare Partners Program by July 1, 1996,
or such contract, if entered into by TBH and the State, is
terminated for any reason during the term of the Agreement."
1.
<PAGE> 2
7. AMENDMENTS. Section 13.1 of the Agreement is deleted in its entirety
and the following is added in lieu thereof:
"13.1 RIGHT OF APPROVAL AND EFFECTIVE DATE. All amendments to
this Agreement proposed by Provider must be agreed to in
writing in advance of the Effective Date by TBH. TBH reserves
the right to reject any proposed amendment in its absolute
discretion. Any amendments to this Agreement proposed by TBH
must be proposed in the form of an Addendum forwarded to
Provider in the manner specified in Section 13.2 and will be
deemed effective upon the earlier of such Addendum's execution
by the parties or the expiration of twenty (20) calendar days
after receipt of such Addendum (determined under Article XVI)
unless within such twenty (20) day period Provider notifies
TBH in writing of Provider's rejection of the requested
amendment. Amendments required because of legislative,
regulatory or legal requirements or because of requirements
imposed by the State or pursuant to any amendment to the Plan
Contract shall not require the consent of Provider or TBH and
will be effective as of the date specified in the Addendum
containing such amendment."
8. EFFECTIVE DATE OF AGREEMENT. The provisions of Article XXII of the
Agreement are deleted in their entirety and the following language is inserted
in lieu thereof:
"This Agreement shall be effective as of December 11, 1995."
9. AMENDMENT TO ADDENDUM NO. 1. The third paragraph of Addendum No. 1
titled "Effective Date" is deleted in its entirety and the following paragraph
is inserted in lieu thereof:
"EFFECTIVE DATE. This Addendum shall become effective as of
December 11, 1995."
10. EFFECTIVE DATE OF ADDENDUM NO. 2. Notwithstanding that the
provisions of Section 13.1 of this Agreement currently provide that any
amendment to the Agreement shall become effective after a period of twenty (20)
days during which Provider has an option to accept or reject such Amendment, the
parties agree that, by signing below, each party agrees to make this Addendum
No. 2 effective as of February 4, 1996, and that the provisions of this Addendum
are incorporated into the Agreement effective as of such date.
11. DELETION OF PARAGRAPH 3.1.7. Paragraph 3.1.7 of the Agreement is
hereby deleted in its entirety. During the term of the Agreement, TBH shall be
the sole party responsible for paying for Designated Covered Services provided
by Provider under this Agreement.
12. SPECIAL TBH REPRESENTATION. TBH represents and warrants that TBH as
of this date has not entered into any exclusive arrangements for case management
and related services. TBH further represents and warrants that the payments to
be made to Provider hereunder are not subject to any priority right of any other
2.
<PAGE> 3
provider whereby any other provider must be paid its percentage of premium, all
inclusive per diem, program or capitated rate for case management or related
services prior to Provider being paid for Designated Covered Service rendered by
Provider under this Agreement.
IN WITNESS WHEREOF, the parties have executed this Addendum No. 2 in
multiple counterparts (including the use of counterpart signature pages, if
necessary) as of February 1, 1996.
PROVIDER (ENTITY): TBH:
TENNESSEE MENTAL HEALTH COOPERATIVE, INC. TENNESSEE BEHAVIORAL HEALTH,
INC.
By: /s/ Pam Womack By: /s/ Albert R. Wesson, Jr.
Title: President Title: Chief Operating Officer
Date: February 4, 1996 Date: February 4, 1996
3.
<PAGE> 4
[EXHIBITS EXCLUDED]
4.
<PAGE> 1
EXHIBIT 10.22
ADVOCARE, INC.
PROVIDER PARTICIPATION AGREEMENT
THIS AGREEMENT, effective this ____ day of _________________, 1995, is
by and between Green Spring Health Services, Inc., AdvoCare, Inc., a subsidiary
of Green Spring Health Services, Inc., (hereinafter collectively referred to as
"AdvoCare"), and THE TENNESSEE MENTAL HEALTH COOPERATIVE, INC. (hereinafter
referred to as "TMHC"), a subsidiary of PMR, Inc.
WHEREAS, TMHC operates programs known as the Nashville/Davidson County Mental
Health Cooperative and Case Management, Inc., which provide case management,
mental health, and/or chemical dependency treatment services; and
WHEREAS, AdvoCare desires to engage TMHC to provide such services to
individuals covered by Benefit Plans sponsored or issued by Payors, as defined
in this Agreement.
NOW THEREFORE, for and in consideration or the premises, the mutual promises
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
SECTION 1
DEFINITIONS
BENEFIT PLAN: The TennCare Health Benefit Program which contains the terms and
conditions of an Enrollee's coverage.
COPAYMENT: The amount which may be charged to Enrollees at the time services are
rendered in accordance with the terms of the Benefit Plan and which are in
addition to payments made by Payor to TMHC for such services.
CUSTOMARY CHARGE: The usual, reasonable and customary fees charged by a
Participating Provider which do not exceed the fees the Participating Provider
would charge any other person, regardless of whether the person is an Enrollee.
DEDUCTIBLE: The annual amount which may be charged to Enrollees for Mental
Health Services and which Enrollees may be required to pay in accordance with
the terms of the Benefit Plan.
EMERGENCY: The sudden and unexpected onset of a mental health emergency or
severe symptoms of sufficient severity that the absence of immediate mental
health intervention within twenty-four (24) hours could reasonably be expected
to cause physical harm to the life and safety of the Enrollee and/or others.
Emergency services may be rendered without prior authorization.
1.
<PAGE> 2
ADVOCARE POLICIES AND PROCEDURES. All AdvoCare standards, policies, procedures,
definitions, criteria, and guidelines as stated in AdvoCare handbooks, manuals,
and other documents, as amended from time to time by AdvoCare.
MENTAL HEALTH SERVICES: The case management, mental health and/or chemical
dependency treatment services and supplies set forth in Enrollee's Benefit Plan.
MEDICALLY NECESSARY MENTAL HEALTH SERVICES: Mental health services including
professional services and supplies rendered by a Provider to identify or treat a
mental illness that has been diagnosed or is suspected, and which are: (a)
consistent with (i) the efficient diagnosis and treatment of a condition; and
(ii) standards of good medical practice; (b) required for other than
convenience; (c) the most appropriate supply or level of service; (d) unable to
be provided in a more cost-effective and efficient manner; (c) unable to be
provided at a facility providing a less intensive level of care; and (f) other
criteria for assessment and placement jointly agreed to by AdvoCare and TMHC.
ENROLLEE: Any individual eligible for the TennCare Mental Health Benefit Program
which has enrolled with a Managed Care Organization ("MCO") where such
individual has been designated by the TennCare Bureau as assigned to AdvoCare or
its parent corporation, Green Spring Health Services, Inc., for the provision of
mental health and/or substance abuse treatment services.
PARTICIPATING PROVIDER: An organization duly licensed and qualified in the state
where Mental Health Services are provided under this agreement who satisfies
AdvoCare credentialing requirements, including Provider that has a Participation
Agreement in effect with AdvoCare to provide Mental Health Services to
Enrollees.
PAYOR: Bureau of TennCare, Tennessee Department of Mental Health and Mental
Retardation (TDMHMR), or other entity which has financial responsibility for
payment of Mental Health Services rendered to Enrollees.
SECTION 2
DUTIES OF TMHC
SECTION 2.1 PROVISION OF MENTAL HEALTH SERVICES. TMHC agrees to provide
Medically Necessary Mental Health Services to each Enrollee in a timely, prompt
and efficient manner consistent with the standard of practice of the community
in which TMHC render Mental Health Services. Such services will be provided in
accordance with the Operating Policies and Procedures set forth in Exhibit A
hereto. Operating Policies and Procedures, Exhibit A,
2.
<PAGE> 3
may be amended, subject to section 12.1. TMHC warrants that the services to be
provided will be provided within the scope of the TMHC providers' professional
practice.
SECTION 2.1.1 TMHC agree not to delegate any professional duties other
than contracting for physician services to any party or facility without the
approval of AdvoCare.
SECTION 2.1.2 TMHC shall be bound by AdvoCare Policies and Procedures.
Failure to comply with AdvoCare policies and procedures may result in loss of
reimbursement to THMC and/or termination of this Agreement. TMHC acknowledges
that full acceptance of this Agreement by AdvoCare is contingent upon TMHC fully
satisfying AdvoCare's credentialing standards.
SECTION 2.2 AUTHORIZATION AND NOTIFICATION REQUIREMENTS. All Mental Health
Services provided to Enrollees by TMHC must be authorized by AdvoCare as
specified in Exhibit B prior to or in the case of an Emergency, at the time of
rendering services. Failure to obtain authorization from AdvoCare in accordance
with these requirements, may result in the loss of reimbursement and/or
termination of this Agreement. AdvoCare's utilization management procedures
shall not diminish the obligation of TMHC to render Mental Health Services
consistent with the applicable standard of care.
SECTION 2.3 COMPLIANCE WITH CIVIL RIGHTS LAWS. TMHC agrees not to
discriminate or differentiate in the treatment of any individual based on sex,
marital status, age, race, color, religion, physical or mental handicap or
otherwise, including by reason of the fact that the individual is an Enrollee of
TennCare. TMHC agrees to ensure that mental health and substance abuse treatment
services are rendered to Enrollees in the same manner, and in accordance with
the same standards and with the same availability, as offered to any other
individual customarily receiving services from TMHC.
TMHC may not refuse to provide medically necessary or covered preventative
services to a TennCare enrollee for non-medical reasons, including but not
limited to, failure to pay application deductibles, copayments and/or special
fees.
SECTION 2.4 UTILIZATION MANAGEMENT, QUALITY ASSURANCE, PEER REVIEW AND
GRIEVANCE PROCEDURES. TMHC agrees to cooperate and participate with all
utilization management, quality assurance, peer review and grievance procedures,
or other similar programs established by AdvoCare in the AdvoCare Provider
Reference Manual or by Payor. TMHC agrees to he bound by any final determination
of AdvoCare and/or Payor as it relates to any Enrollee receiving Mental Health
Services from TMHC under this Agreement. AdvoCare's utilization management
procedures shall not diminish the obligation of TMHC to render Mental Health
Services consistent with the applicable Standard of care.
SECTION 2.5 VERIFICATION AND COLLECTION OF CHARGES FROM ENROLLEES. TMHC
shall verify the status of any Enrollee's eligibility for Mental Health Services
by contacting Payor or AdvoCare. Non-covered services are not eligible for
payment by Payor or AdvoCare. TMHC shall not be
3.
<PAGE> 4
paid by Payor, AdvoCare or Enrollee for Mental Health Services that are deemed
not medically necessary by AdvoCare including other criteria for assessment and
placement jointly agreed to by AdvoCare and TMHC.
SECTION 2.5.1 HOLD HARMLESS PROVISION. TMHC agrees that in no event,
including but not limited to non-payment by AdvoCare or Payor, insolvency or
breach of this Agreement, shall TMHC, its contractors or employees bill, charge,
collect a deposit from, seek compensation, remuneration or reimbursement from,
or have any recourse against any Enrollees or any other persons other than
AdvoCare or its parent company Green Spring Health Services or ally such Payor
contracting with AdvoCare or its parent company Green Spring Health Services,
for services provided pursuant to this Agreement. This provision shall not
prohibit collection of any applicable copayments or deductibles billed in
accordance with the Benefit Plans of Enrollees. TMHC further agrees that: this
provision shall survive the termination of this Agreement regardless of the
cause giving rise to termination and shall be construed to be for the benefit of
the Enrollee; and this provision supersedes any oral or written contrary
agreement Now existing or hereafter entered into between TMHC and Enrollee, or
persons acting on their behalf, and any modifications, additions, or deletions
to this provision shall become effective on a date no earlier then that
specified by the Insurance Commissioner of the state in which services are
rendered.
SECTION 2.6 COORDINATION OF BENEFITS. TMHC shall be paid in accordance with
the Payor's coordination of benefits rules. TMHC shall make all reasonable
efforts to ascertain whether other coverages exist for Enrollees to whom TMHC
renders Mental Health services, and shall notify AdvoCare of any such other
coverages.
SECTION 2.7 REPORTING REQUIREMENTS. TMHC agrees that it will submit all
data and other reports in a timely manner as specified by AdvoCare Policies and
Procedures for reporting including Exhibit A. TMHC agrees to comply with the
State of Tennessee reporting requirements specified on pages 48-49 requirement
3.12.2-3.12.6 of the Contract between the State of Tennessee and the Behavioral
Health Organizations approved and participating in the TennCare Partners
Program, November 20, 1995 (work in progress).
SECTION 2.8 CLAIMS PROCESSING. When the method of payment is fee for
service, TMHC agrees that it will submit all itemized claims for reimbursement
no later than sixty (60) days from the date services are rendered. In the event
Electronic Claims Filing ("ECF") is required by Payor, TMHC agrees that it will
submit claims through a clearinghouse designated by AdvoCare.
SECTION 3
COMPENSATION TO TMHC
4.
<PAGE> 5
SECTION 3.1 COMPENSATION TO TMHC. TMHC accepts payment from Payor for
Mental Health Services provided to Enrollees under this Agreement as payment in
full for such services. TMHC agrees that such payment shall be made in
accordance with the schedule set forth as Exhibit B or amended payment schedule
subject to Section 12.1. Payment will be made within 30 days of proper
submission of a clean claim for services billed on a fee for service basis.
SECTION 4
RELATIONSHIP BETWEEN PARTIES
SECTION 4.1 INDEPENDENT CONTRACTOR. The relationship between AdvoCare and
TMHC is solely that of independent contractors and nothing in this Agreement or
otherwise shall be construed or deemed to create any other relationship,
including one of employment, agency or joint venture. TMHC shall maintain social
security, workers' compensation, employer's liability insurance, and all other
employee benefits covering TMHC's employees as required by law.
SECTION 5
INDEMNIFICATION; LIABILITY INSURANCE
SECTION 5.1 INDEMNIFICATION; LIABILITY INSURANCE. AdvoCare will indemnify
and hold harmless TMHC and PMR, its successors and assigns, officers and
directors, employees, agents, affiliates and subsidiaries, from any and all
claims, demands, damages, judgments, liabilities and expenses, including but not
limited to reasonable attorney fees, that arise directly or indirectly from (i)
any negligent, reckless or willful acts or omissions of AdvoCare, its agents
and/or employees; or (ii) any failure of AdvoCare to perform its obligations
under this Agreement.
TMHC will indemnify and hold harmless TennCare, Green Spring and AdvoCare, its
successors and assigns, officers and directors, employees, agents, affiliates
and subsidiaries, from any and all claims, demands, damages, judgments,
liabilities and expenses, including but not limited to reasonable attorney fees,
that arise directly or indirectly from (i) any negligent, reckless or willful
acts or omissions of TMHC, its agents and/or employees; or (ii) any failure of
TMHC to perform its obligations under this Agreement.
SECTION 5.2 TMHC LIABILITY INSURANCE. TMHC shall procure and maintain, at
TMHC's sole expense: (1) professional liability insurance in the amount of at
least One Million Dollars ($1,000,000) per occurrence and One Million Dollars
($1,000,000) in the aggregate and (2) comprehensive general and/or umbrella
liability insurance. TMHC medical malpractice insurance shall he either
occurrence or claims-made. If the insurance policy is claims-made, TMHC shall be
required to furnish and maintain an extended period reporting endorsement ("tail
policy") under such terms and conditions as may be reasonably required by
AdvoCare. Prior to
5.
<PAGE> 6
or within 90 days following execution of this Agreement and at each policy
renewal thereafter, TMHC shall submit to AdvoCare in writing evidence of
insurance coverage.
TMHC shall notify AdvoCare in writing, within 10 days of (a) any changes in
carrier, termination of, renewal of or any material changes in TMHC's liability
insurance, including reduction of limits, erosion of aggregate, changes in
retention or non-payment of premium, (b) any settlement, judgment or other
disposition of any malpractice or similar claim against TMHC.
SECTION 6
LAWS, REGULATIONS, LICENSES AND ACCREDITATION
SECTION 6.1 LAWS, REGULATIONS, LICENSES AND ACCREDITATION. TMHC shall
comply with all applicable federal and state laws including but not limited to
requirements for licensure and certification, requirements to maintain the
facilities of TMHC and requirements concerning maintenance and disclosure of
records. TMHC shall notify AdvoCare in writing, within 10 days of (a) any
suspension, revocation, condition, limitation, qualification or other
restriction, or upon initiation of any action which could reasonably lead to
such restriction on a license held by TMHC and/or certification in any state in
which TMHC is authorized to provide Mental Health care services; (b) any
suspension, revocation or restriction of staff privileges at any licensed
hospital or other facility at which a TMHC provider has staff privileges and (c)
on all annual basis, any charges of malpractice or professional misconduct
brought against TMHC.
SECTION 7
PUBLIC RELATIONS: NAME, SYMBOLS, AND SERVICE MARKS
SECTION 7.1 RIGHTS OF TMHC, ADVOCARE AND PAYOR. TMHC agrees that AdvoCare
and/or Payor with whom AdvoCare has contracted, may use TMHC's name, address,
telephone number and description of services in any promotional activities. TMHC
further agrees to Cooperate and participate in all reasonable promotional
activities undertaken by AdvoCare. Otherwise, TMHC and AdvoCare shall not use
each other's name, symbol or service mark without prior written approval of the
other party.
AdvoCare agrees that TMHC may use AdvoCare's name, address, telephone
number and description of services in any promotional activities. AdvoCare
further agrees to cooperate and participate in all reasonable promotional
activities undertaken by TMHC. Otherwise, AdvoCare and TMHC shall not use each
other's name, symbol or service mark without prior written approval of the other
party.
6.
<PAGE> 7
SECTION 8
BOOKS AND RECORDS
SECTION 8.1 ACCESS TO AND RECORDS OF BOOK AND RECORDS. TMHC agrees that it
will maintain patient records (including but not limited to such records that
are necessary for (the evaluation of the quality, appropriateness and timeliness
of services performed), in accordance with AdvoCare procedures and to maintain
financial records in accordance with generally accepted accounting principles.
TMHC agrees that AdvoCare, TennCare, the Tennessee Bureau of' Investigation
Medicaid Fraud Unit, the U.S. Department of Health & Human Services and the
Office of the Inspector General, whether announced or unannounced, shall have
access to all information and records or copies of records, free of charge
related to Mental Health Services rendered by TMHC under this Agreement. Upon
request TMHC members will assist in such reviews. Unless otherwise required by
applicable statutes or regulations, AdvoCare shall have access to such books and
records during the term of this Agreement and for five (5) years following its
termination. Such information shall be retained beyond this point if the records
are under review or audit. Prior approval for the disposition of records must be
requested from AdvoCare if this Agreement is continuous.
SECTION 8.2 CONFIDENTIALITY OF RECORDS. AdvoCare and TMHC agree to maintain
the confidentiality of all information regarding Mental Health Services provided
to Enrollees under this Agreement in accordance with any applicable statutes and
regulations. TMHC acknowledges that in receiving, storing, processing, or
otherwise dealing with information from AdvoCare or Payor about Enrollees, it is
fully bound by federal and state statutes governing confidentiality of medical
records, mental health records and/or alcohol and drug abuse patient records.
SECTION 8.3 PATIENT ACCESS TO RECORDS. Enrollees and their representatives
shall be given access to the enrollee's medical records to the extent and in the
manner provided by state and federal law. They will also be given copies of such
records, subject to reasonable charges.
SECTION 9
CONFIDENTIALITY OF ADVOCARE'S PROPRIETARY INFORMATION
SECTION 9.1 CONFIDENTIALITY OF PROPRIETARY INFORMATION. TMHC specifically
agrees to keep confidential and not to disclose to others any and all business,
financial, credentialing, utilization review, quality assurance, protocols or
procedures, manual or other information marked or otherwise designated
"Confidential" or "Proprietary" and made available to it by AdvoCare
("Confidential Information"). Upon request (of AdvoCare, or in the event of
termination of this Agreement, TMHC shall promptly return all such Confidential
Information to AdvoCare. TMHC agrees not to use any such Confidential
Information of AdvoCare except in conjunction with the
7.
<PAGE> 8
purposes of this Agreement. The terms of this Section shall survive termination
of this Agreement.
AdvoCare specifically agrees to keep confidential and not to disclose to others
including any entity controlling, controlled by, or under common control with
AdvoCare any and all business, financial, credentialing, utilization review,
quality assurance, protocols or procedures, manual or other information marked
or otherwise designated "Confidential" or "Proprietary" and made available to it
by TMHC ("Confidential Information"). Upon request of TMHC, or in the event of
termination of this Agreement, AdvoCare shall promptly return all such
Confidential Information to TMHC. AdvoCare agrees not to use any such
Confidential Information of TMHC except in conjunction with the purposes of this
Agreement. The terms of this Section shall survive termination of this
Agreement.
SECTION 10
RESOLUTION OF DISPUTES
SECTION 10.1 RESOLUTION OF DISPUTES. In the event that a dispute between
AdvoCare and TMHC arises out of or is related to this Agreement, the parties to
the dispute agree to negotiate in good faith to attempt to resolve the dispute.
In the event the dispute is not resolved within 30 days of the date one party
sent written notice of the dispute to the other party, and if any party wishes
to pursue the dispute, it shall be submitted to binding arbitration in
accordance with the rules of the American Arbitration Association, in no event
may arbitration be initiated more than one year following the sending of written
notice of the dispute. Any arbitration proceeding under this Agreement shall be
conducted in the State where Mental Health Services are provided under this
Agreement. Legal fees and costs incurred by each party will be borne by them.
The arbitrators shall have no authority to award any punitive or exemplary
damages, or to vary or ignore the terms of this Agreement, and shall be bound by
controlling law. If the dispute pertains to a matter which is generally
administered in accordance with AdvoCare's procedures involving, for example,
credentialing or quality assurance, the procedures set forth by AdvoCare must be
fully exhausted by TMHC before TMHC may invoke its right to arbitration under
this Section. TMHC acknowledges that the recommendation and determination of
whether Mental Health Services are Medically Necessary shall be made in
accordance with AdvoCare's policies and procedures including other criteria for
assessment and placement jointly agreed to by AdvoCare and TMHC.
SECTION 11
TERM AND TERMINATION
SECTION 11.1 TERM. The term of this Agreement shall commence on the
Effective Date and it shall remain in effect until terminated.
8.
<PAGE> 9
SECTION 11.2 TERMINATION OF AGREEMENT WITHOUT CAUSE. Either party may
terminate this Agreement without cause upon ninety (90) days prior written
notice of termination to the other party.
SECTION 11.3 TERMINATION WITH CAUSE. AdvoCare shall have the right to
terminate this Agreement immediately by giving written notice to TMHC upon the
occurrence of any of the following events: (a) Termination of AdvoCare's
obligation to obtain mental health/substance abuse treatment services on behalf
of the Payor with which it has contracted; (b) Restriction, suspension or
revocation of a TMHC provider's license or certification; (c) TMHC's loss of or
failure to maintain any liability insurance, as required under this Agreement;
(d) AdvoCare's failure to make payment when due subject to a 15-day right to
cure; (e) TMHC's exclusion from participation in any third party payor programs;
(f) TMHC's breach of any of the terms or obligations of this Agreement subject
to a 30-day right to cure; (g) TMHC's bankruptcy or insolvency; (h) Submission
of false or misleading billing information by TMHC.
TMHC shall have the right to terminate this Agreement immediately by
giving written notice to TMHC upon the occurrence of any of the following
events: (a) AdvoCare's loss of or failure to maintain any liability insurance,
as required under this Agreement; (b) AdvoCare's exclusion from participation in
any third party payor programs; (c) AdvoCare's bankruptcy or insolvency.
SECTION 11.4 CONTINUATION OF SERVICES AFTER TERMINATION. Upon request of
AdvoCare, TMHC shall continue to provide Medically Necessary Mental Health
Services to Enrollees who are receiving such services from TMHC as of the date
of termination of this Agreement. Said services shall be in accordance with this
Agreement until the Enrollee has been transitioned by AdvoCare to another
Participating Provider, except that AdvoCare or Payor shall pay TMHC for such
services at TMHC's Customary Charges.
SECTION 11.5 INFORMATION TO ENROLLEES. TMHC acknowledges the right of
AdvoCare to inform Enrollees of TMHC's termination.
SECTION 12
MISCELLANEOUS
SECTION 12.1 AMENDMENT. This Agreement may be amended at any time by the
mutual written agreement of the parties. In addition, either party may amend
this Agreement upon thirty (30) days advance written notice to the other party.
If the other party does not provide a written objection to the first party
within thirty (30) days, the amendment shall go into effect.
9.
<PAGE> 10
SECTION 12.2 REGULATORY AMENDMENT. AdvoCare or TMHC may amend this
Agreement to comply with applicable statutes and regulations, and shall give
written notice to the other party of such amendment and its effective date. Such
amendment will not require thirty (30) days advance written notice.
SECTION 12.3 ASSIGNMENT. AdvoCare may assign all or any of its rights and
responsibilities under this Agreement to any entity controlling, controlled by,
or under common control with AdvoCare. If TMHC objects to this assignment, it
may terminate this Agreement by providing 45 days notice to AdvoCare. TMHC may
not assign any of its rights and responsibilities under this Agreement to any
person or entity without the prior written consent of AdvoCare, which consent
shall not be unreasonably withheld. Notwithstanding the foregoing, TMHC may
assign its rights and obligations under this Agreement to thc Nashville/Davidson
County Mental Health Cooperative or to Case Management, Inc. with no prior
consent of AdvoCare. TMHC acknowledges that persons and entities under contract
with AdvoCare may perform certain administrative services under this Agreement.
SECTION 12.4 ENTIRE AGREEMENT. This Agreement, the Operating Policies and
Procedures attached as Exhibit A and any other exhibits attached hereto
constitute the entire agreement between the parties and supersedes or replaces
any prior agreements between the parties, whether oral or written, relating to
its subject matter.
SECTION 12.5 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the state where Mental Health Services
are provided under this Agreement.
SECTION 12.6 COMPLIANCE WITH APPLICABLE LAW. The parties agree to recognize
and abide by all State and federal laws, regulations and guidelines applicable
to the Benefit Plan.
SECTION 12.7 CHANGES IN LAW. This Agreement incorporates by reference all
applicable federal and state laws or regulations and revisions of such laws or
regulations shall automatically be incorporated into the Agreement as they
become effective. In the event that changes in the Agreement as a result of
revisions of applicable federal or state law materially affect the position of
either party, AdvoCare and TMHC agree to negotiate such further amendments as
may be necessary to correct any inequities.
SECTION 12.8 NOTICES. Any notice, request., demand, waiver, consent,
approval, or other communication which is required or permitted hereunder shall
be in writing and shall be deemed given only if delivered personally or sent by
registered or certified mail or by express Mail courier service, postage
prepaid, as follows:
If to AdvoCare: If to The TMHC, Inc.:
10.
<PAGE> 11
Director of Network Development _____________________________
AdvoCare, Inc. _____________________________
5565 Sterrett Place _____________________________
Suite 500 _____________________________
Columbia, Maryland 21044 _____________________________
or to such other address as the addressee may have specified in a notice duly
given to the sender as provided herein. Such notice, request, demand, waiver,
consent, approval or other communication will be deemed to have been given as of
the date so delivered in case of personal delivery or express mail delivery and
three (3) calendar days after being mailed, if sent by registered or certified
mail.
SECTION 12.9 EQUAL OPPORTUNITY. TMHC shall support Affirmative Action as it
relates to providing employment opportunity for minority groups and women.
Utilization of TMHC is predicated upon its full compliance with AdvoCare's Equal
Employment Opportunity Policy.
SECTION 12.10 OTHER TENNCARE PARTNERS CONTRACTING REQUIREMENTS. TMHC and
AdvoCare mutually agree that this agreement can be amended immediately for
purposes of complying with State of Tennessee requirements for contracting
specified on pages 41-46, requirement 3.9.2 of the Contract between the State of
Tennessee and the Behavioral Health Organizations approved and participating in
the TennCare Partners Program, November 20, 1995 (work in progress).
THIS AGREEMENT CONTAINS A BINDING ARRITRATION PROVISION THAT
MAY BE ENFORCED BY THE PARTIES.
[Signatures follow]
11.
<PAGE> 12
ADVOCARE, INC.
By /s/ Joyce N. Fitch
-------------------------
Print Name Joyce N. Fitch
Print Title Secretary
Date November 29, 1995
GREEN SPRING HEALTH SERVICES, INC.
By /s/ Joyce N. Fitch
-------------------------
Print Name Joyce N. Fitch
Print Title Secretary
Date November 29, 1995
THE TENNESSEE MENTAL HEALTH COOPERATIVE
By /s/ Pam Womack
-------------------------
Print Name Pam Womack
Print Title President TMHC
Date December 1, 1995
12.
<PAGE> 13
[EXHIBITS EXCLUDED]
<PAGE> 1
EXHIBIT 10.23
TENNCARE PARTNERS PROGRAM AMENDMENT
TO THE
ADVOCARE OF TENNESSEE, INC.
PROVIDER PARTICIPATION AGREEMENT
THIS AMENDMENT, made by and between GREEN SPRING HEALTH SERVICES, INC.,
ADOVCARE OF TENNESSEE, INC., a subsidiary of Green Spring Health Services, Inc.
(hereinafter collectively referred to as "Green Spring"), and the TENNESSEE
MENTAL HEALTH COOPERATIVE, INC. (hereinafter referred to as "TMHC") is effective
of February 13, 1996, for the purpose of amending the Green Spring Health
Services Provider Participation Agreement ("Agreement") heretofore made and
entered into between Green Spring and TMHC so as to apply additionally to the
rendering of Mental Health Services by TMHC persons receiving services under the
TennCare Partners Program.
WHEREAS, this Amendment is intended to extend basic principles set forth
in the Agreement, to make such principles workable in the context of the
TennCare Partners Program; and
WHEREAS, Green Spring and TMHC have a mutual interest in promoting the
ability of the health care delivery system to provide quality health care to
persons who receive services under the TennCare Partners Program and, by
entering into this Agreement, set out their mutual endeavor to make quality
health care services available to such persons in a manner consistent with the
standard of care required by law and with the medical needs of such persons; and
WHEREAS, Green Spring and TMHC recognize the necessity for making
certain amendments to the Agreement so as to make such Agreement applicable, as
amended, to Mental Health Services rendered by TMHC under the TennCare Partners
Program; and
WHEREAS, TMHC manages Mental Health Cooperative, a not-for-profit
Tennessee corporation ("MHC") and Case Management, Inc., a not-for-profit
Tennessee corporation, ("CMI") who are qualified, licensed and duly certified to
provide Mental Health Services in Tennessee and each has authorized TMHC to
enter into the Agreement and this Amendment on their behalf and reference to
TMHC in the Agreement and Amendment shall mean MHC and CMI with respect to the
provision of Mental Health Services, licensing requirements and professional
liability insurance requirements; and
WHEREAS, Green Spring and TMHC desire to continue the Agreement without
change except for the additional mutual obligations and responsibilities set
forth in this Amendment.
1.
<PAGE> 2
NOW, THEREFORE, in consideration of the premises and the mutual promises
and covenants herein contained, it is AGREED:
1. DEFINITIONS - Except as otherwise stated herein, for purposes of this
Amendment the following definitions apply:
1.1 "AMENDMENT" means this written TennCare Partners Program Amendment
which includes the Exhibits concerning grievances and quality monitoring and all
modifications and updates to such Exhibits as the same may by subsequently
modified or updated.
1.2 "CONSUMER" means individual(s) either (1) enrolled with Green Spring or
a Managed Care Organization for whom Green Spring manages Mental Health Services
and covered under TennCare in accordance with eligibility requirements as
established by TennCare or (2) individuals(s) not eligible for TennCare but
designated by the State or courts of appropriate jurisdiction as a "Judicial
Referral" and assigned by the State to Green Spring or (3) individual(s) not
eligible for TennCare but designated by the State as a "Priority Participant"
and qualified for participation in the TennCare Partners Program based on
Poverty Guidelines as established by the State and assigned by the State to
Green Spring.
1.3 "GREEN SPRING POLICIES AND PROCEDURES FOR THE TENNCARE PARTNERS
PROGRAM" shall include all Green Spring standards, policies, procedures,
definition, criteria, and guidelines for the TennCare Partners Program as stated
in Green Spring handbooks, manuals, and other documents, including, but not
limited to, the AdvoCare of Tennessee Provider Reference Manual and procedure
guides, as amended from time to time by Green Spring. If there are conflicts
between the requirements stated above in 1.3 and the agreement, the agreement
shall control.
1.4 "JUDICIAL REFERRAL" means an individual who is not enrolled in the
TennCare Partners Program but who has been referred to TDMHMR by the court
system for psychiatric evaluations and/or treatment.
1.5 "MANAGED CARE ORGANIZATION" or MCO means the health care plans
qualified by the State and contracting with the State to serve TennCare
Enrollees.
1.6 "MENTAL HEALTH SERVICES" means those inpatient and outpatient
psychiatric and substance abuse services provided to persons receiving services
under the TennCare Partners Program, including, but not limited to, case
management.
2.
<PAGE> 3
1.7 "PRIORITY PARTICIPANT" means an individual who has been classified
under State guidelines as CRG 1,2 or 3 or TPG 2.
1.8 "REASONABLE NOTICE" means thirty (30) days from the date on which
notice is given, except in cases of suspected fraud or abuse, in which case
notice shall be Reasonable Notice when given.
1.9 "STATE" means the State of Tennessee, including but not limited to the
Tennessee Department of Mental and Mental Retardation ("TDMHMR") as the State
Agency which is responsible for administration of the TennCare Partners Program.
As used in this Amendment in connection with State's right to inspect, audit and
duplicate financial and medical records on persons receiving TMHC Services under
the TennCare Partners Program and TMHC's obligation to prepare and to maintain
such financial and medical records, and to make such records on persons
receiving services under the TennCare Partners Program available to the State,
or its agents, "State" means the State of Tennessee including, but not limited
to, the Tennessee Bureau of Investigation ("TBI") Medicaid Fraud Control Unit
("MFCU"), TDMHMR, Tennessee Department of Commerce and Insurance ("TDCI") and
the TennCare Bureau.
1.10 "TENNCARE PARTNERS PROGRAM" means the health benefit program
established by the Tennessee Department of Mental Health and Mental Retardation
under which Green Spring, among others, arranges for Mental Health Services to
benefit persons defined by the State to receive services under the TennCare
Partners Program.
1.11 "TENNCARE" ("TENNCARE PROGRAM") means that program established by the
State of Tennessee, consistent with waivers granted by the Health Care Financing
Administration within the United States Department of Health and Human Services,
whereby the State of Tennessee has been granted the authority to pay a monthly
prepaid capitated payment amount to MCOs rendering or arranging necessary
medical services to persons who are or who would have been Medicaid-eligible
under the Medicaid Program as it was administered during Tennessee's fiscal year
1992-93 and non-Medicaid-eligible Tennesseans who are uninsured or who are
unisurable and are enrolled in TennCare.
1.12 "TENNCARE BUREAU" means that Bureau within the Tennessee Department of
Finance and Administration having the administrative authority for operation of
the TennCare Program.
3.
<PAGE> 4
2. RELATIONSHIP BETWEEN GREEN SPRING, TMHC AND STATE
2.1 Green Spring, TMHC, and State are independent legal entities. Nothing
in this Amendment shall be construed or be deemed to create a relationship of
employer and employee or principal and agent, partnership, joint venture or any
relationship other than that of independent parties contracting with each other
solely to carry out the provisions of this Amendment.
2.2 The Parties hereby expressly acknowledge its understanding that this
Amendment constitutes a legally binding agreement. They further acknowledge and
agree that they have not entered in this Amendment based upon representations by
any person other than a part hereto, and that no person, entity, or organization
other than a party hereto, shall be held accountable or liable to the other for
any obligations created under this Amendment. This paragraph shall not create
any additional obligations whatsoever on the part of a party hereto other than
those obligations created under other provisions of the Agreement and this
Amendment.
3. TMHC SERVICES AND RESPONSIBILITIES
3.1 Conflict of Interest - TMHC warrants that no monies have been or will
be paid directly or indirectly to any officer, employee, or delegate or member
of the legislative body of the State of Tennessee or of the United States
Government or any officer or employee of Green Springs as wages, compensation,
or gifts in exchange for acting as officer, agent, employee, contemplated or
performed relative to this Amendment.
This Amendment may be terminated, immediately and effective upon the
giving of notice thereof, by Green Spring if it is determined that the TMHC, its
agents, employees, subcontractors or consultants offered or gave gratuities of
any kind to any official, employee or delegate or member of the legislative body
of the State of Tennessee or of the United States Government or any officer or
employee of Green Spring. TMHC represents that no member of, employee of, or
delegate of Congress, the U.S. General Accounting Office, U.S. Department of
Health and Human Services, U.S. Health Care Financing Administration, any other
Federal agency, or Green Spring has benefited or will benefit financially or
materially from this Amendment.
3.2 TMHC agrees that Green Spring and the State shall have the right to
monitor and evaluate the quality of services delivered under this Amendment,
whether announced or unannounced, and initiate corrective
4.
<PAGE> 5
action to improve quality of care in accordance with prevailing standards and/or
standards established by TDMHMR. TMHC shall promptly comply with corrective
action plans as set forth by Green Springs and/or the State shall promptly
submit all required reports and clinical information. Said monitoring and
evaluation includes, but is not limited to, internal and external quality
assurance/quality improvement review, utilization review, peer review and
grievance procedures established by Green Spring and/or TDMHMR. TMHC agrees to
adhere to the Quality of Care Monitors included in Exhibit D ("Standards for BHO
Quality Monitoring Programs").
3.3 After Reasonable Notice except under special circumstances as
determined in the sole discretion of the State, TMHC shall permit Green Spring
and the State, or their agents to conduct on-site inspections of TMHC office(s).
3.4 TMHC, MHC, and CMI shall secure and maintain such liability, workers
compensation and malpractice and/or professional liability insurance coverage as
shall reasonable determined to be necessary to protect Consumers and Green
Spring. TMHC shall provide written verification of such coverage to Green
Springs upon request and without charge.
3.5 TMHC shall abide by all state and federal laws, regulations and
guidelines applicable to TennCare and the TennCare Partners Program. It is
further agreed that Green Spring and TMHC will renegotiate this Amendment if
revisions in applicable federal and/or state laws or regulations make changes in
this Amendment necessary.
3.6 TMHC shall not refuse to provide medically necessary covered services
to a person receiving services under the TennCare Partners Program for
non-medical reasons, because of (1) the fact that the patient is a Consumer, or
(2) failure to pay applicable deductibles, coinsurance and/or special fees, or
(3) the fact that Green Spring and a TennCare MCO dispute financial
responsibility for the service. In the case of such a dispute between Green
Spring and a TennCare MCO, Green Spring agrees to abide by State's requirements
for the resolution of such disputes. TMHC shall not be required to accept or
continue treatment of a Consumer with whom TMHC, in good faith, determines, it
cannot establish and/or maintain a professional relationship.
3.7 TMHC shall involve the Consumer in TMHC's treatment planning processes,
shall offer the Consumer reasonable opportunity to participate in establishing
treatment plans, and shall document Consumer's
5.
<PAGE> 6
involvement and participation by obtaining Consumer's signature on such plans.
3.8 For Consumers who refuse referral to Case Management of refuse to
participate in treatment planning, TMHC shall obtain a written statement signed
by the Consumer documenting such refusal. TMHC shall mail a copy of said
statement of refusal to Green Spring in a timely manner and shall maintain the
original of said statement in its internal records.
3.9 TMHC shall implement an internal policy and procedure which requires
that, when a Consumer is given a prescription for medication, the prescribing
physician shall obtain any authorizations required by Green Spring's designated
Pharmacy Benefit Manager.
3.10 TMHC shall coordinate physical and mental health care including, but
not limited to, (1) means for two-way referral, which assures immediate access
for emergency care and a provision of urgent and routine care according to
TennCare guidelines, and (2) means for the transfer of information (to include
items before and after the visit), and (3) maintenance of confidentiality.
3.11 When referring a Consumer to another level of care, TMHC shall make
the referral to a properly credentialed provider in Green Spring's AdvoCare
network. When TMHC cannot locate an appropriate provider, TMHC shall contact a
Green Spring Care Manager or such other agency as Green Spring may from time to
time designate for such purpose.
3.12 TMHC agrees that all laboratory testing sites providing services under
this Amendment shall have either a Clinical Laboratory Improvement Act ("CLIA")
certificate of waiver or a certificate of registration along with CLIA
identification number. TMHC further agrees that those laboratories with
certificates of waiver will provide only the types of tests permitted under the
terms of their waiver.
3.13 TMHC shall implement an internal grievance policy and procedure which,
at a minimum, (1) includes the elements described in more detail in Exhibit C,
and (2) addresses both formal and informal grievances. TMHC agrees to make
TDMHMR-approved grievance forms available to all Consumers at any sites where
Consumers receive such services.
3.14 TMHC shall respond in a timely manner to provider satisfaction surveys
administered in connection with the TennCare Partners Program.
6.
<PAGE> 7
3.15 At all times during the term of this Amendment, TMHC shall indemnify
and hold TDMHMR, the TennCare Bureau, and TDCI harmless from all claims, losses,
or suits relating to activities undertaken pursuant to this Amendment.
3.16 TMHC shall provide Green Spring prompt and timely reporting of TDMHMR-
directed data collection and outcomes reporting.
3.17 At all times during the term of this Amendment, TMHC shall hold Green
Springs harmless for its proportionate share of any liquidated damages Green
Springs accrues from TDMHMR or the State as the direct result of TMHC's failure
to perform in accordance with the terms of the Agreement and this Amendment.
3.18 In consideration of the rates established in Exhibit B to the
Agreement, TMHC agrees to provide the functions and/or services delineated in
Exhibit E to this Amendment (1) during the term of the Agreement and this
Amendment and (2) in such amount as agreed to in Exhibit B. TMHC warrants (1)
that the functions and/or services delineated in Exhibit E are within the scope
of TMHC's, MHC's and CMI's professional/technical practice and (2) that MHC and
CMI hold a currently valid license to provide the functions and/or services
delineated in Exhibit E, if such license is required under State or federal law
or regulation.
4. COMPENSATION TMHC will be compensated according to the terms set forth in
Exhibit B of the Agreement, which is not superceded by this amendment and the
terms of which remain in effect.
4.1 TMHC shall file claims for payment with Green Spring for all Mental
Health Services rendered to Consumers.
4.2 TMHC shall submit all such claims within one hundred twenty (120) days
of the date of service, or, for inpatient services, within one hundred twenty
(120) days from the date of discharge; provided, however, in the case of
retroactive TennCare eligibility determinations, claims, must be submitted
within the later of one hundred (120) days from the date of service or
discharge, as applicable, or sixty (60) days from the date of final eligibility
determination by TennCare. Neither Green Spring nor the consumer will be
obligated to pay such claims filed after expiration of the applicable period,
and such claims shall not be billed to the Consumer. Green Spring will process
in the normal course of its business all claims submitted by TMHC.
7.
<PAGE> 8
4.3 Green Spring shall make payments to TMHC for Mental Health Services
rendered to Consumers pursuant to the provisions set forth in this Amendment,
with at least 95% of clean claims adjudicated as defined by the State within 30
days of receipt.
4.4 TMHC agrees that the only amounts for which Consumers (including
Consumer's parents, guardian or any other legally responsible person) may be
liable and be billed by TMHC shall be (i) mental health services not covered by
the TennCare Partners Program and (ii) deductible and coinsurance amounts (a)
related to Mental Health Services rendered by TMHC to Consumers and (b) as
determined by Green Spring at the time of claims payment.
4.5 TMHC agrees not to implement any policy that would circumvent the
obligations of the Consumer to pay any non-covered service, deductible, or
coinsurance amounts as provided in the TennCare Partners Program.
4.6 TMHC shall bill Green Spring on forms, at times and in a manner
acceptable to Green Spring. Green Spring shall give Reasonable Notice of any
required change(s) in claims submission procedures. TMHC shall furnish, on
request and without charge, all information reasonably required by Green Spring
and the State to verify and substantiate the provision of Mental Health Services
to Consumers and the charges for such services.
4.7 TMHC shall be required to accept TennCare Partners Program
reimbursement amounts set forth in Exhibit B of the Agreement only for Mental
Health Services rendered to Consumers, and TMHC shall not be required to accept
TennCare Partners Program reimbursement amounts for services provided to persons
who are covered under another health plan operated or administered by Green
Spring.
4.8 TMHC shall not receive more than one hundred five percent (105%) of the
rates established in Exhibit B of the Agreement as the final payment amount,
such that under no circumstances shall TMHC receive from Green Spring as an
incentive or bonus more than five percent (5%) of the rates established in the
Agreement as final payment. TMHC shall not be liable for a portion of any excess
benefit costs associated with the provision of services pursuant to this
Amendment. TMHC shall not be required to absorb any amount of Green Spring's
excess administrative and/or management fees.
4.9 The TennCare Partners Program shall be the payor of last resort for all
covered Mental Health Services. TMHC and Green Spring agree to abide by TDMHMR
rules relating to Third Party Resources.
8.
<PAGE> 9
5. RECORDS, ACCESS, INSPECTION AND CONFIDENTIALITY
5.1 TMHC shall prepare and maintain all required financial and medical
records on Consumers. Such records shall include, but not be limited to,
Pre-Admission Authorization documentation and medical records pertaining to
services, dates and charges, servicing providers, costs, utilization, records
necessary for the evaluation of the quality, appropriateness and timeliness of
services, and any other records needed to meet the requirements of governmental
regulatory agencies or as may be requested by Green Spring and the State.
Such records shall be maintained on site in accordance with prudent
record keeping procedures and as required by law, but in no case for less than
five years after the termination of the Program Participation Agreement. Records
shall be retained further, if the records are under review or audit, until the
review or audit is complete. If the Program Participation Agreement renews
automatically from year to year, TMHC agrees to obtain prior approval from
TDMHMR before disposing of records.
5.2 TMHC shall allow Consumers and their representatives access to
Consumer's medical records, to the extent and in the manner provided by
Tennessee Code Annotated Sections 33-3-104(10), 63-2-101(a) & (b) and
63-2-102, 42, CFR 2, and, subject to reasonable charges, shall provide copies
thereof upon request.
5.3 TMHC agrees to allow on-site inspection, audit and duplication at no
charge, of any and all data, billings and other records maintained by TMHC or
under TMHC's direction on Consumers by agents of Green Spring and the State.
Inspection, audit and duplication shall occur during regular working hours and
after Reasonable Notice, except under special circumstances as determined in the
sole discretion of the State. TMHC shall cooperate in such reviews upon request.
5.4 TMHC shall make available to the State and Green Spring, or its
designated representatives, in a form reasonably acceptable for usage by the
TennCare Bureau or TDMHMR and their designated representatives, any or all
records, whether medical or financial, related to TMHC activities undertaken
pursuant to this Amendment.
5.5 The State (including but not limited to TDMHMR, TDCI, the TennCare
Bureau), U.S. Department of Health and Human Services, Office of Inspector
General, and Comptroller shall have the right to evaluate through inspection,
whether announced or unannounced, or other means any records pertinent to this
Agreement including quality,
9.
<PAGE> 10
appropriateness and timeliness of services and such evaluation, and when
performed, shall be performed with the cooperation of TMHC. Upon request, TMHC
shall assist in such reviews including the provision of complete copies of
medical records.
5.6 Notwithstanding termination of this Amendment, Green Spring and the
State shall continue to have access to the records to the extent permitted by
law and as necessary to fulfill the terms of this Amendment.
6. GENERAL PROVISIONS
6.1 The Provider Participation Agreement, the Exhibit A - Operating
Policies and Procedures, the Exhibit B - Fee Schedule, and this TennCare
Partners Program Amendment and Exhibits, as amended from time to time, contain
the entire agreement between the parties relating to the rights granted and the
obligations assumed by the parties for Consumers. Any prior agreements,
promises, negotiations or representations, either oral or written, relating to
the subject matter of this Amendment not expressly set forth in this Amendment
are of no force or effect.
6.2 This Amendment sets out additional agreements made between the parties
pertaining to and only to the provision of and payment for Mental Health
Services provided to Consumers.
6.3 In the event of conflict between the terms of the Agreement, the
Exhibit A Operating Policies and Procedures, and this TennCare Partners Program
Amendment, the terms of this TennCare Partners Program Amendment shall control.
This Amendment shall change or modify the Agreement and the Exhibit A Operating
Policies and Procedures with respect to the provision of Mental Health Services
to Consumers. In the event of any conflict with Exhibit B, the terms of Exhibit
B shall control.
6.4 TMHC shall not subcontract this Amendment or any portion of this
Amendment without prior written consent of Green Spring, and any attempt there
at shall be void. Such consent by Green Spring shall not be unreasonably
withheld provided, however, any subcontract must conform to all applicable
provisions of the TennCare Partners Program as then administered by the State,
including, but not limited to, prior approval of such subcontract by TDMHMR.
6.5 Amendment - The Provider Participation Agreement and this Amendment or
any part, article, section, or exhibit may be amended at any time during the
term of the Amendment by written agreement of the parties hereto. Such further
amendment shall only be valid when reduced
10.
<PAGE> 11
to writing, duly signed and attached to the original of the Agreement or
Amendment.
6.6 This Amendment incorporates by reference all applicable federal and
State laws, regulations, and provider contract requirements, and revisions of
such laws, regulations, or requirements shall automatically be incorporated into
this Amendment as they become effective. In the event changes in the Amendment
as a result of revisions and applicable federal or State law materially affect
the position of either party, Green Spring and TMHC agree to negotiate such
further amendments as may be necessary to correct any inequities.
6.7 In the event Green Spring ceases to manage or arrange for Mental Health
services to Consumers, the provisions of this TennCare Partners Program
Agreement as amended herein shall terminate immediately. Green Spring agrees to
provide prompt notice of the termination of this Agreement to TMHC.
6.8 Arbitration - If any dispute arises between the parties involving a
contention by one party that the other has failed to perform its obligations and
responsibilities under this Amendment and Agreement, then the party making such
contention shall promptly give written notice to the other. Such notice shall
set forth in detail the basis for the party's contention, and shall be sent by
Certified Mail - Return Receipt Requested. The other party shall within thirty
(30) calendar days after receipt of the notice provide a written response
seeking to satisfy the party that gave notice regarding the matter as to which
notice was given. Following such response, or the failure of the second party to
respond to the complaint of the first party within thirty (30) days, if the
party that gave notice of dissatisfaction remains dissatisfied, then that party
shall so notify the other party and the matter shall be promptly submitted to
inexpensive and binding arbitration in accordance with the Tennessee Uniform
Arbitration Act at Tennessee Code Annotated Section 29-5-301 et seq., with the
costs of establishing any arbitration procedures being borne by Green Spring.
TDMHMR shall have no involvement in said arbitration except (1) to enforce its
contract with Green Spring, (2) to approve the arbitration procedure proposed by
Green Spring, and (3) to voluntarily intervene if TDMHMR deems intervention to
be in the best interest of the system, provided, however, TDMHMR shall not be
bound by said arbitration. If at any time TDMHMR decides a particular dispute
should be in a court of competent jurisdiction, TDMHMR shall notify the parties
to the dispute of its decision to refer the dispute to a court of competent
jurisdiction and said arbitration process shall cease and dispute shall be heard
in said court. The only exception to the arbitration process shall be resolution
of the cost for emergency medical services and providers of services under
Tennessee
11.
<PAGE> 12
Code Annotated Section 33-2-601. If a dispute between the parties involving a
claim submitted by TMHC is not resolved prior to the entry of a final decision
by the arbitrator(s), then the prevailing party at the arbitration shall be
entitled to award of reasonable attorney's fees and expenses from the
non-prevailing party. Reasonable attorney's fees means the number of hours
reasonably expended on the dispute multiplied by a reasonable hourly rate, and
shall not exceed ten percent (10%) of the total monetary amount in dispute or
$500.00 whichever amount is greater. This arbitration procedure is subject to
the approval of TDMHMR.
7. NEW CASE MANAGEMENT. Green Spring and AdvoCare represent and warrant that
persons who require Mental Health Services including case management services
who were not receiving case management services upon the effective date of the
TennCare Partners Program shall be entitled to freely choose TMHC to provide
Mental Health Services that fall within the MHC and CMI scope of services listed
in Exhibit B in the areas of Nashville/Davidson County and Memphis/Shelby County
subject to the terms and conditions stated in Exhibit B.
8. TERM. Notwithstanding anything in the Agreement to the contrary, the term of
the Agreement shall be twelve (12) months commencing with the effective date of
the TennCare Partners Program and may not be terminated early without cause,
except for those situations addressed in sections 3.1 and 6.7 of this amendment.
[Signatures to follow]
12.
<PAGE> 13
GREEN SPRING HEALTH SERVICES, INC.
/s/ Joyce N. Fitch
- -----------------------------------------
Joyce N. Fitch
Title: Vice President and General Counsel
Date: February 14, 1996
TENNESSEE MENTAL HEALTH COOPERATIVE, INC.
By: /s/ Pam Womack
-----------------------------
Print Name: Pam Womack
Print Title: President
Date: February 13, 1996
13.
<PAGE> 14
[EXHIBITS EXCLUDED]
<PAGE> 1
Exhibit 10.24
SUBSCRIPTION AGREEMENT
THIS SUBSCRIPTION AGREEMENT (this "Agreement") is entered into as of
June 8, 1998, by and between, PMR CORPORATION, a Delaware corporation ("PMR"),
and STADTLANDER DRUG DISTRIBUTION COMPANY, INC., a Delaware corporation
("Stadtlander").
WHEREAS, PMR and Stadtlander propose to enter into an Operating
Agreement in connection with the issuance and acquisition of a membership
interest in Stadt Solutions, LLC (the "Company"), substantially in the form
attached hereto as Exhibit A (the "Operating Agreement");
WHEREAS, in connection with the formation of the Company, the parties
hereto propose to enter into a Transition and Services Agreement with the
Company in substantially the form attached hereto as Exhibit B (the "Transition
and Services Agreement"); and
WHEREAS, in order to induce each other to enter into the Operating
Agreement and the Transition and Services Agreement (collectively, the "Related
Agreements"), the parties desire to make certain representations, warranties and
covenants as set forth in this Agreement.
NOW, THEREFORE, in consideration of mutual covenants and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereby agree as follows:
ARTICLE 1
DEFINITIONS; ORGANIZATION; CLOSING DATE
1.1 DEFINITIONS. Capitalized terms used herein and not otherwise defined
herein shall have the meanings ascribed to them in the Operating Agreement.
1.2 CLOSINGS. At the First Closing (the "First Closing") and subject to the
terms and conditions of this Agreement, the Company, PMR and each of Stadtlander
shall perform the covenants set forth in Section 4.1(a). At the Second Closing,
(the "Second Closing") each of PMR and Stadtlander shall perform the covenants
set forth in Section 4.1(b). Notwithstanding anything to the contrary herein, if
any party determines that it is necessary to postpone the First Closing for
purposes of complying with applicable regulatory clearance or waiting period(s),
then the First Closing shall be combined with the Second Closing, subject to the
applicable closing conditions herein.
1.3 CLOSING DATES. Subject to Section 1.2, the First Closing shall take
place at the offices of Cooley Godward LLP, whose address is 4365 Executive
Drive, Suite 1100, San Diego, California 92121. The Closing shall be held at
1:00 p.m., local time, on July 1, 1998, or at such other time and place upon
which PMR and Stadtlander shall agree (the date of the First Closing is
hereinafter referred to as the "First Closing Date").
(a) Consummation of the Second Closing will take place at the
offices of Cooley Godward LLP, 4365 Executive Drive, Suite 1100, San Diego,
California 92121, at such
1.
<PAGE> 2
time and date which is as soon as practicable after the satisfaction of the
conditions set forth in Section 5.2 and Section 6.2 (the "Second Closing Date").
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF PMR
PMR makes the following representations and warranties, each of which
is true and correct on the date hereof, shall remain true and correct to and
including each Closing Date, and shall survive each Closing as provided herein:
2.1 ORGANIZATION AND STANDING; CERTIFICATE OF INCORPORATION AND BYLAWS. PMR
is a corporation duly organized and validly existing under, and by virtue of,
the laws of the State of Delaware and is in good standing under such laws. PMR
has all requisite corporate power and authority to own, lease and operate its
properties and assets, and to carry on its business as presently conducted. PMR
has furnished Stadtlander with copies of its Certificate of Incorporation and
Bylaws, each as amended. Said copies are true, correct and complete and shall
contain all amendments through the Closing Date.
2.2 CORPORATE POWER. PMR has and will have at the First Closing Date all
requisite legal and corporate power and authority to execute and deliver this
Agreement and the Related Agreements, and to carry out and perform its
obligations under the terms of this Agreement and the Related Agreements.
2.3 AUTHORIZATION. All corporate action on the part of PMR, its directors
and stockholders necessary for the authorization, execution, delivery and
performance of this Agreement and the Related Agreements by PMR, and the
performance of all of PMR's obligations hereunder and thereunder has been taken
or will be taken prior to the First Closing. This Agreement and the Related
Agreements, when executed and delivered by PMR, shall constitute valid and
binding obligations of PMR, enforceable in accordance with their terms, subject
to laws of general application relating to bankruptcy, insolvency and the relief
of debtors and rules of law governing specific performance, injunctive relief or
other equitable remedies.
2.4 FINANCIAL. The audited consolidated balance sheet and consolidated
statements of stockholders' equity of PMR as of April 30, 1997 and the audited
consolidated statements of operations and statements of cash flows of PMR for
the fiscal year ended April 30, 1997, each certified by Ernst & Young LLP,
independent certified accountants, whose report thereon is included therein, and
the unaudited condensed consolidated balance sheet of PMR as of January 31, 1998
and the unaudited condensed consolidated statements of income and cash flows of
PMR for the fiscal quarter ended January 31, 1998 (as filed with the SEC)
present fairly the financial position of PMR as of the date of said balance
sheets and the results of operations of PMR for the periods covered by said
statements of operations, in accordance with generally accepted accounting
principles consistently applied, except as otherwise disclosed therein and
except, in the case of unaudited statements, for normally recurring year-end
adjustments.
2.
<PAGE> 3
2.5 BUSINESS. PMR is in the business of developing and managing programs
and services for individuals with serious mental illnesses in the United States,
and as of the date hereof, operates programs in 13 states.
2.6 TRANSFERRED BUSINESS. Subject to the consent of third parties as
applicable, PMR has and shall have at the Second Closing, the right to assign
and transfer all of its rights in and to its clinical information initiative to
the Company.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF STADTLANDER
Stadtlander makes the following representations and warranties, each of
which is true and correct on the date hereof, shall remain true and correct to
and including each Closing Date, and shall survive the Closing as provided
herein:
3.1 ORGANIZATION AND STANDING; CERTIFICATE OF INCORPORATION AND BYLAWS.
Stadtlander is a corporation duly organized and validly existing under, and by
virtue of, the laws of the State of Delaware and is in good standing under such
laws. Stadtlander has all requisite corporate power and authority to own, lease
and operate its properties and assets, and to carry on its business as presently
conducted. Stadtlander has furnished PMR with copies of its Certificate of
Incorporation and Bylaws, each as amended. Said copies are true, correct and
complete and shall contain all amendments through the Closing Date.
3.2 CORPORATE POWER. Stadtlander has and will have at the First Closing
Date all requisite legal and corporate power and authority to execute and
deliver this Agreement and the Related Agreements, and to carry out and perform
its obligations under the terms of this Agreement and the Related Agreements.
3.3 AUTHORIZATION. All corporate action on the part of Stadtlander, its
directors and stockholders necessary for the authorization, execution, delivery
and performance of this Agreement and the Related Agreements by Stadtlander, and
the performance of all of Stadtlander's obligations hereunder and thereunder has
been taken or will be taken prior to the First Closing. This Agreement and the
Related Agreements, when executed and delivered by Stadtlander, shall constitute
valid and binding obligations of Stadtlander, enforceable in accordance with
their terms, subject to laws of general application relating to bankruptcy,
insolvency and the relief of debtors and rules of law governing specific
performance, injunctive relief or other equitable remedies.
3.4 TRANSFERRED BUSINESS. Subject to any applicable regulatory approvals
and individual patient consents, Stadtlander has and shall have at the Second
Closing, the right to assign all of its rights in and to its mental health
business (as described in Section 4.1(b) below), which consists of the provision
of Clozaril and related products to a number of patients that is approximately
6,000.
3.5 CLOZARIL BASE OVERHEAD CALCULATION. The calculation of the Clozaril
Base Overhead set forth on Schedule B to the Operating Agreement is in all
material respects an accurate representation of the current operating and
overhead expenses for providing the
3.
<PAGE> 4
pharmaceutical fulfillment and case management services to the customers of the
business to be transferred as identified in Section 3.4 above and Section 4.1(b)
below. Stadtlander is not currently aware of any factors that will likely result
in a material increase in the Clozaril Base Overhead assuming the current volume
of its Clozaril business.
ARTICLE 4
COVENANTS
4.1 CLOSING; DELIVERY.
(a) At the First Closing, each of PMR and Stadtlander shall
execute and deliver the Operating Agreement and the Transition and Services
Agreement, and each shall deliver its Initial Capital Contribution to the
Company under the Operating Agreement.
(b) At the Second Closing, each of PMR and Stadtlander shall
deliver its Second Capital Contribution to the Company under the Operating
Agreement. In addition, Company shall have the right to all of the information
for Stadtlander's mental health business (which serves patients with a primary
designation of "diagnosed with a mental illness," but does not include
Stadtlander's correctional pharmacy division) on Stadtlander's information
system and databases. Following the Second Closing, the parties will act in good
faith to effect the transfer of information to Company and facilitate the use
thereof.
4.2 NONCOMPETITION. PMR and Stadtlander each acknowledge and agree that
upon the formation of the Company, they shall be subject to the noncompetition
provisions as set forth in Article 12 of the Operating Agreement.
4.3 ANNOUNCEMENTS. Announcements concerning the transactions provided for
in this Agreement and the Related Agreements by either PMR or Stadtlander shall
be subject to the approval of the other in all essential respects, except that
approval shall not be required as to any statements and other information which
may be submitted to the Securities and Exchange Commission or required to be
made pursuant to any rule or regulation of the Securities and Exchange
Commission or any other securities regulatory board, or otherwise required by
law.
4.4 THIRD PARTY CONSENTS. Each party shall use its best efforts to obtain
all applicable third party consents (including regulatory consents or waivers,
as applicable) necessary to consummate the Second Closing.
ARTICLE 5
CONDITIONS TO CLOSING OF PMR
5.1 CONDITIONS TO FIRST CLOSING. The obligation of PMR to enter into the
Related Agreements at the First Closing is, at the option of PMR, subject to the
fulfillment of the following conditions:
4.
<PAGE> 5
(a) REPRESENTATIONS AND WARRANTIES CORRECT. The representations and
warranties made by Stadtlander in Article 3 hereof shall be true and correct
when made, and shall be true and correct as of the Closing in all material
respects.
(b) COVENANTS. The Company and Stadtlander shall have performed or
complied with in all material respects with all covenants, agreements and
conditions of this Agreement to be performed by them under this Agreement on or
prior to the Closing.
5.2 CONDITIONS TO SECOND CLOSING. The obligation of PMR to make its Second
Contribution under the Operating Agreement is, at the option of PMR, subject to
fulfillment of the following conditions:
(a) The parties shall have received all such governmental or other
third party approvals, consents, authorizations as may be required to
permit the Second Contribution of both PMR and Stadtlander.
(b) If the parties are required to file notifications of the
transaction under the HSR Act, the waiting period required pursuant to the HSR
Act and the regulations promulgated thereunder shall have expired or any
approvals required in connection with the HSR Act and the regulations
promulgated thereunder shall have been obtained.
(c) There shall have been no material change in Stadtlander's mental
health business described in Section 3.4 above.
ARTICLE 6
CONDITIONS TO CLOSING OF STADTLANDER
6.1 CONDITIONS TO FIRST CLOSING. The obligation of Stadtlander to enter
into the Related Agreements at the First Closing is, at the option of
Stadtlander, subject to the fulfillment of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES CORRECT. The representations and
warranties made by PMR in Article 2 hereof shall be true and correct when made,
and shall be true and correct as of the Closing in all material respects.
(b) COVENANTS. The Company and PMR shall have performed or complied
with in all material respects all covenants, agreements and conditions of this
Agreement to be performed by them under this Agreement on or prior to the
Closing.
6.2 CONDITIONS TO SECOND CLOSING. The obligation of Stadtlander to make its
Second Contribution under the Operating Agreement is, at the option of
Stadtlander, subject to fulfillment of the following conditions:
(a) The parties shall have received all such governmental or other
third party approvals, consents, authorizations as may be required to permit the
Second Capital Contribution of both Stadtlander and PMR.
5.
<PAGE> 6
(b) If the parties are required to file notifications of the
transaction under the HSR Act, the waiting period required pursuant to the HSR
Act and the regulations promulgated thereunder shall have expired or any
approvals required in connection with the HSR Act and the regulations
promulgated thereunder shall have been obtained.
(c) There shall have been no material change in PMR's clinical
information initiative described in Section 2.6.
ARTICLE 7
INVESTMENT REPRESENTATIONS
7.1 REPRESENTATIONS. Each of PMR and Stadtlander hereby makes the following
certifications and representations with respect to the acquisition of its
interests in the Company:
(a) It understands that the interests it is acquiring in the Company
(the "Interests") have not been registered under the Securities Act of 1933, as
amended (the "Securities Act"), on the basis that no distribution or public
offering of the Interests is to be effected. It understands that its Interest is
deemed to constitute "restricted securities" under Rule 144 promulgated under
the Securities Act.
(b) It is acquiring its Interest solely for its account for investment
and it has no intention of distributing or selling the Interest or any part
thereof except as may be permitted under the Securities Act and any applicable
state securities laws. Each party also represents that the entire legal and
beneficial interests of the Interest it is acquiring is being acquired for, and
will be held for its account only.
(c) It recognizes that each Interest being acquired by it must be held
indefinitely unless the Interest is subsequently registered under the Securities
Act or an exemption from such registration is available. It recognizes that the
Company has no obligation to register the Interests or to comply with any
exemption from such registration.
(d) It has either (i) a preexisting personal or business relationship
with the Company or any of its members, officers, directors, managers, or
controlling persons, or (ii) the capacity to protect its own interests in
connection with the purchase of the Interests by virtue of its professional
business or financial experience (or the business or financial experience of its
professional advisers who are unaffiliated with and who are not compensated by
the Company or any affiliate or selling agent of the Company, directly or
indirectly).
(e) It is aware that an Interest may not be sold pursuant to Rule 144
adopted under the Securities Act ("Rule 144") unless certain conditions are met
and until it has held the Interest for at least one year. Among the conditions
for use of Rule 144 is the availability of current information to the public
about the issuer of the Interest. It understands that there is no such
information available and that the Company has no plans to make such information
available.
(f) It further agrees not to make any disposition of all or any part
of any Interests being acquired in any event unless and until: (i) the Interest
is transferred pursuant to
6.
<PAGE> 7
Rule 144, and the Company shall have received from it documentation
acceptable to the Company that a sale of the Interest has occurred in accordance
with all of the provisions of Rule 144, as in effect from time to time; or (ii)
there is then in effect a registration statement under the Securities Act
covering such proposed disposition and such disposition is made in accordance
with said registration statement; or (iii) (A) it shall have notified the
Company of the proposed disposition and shall have furnished the Company with a
detailed statement of the circumstances surrounding the proposed disposition,
(B) it shall have complied with all applicable provisions of the Operating
Agreement, (C) it shall have furnished the Company with an opinion of counsel
for the party to the effect that such disposition will not require registration
of such Interest under the Securities Act, and (D) such opinion of counsel for
the party shall have been concurred in by the Company's counsel and the Company
shall have advised the party of such concurrence.
(g) It understands and agrees that all certificates evidencing the
Interest to be issued to it may bear (and if no certificate evidencing the
Interest is issued by the Company, an initial transaction statement, if
required, shall include) a legend substantially in the following form:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS
TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY
TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED."
7.2 NO TRANSFER. The Company shall not be required (i) to transfer on its
books any Interest which shall have been sold or transferred in violation of any
of the provisions set forth in this Agreement or the Operating Agreement or (ii)
to treat as owner of such Interest or to accord the right to vote as such owner
or to make any distributions to any transferee to whom such Interest shall have
been so transferred.
ARTICLE 8
MISCELLANEOUS
8.1 GOVERNING LAW. This Agreement shall be governed in all respects by the
internal laws of the State of California.
8.2 ARBITRATION. The parties agree that they shall submit any disputes
arising under this Agreement to binding arbitration pursuant to Section 14.1 of
the Operation Agreement, which section is incorporated herein by reference.
8.3 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto,
provided, however, that the rights of PMR or Stadtlander to purchase its
interests of the Company shall not be assignable without the consent of the
other parties hereto.
7.
<PAGE> 8
8.4 THIRD PARTY BENEFICIARY. The Company shall be a third party beneficiary
with respect to the representations and warranties of PMR and Stadtlander
hereunder.
8.5 ENTIRE AGREEMENT; AMENDMENT. This Agreement and the Related Agreements,
and other documents delivered pursuant hereto and thereto at each Closing
constitute the full and entire understanding and agreement among the parties
with regard to the subjects hereof and thereof, and no party shall be liable or
bound to any other party in any manner by any warranties, representations or
covenants except as specifically set forth herein or therein. Except as
expressly provided herein, neither this Agreement nor any term hereof may be
amended, waived, discharged or terminated other than by a written instrument
signed by the party against whom enforcement of any such amendment, waiver,
discharge or termination is sought.
8.6 NOTICES, ETC. All notices and other communications required or
permitted hereunder shall be in writing (including telecopy or similar
electronic transmission) and shall be sent by telecopy or other electronic
facsimile transmission or by registered or certified mail, postage prepaid, or
otherwise delivered by hand or by messenger, addressed:
(a) if to PMR, to:
PMR Corporation
501 Washington Street, 5th Floor
San Diego, CA 92103
Attn: President
Tel: (619) 610-4001
Fax: (619) 610-4184
or to such other address as PMR shall have furnished to the Company and
Stadtlander in writing;
(b) if to Stadtlander, to:
Stadtlander Drug Distribution Company, Inc.
600 Penn Center Boulevard
Pittsburgh, PA 15235
Attn: President
Tel: (800) 238-7828
Fax: (412) 825-8686
or to such other address as Stadtlander shall have furnished to PMR and the
Company in writing.
Each such notice or other communication shall for all purposes of this Agreement
be treated as effective or having been given when received if delivered
personally or by facsimile, or, if sent by mail, at the earlier of its receipt
or 72 hours after the same has been deposited in a regularly maintained
receptacle for the deposit of the United States mail, addressed and mailed as
aforesaid.
8.7 DELAYS OR OMISSIONS. Except as expressly provided herein, no delay or
omission to exercise any right, power or remedy accruing hereunder upon any
breach of any party under this Agreement, shall impair any such right, power or
remedy nor shall it be construed to be a
8.
<PAGE> 9
waiver of any such breach or default, or an acquiescence therein, or of or in
any similar breach or default thereafter occurring, nor shall any waiver of any
single breach or default be deemed a waiver of any other breach or default
theretofore or thereafter occurring. Any waiver, permit, consent or approval of
any kind or character on the part of any party hereto of any breach or default
under this Agreement, or any waiver on the part of any party hereto of any
provisions or conditions of this Agreement, must be in writing and shall be
effective only to the extent specifically set forth in such writing. All
remedies, either under this Agreement or by law or otherwise afforded to any
party hereto, shall be cumulative and not alternative.
8.8 EXPENSES. Each party bears its own expenses incurred by it with respect
to this Agreement and the transactions contemplated hereby.
8.9 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.
8.10 SEVERABILITY. In the event that any provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision, provided that no such severability shall be effective if
it materially changes the economic benefit of this Agreement to any party.
8.11 TITLES AND SUBTITLES. The titles and subtitles used in this Agreement
are used for convenience only and are not to be considered in construing or
interpreting this Agreement.
9.
<PAGE> 10
IN WITNESS WHEREOF, the parties have executed this Subscription
Agreement as of the date first above written.
PMR:
PMR CORPORATION
a Delaware corporation
By: /s/ Mark Clein
-------------------------------------
Title: Chief Financial Officer
-------------------------------------
STADTLANDER:
STADTLANDER DRUG DISTRIBUTION COMPANY INC.
a Delaware corporation
By: /s/ Morris Perlis
-------------------------------------
Title: President and Chief Executive Officer
-------------------------------------
10.
<PAGE> 11
[EXHIBITS EXCLUDED]
<PAGE> 1
EXHIBIT 21.1
The following is a list of the subsidiaries of PMR Corporation:
<TABLE>
<CAPTION>
NAME: JURISDICTION OF ORGANIZATION:
- --------------------------------------------------------------------------------
<S> <C>
Business Office Solutions Corporation Delaware
Collaborative Care Corporation Tennessee
Collaborative Care, Inc. California
BHC Acquisition Corp. Delaware
PMR - CD, Inc. California
Psychiatric Management Resources, Inc. California
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 File No. 333-38419) pertaining to the 1997 Equity Incentive Plan,
1995 Warrant Grant, and the 1996 Stock Grants and the Registration Statements
(Forms S-3 File No. 033-97202 and File No. 333-34473) of PMR Corporation of
our report dated June 12, 1998, except for paragraph four of Note 13, as to
which the date is July 24, 1998, with respect to the consolidated financial
statements of PMR Corporation included in its Annual Report (Form 10-K) for the
year ended April 30, 1998, filed with the Securities and Exchange Commission.
ERNST & YOUNG LLP
San Diego, California
July 24, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> APR-30-1998
<CASH> 18,522,859
<SECURITIES> 20,257,045
<RECEIVABLES> 25,737,369
<ALLOWANCES> 9,081,610
<INVENTORY> 0
<CURRENT-ASSETS> 60,763,807
<PP&E> 5,219,489
<DEPRECIATION> 1,727,040
<TOTAL-ASSETS> 70,449,054
<CURRENT-LIABILITIES> 8,943,392
<BONDS> 0
0
0
<COMMON> 69,496
<OTHER-SE> 47,959,554
<TOTAL-LIABILITY-AND-EQUITY> 70,449,054
<SALES> 0
<TOTAL-REVENUES> 67,523,950
<CGS> 0
<TOTAL-COSTS> 48,255,459
<OTHER-EXPENSES> 1,064,873
<LOSS-PROVISION> 5,148,580
<INTEREST-EXPENSE> (1,186,637)
<INCOME-PRETAX> 2,472,378
<INCOME-TAX> 1,014,000
<INCOME-CONTINUING> 1,458,378
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,458,378
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.22
</TABLE>
