Option Care Health, Inc. (OPCH) FY 2023 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations is designed to assist the reader in understanding our consolidated financial statements, the changes in certain key items in those financial statements from year-to-year and the primary factors that accounted for those changes as well as how certain accounting principles affect our consolidated financial statements.
Except for the historical information contained herein, the following discussion contains forward-looking statements that are subject to known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from those expressed or implied by such forward-looking statements. We discuss such risks, uncertainties and other factors throughout this Annual Report and specifically under the caption “Forward-Looking Statements” and in Item 1A. “Risk Factors” in this Annual Report. In addition, the following discussion of financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes thereto appearing in Item 8 in this Annual Report.
Business Overview
Option Care Health and its wholly-owned subsidiaries provide infusion therapy and other ancillary healthcare services through a national network of 177 locations around the United States. The Company contracts with managed care organizations, third-party payers, hospitals, physicians, and other referral sources to provide pharmaceuticals and complex compounded solutions to patients for intravenous delivery in the patients’ homes or other non-hospital settings. Our services are provided in coordination with, and under the direction of, the patient’s physician. Our multidisciplinary team of clinicians, including pharmacists, nurses, dietitians and respiratory therapists, work with the physician to develop a plan of care suited to each patient’s specific needs. We provide home infusion services consisting of anti-infectives, nutrition support, therapies for chronic inflammatory disorders and neurological disorders, immunoglobulin therapy, and other therapies for chronic and acute conditions.
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Composition of Results of Operations
The following results of operations include the accounts of Option Care Health and our subsidiaries for the years ended December 31, 2023 and 2022.
Gross Profit
Gross profit represents our net revenue less cost of revenue.
Net Revenue. Infusion and related healthcare services revenue is reported at the estimated net realizable amounts from third-party payers and patients for goods sold and services rendered. When pharmaceuticals are provided to a patient, revenue is recognized upon delivery of the goods. When nursing services are provided, revenue is recognized when the services are rendered.
Due to the nature of the healthcare industry and the reimbursement environment in which the Company operates, certain estimates are required to record revenue and accounts receivable at their net realizable values at the time goods or services are provided. Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available. Specifically, the complexity of many third-party billing arrangements and the uncertainty of reimbursement amounts for certain services from certain payers may result in adjustments to amounts originally recorded.
Cost of Revenue. Cost of revenue consists of the actual cost of pharmaceuticals and other medical supplies dispensed to patients. In addition to product costs, cost of revenue includes warehousing costs, purchasing costs, depreciation expense relating to revenue-generating assets, such as infusion pumps, shipping and handling costs, and wages and related costs for the pharmacists, nurses, and all other employees and contracted workers directly involved in providing service to the patient.
The Company receives volume-based rebates and prompt payment discounts from some of its pharmaceutical and medical supplies vendors. These payments are recorded as a reduction of inventory and are accounted for as a reduction of cost of revenue when the related inventory is sold.
Operating Costs and Expenses
Selling, General and Administrative Expenses. Selling, general and administrative expenses consist principally of salaries for administrative employees that directly and indirectly support the operations, occupancy costs, marketing expenditures, insurance, and professional fees.
Depreciation and Amortization Expense. Depreciation within this caption includes infrastructure items such as intangibles amortization, computer hardware and software, office equipment and leasehold improvements. Depreciation of revenue-generating assets, such as infusion pumps, is included in cost of revenue.
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Other Income (Expense)
Interest Expense, Net. Interest expense consists principally of interest payments on the Company’s outstanding borrowings under the ABL Facility, First Lien Term Loan, Revolver Facility, Senior Notes, amortization of discount and deferred financing fees, and payments associated with the interest rate cap, and interest income earned on cash and cash equivalents. Refer to the “Liquidity and Capital Resources” section below for further discussion of these outstanding borrowings.
Equity in Earnings of Joint Ventures. Equity in earnings of joint ventures consists of our proportionate share of equity earnings or losses from equity investments in two infusion joint ventures with health systems.
Other, Net. On May 3, 2023, the Company entered into a definitive merger agreement (the “Amedisys Merger Agreement”) with Amedisys, Inc. (“Amedisys”), a leading provider of healthcare in home health and hospice settings. On June 26, 2023, the Company entered into an agreement to terminate the Amedisys Merger Agreement (the “Mutual Termination Agreement”). Under the terms of the Mutual Termination Agreement, the Company received a payment of $106.0 million in cash on behalf of Amedisys (the “Termination Fee”). Other income (expense) primarily includes the termination fee, net of merger-related expenses, received on behalf of Amedisys during the year ended December 31, 2023. During the year ended December 31, 2022, other income (expense) primarily includes the gain on the sale of respiratory therapy assets, which closed in December 2022.
Income Tax Benefit Expense. The Company is subject to taxation in the United States and various states. The Company’s income tax expense is reflective of the current federal and state tax rates.
Change in Unrealized Gain (Loss) on Cash Flow Hedge, Net of Income Tax Benefit (Expense). Change in unrealized gain (loss) on cash flow hedge, net of income tax benefit (expense), consists of the gain (loss) associated with the changes in the fair value of hedging instruments related to the interest rate cap, net of income taxes.
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Results of Operations
The following table presents Option Care Health’s consolidated results of operations for the years ended December 31, 2023 and 2022 (in thousands, except for percentages). For a discussion of Option Care Health’s consolidated results of operations for the year ended December 31, 2022 compared to the year ended December 31, 2021, refer to Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2022 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 23, 2023.
| Year Ended December 31, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | ||||||||||||
| Amount | % of Revenue | Amount | % of Revenue | ||||||||||
| NET REVENUE | $ | 4,302,324 | 100.0 | % | $ | 3,944,735 | 100.0 | % | |||||
| COST OF REVENUE | 3,321,101 | 77.2 | % | 3,077,817 | 78.0 | % | |||||||
| GROSS PROFIT | 981,223 | 22.8 | % | 866,918 | 22.0 | % | |||||||
| OPERATING COSTS AND EXPENSES: | |||||||||||||
| Selling, general and administrative expenses | 607,427 | 14.1 | % | 566,122 | 14.4 | % | |||||||
| Depreciation and amortization expense | 59,201 | 1.4 | % | 60,565 | 1.5 | % | |||||||
| Total operating expenses | 666,628 | 15.5 | % | 626,687 | 15.9 | % | |||||||
| OPERATING INCOME | 314,595 | 7.3 | % | 240,231 | 6.1 | % | |||||||
| OTHER INCOME (EXPENSE): | |||||||||||||
| Interest expense, net | (51,248) | (1.2) | % | (53,806) | (1.4) | % | |||||||
| Equity in earnings of joint ventures | 5,530 | 0.1 | % | 5,125 | 0.1 | % | |||||||
| Other, net | 89,865 | 2.1 | % | 14,218 | 0.4 | % | |||||||
| Total other income (expense) | 44,147 | 1.0 | % | (34,463) | (0.9) | % | |||||||
| INCOME BEFORE INCOME TAXES | 358,742 | 8.3 | % | 205,768 | 5.2 | % | |||||||
| INCOME TAX EXPENSE | 91,652 | 2.1 | % | 55,212 | 1.4 | % | |||||||
| NET INCOME | $ | 267,090 | 6.2 | % | $ | 150,556 | 3.8 | % | |||||
| OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX: | |||||||||||||
| Change in unrealized (loss) gain on cash flow hedge, net of income tax benefit (expense) of $2,158 and $(7,259), respectively | (6,181) | (0.1) | % | 21,610 | 0.5 | % | |||||||
| OTHER COMPREHENSIVE (LOSS) INCOME | (6,181) | (0.1) | % | 21,610 | 0.5 | % | |||||||
| NET COMPREHENSIVE INCOME | $ | 260,909 | 6.1 | % | $ | 172,166 | 4.4 | % |
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Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
The following table presents selected consolidated comparative results of operations for the years ended December 31, 2023 and 2022:
Gross Profit
| Year Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | Variance | |||||||||
| (in thousands, except for percentages) | |||||||||||
| Net revenue | $ | 4,302,324 | $ | 3,944,735 | $ | 357,589 | 9.1 | % | |||
| Cost of revenue | 3,321,101 | 3,077,817 | 243,284 | 7.9 | % | ||||||
| Gross profit | $ | 981,223 | $ | 866,918 | $ | 114,305 | 13.2 | % | |||
| Gross profit margin | 22.8% | 22.0% |
The increase in net revenue during the year ended December 31, 2023 was primarily driven by organic growth in the Company’s portfolio of therapies, consisting of acute revenue that had mid-single-digit growth relative to the prior year while chronic revenue grew in the low-double-digits. The increase in net revenue was partially offset by the divestiture of respiratory therapy assets in December 2022 as well as therapies related to the treatment of ALS and pre-term labor. The increase in cost of revenue and gross profit was primarily driven by the growth in revenue, which outpaced the increase in cost of revenue primarily due to our disciplined procurement strategies, certain temporary favorable therapy pricing dynamics that emerged due to the timing in variances in reference prices that affects our costs relative to reimbursement, and efficient utilization of our clinical workforce and infusion suite network.
Operating Expenses
| Year Ended December 31, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | Variance | |||||||||||
| (in thousands, except for percentages) | |||||||||||||
| Selling, general and administrative expenses | $ | 607,427 | $ | 566,122 | $ | 41,305 | 7.3 | % | |||||
| Depreciation and amortization expense | 59,201 | 60,565 | (1,364) | (2.3) | % | ||||||||
| Total operating expenses | $ | 666,628 | $ | 626,687 | $ | 39,941 | 6.4 | % |
The increase in selling, general and administrative expenses during the year ended December 31, 2023 is primarily due to an increase in salaries, benefits, and equity compensation as a result of expansion of team members to adjust to current volumes, however, these expenses have remained relatively consistent as a percentage of revenue at 14.1% and 14.4% for the years ended December 31, 2023 and 2022, respectively, due to the Company’s focus on controlling spending leverage.
Other Income (Expense)
| Year Ended December 31, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | Variance | |||||||||||
| (in thousands, except for percentages) | |||||||||||||
| Interest expense, net | $ | (51,248) | $ | (53,806) | $ | 2,558 | (4.8) | % | |||||
| Equity in earnings of joint ventures | 5,530 | 5,125 | 405 | 7.9 | % | ||||||||
| Other, net | 89,865 | 14,218 | 75,647 | 532.1 | % | ||||||||
| Total other income (expense) | $ | 44,147 | $ | (34,463) | $ | 78,610 | (228.1) | % |
The decrease in interest expense, net during the year ended December 31, 2023 was primarily attributable to an increase in interest income generated from our cash and cash equivalents, partially offset by increases in the First Lien Term Loan’s variable interest rate compared to the year ended December 31, 2022.
The increase in other, net during the year ended December 31, 2023 is primarily attributable to the receipt of the Termination Fee, net of merger-related expenses. During the year ended December 31, 2022, the change in other, net is primarily due to a $10.3 million pre-tax gain from the sale of respiratory therapy assets (“Respiratory Therapy Asset Sale”), which closed in December 2022.
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Income Tax Expense
| Year Ended December 31, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | Variance | |||||||||||
| (in thousands, except for percentages) | |||||||||||||
| Income tax expense | $ | 91,652 | $ | 55,212 | $ | 36,440 | 66.0 | % |
The Company recorded income tax expense of $91.7 million and $55.2 million, which represents an effective tax rate of 25.5% and 26.8% for the years ended December 31, 2023 and 2022, respectively. The income tax expense for the year ended December 31, 2023 includes $21.8 million of tax expense related to the Termination Fee received, under the terms of the Mutual Termination Agreement, net of merger-related expenses, and the release of $5.8 million of state valuation allowance in September 2023. The variance in the Company’s effective tax rate of 25.5% and 26.8% for the years ended December 31, 2023 and 2022, respectively, is primarily attributable to the difference in state taxes, various non-deductible expenses, and a change in state valuation allowance. The variance in the Company’s effective tax rate of 25.5% for the year ended December 31, 2023, compared to the federal statutory rate of 21%, is also primarily attributable to state taxes, various non-deductible expenses, and a change in state valuation allowance.
Net Income and Other Comprehensive (Loss) Income
| Year Ended December 31, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | Variance | |||||||||||
| (in thousands, except for percentages) | |||||||||||||
| Net income | $ | 267,090 | $ | 150,556 | $ | 116,534 | 77.4 | % | |||||
| Other comprehensive (loss) income, net of tax: | |||||||||||||
| Change in unrealized (loss) gain on cash flow hedge, net of income tax benefit (expense) | (6,181) | 21,610 | (27,791) | (128.6) | % | ||||||||
| Other comprehensive (loss) income | (6,181) | 21,610 | (27,791) | (128.6) | % | ||||||||
| Net comprehensive income | $ | 260,909 | $ | 172,166 | $ | 88,743 | 51.5 | % |
The change in net income for the year ended December 31, 2023 was attributable to organic growth from additional revenue related to the factors described in the above sections and the Termination Fee received under the terms of the Mutual Termination Agreement, net of merger-related expenses. There was no comparable activity during the year ended December 31, 2022.
For the year ended December 31, 2023, the change in unrealized (loss) gain on cash flow hedge, net of income tax benefit (expense) was related to the change in fair market value of the $300.0 million interest rate cap hedge executed in October 2021.
Net comprehensive income increased to $260.9 million for the year ended December 31, 2023, compared to net comprehensive income of $172.2 million for the year ended December 31, 2022, primarily as a result of the changes in net income discussed above, partially offset by the impact of the change in fair market value of the interest rate cap hedge discussed above.
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Liquidity and Capital Resources
For the years ended December 31, 2023 and 2022, the Company’s primary sources of liquidity were cash on hand of $343.8 million and $294.2 million, respectively. As of December 31, 2023, the Company had $394.7 million of borrowings available under its credit facilities (net of $5.3 million undrawn letters of credit issued and outstanding), described further below. During the years ended December 31, 2023 and 2022, the Company’s positive cash flows from operations have enabled investments in pharmacy, infusion suites, and information technology infrastructure to support growth and create additional capacity in the future, as well as to pursue acquisitions and share repurchases.
The Company’s primary uses of cash include supporting our ongoing business activities, investment in capital expenditures in both facilities and technology, and the pursuit of acquisitions and share repurchases. Ongoing operating cash outflows are associated with procuring and dispensing drugs, personnel and other costs associated with servicing patients, as well as paying cash interest on outstanding debt and cash taxes. Ongoing investing cash flows are primarily associated with capital projects and business acquisitions, the improvement and maintenance of our pharmacy facilities and investment in our information technology systems. Ongoing financing cash flows are primarily associated with the quarterly principal payments on our outstanding debt, along with potential future share repurchases.
Our business strategy includes the deployment of capital to pursue acquisitions that complement our existing operations. We continue to evaluate acquisition opportunities and view acquisitions as a key part of our growth strategy. The Company historically has funded its acquisitions with cash and cash equivalents with the exception of the Merger. The Company may require additional capital in excess of current availability in order to complete future acquisitions. It is impossible to predict the amount of capital that may be required for acquisitions, and there is no assurance that sufficient financing for these activities will be available on acceptable terms.
Short-Term and Long-Term Liquidity Requirements
The Company’s ability to make principal and interest payments on any borrowings under our credit facilities and our ability to fund planned capital expenditures will depend on our ability to generate cash and cash equivalents in the future, which to a certain extent, is subject to general economic, financial, competitive, regulatory and other conditions. Based on our current level of operations and planned capital expenditures, we believe that our existing cash and cash equivalents balances and expected cash flows generated from operations will be sufficient to meet our operating requirements for at least the next 12 months and beyond. We may require additional borrowings under our credit facilities and alternative forms of financings or investments to achieve our longer-term strategic plans.
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Credit Facilities
On December 7, 2023, the Company amended its First Lien Credit Agreement to, among other things, create a Revolver Facility which provides for borrowings up to $400.0 million. The Revolver Facility matures on the date that is the earlier of (i) December 7, 2028 and (ii) the date that is 91 days prior to the stated maturity date applicable to any Term B Loans. Borrowings under the Revolver Facility will bear interest at a rate equal to, at the option of the Company, either (i) the Term Secured Overnight Financing Rate (“SOFR”) applicable thereto plus the Applicable Rate or (ii) the then-applicable Base Rate plus the Applicable Rate, which Applicable Rate shall be, subject to certain caveats thereto, as follows (i) until delivery of financial statements and related Compliance Certificate for the first full fiscal quarter ending after the effective date of the Amendment, (A) for Term SOFR Loans, 1.75%, (B) for Base Rate Loans, 0.75% and (ii) thereafter, the following percentages per annum, based upon the Total Net Leverage Ratio as set forth in the most recent compliance certificate received by the Administrative Agent pursuant to the terms of the Credit Agreement. As of December 31, 2023, the Company had $5.3 million of undrawn letters of credit issued and outstanding, resulting in net borrowing availability under the Revolver Facility of $394.7 million. The table below illustrates the aforementioned interest rate terms:
| Pricing Level | Total Net Leverage Ratio | Applicable Rate for Term SOFR Loans | Applicable Rate for Base Rate Loans | |||
|---|---|---|---|---|---|---|
| I | Greater than or equal to 3.00x | 2.25% | 1.25% | |||
| II | Less than 3.00x, but greater than or equal to 2.25x | 2.00% | 1.00% | |||
| III | Less than 2.25x, but greater than or equal to 1.50x | 1.75% | 0.75% | |||
| IV | Less than 1.50x, but greater than or equal to 1.00x | 1.50% | 0.50% | |||
| V | Less than 1.00x | 1.25% | 0.25% |
Concurrently with the creation of the Revolver Facility, the Company terminated the asset-based-lending revolving credit facility, which provided for borrowings up to $225.0 million with a maturity date of October 27, 2026 (the “ABL Facility”). The ABL Facility bore interest at a rate equal to, at the Company’s election, either (i) a base rate determined in accordance with the ABL Credit Agreement plus an applicable margin, which is equal to between 0.25% and 0.75% based on the historical excess availability as a percentage of the Line Cap (as such term is defined in the ABL Credit Agreement) and (ii) SOFR (with a floor of 0.00% per annum) plus an applicable margin, which is equal to between 1.25% and 1.75% based on the historical excess availability as a percentage of the Line Cap. As of December 31, 2023, the Company’s ABL Facility was terminated. Effective January 13, 2023, the Company entered into an agreement to amend the ABL Facility and increase the amount of borrowing availability by $50.0 million to $225.0 million total borrowing availability. As a result of the amended agreement, SOFR was established as the new reference rate, replacing LIBOR.
Effective June 30, 2023, the Company entered into an agreement, dated as of June 8, 2023, to amend the First Lien Term Loan to replace LIBOR and related definitions and provisions with SOFR as the new reference rate. The principal balance of the First Lien Term Loan is repayable in quarterly installments of $1.5 million plus interest, with a final payment of all remaining outstanding principal due on October 27, 2028. The quarterly principal payments commenced in March 2022. Interest on the First Lien Term Loan is payable monthly on either (i) SOFR (with a floor of 0.50% per annum) plus an applicable margin of 2.75% for Term SOFR Loans (as such term is defined in the First Lien Credit Agreement Amendment); or (ii) a base rate determined in accordance with the new First Lien Credit Agreement Amendment, plus 1.75% for Base Rate Loans (as such term is defined in the First Lien Credit Agreement Amendment).
The Senior Notes bear interest at a rate of 4.375% per annum, which are payable semi-annually in arrears on October 31 and April 30 of each year, and which began on April 30, 2022. The Senior Notes mature on October 31, 2029.
Interest payments over the course of long-term debt obligations total an estimated $359.8 million based on final maturity dates of the Company’s credit facilities. Interest payments are calculated based on current rates as of December 31, 2023. Actual payments are based on changes in SOFR and exclude the interest rate cap derivative instrument.
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Cash Flows
Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
The following table presents selected data from Option Care Health’s consolidated statements of cash flows for the years ended December 31, 2023 and 2022:
| Year Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | Variance | ||||||||
| (in thousands) | ||||||||||
| Net cash provided by operating activities | $ | 371,295 | $ | 267,547 | $ | 103,748 | ||||
| Net cash used in investing activities | (56,506) | (108,052) | 51,546 | |||||||
| Net cash (used in) provided by financing activities | (265,126) | 15,268 | (280,394) | |||||||
| Net increase in cash and cash equivalents | 49,663 | 174,763 | (125,100) | |||||||
| Cash and cash equivalents - beginning of period | 294,186 | 119,423 | 174,763 | |||||||
| Cash and cash equivalents - end of period | $ | 343,849 | $ | 294,186 | $ | 49,663 |
Cash Flows from Operating Activities
The increase in cash provided by operating activities is primarily due to higher net income, the Termination Fee received under the terms of the Mutual Termination Agreement, net of merger-related expenses and taxes, stock-based incentive compensation expense, changes in accrued compensation and employee benefits, timing of collections on accounts receivable, partially offset by cash paid for taxes, changes in inventory, and certain accruals and timing of vendor payments during the year ended December 31, 2023 as compared to the year ended December 31, 2022.
Cash Flows from Investing Activities
The decrease in cash used in investing activities during the year ended December 31, 2023 is primarily due to a decrease in acquisition activity as compared to the year ended December 31, 2022. See Note 3, Business Acquisitions and Divestitures, of the consolidated financial statements for more information.
Cash Flows from Financing Activities
The cash used in financing activities is primarily related to the Company’s repurchase of common stock during the year ended December 31, 2023, whereas the cash provided by financing activities in the year ended December 31, 2022 was primarily related to the proceeds of warrant exercises.
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Critical Accounting Estimates
The Company prepares its consolidated financial statements in accordance with United States generally accepted accounting principles (“GAAP”), which requires the Company to make estimates and assumptions. The Company evaluates its estimates and judgments on an ongoing basis. Estimates and judgments are based on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the period presented. The Company’s actual results may differ from these estimates, and different assumptions or conditions may yield different estimates.
The following discussion is not intended to be a comprehensive list of all the accounting policies, estimates or judgments made in the preparation of our financial statements. A discussion of our significant accounting policies, including further discussion of the accounting policies described below, can be found in Note 2, Summary of Significant Accounting Policies, within the notes to the consolidated financial statements included in Item 8 of this Annual Report.
Revenue Recognition and Accounts Receivable
Net revenue is reported at the net realizable value amount that reflects the consideration the Company expects to receive in exchange for providing services. Revenues are from commercial payers, government payers, and patients for goods and services provided and are based on a gross price based on payer contracts, fee schedules, or other arrangements less any implicit price concessions.
Due to the nature of the healthcare industry and the reimbursement environment in which the Company operates, certain estimates are required to record revenue and accounts receivable at their net realizable values at the time goods or services are provided. Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available.
The Company assesses the expected consideration to be received at the time of patient acceptance based on the verification of the patient’s insurance coverage, historical information with the patient, similar patients, or the payer. Performance obligations are determined based on the nature of the services provided by the Company. The majority of the Company’s performance obligations are to provide infusion services to deliver medicine, nutrients, or fluids directly into the body.
The Company provides a variety of infusion-related therapies to patients, which frequently include multiple deliverables of pharmaceutical drugs and related nursing services. After applying the criteria from Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), the Company concluded that multiple performance obligations exist in its contracts with its customers. Revenue is allocated to each performance obligation based on relative standalone price, determined based on reimbursement rates established in the third-party payer contracts. Pharmaceutical drug revenue is recognized at the time the pharmaceutical drug is delivered to the patient, and nursing revenue is recognized on the date of service.
The Company’s accounts receivable are reported at the net realizable value amount that reflects the consideration the Company expects to receive in exchange for providing services, which is inclusive of adjustments for price concessions. The majority of accounts receivable are due from private insurance carriers and governmental healthcare programs, such as Medicare and Medicaid.
Price concessions may result from patient hardships, patient uncollectible accounts sent to collection agencies, lack of recovery due to not receiving prior authorization, differing interpretations of covered therapies in payer contracts, different pricing methodologies, or various other reasons.
Included in accounts receivable are earned but unbilled gross receivables. Delays ranging from one day up to several weeks between the date of service and billing can occur due to delays in obtaining certain required payer-specific documentation from internal and external sources.
After applying the criteria from ASC 606, an allowance for doubtful accounts is established only as a result of an adverse change in the payers’ ability to pay outstanding billings. As of December 31, 2023 and 2022, the Company had no allowance for doubtful accounts. The Company recorded an allowance for implicit price concessions based on its historical experience of additional revenue being recorded or revenue being written off when amounts received are greater than or less than the originally estimated net realizable value. The detailed assessments included, among other factors, current over/under payments which had not yet been applied to an account, historical contractual adjustments, and historical payments. Contractual allowance estimates are adjusted to actual amounts as cash is received and claims are settled.
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Business Acquisitions
The Company accounts for business acquisitions in accordance with ASC Topic 805, Business Combinations (“ASC 805”), with assets and liabilities being recorded at their acquisition date fair values and goodwill being calculated as the purchase price in excess of the net identifiable assets. The application of ASC 805 requires management to make estimates and assumptions when determining the acquisition date fair values of acquired assets and assumed liabilities. Management’s estimates and assumptions include, but are not limited to, the future cash flows an asset is expected to generate and the weighted-average cost of capital. See Note 3, Business Acquisitions and Divestitures, for further discussion of business acquisitions.
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