In recent months, Hanger Inc., O&P’s largest patient care provider, announced the company would undertake additional accounting reviews to begin adjusting and restating financial records that reach back to 2008. In February, the company released a business update video shortly before the company’s stock was delisted from the New York Stock Exchange.
In the video, Vinit K. Asar, Hanger president and chief executive officer, referred to potential “inappropriate activities” made by former employees regarding company filings with the Securities & Exchange Commission (SEC). These activities were first mentioned on the company’s 8-K filing with the SEC on Feb. 26, 2016. While the investigation is ongoing within the company, the fallout from any financial issues could have implications for the profession of O&P, according to sources interviewed by O&P News.
As the company reported on its Feb. 26, 2016 8-K form, “The preliminary unaudited cumulative amount of the pre-tax income statement effect of these misstatements over that timeframe [of 2011 to 2014] is estimated to be approximately $40.4 million, comprised of an estimated $2.9 million in 2011, an estimated $9.6 million in 2012, an estimated $16.0 million in 2013, an estimated $7.5 million in the first quarter of 2014 and an estimated $4.4 million in the second quarter of 2014.”
For Brian L. Gustin, CP, the company’s apparent financial success in a struggling field has been suspect for some time. Gustin, who is president of Forensic Prosthetic and Orthotic Consulting, began looking more closely at the company’s financial reporting in 2014.
“In looking at their financials as an industry insider and knowing what I know is happening in the industry overall, things just were not adding up to me,” he told O&P News.
Gustin said a few years ago, financial managers were writing articles about the rise of Hanger and the prosperity of O&P as an investment. But, he said, Hanger’s continually rising stock — hitting its highest point at $40 — did not square with utilization data or with the problems affecting O&P providers. When listening to earnings calls and reading Hanger financial reports, he noticed the company would report same-center sales growth without accounting for the annual Medicare fee increases.
“For instance, if they are reporting a 2.3% increase in same-center sales, but the Medicare fee schedule increase was 3% for that year, it was actually a 0.7% loss,” Gustin said. “It was in net terms — not gross terms. The financial people did not understand how the industry worked that way and how the numbers being reported were actually year-over-year losses.”
In an email interview with O&P News, Asar did not detail how the financial misstatements could have happened.
“The audit committee of the company’s board of directors has retained counsel to conduct an investigation of the circumstances surrounding the accounting misstatements that led to the restatement. The investigation remains ongoing,” he wrote to O&P News.
For the time being, the company structure — in terms of management as well as subsidiaries and partners — is not expected to change, Asar said. In addition, he said Hanger does not expect to undertake any acquisitions until the financial filings are back on track. No time frame has been provided so far for the company to complete its financial restatements, according to company filings.
Hanger was delisted from the New York Stock Exchange (NYSE) and began trading on the OTC Pink, operated by OTC Markets Group Inc., on Feb. 29, 2016. As of press time, the company’s stock price had leveled out at about $6. According to Hanger’s Investor Frequently Asked Questions (FAQs), broker-dealers who want to make a market in Hanger’s stock must file an application with the Financial Industry Regulatory Authority and receive a quotation of the shares for trading after the application is approved. The OTC markets do not offer an exchange or allow use of the NYSE’s trading platform, so trading occurs directly between brokers. Hanger trades under the symbol “HNGR” on the OTC Pink.
As the company reported in September 2015, its 2013 credit agreement with Bank of America was modified after it was unable to deliver financial information to the bank. Although the credit agreement had included a revolving credit line with a $200 million limit, the bank reduced the limit to $146.3 million — the exact amount Hanger had already drawn — thereby cutting off Hanger’s credit. The original agreement also included a loan of $225 million. The company reportedly held $59.9 million of cash on hand at the time to take care of operational and capital expenses through 2015.
Gustin said publicly traded companies can raise cash through two avenues: debt structure and equity structure. Because Hanger’s debt has been cut off, it can only acquire cash through equity, or the selling of its stock, he said.
“When the bottom falls out and you fail to report your earnings to the SEC and they delist you, now you lose your ability to raise capital on both the credit and the equity side. Their current cash from operations is not a sustainable business model at the size that the company currently is,” Gustin said.
Gustin said predictions made among O&P professionals include bankruptcy, acquisition by another company or the company is split into pieces that are sold regionally. However, determining the weight of any prediction is difficult until all financial records have been rectified, he said.
“The likelihood of any of these options is no more than conjecture at this point,” Gustin said.
Business as usual
Asar emphasized the accounting problems have not changed Hanger’s approach to patient care or its day-to-day operations.
“The accounting issues underlying the restatements do not directly relate to the company’s business operations,” he said. “Every day, our 5,000-plus employees provide outstanding patient care and customer service, and that is the fundamental strength of our business.”
Gustin said it is difficult to predict what will happen once the company’s financial restatements are complete and accurate. He added investors may be difficult to convince due to the blame for the misstatements being placed solely on unnamed former employees.
In the Investor FAQs section, the Hanger website states the company “intends to become current with its SEC filings as expeditiously as is possible, after which time the company intends to apply for listing on a national stock exchange.”
Gustin said the major obstacle for any company considering any acquisition of Hanger is its $515 million in debt, particularly at its current rate of more than 10%. Hanger reported in its November 2015 consent solicitation that interest on its $200,000,000 aggregate principal amount 71/8% Senior Notes was 9.125% and the rate would increase to 10.625% on May 15, 2016, if the company was not current in its SEC filings.
“What all creditors are concerned about is the creditors getting their money back,” Gustin said.
A major component of the O&P profession that could be affected by Hanger’s future financial decisions is its support of O&P organizations and legislative efforts. Hanger declined to provide figures on its financial contributions to organizations and efforts to further the growth of O&P.
“Hanger does a lot of things behind the scenes that benefit the industry,” Gustin said. “It puts a lot of money, talents and people behind industry efforts.”
Stephen Blatchford, executive chairman of Blatchford Inc. and major shareholder and non-executive company director of Endolite USA, added, “Hanger acts as a stabilizing influence on the O&P field. It provides a consistent good level of service to the patient and generally lobbies to protect the interests of the field as a whole.”
Joel J. Kempfer, CP, FAAOP, president and chief executive officer of Kempfer P&O, said, “Certainly, Hanger has had a huge impact on the field of prosthetics and orthotics, not only as the largest provider and employer in our industry, but historically they have shaped the industry by raising prosthetics and orthotics to the status of a profession post-Civil War.”
In particular, Gustin said Hanger has been a major supporter of various O&P organizations that share similar goals. If Hanger changes its financial priorities, this could encourage consolidation.
“As a small industry, we have far too many organizations putting out disparate messages,” he said. “We have tried to consolidate the organizations for some time, and it has never happened. Maybe this will be a reason to make it happen.”
When asked whether Hanger would continue its financial commitment to organizations, such as the American Orthotic and Prosthetic Association (AOPA) and to legislative efforts, Asar stated: “Hanger remains committed to being a leader in O&P to ensure patients have access to the highest quality care.”
In a statement to O&P News, Thomas Fise, JD, executive director of AOPA, said, “Hanger dates back 150 years and is the largest patient care facility company in orthotics and prosthetics and has been a member of AOPA since it was founded in 1917. Hanger is one of over 800 companies that are members of AOPA. We place a high value on all members, large and small, with each AOPA member company allocated one vote. Together with other member companies, Hanger sustains an active role in various AOPA initiatives.”
Representatives from the American Academy of Orthotists and Prosthetists declined to comment for this article.
As a supplier for Hanger, Blatchford said Endolite depends on the company to sell its products and highly values its relationship with Hanger. Blatchford said he does not expect Hanger’s financial situation to negatively impact suppliers.
“I do not think that their issues are real in the sense that it is about how the financial numbers are reported and not about the underlying operation of the business. Provided their creditors recognize this — which I am sure they do — then there is nothing for suppliers to worry about,” Blatchford said.
Gustin, however, believes the problem is deeper than financial reporting and said that although many people in O&P may see Hanger as an outsider, this is not the case. Rather, Hanger is an umbrella over several small O&P businesses that share much in common with small independent practices.
“Hanger is the canary in a birdcage for the O&P industry. Everybody thinks of Hanger as being a single consolidated company and it is not. It is a loose confederation of independent companies,” he said.
Using the example of McDonald’s, Gustin said a customer can go to any location of this company and receive an identical product. But for a Hanger patient who visits one practice and then another in a different area of the United States for the same problem, the offerings could be different.
“This is a fundamental problem, not only with Hanger, but with the entire industry. This is called fragmentation of care and is a systemic problem within all of O&P specifically and health care generally. [We, as an industry] lack a standardization of processes. When a business does not have standardization of processes, [its] costs are enormous and its outcomes are variable. It is inefficient,” he said.
Hanger’s situation should serve as a warning signal to all O&P professionals, Gustin said. O&P facility owners need to look at their finances and pay attention to profit and loss sheets and balance sheets, making sure to look past the top line and focus on operational decisions that led there, he said. They also should compare their numbers year-over-year and take fee schedule increases into account.
“It begs everybody to take a good strong look in the mirror,” he said.
In the long term, Hanger’s decisions may impact the entire O&P profession. Because Hanger’s financial success has been viewed as an indicator of the profession’s success, the correlation is true, Gustin said.
“It is going to have an impact on everybody’s [O&P] business and the ability to sell those businesses,” Gustin said.
Kathleen DeLawrence, chief operating officer of Ability Prosthetics and Orthotics, said, “Hanger brings a national presence to our field as the largest O&P firm in the United States. With that awareness comes the challenges of managing the impact of their current situation, which I hope will continue to be managed with a focus on their issues and not affect the reputation of O&P for the rest of the providers. It is incumbent on us to make sure that does not happen by continuing to serve our patients without it affecting their care.”
It could also affect new O&P professionals and students considering an O&P career.
“It is my understanding that Hanger is one of the largest providers of residency slots in the country,” Kempfer said. “I also believe that because of their size, they may offer the resident a wider scope of experience than a smaller company may offer. I know Hanger is also supportive of certain prosthetic and orthotic programs, which allow more opportunities for prospective practitioners.”
Gustin added, “To the young person who sees O&P as their career path and thinking that someday they would like to have their own business and a piece of the American dream, this makes it difficult to achieve that.”
DeLawrence said this could provide an opportunity for students.
“If there is a substantial reduction of force to compensate for [Hanger’s] financial issues, I would think many of those folks will retire from the field altogether. This will create significant opportunity for students to fill that gap,” she said. “Let’s face it — the patients are going to need our services and the students we are training are clinically sophisticated, outcomes-focused and trained to work in this challenging health care landscape.”
Wendy Beattie, CPO, FAAOP, program director and clinical education coordinator for Eastern Michigan University’s graduate program in orthotics and prosthetics, said, “As the largest employer and the largest residency provider, it is impossible to understate Hanger’s impact on the profession. Also, with its employee pool and ability to lead by example, Hanger has the opportunity to shape not only how we practice today, but for decades to come.”
She said she does not believe Hanger’s situation will affect the students directly.
“The company continues to be a tremendous help in allowing students to perform clinical rotations at a myriad of their facilities,” Beattie told O&P News.
If Hanger is forced to reduce its size, there may be fewer opportunities for new practitioners, Gustin said.
“If you look at the Medicare utilization trends in key areas, specifically in the area of lower limb prosthetic utilization and lower limb orthotic utilization, the numbers do not look good. The lower limb prosthetic and orthotic utilization is declining while the non-custom orthotic utilization is increasing. Yet O&P provides fewer and fewer non-custom services. So why do we need more people? If Hanger gets smaller as an organization, [then] we are going to have a whole bunch of people looking for work and there is not going to be work available,” he said.
Beattie said regardless of whether Hanger’s residency offerings change, more residency sites are needed for O&P students.
“We need to encourage more sites to consider residencies. As a former residency director, I cannot recommend becoming a residency site highly enough. Renewed enthusiasm for existing employees, continuous learning and the influx of new ideas and energy from the residents, all combine to be a positive force for a facility. The schools need to be cognizant of both the number of residency sites and the number of jobs. Too many graduates have the potential to deplete both residencies and long-term employment for all of our graduates,” she said. – by Amanda Alexander
Disclosures: Beattie, Fise and Gustin report no relevant financial disclosures. Asar reports he is president and chief executive officer of Hanger Inc. Blatchford reports he is executive chairman of Blatchford Inc. and a major shareholder and non-executive company director of Endolite USA. DeLawrence reports she is chief operating officer of Ability Prosthetics and Orthotics. Kempfer reports he is president and chief executive officer of Kempfer P&O.