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| NHC > SEC Filings for NHC > Form 10-Q on 5-Nov-2009 | All Recent SEC Filings |
5-Nov-2009
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 and lease properties 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 - 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 of $22,645,000), and in 2009 we broke ground on a new assisted living facility in Mauldin, South Carolina (expected cost of $6,600,000).
In January, 2008, we purchased a 109-bed skilled nursing rehabilitation facility located in Knoxville, Tennessee for $6,347,000 in cash.
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 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 39 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 2009, 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. Effective January 1, 2009, we purchased five hospice locations in South Carolina for approximately $3,100,000. During 2009, we will apply for Certificates of Need for additional beds in select markets and new NHC construction opportunities for skilled nursing and assisted living facilities. NHC will also continue to seek prudent acquisition opportunities in each of our lines of business.
Accrued Risk Reserves - Our accrued professional liability reserves, workers= compensation reserves and health insurance reserves totaled $107,821,000 at September 30, 2009 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 61% (2008), 60% (2007),
and 63% (2006) 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, 2009, we
have made provisions for amounts due third party payors of approximately
$17,659,000. Revenues and results of operations in the nine months ended
September 30, 2009 and 2008 were not materially impacted by changes in estimates
of settlements and final determinations.
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.
Accrued Risk Reserves - We are principally self-insured for risks related to 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, 2009, we and/or our managed centers are defendants in 34 such claims inclusive of years 1999 through 2009. 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. 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.
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 ASC Topic 310, Receivables (previously SFAS No. 114, "Accounting by Creditors for Impairment of a Loan - an Amendment of SFAS Nos. 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 were 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 recognized 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 - At September 30, 2009, no agreements to guarantee debt of other parties are outstanding.
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 December 31, 2008 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 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, 2008, our SNF PPS rates were increased by 3.4% due to an inflation update. Our annual 2008 Medicare revenues increased by 6.5% over our annual 2007 Medicare revenues. The inflation update (or market basket increase) was 3.1% in 2006 and 3.3% in 2007.
For the first nine months of 2009 our average Medicare per diem increased by 3.08% over the same period of 2008. 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.
CMS released the final Medicare SNF PPS rule on July 31, 2009. In this rule, payment system changes for fiscal years 2010 and 2011 include the following:
Fiscal Year 2010 - Effective October 1, 2009
†
The federal rates will be updated by a market basket increase of 2.2%.
†
A recalibration of the nursing weights will be implemented, resulting in a reduction of 3.3%.
†
The net impact of these adjustments is a reduction of 1.1%.
Fiscal Year 2011 - Effective October 1, 2010
†
The MDS 3.0 and RUG-IV payment system will be implemented on October 1, 2010.
†
Services rendered prior to the admission of the individual to the SNF will no longer be counted for classification to a RUG category. Only services rendered in the SNF will be reported on the MDS 3.0, and recognized for reimbursement purposes.
†
Concurrent therapy cannot be provided to more than 2 individuals. The MDS 3.0 will capture individual and concurrent therapy separately.
Medicaid-
South Carolina Medicaid fully funded their normal October 1, 2008 rate increases and a retroactive settlement was received and recognized in June, 2009. The per diem rate increases have resulted in additional revenues of approximately $321,000 per quarter.
Tennessee annual Medicaid rate increases were implemented effective July 1, 2009. Due to budget cuts, the increase in revenue to our owned and leased centers is limited by approximately $89,000 per quarter. The amount is approximately 20% of the amount of increases that would have been paid if Tennessee had fully funded its payment formula.
Missouri Medicaid funded a global rate increase for all providers of $6.00 per day effective after July 1, 2008. The first nine months of 2009 effect was approximately $990,000. Missouri has indicated that it will increase current reimbursement rates retroactively to July 1, 2009. However, no increase in rates has been implemented currently.
For the first nine months of 2009, our average Medicaid per diem increased by 3.03% over the same period in 2008. We face challenges with respect to states' Medicaid payments, because many states 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 or slow the rate of increase in 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.
Potential Healthcare Reform -
The increase in the number of individuals and families without healthcare coverage has heightened debate about whether and how to implement comprehensive reform of the United States healthcare system. The Obama administration has made healthcare reform its primary domestic agenda item, and Congress is currently considering multiple plans on how to change the healthcare system and how to fund those changes. Generally, President Obama and most members of Congress believe that the current healthcare system is too inefficient and leaves too many individuals without healthcare coverage. Much of the current healthcare reform debate includes the following considerations; whether a public insurance option should be established; the impact to private insurance companies; the impact to consumer choice of healthcare services; the impact to small businesses; and the impact of funding alternatives including personal tax rate increases, business surcharges, service provider assessments and increasing the federal deficit. We are not able to predict whether healthcare reform will be implemented, what provisions a potential reform plan may include or what impact these developments may have on our future operating results or cash flows at this time.
Results of Operations
Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008.
Results for the three month period ended September 30, 2009 include a 5.1% increase in net revenues and an 11.9% increase in income before taxes compared to the same period in 2008.
Net patient revenues increased $8,025,000 or 5.5% compared to the same period last year. Medicare, Medicaid and private pay per diem rates increased 3.1%, 2.4%, and 5.2%, respectively, compared to the quarter a year ago. Additionally, the January 1, 2009 acquisition of five hospice locations in South Carolina and 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 added approximately $2,339,000 in net patient revenues. Homecare operations also increased net patient revenues in the amount of $1,895,000.
The total census at owned and leased centers for the quarter averaged 92.0% (92.4% if operations owned less than one year are removed) compared to an average of 92.4% (92.7% if operations owned less than one year are removed) for the same quarter a year ago.
Other revenues increased $334,000 or 2.0% in the three month 2009 period to $17,084,000 from $16,750,000 in the 2008 three month period. Increases in other revenues include increased management and accounting services fees ($699,000) and greater earnings from our equity in unconsolidated investments (primarily from Caris HealthCare L.P. ($329,000). The increases were offset due to a decrease in interest income ($371,000). Interest income decreased due to decreasing interest rate yields.
Total costs and expenses for the 2009 third quarter compared to the 2008 third
quarter increased $6,442,000 or 4.4% to $153,559,000 from $147,117,000.
Salaries, wages and benefits, the largest operating costs of this service
company, increased $3,798,000 or 4.3% to $91,834,000 from $88,036,000. Other
operating expenses increased $2,444,000 or 5.5% to $47,199,000 for the 2009
period compared to $44,755,000 in the 2008 period. Rent expense increased
$198,000 or 2.5% to $8,032,000 compared to $7,834,000 in the 2008 period.
Depreciation and amortization increased $117,000 or 1.9% to $6,335,000 from
$6,218,000. Interest costs decreased $115,000 to $159,000.
Increases in salaries, wages and benefits are due to increased staffing due to the acquisition of a skilled health care facility (132 long-term beds), a 60-bed assisted living facility and five hospice locations ($1,686,000), increased costs for therapist services ($1,082,000), increased costs for homecare services ($1,033,000), and inflationary wage increases. Increases in other operating costs are due to costs associated with the recently acquired health care facility (132 long-term beds), a 60-bed assisted living facility, five hospice locations ($891,000), increased operating costs for homecare services ($806,000) and also an increase in professional liability expenses ($590,000).
Depreciation expense increased primarily due to the acquisition of certain depreciable assets during the last year, including a 132-bed skilled health facility and a 60-bed assisted living facility.
The income tax provision for the three months ended September 30, 2009 is $5,727,000 (an effective income tax rate of 31.7%). The income tax provision and effective tax rate for 2009 were favorably impacted by statute of limitation expirations and adjustment to unrecognized tax benefits resulting in a benefit to the provision of $1,553,000 (including $612,000 of interest and penalties) or 8.6% of income before taxes. The income tax provision for the three months ended September 30, 2008 was $2,381,000 (an effective tax rate of 14.7%). The income tax provision and effective tax rate for the three months ended 2008 were favorably impacted by statute of limitation expirations resulting in a benefit to the provision of $4,187,000 (including $2,050,000 of interest and penalties) or 25.9% of income before taxes.
Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008.
Results for the nine month period ended September 30, 2009 include a 5.9% increase in net revenues and a 15.6% increase in income before income taxes compared to the same period in 2008.
Net patient revenues increased $29,813,000 or 6.9% compared to the same period
last year. Medicare, Medicaid and private pay per diem rates increased 3.1%,
3.0%, and 5.0%, respectively, compared to the nine months a year ago.
Additionally, the January 1, 2009 acquisition of five hospice locations in
South Carolina and 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 added approximately
$11,632,000 in net patient revenues. Homecare operations also increased net
patient revenues in the amount of $4,773,000.
The total census at owned and leased centers for the nine month period averaged 92.0% (92.3% if operations owned less than one year are removed) compared to an average of 92.7% (92.4% if operations owned less than one year are removed) for the same nine month period a year ago.
Other revenues decreased $1,452,000 or a decline of 2.9% in the nine month 2009 period to $48,873,000 from $50,325,000 in the 2008 nine month period. Decreases in other revenues include decreased management and accounting services fees ($849,000), decreased interest income due to lower yield rates ($989,000), and decreased rental income ($630,000). Decreases in other revenues in the 2009 period over the 2008 period were offset in part due to greater earnings from our equity in unconsolidated investments (primarily from Caris HealthCare L.P. ($1,178,000).
Total costs and expenses for the 2009 nine months compared to the 2008 nine
months increased $21,379,000 or 4.9% to $460,506,000 from $439,127,000.
Salaries, wages and benefits, the largest operating costs of this service
company, increased $12,546,000 or 4.8% to $274,435,000 from $261,889,000. Other
operating expenses increased $7,880,000 or 5.8% to $142,588,000 for the 2009
period compared to $134,708,000 in the 2008 period. Rent expense increased
$436,000 or 1.8% to $24,064,000 compared to $23,628,000 in the 2008 period.
Depreciation and amortization increased $626,000 or 3.4% to $18,865,000 from
$18,239,000. Interest costs decreased $109,000 to $554,000.
Increases in salaries, wages and benefits are due to increased staffing due to the acquisition of a skilled health care facility (132 long-term beds), a 60-bed assisted living facility and five hospice locations ($6,962,000), increased costs for therapist services ($2,327,000), increased costs for homecare services ($2,815,000), and inflationary wage increases. Increases in other operating costs are due to costs associated with the acquisition of a health care facility (132 long-term beds), a 60-bed assisted living facility, five hospice locations ($4,746,000) and increased homecare services ($1,750,000).
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