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| NHC > SEC Filings for NHC > Form 10-Q on 6-Nov-2008 | All Recent SEC Filings |
6-Nov-2008
Quarterly Report
Overview
National HealthCare Corporation (ANHC@ or the ACompany@) is a leading provider of long-term health care services. We operate or manage, through certain affiliates, 76 long-term health care centers with 9,772 beds in 10 states and provide other services in two additional states. These operations are provided by separately funded and maintained subsidiaries. We provide long-term health care services to patients in a variety of settings including long-term nursing centers, managed care specialty units, sub-acute care units, Alzheimer's care units, hospice programs, homecare programs, assisted living centers and independent living centers. In addition, we provide management and accounting services to owners of long-term health care centers.
Summary of Goals and Areas of Focus
Earnings - To monitor our earnings, we have developed budgets and management reports to monitor labor, census, and the composition of revenues. Inflationary increases in our costs may cause net earnings from patient services to decline.
Development and Growth - During the first quarter of 2007, we placed in service 60 bed additions to existing long-term care facilities located in Garden City and Columbia, South Carolina. In July, 2008 we opened a 60 bed addition to an existing facility located in North Augusta, South Carolina. We broke ground in September, 2008 for construction of a new 120 bed health care center in Bluffton, South Carolina (expected cost $21,657,000), and we expect to break ground in the winter of 2008 on a new assisted living facility in Mauldin, South Carolina (expected cost of $8,000,000).
In January, 2008, we purchased a 109-bed skilled nursing rehabilitation facility from the St. Mary's Health System for $6,437,000 in cash. Holston Health and Rehabilitation Center is located in Knoxville, Tennessee.
Also in January 2008, we purchased for $5,073,000 in cash, two tracts of land located in the state of South Carolina and one tract of land located in the state of Tennessee. The tracts are undeveloped and are held for future development.
Effective February 1, 2008, we were selected by the McKendree Village, Inc. to manage under a five-year contract McKendree Village, a continuing care retirement community located on 42 acres in the Nashville, Tennessee suburb of Hermitage. McKendree Village offers nursing care in the 300-bed McKendree Health Center, assisted living services in the 85-unit McKendree Manor, and independent senior care living in a 234-unit residential tower and in 30 individually designed cottages.
In August 2008, we purchased for $13,250,000 in cash, a 132-bed skilled nursing and rehabilitation facility and a 60-bed assisted living facility located in Charleston, South Carolina.
In 2008, we are continuing to develop an active hospice program in South Carolina independently of our partnership with Caris Healthcare and are also exploring opportunities to expand our home health care services. Also during 2008, we will apply for Certificates of Need for additional beds in our markets and also evaluate the feasibility of expansion into new markets by building private pay health care centers or by the purchase of existing health care centers.
Accrued Risk Reserves - Our accrued professional liability reserves, workers= compensation reserves and health insurance reserves totaled $96,032,000 at September 30, 2008 and are a primary area of management focus. We have set aside restricted cash to fund substantially all of our professional liability and workers= compensation reserves.
As to exposure for professional liability claims, we have developed for our centers performance certification criteria to measure and bring focus to the patient care issues most likely to produce professional liability exposure, including in-house acquired pressure ulcers, significant weight loss and numbers of falls. These programs for certification,
which we regularly modify and improve, have produced measurable improvements in
reducing these incidents. Our experience is that achieving goals in these
patient care areas improves both patient and employee satisfaction.
Furthermore, we are continuing efforts to identify and restructure the
ownership or management of our higher risk operations and locations to eliminate
NHC liability exposure.
Application of Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and cause our reported net income to vary significantly from period to period.
Our critical accounting policies that are both important to the portrayal of our financial condition and results and require our most difficult, subjective or complex judgments are as follows:
Revenue Recognition - Third Party Payors - Approximately 60% (2007), 63% (2006),
and 63% (2005) of our net revenues are derived from Medicare, Medicaid, and
other government programs. Amounts earned under these programs are subject to
review by the Medicare and Medicaid intermediaries. In our opinion, adequate
provision has been made for any adjustments that may result from these reviews.
Any differences between our estimates of settlements and final determinations
are reflected in operations in the year finalized. At September 30, 2008, we
have made provisions of approximately $13,432,000 for other various Medicare and
Medicaid issues for current and prior year cost reports. Consistent with our
revenue recognition policies, we will record revenues associated with the
various issues when the approvals, including the final cost report audits, are
assured. Revenues for such cost report adjustments in the three and nine months
ended September 30, 2008 and 2007 were not significant.
Revenue Recognition - Private Pay - For private pay patients in skilled nursing or assisted living facilities, we bill room and board in advance for the current month with payment being due upon receipt of the statement in the month the services are performed. Charges for ancillary, pharmacy, therapy and other services to private patients are billed in the month following the performance of services. All billings are recognized as revenue when the services are performed.
Valuations and Impairments to our Investment in Enhanced Cash Fund - At September 30, 2008, we reported an aggregate investment of $12,662,000 in the Columbia Strategic Cash Portfolio Fund (the "Fund") which invests principally in high quality corporate debt, mortgage-backed securities and asset-backed securities. During December, 2007 the Fund's manager notified us that due to turmoil in credit markets in the United States (1) Fund cash redemptions to investors were suspended, (2) the Fund's valuation will be based on the market value of the underlying securities instead of amortized cost, (3) interest would continue to accrue and be paid and (4) the Fund would begin an orderly liquidation and dissolution of its assets for distribution to the Fund holders that is expected to be completed in early 2009. As the Fund is liquidated, we expect to receive our pro rata share of the Fund in cash distributions.
The Fund's valuation fluctuates based on changes in the market values of the securities held by the Fund. In addition to any transaction gains or losses reported by the Fund to us, since December 7, 2007 we have adjusted our carrying value to the Fund's net asset value, which adjustments have required us to charge earnings and reduce our carrying value in the Fund by a total of $724,000, of which amount $453,000 was expensed in the fourth quarter of 2007, $259,000 in the first quarter of 2008, $0.00 in the second quarter of 2008, and $12,000 in the third quarter of 2008. We will continue to evaluate our investment in the Fund for other-than-temporary impairments. It is possible that future events could require us to make significant adjustments or revisions to our estimates of the Fund value.
As to valuation methods, all Fund assets are valued each business day by a third party accounting agent under the oversight of a valuation committee within Columbia Management. Historically, in over 95% of the cases, a third party
pricing service, or services, delivers the nightly security valuations based on widely available market data and sources to the accounting agent for the Fund.
For securities where prices from third party valuation services are not available (in less than 5% of the cases) , the Columbia Management valuation committee meets and determines a value for the security based on an evaluation of available data, portfolio manager input, trading desk input as well as any other appropriate factors. The portfolio manager of the Fund may present facts to the valuation committee but does not have a vote in this process.
The valuation committee comprises investment professionals, fixed income and equity traders, risk management professionals and accountants and is advised at each meeting by legal, compliance and internal audit professionals. Valuations used for each individual security within the Fund are reviewed every night by Columbia Management fixed income traders prior to the calculation of the Fund's NAV for that day. If the fixed income traders determine that adjustments are required, they must be verified by an independent third party or approved by the valuation committee.
The Fund does not provide detailed information on prices on individual securities except annually at December 31.
Accrued Risk Reserves - We are principally self-insured for risks related to
employee health insurance, workers= compensation and professional and general
liability claims. Our accrued risk reserves primarily represent the accrual for
self-insured risks associated with employee health insurance, workers=
compensation and professional and general liability claims. The accrued risk
reserves include a liability for reported claims and estimates for incurred but
unreported claims. Our policy with respect to a significant portion of our
workers= compensation and professional and general liability claims is to use an
actuary to support the estimates recorded for incurred but unreported claims.
Our health insurance reserve is based on our known claims incurred and an
estimate of incurred but unreported claims determined by our analysis of
historical claims paid. We reassess our accrued risk reserves on a quarterly
basis.
Professional liability remains an area of particular concern to us. The entire long term care industry has seen personal injury/wrongful death claims based on alleged negligence by nursing homes and their employees in providing care to residents. As of September 30, 2008, we and/or our managed centers are defendants in 67 such claims inclusive of years 1999 through 2008. It remains possible that these pending matters plus potential unasserted claims could exceed our reserves, which would have a material adverse effect on our financial position, results of operations and cash flows. It is also possible that future events could cause us to make significant adjustments or revisions to these reserve estimates and cause our reported net income to vary significantly from period to period.
We maintain insurance coverage for incidents occurring in all provider locations owned, leased or managed by us. The coverages include both primary policies and umbrella policies.
For 2002, we maintain primary coverage through our own insurance company with
excess coverage provided by a third party insurance company. For 2003-2008, we
maintain both primary and excess coverage through our own insurance subsidiary.
In all years, settlements, if any, in excess of available insurance policy
limits and our own reserves would be expensed by us.
Revenue Recognition - Subordination of Fees and Uncertain Collections - We
provide management services to certain long-term care facilities and to others
we provide accounting and financial services. We generally charge 6% of net
revenues for our management services and a predetermined fixed rate per bed for
the accounting and financial services. Our policy is to recognize revenues
associated with both management services and accounting and financial services
on an accrual basis as the services are provided. However, under the terms of
our management contracts, payments for our management services are subject to
subordination to other expenditures of the long-term care center being managed.
Furthermore, there are certain of the third parties with whom we have
contracted to provide services and which we have determined, based on
insufficient historical collections and the lack of expected future collections,
that collection is not reasonably assured and our policy is to recognize income
only in the period in which the amounts are realized. We recognize the expenses
related to the provision of those services in the period in which they are
incurred. We may receive
payment for the unpaid and unrecognized management fees in whole or in part in the future only if cash flows from the operating and investing activities of the centers are sufficient to pay the fees. There can be no assurance that such future cash flows will occur. The realization of such previously unrecognized revenue could cause our reported net income to vary significantly from period to period.
We agree to subordinate our fees to the other expenses of a managed center because we believe we know how to improve the quality of patient services and finances of a long-term care center and because subordinating our fees demonstrates to the owner and employees of the managed center how confident we are of the impact we can have in making the center operations successful. We may continue to provide services to certain managed centers despite not being fully paid currently so that we may be able to collect unpaid fees in the future from improved operating results and because the incremental savings from discontinuing services to a center may be small compared to the potential benefit. Also, we may benefit from providing other ancillary services to the managed center. We may receive payment for the unrecognized management fees in whole or in part in the future only if cash flows from the operating and investment activities of the centers are sufficient to pay the fees. There can be no assurance that such future cash flows will occur.
Certain of our accounts receivable from private paying patients and certain of our notes receivable are subject to credit losses. We have attempted to reserve for expected accounts receivable credit losses based on our past experience with similar accounts receivable and believe our reserves to be adequate.
We continually monitor and evaluate the carrying amount of our notes receivable in accordance with Statement of Financial Accounting Standards No. 114, AAccounting by Creditors for Impairment of a Loan - An Amendment of FASB Statements No. 5 and 15.@ It is possible, however, that the accuracy of our estimation process could be materially impacted as the composition of the receivables changes over time. We continually review and refine our estimation process to make it as reactive to these changes as possible. However, we cannot guarantee that we will be able to accurately estimate credit losses on these balances. It is possible that future events could cause us to make significant adjustments or revisions to these estimates and cause our reported net income to vary significantly from period to period.
Potential Recognition of Deferred Income - During 1988, we sold the assets of
eight long-term health care centers to National Health Corporation (ANational@),
our administrative general partner at the time of the sale. The resulting
profit of $15,745,000 was deferred. $10,000,000 of the deferred gain and
related deferred income taxes of $4,000,000 was recognized as income in
December, 2007 with the collection of the $10,000,000 note from National.
$3,745,000 of the deferred gain has been amortized into income on a
straight-line basis over the 20-year management contract period. Additional
deferred income of $2,000,000 will be reported when the Company no longer has an
obligation to advance the $2,000,000 working capital loan which obligation was
extended until January 20, 2018 with the extension of the management agreement
with National to that date.
Guarantees - We guarantee certain debt of National and the ESOP ($1,030,000).
It is possible that future events could cause us to make significant
adjustments to our estimates and liability under this guarantee and cause our
reported net income to vary from period to period.
Uncertain Tax Positions - NHC continually evaluates for uncertain tax positions. These uncertain positions may arise where tax laws may allow for alternative interpretations or where the timing of recognition of income is subject to judgment. We believe we have adequate provisions for our uncertain tax positions including related penalties and interest. However, because of uncertainty of interpretation by various tax authorities and the possibility that there are issues that have not been recognized by management, we cannot guarantee we have accurately estimated our tax liabilities.
The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, with no need for management=s judgment in their application. There are also areas in which management=s judgment in selecting any available alternative would not produce a materially different result. See our audited consolidated financial statements and notes thereto which contain accounting policies and other disclosures required by generally accepted accounting principles.
Government Program Financial Changes
Cost containment will continue to be a priority for Federal and State governments for health care services, including the types of services we provide. Government reimbursement programs such as Medicare and Medicaid prescribe, by law, the billing methods and amounts that health care providers may charge and be reimbursed to care for patients covered by these programs. Congress has passed a number of laws that have effected major changes in the Medicare and Medicaid programs. The Balanced Budget Act of 1997, or the Budget Act, sought to achieve a balanced federal budget by, among other things, reducing federal spending on Medicare and Medicaid to various providers. In February 2006, Congress enacted the Deficit Reduction Act, or DRA, which reduced net Medicare and Medicaid spending, and in December 2006, Congress passed the Tax Relief and Health Care Act of 2006, which also affects payments under the Medicare and Medicaid programs. In the Tax Relief and Health Care Act of 2006, Congress reduced the limit on Medicaid provider taxes for the period January 1, 2008 through September 30, 2011 from the 6 percent set by CMS regulations to a 5.5 percent limit set by statute.
Medicare-
Effective October 1, 2007, our PPS rates were increased by 5.5% due to inflation update (3.3%) and Care Based Statistical Area (CBSA) designations. We estimate that the positive revenue effect of the Centers for Medicare and Medicaid Services (CMS) final rule was $3,946,766 for the first nine months of 2008. The inflation update (or market basket increase) was 3.1% in 2006 and 3.3% in 2007.
For the first nine months of 2008 our average Medicare per diem increased by 3.80% over the same period of 2007. No assurances can be given as to whether Congress will increase or decrease reimbursement in the future, the timing of any action or the form of relief, if any, that may be enacted.
Medicaid-
Tennessee annual Medicaid rate increases were implemented effective July 1, 2008. The increase in revenue was approximately $513,000 per quarter.
Missouri Medicaid funded a global rate increase for all providers of $3.00 per day effective for February 1, 2007 through June 30, 2007. Effective July 1, 2007, an additional $6.00 per day increase was funded. The combined effect of the eleven months in rate increases was approximately $1,275,000 in 2007. The first nine months of 2008 effect was approximately $1,528,000.
South Carolina Medicaid annual per diem rate increases that were implemented on October 1, 2007 have resulted in additional revenues of approximately $251,000 per quarter.
For the first nine months of 2008 our average Medicaid per diem increased by 3.60% over the same period in 2007. We face challenges with respect to states' Medicaid payments, because many currently do not cover the total costs incurred in providing care to those patients. States will continue to control Medicaid expenditures but also look for adequate funding sources, including provider assessments. The DRA includes several provisions designed to reduce Medicaid spending. These provisions include, among others, provisions strengthening the Medicaid asset transfer restrictions for persons seeking to qualify for Medicaid long-term care coverage, which could, due to the timing of the penalty period, increase facilities' exposure to uncompensated care. Other provisions could increase state funding for home and community-based services, potentially having an impact on funding for nursing facilities. There is no assurance that the funding for our services will increase or decrease in the future.
Results of Operations
Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007.
Results for the three month period ended September 30, 2008 include a 10.5% increase in net revenues and a 107.1% increase in net income compared to the same period in 2007 after removing the after tax effect of a gain on sale of assets ($6,475,000) occurring in the 2007 period.
Net patient revenues increased $12,390,000 or 9.2% compared to the same period
last year. Medicare, Medicaid and private pay per diem rates increased 4.1%,
2.85% and 5.84%, respectively, compared to the quarter a year ago.
Additionally, the January 2, 2008 acquisition of a 109-bed skilled nursing and
rehabilitation facility located in Knoxville, Tennessee, the acquisition of a
132-bed skilled nursing and rehabilitation facility and a 60-bed assisted living
facility located in Charleston, South Carolina, effective August 1, 2008, and
the completion of a 60-bed addition to an existing facility located in North
Augusta, South Carolina, effective July 1, 2008 added approximately $4,351,000
in net patient revenues.
The total census at owned and leased centers for the quarter averaged 92.4% compared to an average of 93.1% for the same quarter a year ago.
Other revenues increased $3,162,000 or 23.3% in the three month 2008 period to $16,750,000 from $13,588,000 in the 2007 three month period. Increases in other revenues include increased collections of management and accounting services fees ($864,000), increased dividends and other realized gains on securities due both to higher dividend rates and greater numbers of securities owned ($79,000), greater earnings from our equity in unconsolidated investments (primarily from Caris HealthCare L.P., $188,000), and increased rental income ($2,524,000). The increased rental income is due primarily to (1) rental revenues from nine Florida facilities acquired on October 31, 2007 in the merger with NHR ($1,850,000) and (2) rental revenues from the real estate of a 544 bed long term care center and 66 unit assisted living center located in Chattanooga, Tennessee acquired on November 1, 2007 ($600,000).
Increases in other revenues in the 2008 period over the 2007 period were offset in part due to decreases in interest revenue ($721,000) and in advisory fees ($125,000). Interest revenue decreased in 2008 compared to 2007 due primarily to decreased investments caused by the expenditure by NHC of approximately $89,600,000 in cash to complete the merger with NHR effective on October 31, 2007. Further, interest income decreased in 2008 compared to 2007 due to the collection of notes receivable of $13,571,000 occurring in the second, ($6,195,000) and fourth ($7,376,000) quarters of 2007. The advisory fee income from NHR was terminated with completion of the NHR merger with NHC on October 31, 2007.
Total costs and expenses for the 2008 third quarter compared to the 2007 third
quarter increased $18,669,000 or 14.5% to $147,117,000 from $128,448,000.
Salaries, wages and benefits, the largest operating costs of this service
company, increased $4,496,000 or 5.4% to $88,036,000 from $83,540,000. Other
operating expenses increased $3,763,000 or 9.2% to $44,755,000 for the 2008
period compared to $40,992,000 in the 2007 period. Rent expense decreased
$2,701,000 to $7,834,000 compared to $10,535,000 in the 2007 period.
Depreciation and amortization increased $2,326,000 or 59.8% to $6,218,000 from
$3,892,000. Interest costs decreased $7,000 to $274,000. Costs and expenses
for the 2007 third quarter include a $10,792,000 gain from the sale of land
located in South Carolina.
Increases in salaries, wages and benefits are due to increased staffing due to the acquisition of two long-term skilled health care facilities (241 long-term beds), a 60-bed assisted living facility and due to completion of construction of a 60-bed addition to an existing facility ($2,374,000), increased costs for therapist services ($728,000) and inflationary wage increases. Increases in other operating costs are due to costs associated with the acquisition of two long-term skilled health care facilities (241 long-term beds), a 60-bed assisted living facility and due to completion of construction of a 60-bed addition to an existing facility ($1,723,000) and inflationary increases offset in part due to decreases in workers compensation ($820,000).
Rent expense in the third quarter of 2008 declined by approximately $2,701,000 compared to the same quarter last year because NHC is no longer paying rent to NHR after the October 31, 2007 merger between the two companies. This decline in rent expense is offset in part due to increased percentage rent to NHI ($101,000). Percentage rent to NHI is equal to 4% of the increase in facility revenues over the 2007 base year revenues.
Depreciation expense increased primarily due to the acquisition of certain depreciable assets during the last year. The merger with NHR completed on October 31, 2007 added depreciable real property of $247,649,000 and the net increase in depreciation in the quarter ended September 30, 2008 was $2,326,000.
The income tax provision for the three months ended September 30, 2008 is . . .
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