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NHC > SEC Filings for NHC > Form 10-Q on 30-Oct-2012All Recent SEC Filings

Show all filings for NATIONAL HEALTHCARE CORP

Form 10-Q for NATIONAL HEALTHCARE CORP


30-Oct-2012

Quarterly Report

Management's Discussion and Analysis of Financial Condition and Results of Operations.

Overview

National HealthCare Corporation ("NHC" or the "Company") is a leading provider of long-term health care services. We operate or manage, through certain affiliates, 75 long-term health care centers with 9,460 beds in 10 states and provide other services in one additional state. 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, homecare programs, assisted living centers and independent living centers. In addition, we provide insurance services, management and accounting services, and lease properties to operators 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.

Medicare Reimbursement Rate Changes

In July 2011, the Centers for Medicare and Medicaid Services ("CMS") announced a final rule reducing Medicare skilled nursing facility PPS payments in fiscal year 2012 by $3.87 billion, or 11.1% lower than payments for fiscal year 2011.
We estimated the resulting decrease in revenue from the fiscal year 2012 Medicare rate changes to be approximately $24,000,000 annually, or $6,000,000 quarterly. Furthermore, changes in government requirements for providing therapy services were estimated to increase our operating costs by approximately $6,000,000 annually, or $1,500,000 per quarter. We implemented and continue to implement cost saving measures to help mitigate a portion of the revenue decrease and cost increase, but we are also committed to maintaining the quality of care to our patients.

In July 2012, CMS released its skilled nursing facility PPS update for the fiscal year 2013, which begins October 1, 2012. The notice provides a 1.8% rate update, which reflects a 2.5% market basket increase that is reduced under the ACA by a 0.7% multifactor productivity adjustment. CMS estimates the update will increase overall payments to skilled nursing facilities in fiscal year 2013 by $670 million compared to fiscal year 2012 levels. The notice also provides an update to certain fiscal year 2012 policy changes involving recalibration of the parity adjustment, reallocation of group therapy time, and changes to the MDS 3.0 patient assessment instrument. The effect of the rate changes on our revenues is dependent upon our census and the mix of our patients at the PPS pay rates.

Development and Growth


We are undertaking to expand our long-term care operations while protecting our
existing operations and markets.  The following table lists our recent
construction and purchase activities.


Type of Operation    Description        Size           Location       Placed in Service
 Assisted Living     New Facility     75 Units       Columbia, SC         May, 2011
 Assisted Living       Addition       46 Units       Franklin, TN        June, 2011
     Hospice         Acquisition     Additional     Knoxville, TN      December, 2011
                                        7.5%
                                     interest in
                                        Caris
                                     HealthCare
                                         LP
     Hospice         Acquisition     Additional     Knoxville, TN        June, 2012
                                        7.5%
                                     interest in
                                        Caris
                                     HealthCare
                                         LP

In August 2012, we began construction on a 90-bed skilled nursing facility in Tullahoma, Tennessee. This facility is expected to be completed during the third quarter of 2013. Also, in the fourth quarter of 2012, we expect to begin construction on a 50-bed skilled nursing addition to NHC Lexington in Lexington, South Carolina. In 2013 we expect to begin construction on a 92-bed skilled nursing facility in Sumner County, Tennessee.

During 2012, 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. We will also evaluate the feasibility of construction of new assisted living facilities in select markets.

Accrued Risk Reserves

Our accrued professional liability reserves, workers' compensation reserves and health insurance reserves totaled $103,202,000 at September 30, 2012 and are a primary area of management focus. We have set aside


restricted cash and cash equivalents and marketable securities to fund substantially all of our professional liability and workers' compensation liabilities.

As to exposure for professional liability claims, we have developed 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.

Application of Critical Accounting Policies

There have been no significant changes during the nine month period ended September 30, 2012 to the items we disclosed as our critical accounting policies and estimates in our discussion and analysis of financial condition and results of operations in our December 31, 2011 Annual Report on Form 10-K filed with the SEC.

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. The Balanced Budget Act of 1997 defined the Medicare Prospective Payment System ("PPS") and this system has subsequently been refined in 1999, 2000, 2005, 2006 and 2010.

Federal Health Care Reform

In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act ("PPACA" or, commonly, "ACA") and the Health Care and Education Reconciliation Act of 2010 ("HCERA"), which represents significant changes to the current U.S. health care system (collectively the "Acts"). The primary goals of the Acts are to: (1) expand coverage to Americans without health insurance, (2) reform the delivery system to improve quality and drive efficiency, (3) and to lower the overall costs of providing health care. The timeline of the enacted provisions span over several years - some of the provisions were effective immediately in 2010 and others will be phased in through 2020. We have evaluated the Acts as they currently stand and do not expect material effects on our results of operations, liquidity and cash flows in 2012.

In August 2011 and pursuant to the Budget Control Act of 2011, Congress created a 12-member bipartisan committee called the Joint Select Committee on Deficit Reduction, or the Joint Committee. The Joint Committee was charged with issuing a formal recommendation by November 23, 2011 on how to reduce the federal deficit by at least $1.5 trillion over the next ten years. The Committee concluded their work in November and was not able to reach a bipartisan agreement before the Committee's deadline period. This failure by the Committee is scheduled to trigger automatic reductions in discretionary and mandatory spending starting in 2013, including reductions of not more than 2% to payments to Medicare providers. We are unable to predict the financial impact, if enacted, of the automatic payment cuts beginning in 2013. However, such impact may be adverse and material to our future results of operations and cash flows.

In June 2012, the U.S. Supreme Court issued its ruling on the constitutionality of a key provision in the ACA, which is the requirement that every American maintain a minimum level of health coverage or pay a penalty beginning in 2014.
The Supreme Court upheld the constitutionality of the "individual mandate", holding that the penalty for not doing so could reasonably be interpreted as a tax, which the Constitution permits. The ruling also permits the federal government to pursue a broad expansion of the Medicaid program, but the ruling gives the states the maximum flexibility on whether to do so. In preparation for the Medicaid coverage expansion to occur in 2014, the current Administration is expected to release a host of regulations and an array of new taxes and fees. It is


uncertain at this time the effect the Acts, their modifications, or Medicaid expansion will have on our future results of operations or cash flows.

Medicare

In July 2011, CMS issued a final rule providing a net 11.1% reduction in PPS payments to skilled nursing facilities for CMS's fiscal year 2012 (which began October 1, 2011) as compared to PPS payments in CMS's fiscal year 2011. The final 2012 CMS rule also adjusted the method by which group therapy is counted for reimbursement purposes, and changes the timing in which patients who are receiving therapy must be reassessed for purposes of determining their RUG category. We anticipated that, assuming other factors remained constant, the resulting decrease in revenue from the fiscal year 2012 Medicare rate changes would be approximately $24,000,000 annually, or $6,000,000 per quarter.
Furthermore, changes in government requirements for providing therapy services were estimated to increase our operating costs by approximately $6,000,000 annually, or $1,500,000 per quarter. We implemented and continue to implement cost saving measures to help mitigate the effects of a portion of the revenue decrease and cost increase, but we are also committed to maintaining the quality of care to our patients.

For the first nine months of 2012, our average Medicare per diem rate decreased 6.9% compared to the same period in 2011. The decrease is due to the October 1, 2011 rate reductions, but partially offset by the increased acuity levels of the patients in our skilled nursing centers. The PPS rates had a net market basket increase of 2.3% for CMS's fiscal year 2011.

In July 2012, CMS released its skilled nursing facility PPS update for the fiscal year 2013, which began October 1, 2012. The notice provides a 1.8% rate update, which reflects a 2.5% market basket increase that is reduced under the ACA by a 0.7% multifactor productivity adjustment. CMS estimates the update will increase overall payments to skilled nursing facilities in fiscal year 2013 by $670 million compared to fiscal year 2012 levels. The notice also provides an update to certain fiscal year 2012 policy changes involving recalibration of the parity adjustment, reallocation of group therapy time, and changes to the MDS 3.0 patient assessment instrument. The effect of the rate changes on our revenues is dependent upon our census and the mix of our patients at the PPS pay rates.

Effective January 1, 2012, CMS issued a final ruling for homecare programs which stated an approximate 2.4% rate reduction from the 2011 HH PPS rates. The 2.4% rate reduction impacts individual providers unevenly. Per the final ruling, providers with high volume of therapy cases may see greater net rate reductions while others with non-therapy patients may see a negligible overall reduction in revenue or a slight increase. We estimate the effect of the revenue decrease for NHC homecare programs to be approximately $2,600,000 annually, or $650,000 per quarter.

Medicaid

Beginning January 1, 2012, the state of Tennessee implemented a 4.25% rate reduction for their Medicaid program. On May 14, 2012 and effective retroactively to January 1, 2012, Tennessee's legislation voted to restore 1.75% of the 4.25% rate reduction; thus leaving a net 2.5% rate reduction for the first six months of 2012. Effective July 1, 2012 and for the fiscal year 2013, the state of Tennessee implemented specific individual nursing facility rate increases. We estimate the resulting increase in revenue for the fiscal year 2013 will be approximately $3,500,000 annually, or $875,000 per quarter.

In February 2012 and effective retroactively to October 1, 2011, the state of Missouri's Medicaid program announced a net $6.00 per patient day increase in their Medicaid rates. We estimate the resulting increase in revenue will be approximately $1,720,000 annually, or $430,000 per quarter. There will be no rate increase or decrease implemented as of October 1, 2012 for the Medicaid program in the state of Missouri.

There was no rate increase or decrease implemented for the fiscal year beginning October 1, 2011 for the Medicaid program in the state of South Carolina.
Effective October 1, 2012 and for the fiscal year 2013, South Carolina implemented specific individual nursing facility rate increases. We estimate the resulting increase in revenue beginning October 1, 2012 will be approximately $1,660,000 annually, or $415,000 per quarter.


For the first nine months of 2012, our average Medicaid per diem overall increased by 0.8% compared to the same period in 2011. 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. 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, 2012 Compared to Three Months Ended September 30, 2011

Results for the three month period ended September 30, 2012 include a 3.9% decrease in net operating revenues and a 1.6% increase in income before income taxes compared to the same period in 2011.

The total census at owned and leased long-term health care centers for the quarter averaged 89.7% compared to an average of 90.5% for the same quarter a year ago.

Medicare and Managed Care per diem rates decreased 8.6% and 3.0%, respectively, compared to the quarter a year ago. Medicaid and private pay per diem rates increased 2.4% and 2.6%, respectively, compared to the quarter a year ago. The Medicare per diem rate decrease is due to the 11.1% rate reduction in fiscal year 2012, but is partially offset by the increased acuity levels of our patients.

Net patient revenues decreased $6,773,000 or 3.7% compared to the same period last year. In addition to our Medicare per diem rates decreasing, the remaining decrease in net patient revenues is due from the assignment of our Solaris Hospice business to Caris effective January 1, 2012. There was $3,514,000 of net patient revenues recorded for the Solaris Hospice entities for the three months ended September 30, 2011. The increase in our earnings in equity recorded from Caris is presented in "non-operating income" in our interim condensed consolidated statements of income.

Other revenues decreased $923,000 or 6.2% in the three month 2012 period to $14,007,000 from $14,930,000 in the 2011 three-month period. The decrease in other revenues is primarily due to the decreased collections of management and accounting services fees of $788,000, as further detailed in Note 3 of our interim condensed consolidated financial statements.

Total costs and expenses for the 2012 third quarter compared to the 2011 third quarter decreased $6,423,000 or 3.6% to $172,697,000 from $179,120,000.
Salaries, wages and benefits, the largest operating costs of our company, decreased $26,000 to $106,844,000 from $106,870,000. Other operating expenses decreased $6,288,000 or 11.5% to $48,519,000 for the 2012 period compared to $54,807,000 for the 2011 period. Facility rent expense decreased $187,000 or 1.9% to $9,813,000. Depreciation and amortization increased 1.3% to $7,402,000.

The increase in salaries, wages and benefits is primarily due to the increased costs for therapist services of $1,550,000. The assignment of our Solaris Hospice entities to Caris decreased salaries and wages $1,516,000 compared to same period a year ago, which offset the increase in therapy services.

The decrease in other operating expenses is primarily due to the cost saving measures implemented at our skilled nursing facilities ($1,929,000). We also had favorable results within our accrued risk reserves of $2,495,000 compared to the same period a year ago. The assignment of our Solaris Hospice entities to Caris decreased other operating expenses $1,538,000 compared to the same period a year ago.

Non-operating income increased by $1,631,000 to $6,771,000 in the three month 2012 period in comparison to $5,140,000 for the three month 2011 period, as further detailed in Note 4 to our interim condensed consolidated financial statements. The increase ($1,623,000) is primarily due to our investment in Caris, including our increased non-controlling ownership interest effective January 1, 2012 and June 1, 2012.


The income tax provision for the three months ended September 30, 2012 is $6,209,000 (an effective income tax rate of 26.5%). The income tax provision and effective tax rate for the three months ended September 30, 2012 were unfavorably impacted by adjustments to unrecognized tax benefits of $193,000 and permanent differences including nondeductible expenses of $208,000 resulting in an increase in the provision. The income tax provision and effective tax rate for 2012 were favorably impacted by statute of limitation expirations resulting in a benefit to the provision of $3,187,000 or 13.6% of income before taxes in 2012. The income tax provision for the three months ended September 30, 2011 was $5,873,000 (an effective tax rate of 25.4%). The income tax provision and effective tax rate for the three months ended September 30, 2011 were unfavorably impacted by adjustments to unrecognized tax benefits resulting in an increase in the provision of $23,000 or 0.1% of income before taxes. The income tax provision and effective tax rate for 2011 were favorably impacted by statute of limitation expirations resulting in a benefit to the provision of $3,226,000 or 14% of income before taxes in 2011.

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

Results for the nine month period ended September 30, 2012 include a 2.3% decrease in net operating revenues and a 12.2% decrease in income before income taxes compared to the same period in 2011. For comparative purposes, other operating expenses for the 2011 nine month period included favorable results within our accrued risk reserves of $10,500,000. Excluding this adjustment, the nine months ended September 30, 2012 would have reflected an increase in income before income taxes of $1,225,000, or 1.9%, over the same period in 2011.

The total census at owned and leased long-term health care centers for the nine months averaged 90.3% compared to an average of 90.7% for the same period a year ago.

Medicare and Managed Care per diem rates decreased 6.9% and 2.8%, respectively, compared to the nine month period a year ago. Medicaid and private pay per diem rates increased 0.8% and 2.4%, respectively, compared to the nine month period a year ago. The Medicare per diem rate decrease is due to the 11.1% rate reduction in fiscal year 2012, but is partially offset by the increased acuity levels of our patients.

Net patient revenues decreased $11,320,000 or 2.1% compared to the same period last year. In addition to our Medicare per diem rates decreasing, the remaining decrease in net patient revenues is due from the assignment of our Solaris Hospice business to Caris effective January 1, 2012. There was $10,242,000 of net patient revenues recorded for the Solaris Hospice entities for the nine months ended September 30, 2011. The increase in our earnings in equity recorded from Caris is presented in "non-operating income" in our interim condensed consolidated statements of income. The two newly constructed assisted living communities that were placed in service during the second quarter of 2011 helped increase net patient revenues approximately $3,610,000.

Other revenues decreased $2,256,000 or 5.1% in the 2012 nine month period to $42,008,000 from $44,264,000 in the 2011 nine month period. The decrease in other revenues is primarily due to the decreased collections of management and accounting services fees of $1,432,000, as further detailed in Note 3 of our interim condensed consolidated financial statements.

Total costs and expenses for the 2012 nine months compared to the 2011 period decreased $611,000 or 0.1% to $519,319,000 from $519,930,000. Salaries, wages and benefits, the largest operating costs of our company, decreased $2,397,000 or 0.7% to $318,028,000 from $320,425,000. Other operating expenses increased $1,187,000 or 0.8% to $149,271,000 for the 2012 period compared to $148,084,000 for the 2011 period. Facility rent expense decreased $237,000 or 0.8% to $29,507,000. Depreciation and amortization increased 3.9% to $22,168,000.

The decrease in salaries, wages and benefits is primarily due to the cost saving measures implemented at our skilled nursing facilities ($5,829,000). The assignment of our Solaris Hospice entities to Caris also decreased salaries and wages $4,447,000 compared to same period in 2011. We had increased costs for therapist services of $6,144,000, which offsets these decreases.

As discussed above, the increase in other operating expenses is primarily due to the 2011 nine month period having a favorable adjustment within the accrued risk reserves of $10,500,000, thus lowering the prior year expense by this amount.
Excluding this adjustment, other operating expenses for the 2012 nine month period would


have decreased $9,313,000. The decrease in other operating expenses is primarily due to the assignment of our Solaris Hospice entities to Caris, which decreased expenses $4,311,000 compared to same period in 2011. Our skilled nursing centers also decreased other operating expenses ($2,406,000) and we had favorable results within our accrued risk reserves ($3,129,000) compared to the same period a year ago.

Non-operating income increased by $3,690,000 to $18,546,000 in the 2012 nine month period in comparison to $14,856,000 for the same period a year ago, as further detailed in Note 4 to our interim condensed consolidated financial statements. The increase ($2,910,000) is primarily due to our investment in Caris, including our increased non-controlling ownership interest effective January 1, 2012 and June 1, 2012.

The income tax provision for the nine months ended September 30, 2012 is $22,923,000 (an effective income tax rate of 34.5%). The income tax provision and effective tax rate for the nine months ended September 30, 2012 were unfavorably impacted by adjustments to unrecognized tax benefits of $218,000 and permanent differences including nondeductible expenses of $348,000 resulting in an increase in the provision. The income tax provision and effective tax rate for 2012 were favorably impacted by statute of limitations expirations resulting in a benefit to the provision of $3,187,000 or 4.8% of income before taxes in 2012. The income tax provision for the nine months ended September 30, 2011 was $26,175,000 (an effective tax rate of 34.6%). The income tax provision and effective tax rate for the nine months ended September 30, 2011 were favorably impacted by adjustments to unrecognized tax benefits resulting in a decrease in the provision of $45,000 or 0.1% of income before taxes. The income tax provision and effective tax rate for the nine months ended September 30, 2011 were favorably impacted by statute of limitation expirations resulting in a benefit to the provision of $3,226,000 or 4.3% of income before taxes in 2011.

Liquidity, Capital Resources, and Financial Condition

Our primary sources of cash include revenues from the operations of our healthcare and senior living facilities, insurance services, management services and accounting services. Our primary uses of cash include salaries, wages and other operating costs of our healthcare and senior living facilities, the cost of additions to and acquisitions of real property, facility rent expenses, and dividend distributions. These sources and uses of cash are reflected in our interim condensed consolidated statements of cash flows and are discussed in further detail below. The following is a summary of our sources and uses of cash flows (dollars in thousands):

                                           Nine Months Ended
                                             September 30             Nine Month Change
                                           2012         2011            $            %
 Cash and cash equivalents at
 beginning of period                   $  61,008    $  28,478     $   32,530        114.2%

 Cash provided by operating
 activities                               60,118       53,774          6,344         11.8%

 Cash used in investing activities       (24,286)     (17,782)        (6,504)      (36.6)%

 Cash used in financing activities       (13,133)     (11,312)        (1,821)      (16.1)%

 Cash and cash equivalents at end of
 period                                $  83,707    $  53,158     $   30,549         57.5%

Operating Activities

Net cash provided by operating activities for the nine months ended September 30, 2012 was $60,118,000 as compared to $53,774,000 in the same period last year. Cash provided by operating activities consisted of net income of $43,523,000, adjustments for non-cash items of $20,855,000, and $4,260,000 used for working capital.

Cash used for working capital primarily consisted of an increase of restricted cash and cash equivalents of $6,270,000 and decreases in accounts payable of $4,288,000. The increase in restricted cash and cash equivalents is from NHC and other healthcare entities paying insurance premiums into NHC insurance companies, which restrict the cash payment. The decrease in accounts payable is due to the timing of payments.


Investing Activities

Cash used in investing activities totaled $24,286,000 and $17,782,000 for the nine months ended September 30, 2012 and 2011, respectively. Cash used for property and equipment additions was $14,888,000 for the nine months ended September 30, 2012 and $17,881,000 in the comparable period in 2011. In June 2012, we acquired an additional 7.5% non-controlling ownership interest in Caris . . .

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