PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Statements of Operations

(in thousands, except share and per share amounts)

(unaudited)

 

 

The accompanying notes to interim condensed consolidated financial statements are an integral part of these consolidated statements.

 

 

NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Statements of Comprehensive Income/(Loss)

(unaudited – in thousands)

 

 

The accompanying notes to interim condensed consolidated financial statements are an integral part of these consolidated statements.

 

 

NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Balance Sheets

(in thousands)

 

 

The accompanying notes to interim condensed consolidated financial statements are an integral part of these consolidated statements.

 

 

NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Balance Sheets (continued)

(in thousands, except share and per share amounts)

 

 

The accompanying notes to interim condensed consolidated financial statements are an integral part of these consolidated statements.

 

 

NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Statements of Cash Flows

(unaudited – in thousands)

 

 

The accompanying notes to interim condensed consolidated financial statements are an integral part of these consolidated statements.

 

 

NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share and per share amounts)

(unaudited)

 

For the nine months ended September 30, 2023:

 

 

 

For the nine months ended September 30, 2022: 

 

The accompanying notes to interim condensed consolidated financial statements are an integral part of these consolidated statements.

 

 

NATIONAL HEALTHCARE CORPORATION

Notes to Interim Condensed Consolidated Financial Statements

September 30, 2023

(unaudited) 

 

 

 

Note 1 – Description of Business

 

National HealthCare Corporation (“NHC” or the “Company”) is a leading provider of senior health care services. As of September 30, 2023, we operate or manage, through certain affiliates, 68 skilled nursing facilities with a total of 8,732 licensed beds, 26 assisted living facilities with 1,501 units, five independent living facilities, three behavioral health hospitals, 35 homecare agencies, and 30 hospice agencies. We operate specialized care units within certain of our healthcare centers such as Alzheimer's disease care units and sub-acute nursing units. In addition, we provide insurance services, management and accounting services, and we lease properties to operators of skilled nursing and assisted living facilities. We operate in 8 states and are located primarily in the southeastern United States.

 

 

Note 2 – Summary of Significant Accounting Policies

 

The listing below is not intended to be a comprehensive list of all our significant accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by U.S. generally accepted accounting principles (“GAAP”), with limited 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 December 31, 2022 consolidated financial statements and notes thereto which contain accounting policies and other disclosures required by U.S. GAAP. Our audited December 31, 2022 consolidated financial statements are available at our web site: www.nhccare.com.

 

Basis of Presentation

 

The unaudited interim condensed consolidated financial statements to which these notes are attached include all normal, recurring adjustments which are necessary to fairly present the financial position, results of operations and cash flows of NHC. All significant intercompany transactions and balances have been eliminated in consolidation. The consolidated financial statements include the accounts of all entities controlled by NHC. The Company presents noncontrolling interest within the equity section of its consolidated balance sheets. The Company presents the amount of consolidated net income that is attributable to NHC and the noncontrolling interest in its consolidated statements of operations.

 

We assume that users of these interim financial statements have read or have access to the audited December 31, 2022 consolidated financial statements and that the adequacy of additional disclosure needed for a fair presentation, except in regard to material contingencies, may be determined in that context. Accordingly, footnotes and other disclosures which would substantially duplicate the disclosure contained in our most recent annual report to stockholders have been omitted. This interim financial information is not necessarily indicative of the results that may be expected for a full year for a variety of reasons.

 

Estimates and Assumptions

 

The preparation of financial statements in conformity with U.S. GAAP 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 could cause our reported net income to vary significantly from period to period.

 

Net Patient Revenues and Accounts Receivable

 

Net patient revenues are derived from services rendered to patients for skilled and intermediate nursing, rehabilitation therapy, assisted living and independent living, home health care services, hospice services, and behavioral health services. Net patient revenue is reported at the amount that reflects the consideration to which the Company expects to be entitled in exchange for providing patient services. These amounts are due from patients, governmental programs, and other third-party payors, and include variable consideration for retroactive revenue adjustments due to settlement of audits, reviews, and investigations.

 

The Company recognizes revenue as its performance obligations are completed. Routine services are treated as a single performance obligation satisfied over time as services are rendered. These routine services represent a bundle of services that are not capable of being distinct. The performance obligations are satisfied over time as the patient simultaneously receives and consumes the benefits of the healthcare services provided. Additionally, there may be ancillary services which are not included in the daily rates for routine services, but instead are treated as separate performance obligations satisfied at a point in time when those services are rendered.  Contract liabilities are recorded for payments the Company receives in which performance obligations have not been completed.

 

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The Company determines the transaction price based on established billing rates reduced by explicit price concessions provided to third party payors. Explicit price concessions are based on contractual agreements and historical experience. The Company considers the patient's ability and intent to pay the amount of consideration upon admission. Credit losses are recorded as bad debt expense, which is included as a component of other operating expenses in the interim condensed consolidated statements of operations. Bad debt expense was $1,668,000 and $5,331,000 for the three and nine months ended September 30, 2023, respectively. For the three and nine months ended September 30, 2022, bad debt expense was $1,685,000 and $6,026,000, respectively. As of September 30, 2023 and December 31, 2022, the Company has recorded allowance for doubtful accounts of $8,598,000 and $6,246,000, respectively, as our best estimate of expected losses inherent in the accounts receivable balance.

 

Other Revenues

 

Other revenues include revenues from the provision of insurance services to other healthcare providers, management and accounting services to other healthcare providers, and rental income. Our insurance revenues consist of premiums that are generally paid in advance and then amortized into income over the policy period. We charge for management services based on a percentage of net revenues. We charge for accounting services based on a monthly fee or a fixed fee per bed of the healthcare center under contract. We record other revenues as the performance obligations are satisfied based on the terms of our contractual arrangements.

 

We recognize rental income based on the terms of our operating leases. Under certain of our leases, we receive variable rent, which is based on the increase in revenues of a lessee over a base year. We recognize variable rent annually or monthly, as applicable, when, based on the actual revenue of the lessee is earned.

 

Government Grants

 

We account for government grants in accordance with International Accounting Standard (“IAS”) 20, Accounting for Government Grants and Disclosure of Government Assistance, and as such, we recognize grant income on a systematic basis in line with the recognition of specific expenses and lost revenues for which the grants are intended to compensate.   

 

Segment Reporting

 

In accordance with the provisions of Accounting Standards Codification ("ASC") 280, Segment Reporting, the Company is required to report financial and descriptive information about its reportable operating segments. The Company has two reportable operating segments: (1) inpatient services, which includes the operation of skilled nursing facilities, assisted and independent living facilities, and behavioral health hospitals, and (2) homecare and hospice services. The Company also reports an “all other” category that includes revenues from rental income, management and accounting services fees, insurance services, and costs of the corporate office. See Note 7 for further disclosure of the Company’s operating segments.

 

Other Operating Expenses

 

Other operating expenses include the costs of care and services that we provide to the residents of our facilities and the costs of maintaining our facilities. Our primary patient care costs include drugs, medical supplies, purchased professional services, food, and professional liability insurance and licensing fees. The primary facility costs include utilities and property insurance.

 

General and Administrative Costs

 

With the Company being a healthcare provider, the majority of our expenses are "cost of revenue" items. Costs that could be classified as "general and administrative" by the Company would include its corporate office costs, excluding stock-based compensation and incentive compensation, which were $5,661,000 and $16,309,000 for the three and nine months ended September 30, 2023, respectively. General and administrative costs were $6,050,000 and $16,636,000 for the three and nine months ended September 30, 2022, respectively.

 

Long-Term Leases

 

The Company’s lease portfolio primarily consists of finance and operating real estate leases for certain skilled nursing facilities, assisted and independent living facilities, homecare and hospice offices, and pharmacy warehouses. The original terms of the leases typically range from two to fifteen years. Several of the real estate leases include renewal options which vary in length and may not include specific rent renewal amounts. We determine if an arrangement is a lease at inception of a contract. We determine the lease term by assuming exercise of renewal options that are reasonably certain.

 

The Company records right-of-use assets and liabilities for non-cancelable real estate operating leases with original or remaining lease terms in excess of one year. Leases with a lease term of 12 months or less at inception are expensed on a straight-line basis over the lease term. We recognize lease components and non-lease components together and not as separate parts of a lease for real estate leases.

 

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Operating lease right-of-use assets and liabilities are recorded at the present value of the lease payments over the lease term. The present value of the lease payments are discounted using the incremental borrowing rate associated with each lease. The variable components of the lease payment that fluctuate with the operations of a health facility are not included in determining the right-of-use assets and lease liabilities. Rather, these variable components are expensed as incurred.

 

Property and Equipment

 

Property and equipment are recorded at cost. Depreciation is provided by the straight-line method over the expected useful lives of the assets estimated as follows: buildings and improvements, 20-40 years and equipment and furniture, 3-15 years. Leasehold improvements are amortized over periods that do not exceed the non-cancelable respective lease terms using the straight-line method.

 

Finance leases are recorded at cost. Finance leases are amortized in accordance with the provision codified within ASC 842, Leases. Amortization of finance lease assets is included in depreciation and amortization expense.

 

Business Combinations

 

We account for acquisitions using the acquisition method of accounting in accordance with ASC 805, Business Combinations. Acquisitions are accounted for as purchases and are included in our consolidated financial statements from their respective acquisition dates. Assets acquired and liabilities assumed, if any, are measured at fair value on the acquisition date using the appropriate valuation method. Goodwill generated from acquisitions is recognized for the excess of the purchase price over the fair value of tangible and identifiable intangible assets acquired and liabilities assumed. In determining the fair value of identifiable assets, we use various valuation techniques. These valuation methods require us to make estimates and assumptions surrounding projected revenues and costs, future growth, and discount rates.

 

Goodwill and Other Intangible Assets

 

Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations. Goodwill is not amortized but is subject to an annual impairment test. We perform our annual goodwill impairment assessment on the first day of the fourth quarter.  Tests are performed more frequently if events occur, or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount.

 

The Company’s indefinite-lived intangible assets consist of trade names and certificates of need and licenses. The Company reviews indefinite-lived intangible assets for impairment on an annual basis or more frequently if events or changes in circumstances indicate that the fair value of the intangible asset is below its carrying amount.

 

Accrued Risk Reserves  

 

We are self–insured for risks related to workers' compensation and general and professional liability insurance. We have two wholly–owned limited purpose insurance companies that insure these risks. The accrued risk reserves include a liability for reported claims and estimates for incurred but unreported claims. Our policy is to engage an external, independent actuary to assist in estimating our exposure for claims obligations (for both asserted and unasserted claims). We reassess our accrued risk reserves on a quarterly basis.

 

Professional liability remains an area of particular concern to us. The long-term care industry has seen an increase in personal injury/wrongful death claims based on alleged negligence by skilled nursing facilities and their employees in providing care to residents. The Company has been, and continues to be, subject to claims and legal actions that arise in the ordinary course of business, including potential claims related to patient care and treatment. A significant increase in the number of these claims, or an increase in the amounts due as a result of these claims could have a material adverse effect on our consolidated 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 are principally self-insured for incidents occurring in all centers owned or leased by us. The coverage includes both primary policies and excess policies. In all years, settlements, if any, in excess of available insurance policy limits and our own reserves would be expensed by us.

 

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Continuing Care Contracts

 

We have one continuing care retirement center (“CCRC”) within our operations. Residents at this retirement center may enter into continuing care contracts with us. The contracts provide that 10% of the resident entry fee becomes non-refundable upon occupancy, and the remaining refundable portion of the entry fee is calculated using the lessor of the price at which the apartment is re-assigned or 90% of the original entry fee, plus 40% of any appreciation if the apartment value exceeds the original resident’s entry fee.

 

Non-refundable fees are included as a component of the transaction price and are amortized into revenue over the actuarily determined remaining life of the resident, which is the expected period of occupancy by the resident. We pay the refundable portion of our entry fees to residents when they relocate from our community and the apartment is re-occupied. Refundable entrance fees are not included as part of the transaction price and are classified as noncurrent liabilities in our consolidated balance sheets. 

 

We also annually estimate the present value of the cost of future services and the use of facilities to be provided to the current CCRC residents and compare that amount with the balance of non-refundable deferred revenue from entrance fees received. If the present value of the cost of future services exceeds the related anticipated revenues, a liability is recorded with a corresponding charge to income. As of September 30, 2023, and December 31, 2022, we have recorded a future service obligation liability in the amount of $2,218,000. This obligation is reflected within other noncurrent liabilities in the interim condensed consolidated balance sheets. 

 

Other Noncurrent Liabilities

 

Other noncurrent liabilities include reserves primarily related to various uncertain income tax positions, deferred revenue, and obligations to provide future services to our CCRC residents. Deferred revenue includes the deferred gain on the sale of assets to National Health Corporation (“National”) and the non-refundable portion (10%) of CCRC entrance fees being amortized over the remaining life expectancies of the residents.

 

Noncontrolling Interest

 

The noncontrolling interest in a subsidiary is presented within total equity in the Company's interim condensed consolidated balance sheets. The Company presents the noncontrolling interest and the amount of consolidated net income attributable to NHC in its interim condensed consolidated statements of operations. The Company’s earnings per share is calculated based on net income attributable to NHC’s stockholders. The carrying amount of the noncontrolling interest is adjusted based on an allocation of the subsidiary earnings, contributions, and distributions.

 

Variable Interest Entities

 

We have equity interests in unconsolidated limited liability companies that operate various post-acute and senior healthcare businesses. We analyze our investments in these limited liability companies to determine if the company is considered a variable interest entity (“VIE”) and would require consolidation. To the extent that we own interests in a VIE and we (i) have the power to direct the activities of the VIE and (ii) have the obligation or rights to absorb the VIE's losses or receive its benefits, then we would be determined to be the primary beneficiary and would consolidate the VIE. To the extent we own interests in a VIE, then at each reporting period, we re-assess our conclusions as to which, if any, party within the VIE is considered the primary beneficiary.

 

The Company's maximum exposure to losses in its investments in unconsolidated VIEs cannot be quantified and may or may not be limited to its investment in the unconsolidated VIE. The investments in unconsolidated VIEs are classified as “investments in unconsolidated companies” in the interim condensed consolidated balance sheets. 

 

 

Note 3 – Coronavirus Pandemic

 

In early March 2020, COVID-19, a disease caused by the novel strain of the coronavirus, was characterized as a pandemic by the World Health Organization. The U.S. government enacted several laws beginning in March 2020 designed to help the nation respond to the COVID-19 pandemic. The laws impacted healthcare providers in a variety of ways, but the largest legislation from a monetary relief perspective was the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). Through the CARES Act, as well as the Paycheck Protection Program and Health Care Enhancement Act ("PPPCHE"), the federal government allocated $178 billion to the Public Health and Social Services Emergency Fund, which is referred to as the Provider Relief Fund. The Provider Relief Fund is administered through grants and other mechanisms to skilled nursing providers, home health providers, hospitals, and other Medicare and Medicaid enrolled providers to cover unreimbursed health care related expenses or lost revenue attributable to the public health emergency resulting from COVID-19.  

 

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The Provider Relief Fund grants come with terms and condition certifications in which all providers are required to submit documents to ensure the funds are used for healthcare-related expenses or lost revenue attributable to COVID-19. The Company recorded $0 of government stimulus income from the Provider Relief Funds for the three months ended September 30, 2023 and 2022. The Company recorded $0 and $10,940,000 of government stimulus income from the Provider Relief Funds for the nine months ended September 30, 2023 and 2022, respectively. The grant income was determined on a systematic basis in line with the recognition of specific expenses and lost revenues for which the grants are intended to compensate. The Company’s assessment of whether the terms and conditions for amounts received have been met for income recognition and the Company’s related income calculation considered all frequently asked questions and other interpretive guidance issued to date by the U.S. Department of Health and Human Services (“HHS”).

 

We have also received supplemental Medicaid payments from many of the states in which we operate to help mitigate the incremental costs resulting from the COVID-19 public health emergency. We have recorded $4,232,000 and $4,773,000 in net patient revenues for these supplemental Medicaid payments for the three months ended September 30, 2023 and 2022, respectively. We have recorded $15,362,000 and $15,312,000 in net patient revenues for these supplemental Medicaid payments for the nine months ended September 30, 2023 and 2022, respectively.

 

 

Note 4 – Net Patient Revenues

 

The Company disaggregates revenue from contracts with customers by service type and by payor.

 

Revenue by Service Type

 

The Company’s net patient services can generally be classified into the following two categories: (1) inpatient services, which includes the operation of skilled nursing facilities, assisted and independent living facilities, and behavioral health hospitals, and (2) homecare and hospice services (in thousands).

 

		Three Months Ended September 30								Nine Months Ended September 30
		2023				2022				2023				2022
Net patient revenues:
Inpatient services		$	243,865			$	228,138			$	706,795			$	680,776
Homecare and hospice			33,140				32,109				97,822				95,885
Total net patient revenue		$	277,005			$	260,247			$	804,617			$	776,661

 

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For inpatient and hospice services, revenue is recognized on a daily basis as each day represents a separate contract and performance obligation. For homecare, revenue is recognized when services are provided based on the number of days of service rendered in the period of care or on a per-visit basis. Typically, patients and third-party payors are billed monthly after services are performed or the patient is discharged, and payments are due based on contract terms.

 

As our performance obligations relate to contracts with a duration of one year or less, the Company is not required to disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period. The Company has minimal unsatisfied performance obligations at the end of the reporting period as our patients are typically under no obligation to remain admitted in our facilities or under our care.  As the period between the time of service and time of payment is typically one year or less, the Company did not adjust for the effects of a significant financing component.

 

Revenue by Payor

 

Certain groups of patients receive funds to pay the cost of their care from a common source. The following table sets forth sources of net patient revenues for the periods indicated:

 

		Three Months Ended September 30								Nine Months Ended September 30
Source		2023				2022				2023				2022
Medicare			33%				37%				35%				37%
Managed Care			10%				9%				10%				10%
Medicaid			32%				29%				30%				28%
Private Pay and Other			25%				25%				25%				25%
Total			100%				100%				100%				100%

 

Medicare covers skilled nursing services for beneficiaries who require nursing care and/or rehabilitation services following a hospitalization of at least three consecutive days. For each eligible day a Medicare beneficiary is in a skilled nursing facility, Medicare pays the facility a daily payment, subject to adjustment for certain factors such as a wage index in the geographic area. The payment covers all services provided by the skilled nursing facility for the beneficiary that day, including room and board, nursing, therapy and drugs, as well as an estimate of capital–related costs to deliver those services.

 

For homecare services, Medicare pays based on the acuity level of the patient and based on periods of care. A period of care is defined as a length of care up to 30 days with multiple continuous periods allowed. The services covered by the payment include all disciplines of care, in addition to medical supplies, within the scope of the home health benefit.

 

For hospice services, Medicare pays a daily rate to cover the hospice’s costs for providing services included in the patient care plan. Medicare makes daily payments based on 1 of 4 levels of hospice care. All hospice care and services offered to patients and their families must follow an individualized written plan of care that meets the patient’s needs.

 

Our hospice service revenue is subject to certain limitations on payments from Medicare. We are subject to an inpatient cap limit and an overall Medicare payment cap for each provider number. We monitor these caps on a provider-by-provider basis and estimate amounts due back to Medicare if we estimate a cap has been exceeded. If applicable, we record these cap adjustments as a reduction to revenue.

 

Medicaid is operated by individual states with the financial participation of the federal government. The states in which we operate currently use prospective cost–based reimbursement systems. Under cost–based reimbursement systems, the skilled nursing facility is reimbursed for the reasonable direct and indirect allowable costs it incurred in a base year in providing routine resident care services as defined by the program.

 

Private pay, managed care, and other payment sources include commercial insurance, individual patient funds, managed care plans and the Veterans Administration. Private paying patients, private insurance carriers and the Veterans Administration generally pay based on the healthcare center's charges or specifically negotiated contracts. For private pay patients in skilled nursing, assisted living and independent living facilities, the Company bills for room and board charges, with the remittance being due on receipt of the statement and generally by the 10th day of the month the services are performed.

 

Certain managed care payors for homecare services pay on a per-visit basis. This revenue is recorded on an accrual basis based upon the date of services at amounts equal to its established or estimated per-visit rates.     

 

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Third Party Payors

 

Laws and regulations governing Medicare and Medicaid programs are complex and subject to interpretation. Noncompliance with such laws and regulations can be subject to regulatory actions including fines, penalties, and exclusion from the Medicare and Medicaid programs. We believe that we are following all applicable laws and regulations.

 

Medicare and Medicaid program revenues, as well as certain Managed Care program revenues, are subject to audit and retroactive adjustment by government representatives or their agents. Settlements with third-party payors for retroactive adjustments due to audits, reviews or investigations are considered variable consideration and are included in the determination of the estimated transaction price for providing patient care. These settlements are estimated based on the terms of the payment agreement with the payor, correspondence from the payor and the Company’s historical settlement activity, including an assessment to ensure that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the retroactive adjustment is subsequently resolved. Estimated settlements are adjusted in future periods as adjustments become known, or as years are settled or are no longer subject to such audits, reviews, and investigations. We believe that any differences between the net revenues recorded, and final determination will not materially affect the consolidated financial statements. We have made provisions of approximately $15,588,000 and $16,631,000 as of September 30, 2023 and December 31, 2022, respectively, for various Medicare, Medicaid, and Managed Care claims reviews and current and prior year cost reports.

 

 

Note 5 – Other Revenues

 

Other revenues are outlined in the table below. Revenues from rental income include health care real estate properties owned by us and leased to third party operators. Revenues from management and accounting services include fees provided to manage and provide accounting services to other healthcare operators. Revenues from insurance services include premiums for workers’ compensation and professional liability insurance policies that our wholly owned insurance subsidiaries have written for certain healthcare operators to which we provide management or accounting services. "Other" revenues include miscellaneous health care related earnings (in thousands).

 

		Three Months Ended September 30								Nine Months Ended September 30
		2023				2022				2023				2022
Rental income		$	5,958			$	5,830			$	17,966			$	17,642
Management and accounting services fees			4,185				3,922				14,045				11,993
Insurance services			989				1,015				2,920				3,497
Other			348				(171	)			1,082				452
Total other revenues		$	11,480			$	10,596			$	36,013			$	33,584

 

Rental Income

 

The Company leases real estate assets consisting of skilled nursing facilities and assisted living facilities to third party operators. Additionally, we sublease four Florida skilled nursing facilities included in our lease from National Health Investors (“NHI”) as noted in Note 8 – Long Term Leases.

 

Management Fees from National Health Corporation

 

We manage five skilled nursing facilities owned by National Health Corporation (“National”). We recognized management fees and interest on management fees from these facilities of $1,243,000 and $1,029,000 for the three months ended September 30, 2023 and 2022, respectively. We recognized management fees and interest on management fees of $3,968,000 and $3,012,000 from these facilities for the nine months ended September 30, 2023 and 2022, respectively.

 

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Insurance Services

 

For workers’ compensation insurance services, the premium revenues reflected in the interim condensed consolidated statements of operations for the three months ended September 30, 2023 and 2022 were $678,000 and $496,000, respectively. The premium revenues reflected in the interim condensed consolidated statements of operations for the nine months ended September 30, 2023 and 2022 were $1,985,000 and $1,939,000, respectively. Associated losses and expenses including those for self-insurance are included in the interim condensed consolidated statements of operations as "Salaries, wages and benefits."

 

For professional liability insurance services, the premium revenues reflected in the interim condensed consolidated statements of operations for the three months ended September 30, 2023 and 2022 were $312,000 and $519,000, respectively. The premium revenues reflected in the interim condensed consolidated statements of operations for the nine months ended September 30, 2023 and 2022 were $935,000 and $1,558,000, respectively. Associated losses and expenses including those for self–insurance are included in the interim condensed consolidated statements of operations as "Other operating costs and expenses".

 

 

Note 6 – Non–Operating Income

 

Non–operating income includes equity in earnings of unconsolidated investments, dividends and other realized gains and losses on sales of marketable securities, and interest income (in thousands).

 

		Three Months Ended September 30								Nine Months Ended September 30
		2023				2022				2023				2022
Dividends and net realized gains and losses on sales of securities		$	1,690			$	1,324			$	4,604			$	4,381
Interest income			2,222				1,373				5,571				3,572
Equity in earnings of unconsolidated investments			185				34				1,941				498
Total non-operating income		$	4,097			$	2,731			$	12,116			$	8,451

 

 

Note 7 – Business Segments

 

The Company has two reportable operating segments: (1) inpatient services, which includes the operation of skilled nursing facilities, assisted and independent living facilities, and behavioral health hospitals; and (2) homecare and hospice services. These reportable operating segments are consistent with information used by the Company’s Chief Executive Officer, as chief operating decision maker (“CODM”), to assess performance and allocate resources. The Company also reports an “all other” category that includes revenues from rental income, management and accounting services fees, insurance services, and costs of the corporate office.

 

The Company’s CODM evaluates performance and allocates capital resources to each segment based on an operating model that is designed to improve the quality of patient care and profitability of the Company while enhancing long-term shareholder value. The CODM does not review assets by segment in his resource allocation and therefore, assets by segment are not disclosed below.

 

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The following table sets forth the Company’s unaudited interim condensed consolidated statements of operations by business segment (in thousands):

 

		Three Months Ended September 30, 2023
		Inpatient Services				Homecare and Hospice				All Other				Total
Revenues:
Net patient revenues		$	243,865			$	33,140			$	-			$	277,005
Other revenues			297				-				11,183				11,480
Net operating revenues			244,162				33,140				11,183				288,485
Costs and expenses:
Salaries, wages, and benefits			151,912				20,066				10,686				182,664
Other operating			64,228				5,868				2,394				72,490
Rent			8,186				538				1,370				10,094
Depreciation and amortization			9,203				185				747				10,135
Interest			77				-				-				77
Total costs and expenses			233,606				26,657				15,197				275,460
Income/(loss) from operations			10,556				6,483				(4,014	)			13,025
Non-operating income			-				-				4,097				4,097
Unrealized losses on marketable equity securities			-				-				(3,093	)			(3,093	)
Income/(loss) before income taxes		$	10,556			$	6,483			$	(3,010	)		$	14,029

 

 

		Three Months Ended September 30, 2022
		Inpatient Services				Homecare and Hospice				All Other				Total
Revenues:
Net patient revenues		$	228,138			$	32,109			$	-			$	260,247
Other revenues			(198	)			-				10,794				10,596
Net operating revenues			227,940				32,109				10,794				270,843
Costs and expenses:
Salaries, wages, and benefits			144,047				19,581				9,570				173,198
Other operating			66,522				6,310				51				72,883
Rent			8,088				575				1,631				10,294
Depreciation and amortization			9,198				248				807				10,253
Interest			137				-				-				137
Total costs and expenses			227,992				26,714				12,059				266,765
Income/(loss) from operations			(52	)			5,395				(1,265	)			4,078
Non-operating income			-				-				2,731				2,731
Unrealized losses on marketable equity securities			-				-				(11,056	)			(11,056	)
Income/(loss) before income taxes		$	(52	)		$	5,395			$	(9,590	)		$	(4,247	)

 

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		Nine Months Ended September 30, 2023
		Inpatient Services				Homecare and Hospice				All Other				Total
Revenues:
Net patient revenues		$	706,795			$	97,822			$	-			$	804,617
Other revenues			894				-				35,119				36,013
Net operating revenues			707,689				97,822				35,119				840,630
Costs and expenses:
Salaries, wages, and benefits			435,517				60,804				29,461				525,782
Other operating			192,473				17,356				7,384				217,213
Rent			24,520				1,639				3,928				30,087
Depreciation and amortization			27,474				555				2,237				30,266
Interest			268				-				-				268
Total costs and expenses			680,252				80,354				43,010				803,616
Income/(loss) from operations			27,437				17,468				(7,891	)			37,014
Non-operating income			-				-				12,116				12,116
Unrealized gains on marketable equity securities			-				-				2,943				2,943
Income before income taxes		$	27,437			$	17,468			$	7,168			$	52,073

 

 

		Nine Months Ended September, 2022
		Inpatient Services				Homecare and Hospice				All Other				Total
Revenues and grant income:
Net patient revenues		$	680,776			$	95,885			$	-			$	776,661
Other revenues			15				-				33,569				33,584
Government stimulus income			10,940				-				-				10,940
Net operating revenues and grant income			691,731				95,885				33,569				821,185
Costs and expenses:
Salaries, wages, and benefits			435,322				58,007				25,499				518,828
Other operating			192,791				19,848				5,640				218,279
Rent			24,498				1,759				4,513				30,770
Depreciation and amortization			27,120				472				2,419				30,011
Interest			451				-				-				451
Total costs and expenses			680,182				80,086				38,071				798,339
Income/(loss) from operations			11,549				15,799				(4,502	)			22,846
Non-operating income			-				-				8,451				8,451
Unrealized losses on marketable equity securities			-				-				(11,479	)			(11,479	)
Income/(loss) before income taxes		$	11,549			$	15,799			$	(7,530	)		$	19,818

 

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Note 8 – Long-Term Leases

 

Operating Leases

 

At September 30, 2023, we lease from NHI the real property of 28 skilled nursing facilities, five assisted living centers and three independent living centers under one lease agreement. As part of the lease agreement, we sublease four Florida skilled nursing facilities to a third-party operator. The lease includes base rent plus a percentage rent. The annual base rent is $34,075,000 in 2023, $32,625,000 in 2024, $32,225,000 in 2025, and $31,975,000 in 2026 with the lease term expiring in 2026. The percentage rent is based on a quarterly calculation of revenue increases and is payable on a quarterly basis. Total facility rent expense to NHI was $9,300,000 and $9,478,000 for the three months ended September 30, 2023 and 2022, respectively. Total facility rent expense to NHI was $27,719,000 and $28,293,000 for the nine months ended September 30, 2023 and 2022, respectively.

 

Finance Leases

 

At September 30, 2023, we leased and operated three senior healthcare facilities in the state of Missouri under three separate lease agreements. Two of the healthcare facilities are skilled nursing facilities that also include assisted living facilities and the third healthcare facility is a memory care facility. Each of the leases is a ten-year lease with two five–year renewal options with the original lease expiring in 2024. Under the terms of the leases, base rent totals $5,200,000 annually with rent thereafter escalating by 4% of the increase in facility revenue over the 2014 base year.

 

Minimum Lease Payments

 

The following table summarizes the maturity of our finance and operating lease liabilities as of September 30, 2023 (in thousands):

 

		Finance Leases				Operating Leases
2024		$	2,166			$	34,765
2025			-				33,699
2026			-				32,991
2027			-				8,510
2028			-				184
Thereafter			-				4
Total minimum lease payments			2,166				110,153
Less: amounts representing interest			(32	)			(10,731	)
Present value of future minimum lease payments			2,134				99,422
Less: current portion			(2,134	)			(29,222	)
Noncurrent lease liabilities		$	-			$	70,200

 

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Note 9 – Earnings per Share

 

Basic net income per share is computed based on the weighted average number of common shares outstanding for each period presented. Diluted net income per share reflects the potential dilution that would have occurred if securities to issue common stock were exercised, converted, or resulted in the issuance of common stock that would have then shared in our earnings.

 

The following table summarizes the earnings and the weighted average number of common shares used in the calculation of basic and diluted earnings per share (in thousands, except for share and per share amounts):

 

		Three Months Ended September 30								Nine Months Ended September 30
		2023				2022				2023				2022
Basic:
Weighted average common shares outstanding			15,299,913				15,445,569				15,311,453				15,438,375
Net income attributable to National HealthCare Corporation		$	10,388			$	(2,429	)		$	38,392			$	16,092
Earnings per common share, basic		$	0.68			$	(0.16	)		$	2.51			$	1.04
Diluted:
Weighted average common shares outstanding			15,299,913				15,445,569				15,311,453				15,438,375
Effects of dilutive instruments			24,598				-				22,816				38,728
Weighted average common shares outstanding			15,324,511				15,445,569				15,334,269				15,477,103
Net income attributable to National HealthCare Corporation		$	10,388			$	(2,429	)		$	38,392			$	16,092
Earnings per common share, diluted		$	0.68			$	(0.16	)		$	2.50			$	1.04

 

In the above table, options to purchase 637,409 and 389,781 shares of our common stock have been excluded for the nine months ended September 30, 2023 and 2022, respectively, due to their anti-dilutive impact.

 

 

Note 10 – Investments in Marketable Securities

 

Our investments in marketable equity securities are carried at fair value with the changes in unrealized gains and losses recognized in our results of operations at each measurement date. Our investments in marketable debt securities are classified as available for sale securities and carried at fair value with the unrealized gains and losses recognized through accumulated other comprehensive income at each measurement date. Any credit-related decline in fair market values below the amortized cost of our available for sale debt securities are recorded in our results of operations through an allowance for credit losses. Realized gains and losses from securities sales are recognized in results of operations upon disposition of the securities using the specific identification method on a trade date basis. Refer to Note 11 for a description of the Company's methodology for determining the fair value of marketable securities. 

 

Marketable securities consist of the following (in thousands):

 

		September 30, 2023								December 31, 2022
		Amortized Cost				Fair Value				Amortized Cost				Fair Value
Investments available for sale:
Marketable equity securities		$	30,176			$	102,137			$	30,176			$	100,786
Corporate debt securities			4,358				4,252				14,317				13,885
Asset-backed securities			-				-				500				494
U.S. Treasury securities			3,838				3,797				9,009				8,757
Restricted investments available for sale:
Marketable equity securities			24,059				23,683				24,326				22,358
Corporate debt securities			57,745				53,928				54,412				51,009
Asset-based securities			20,661				18,572				24,605				22,437
U.S. Treasury securities			47,824				42,401				45,989				41,294
State and municipal securities			4,133				3,961				4,877				4,771
		$	192,794			$	252,731			$	208,211				265,791

 

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Included in the marketable equity securities are the following (in thousands, except share amounts):

 

		September 30, 2023												December 31, 2022
		Shares				Cost				Fair Value				Shares				Cost				Fair Value
NHI Common Stock			1,630,642			$	24,734			$	83,750				1,630,642			$	24,734			$	85,152

 

The amortized cost and estimated fair value of debt securities classified as available for sale, by contractual maturity, are as follows (in thousands):

 

		September 30, 2023								December 31, 2022
		Cost				Fair Value				Cost				Fair Value
Maturities:
Within 1 year		$	21,937			$	21,534			$	33,662			$	33,037
1 to 5 years			76,971				71,362				81,500				76,394
6 to 10 years			38,178				32,606				38,547				33,216
Over 10 years			1,473				1,409				-				-
		$	138,559			$	126,911			$	153,709			$	142,647

 

Gross unrealized gains related to marketable equity securities are $73,823,000 and $71,869,000 as of September 30, 2023 and December 31, 2022, respectively. Gross unrealized losses related to marketable equity securities are $2,238,000 and $3,227,000 as of September 30, 2023 and December 31, 2022, respectively. For the three months ended September 30, 2023 and 2022, the Company recognized net unrealized losses of $3,093,000 and $11,056,000, respectively, for the changes in fair market value of the marketable equity securities in the interim condensed consolidated statements of operations. For the nine months ended September 30, 2023 and 2022, the Company recognized net unrealized gains of $2,943,000 and net unrealized losses of $11,479,000, respectively, for the changes in fair market value of the marketable equity securities in the interim condensed consolidated statements of operations.

 

Gross unrealized gains related to available for sale marketable debt securities are $3,000 and $9,000 as of September 30, 2023 and December 31, 2022, respectively. Gross unrealized losses related to available for sale marketable debt securities are $11,651,000, comprised of securities with a fair value of $123,530,000, as of September 30, 2023.  Gross unrealized losses related to available for sale marketable debt securities are $11,071,000, comprised of securities with a fair value of $139,629,000, as of December 31, 2022.

 

The Company’s unrealized losses in our available for sale marketable debt securities were determined to be non-credit related. The Company has not recognized any credit related impairments for the nine months ended  September 30, 2023 and 2022.

 

For the marketable debt securities in gross unrealized loss positions, (a) it is more likely than not that the Company will not be required to sell the investment securities before recovery of the unrealized losses, and (b) the Company expects that the contractual principal and interest will be received on the investment securities.

 

Proceeds from the sale of available for sale marketable securities during the nine months ended September 30, 2023 and 2022 were $36,578,000 and $38,114,000, respectively. Investment losses of $603,000 and $756,000 were realized on these sales during the nine months ended September 30, 2023 and 2022, respectively. 

 

 

Note 11 – Fair Value Measurements

 

The accounting standard for fair value measurements provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. Fair value is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. This accounting standard establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs, where available. The following summarizes the three levels of inputs that may be used to measure fair value:

 

	Level 1  – The valuation is based on quoted prices in active markets for identical instruments.
	Level 2 – The valuation is based on observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model–based valuation techniques for which all significant assumptions are observable in the market.
	Level 3 – The valuation is based on unobservable inputs that are supported by minimal or no market activity and that are significant to the fair value of the instrument. Level 3 valuations are typically performed using pricing models, discounted cash flow methodologies, or similar techniques that incorporate management’s own estimates of assumptions that market participants would use in pricing the instrument, or valuations that require significant management judgment or estimation.

 

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A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

 

The following table summarizes fair value measurements by level at September 30, 2023 and December 31, 2022 for assets and liabilities measured at fair value on a recurring basis (in thousands):

 

		Fair Value Measurements Using
September 30, 2023		Fair Value				Quoted Prices in Active Markets For Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Cash and cash equivalents		$	100,308			$	100,308			$	–			$	–
Restricted cash and cash equivalents			19,947				19,947				–				–
Marketable equity securities			125,820				125,820				–				–
Corporate debt securities			58,180				34,905				23,275				–
Mortgage–backed securities			18,572				–				18,572				–
U.S. Treasury securities			46,198				46,198				–				–
State and municipal securities			3,961				1,288				2,673				–
Total financial assets		$	372,986			$	328,466			$	44,520			$	–

 

 

		Fair Value Measurements Using
December 31, 2022		Fair Value				Quoted Prices in Active Markets For Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Cash and cash equivalents		$	58,667			$	58,667			$	–			$	–
Restricted cash and cash equivalents			16,198				16,198				–				–
Marketable equity securities			123,144				123,144				–				–
Corporate debt securities			64,894				48,525				16,369				–
Asset–backed securities			22,931				–				22,931				–
U.S. Treasury securities			50,051				50,051				–				–
State and municipal securities			4,771				1,337				3,434				–
Total financial assets		$	340,656			$	297,922			$	42,734			$	–

 

 

Note 12 – Goodwill and Other Intangible Assets

 

At September 30, 2023, the Company reviewed the carrying value of goodwill for impairment indicators. As a result of the review, there were no impairment indicators regarding the Company’s goodwill that required a quantitative test to be performed. However, our accounting estimates could materially change from period to period due to changing market factors. We will continue to monitor future events, changes in circumstances, and the potential impact thereof. If actual results are not consistent with our assumptions and estimates, we may be exposed to future goodwill impairment losses.

 

At September 30, 2023, the following table represents the activity related to our goodwill by segment (in thousands):

 

		Inpatient Services				Homecare and Hospice				All Other				Total
January 1, 2023		$	3,741			$	164,554			$	–			$	168,295
Additions			–				–				–				–
September 30, 2023		$	3,741			$	164,554			$	–			$	168,295

 

We also have recorded indefinite-lived intangible assets that consist of trade names ($4,340,000) and certificates of need and licenses ($2,698,000).

 

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Note 13 - Stock Repurchase Program

 

During the nine months ended September 30, 2023, the Company repurchased 44,349 shares of its common stock for a total cost of $2,482,000. During the nine months ended September 30, 2022, the Company repurchased 99,547 shares of its common stock for a total cost of $6,907,000. The shares were funded from cash on hand and were cancelled and returned to the status of authorized but unissued.

 

 

Note 14 – Stock–Based Compensation

 

NHC recognizes stock–based compensation expense for all stock options granted over the requisite service period using the fair value at the date of grant using the Black–Scholes pricing model. Stock–based compensation totaled $708,000 and $639,000 for the three months ended September 30, 2023 and 2022, respectively. Stock-based compensation totaled $2,119,000 and $1,980,000 for the nine months ended September 30, 2023 and 2022, respectively. Stock–based compensation is included in “Salaries, wages and benefits” in the interim condensed consolidated statements of operations.

 

At September 30, 2023, the Company had $4,068,000 of unrecognized compensation cost related to unvested stock–based compensation awards. This unrecognized compensation cost will be amortized over an approximate two-year period.

 

Stock Options

 

The following table summarizes the significant assumptions used to value the options granted for the nine months ended September 30, 2023 and for the year ended December 31, 2022.

 

		September 30, 2023				December 31, 2022
Risk–free interest rate			4.52%				1.83%
Expected volatility			29.30%				31.40%
Expected life, in years			2.9				2.9
Expected dividend yield			4.41%				3.57%

 

The following table summarizes our outstanding stock options for the nine months ended September 30, 2023 and for the year ended December 31, 2022.

 

		Number of Shares				Weighted Average Exercise Price				Aggregate Intrinsic Value
Options outstanding at January 1, 2022			374,926			$	72.95			$	–
Options granted			302,266				64.72				–
Options exercised			(32,597	)			64.49				–
Options cancelled			(199,451	)			75.98				–
Options outstanding at December 31, 2022			445,144				66.62				–
Options granted			299,712				54.45				–
Options exercised			(7,540	)			65.39				–
Options cancelled			(47,407	)			60.75				–
Options outstanding at September 30, 2023			689,909				61.75			$	2,768,603
Options exercisable at September 30, 2023			175,847				70.97			$	–

 

 

Options Outstanding September 30, 2023			Exercise Prices						Weighted Average Exercise Price				Weighted Average Remaining Contractual Life in Years
601,514				53.94	-	69.19				59.84				3.7
88,395				71.64	-	77.92				74.72				1.6
689,909										61.75				3.5

 

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Note 15 – Income Taxes

 

The Company's income tax provision as a percentage of our income before income taxes was 27.9% for the three months ended September 30, 2023. The Company’s income tax benefit as a percentage of our income before income taxes was 26.8% for the three months ended September 30, 2022.

 

The Company's income tax provision as a percentage of our income before income taxes was 28.3% and 27.3% for the nine months ended September 30, 2023 and 2022, respectively. 

 

Typically, these percentages vary from the U.S. federal statutory income tax rate of 21% primarily due to state income taxes, excess tax benefits from stock-based compensation, benefits resulting from the lapsing of statute of limitations of items in our tax contingency reserve, and non-deductible expenses. The tax benefit related to the statute of limitation expirations was $0 for the three and nine months ended September 30, 2023. The tax benefit related to the statute of limitation expirations was $437,000 for the three and nine months ended September 30, 2022.

 

Our quarterly income tax provision, and our estimate of our annual effective income tax rate, is subject to variation due to several factors, including volatility based on the amount of pre-tax income or loss.  

 

The Company is no longer subject to U.S. federal and state examinations by tax authorities for years before 2019 (with certain state exceptions).

 

 

Note 16 – Credit Facility

 

In May 2023, we entered into an unsecured $50,000,000 credit facility that has a 364-day maturity date. Loans bear interest at the one-month secured overnight financing rate (“SOFR”) plus 1.25%. If we maintain certain aggregate deposit levels within the financial institution, the credit facility shall bear interest at one-month SOFR plus 1.10%. The credit facility is available for general corporate purposes, including working capital and acquisitions. The credit facility agreement contains customary representations and financial covenants, including covenants that restrict, among other things, asset dispositions, additional indebtedness, investments, sale-leasebacks, and certain contingent liabilities. The credit facility contains customary events of default and remedies.

 

As of September 30, 2023, we have no outstanding balance on the credit facility.

 

 

Note 17 – Contingencies and Commitments

 

Accrued Risk Reserves

 

We have wholly–owned limited purpose insurance companies that insure risks related to workers’ compensation and general and professional liability insurance claims both for our owned and leased entities and certain of the entities to which we provide management or accounting services. The liability we have recognized for reported claims and estimates for incurred but unreported claims totals $108,125,000 and $102,469,000 at September 30, 2023 and December 31, 2022, respectively. The liability is included in accrued risk reserves in the interim condensed consolidated balance sheets and is subject to adjustment for actual claims incurred. It is possible that these claims plus unasserted claims could exceed our insurance coverages and our reserves, which could have a material adverse effect on our consolidated financial position, results of operations and cash flows.

 

As a result of the terms of our insurance policies and our use of wholly owned limited purpose insurance companies, we have retained significant insurance risk with respect to workers’ compensation and general and professional liability. We consider the professional services of independent actuaries to assist us in estimating our exposures for claims obligations (for both asserted and unasserted claims) related to deductibles and exposures in excess of coverage limits, and we maintain reserves for these obligations. Such estimates are based on many variables including historical and statistical information and other factors.

 

Workers’ Compensation

 

For workers’ compensation, we utilize a wholly–owned Tennessee domiciled property/casualty insurance company to write coverage for NHC affiliates and for third–party customers. Policies are written for a duration of twelve months and cover only risks related to workers’ compensation losses. All customers are companies which operate in the senior care industry. Business is written on a direct basis. 

 

General and Professional Liability Insurance and Lawsuits

 

The senior care industry has experienced significant increases in both the number of personal injury/wrongful death claims and in the severity of awards based upon alleged negligence by skilled nursing facilities and their employees in providing care to residents. The Company has been, and continues to be, subject to claims and legal actions that arise in the ordinary course of business, including potential claims related to patient care and treatment. The defense of these lawsuits may result in significant legal costs, regardless of the outcome, and can result in large settlement amounts or damage awards. Additional insurance is purchased through third party providers that serve to supplement the coverage provided through our wholly owned captive insurance company.

 

There is certain additional litigation incidental to our business, none of which, based upon information available to date, would be material to our financial position, results of operations, or cash flows. In addition, the long–term care industry is continuously subject to scrutiny by governmental regulators, which could result in litigation or claims related to regulatory compliance matters.

 

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Qui Tam Litigation

 

United States of America, ex rel. Jennifer Cook and Sally Gaither v. Integrated Behavioral Health, Inc., NHC HealthCare/Moulton, LLC, et al., Case No. 2:20-CV-00877-AMM (N.D. Ala.)  This is a qui tam case originally filed under seal on June 22, 2020. The United States declined intervention on March 1, 2021. Thereafter, the Plaintiffs filed an amended Complaint against Dr. Sanja Malhotra, Integrated Behavioral Health, Inc. and other entities that Dr. Malhotra was alleged to own or in which he allegedly had a financial interest. The Complaint also named multiple skilled nursing facilities as Defendants, including NHC Healthcare/Moulton, LLC, an affiliate of National HealthCare Corporation. The Complaint alleged that nurse practitioners affiliated with Dr. Malhotra provided free services to the facilities in exchange for referrals to entities owned by or in which Dr. Malhotra had a financial interest in violation of the False Claims Act and Anti-Kickback Statute. NHC Healthcare/Moulton, LLC denied the allegations and filed a motion to dismiss on November 4, 2021. On January 28, 2022, the district court stayed this matter and administratively terminated the motion to dismiss pending the U.S. Supreme Court's review of a petition for certiorari filed in an unrelated matter but involving one of the legal arguments raised in the motion to dismiss. Thereafter, the U.S. Supreme Court denied the petition for certiorari in the unrelated matter. As a result, NHC Healthcare/Moulton, LLC renewed its motion to dismiss. The District Court granted NHC Healthcare/Moulton’s Motion to Dismiss, along with other pending Motions to Dismiss, and entered an Order of Dismissal on March 23, 2023 and an Amended Order of Dismissal on April 4, 2023, which dismissed the case in its entirety with prejudice with respect to the claims asserted by the Plaintiffs. The Plaintiffs filed a Notice of Appeal on April 20, 2023 to appeal the dismissal to the 11th Circuit Court of Appeals, which remains pending.

 

Governmental Regulations

 

Laws and regulations governing Medicare, Medicaid and other federal healthcare programs are complex and subject to interpretation. Management believes that it is following all applicable laws and regulations in all material respects. However, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusions from the Medicare, Medicaid and other federal healthcare programs.

 

 

Item 2.

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

 

Forward–Looking Statements

 

References throughout this document to the Company include National HealthCare Corporation and its wholly owned subsidiaries. In accordance with the Securities and Exchange Commissions “Plain English” guidelines, this Quarterly Report on Form 10–Q has been written in the first person. In this document, the words “we”, “our”, “ours” and “us” refer only to National HealthCare Corporation and its wholly–owned subsidiaries and not any other person.

 

This Quarterly Report on Form 10–Q and other information we provide from time to time, contains certain “forward–looking” statements as that term is defined by the Private Securities Litigation Reform Act of 1995. All statements regarding our expected future financial position, results of operations or cash flows, continued performance improvements, ability to service and refinance our debt obligations, ability to finance growth opportunities, ability to control our patient care liability costs, ability to respond to changes in government regulations, ability to execute our three–year strategic plan, and similar statements including, without limitations, those containing words such as “believes”, “anticipates”, “expects”, “intends”, “estimates”, “plans”, and other similar expressions are forward–looking statements.

 

 

Forward–looking statements involve known and unknown risks and uncertainties that may cause our actual results in future periods to differ materially from those projected or contemplated in the forward–looking statements as a result of, but not limited to, the following factors:

 

●	national and local economic conditions, including their effect on the availability and cost of labor, utilities and materials;
●	the effect of government regulations and changes in regulations governing the healthcare industry, including our compliance with such regulations;
●	changes in Medicare and Medicaid payment levels and methodologies and the application of such methodologies by the government and its fiscal intermediaries;
●	liabilities and other claims asserted against us, including patient care liabilities, as well as the resolution of current litigation (see Note 17: Contingencies and Commitments);
●	the ability to attract and retain qualified personnel;
●	the availability and terms of capital to fund acquisitions and capital improvements;
●	the competitive environment in which we operate;

 

●	our need to make investments continually in our processes and information systems to protect the privacy of patients, partners and other persons and reduce the risk of successful cybersecurity attacks;
●	damage to our reputation, regulatory penalties, legal claims and liability under state and federal laws that we could suffer upon any cybersecurity or privacy breaches;
●	the ability to maintain and increase census levels; and
●	demographic changes.

 

See the notes to the quarterly financial statements, and “Item 1. Business” in our 2022 Annual Report on Form 10–K for a discussion of various governmental regulations and other operating factors relating to the healthcare industry and the risk factors inherent in them. This may be found on our web site at www.nhccare.com. You should carefully consider these risks before making any investment in the Company. These risks and uncertainties are not the only ones facing us. There may be additional risks that we do not presently know of or that we currently deem immaterial. If any of the risks occur, our business, financial condition or results of operations could be materially adversely affected. In that case, the trading price of our shares of stock could decline, and you may lose all or part of your investment. Given these risks and uncertainties, we can give no assurances that these forward–looking statements will, in fact, transpire and, therefore, caution investors not to place undue reliance on them.

 

Overview

 

National HealthCare Corporation (“NHC” or the “Company”) is a leading provider of senior health care services. As of September 30, 2023, we operate or manage, through certain affiliates, 68 skilled nursing facilities with a total of 8,732 licensed beds, 26 assisted living facilities with 1,501 units, five independent living facilities, three behavioral health hospitals, 35 homecare agencies, and 30 hospice agencies. We operate specialized care units within certain of our healthcare centers such as Alzheimer's disease care units and sub-acute nursing units. In addition, we provide insurance services, management and accounting services, and we lease properties to operators of skilled nursing and assisted living facilities. We operate in 8 states and are located primarily in the southeastern United States. 

 

Impact of COVID-19

 

In early March 2020, COVID-19, a disease caused by the novel strain of the coronavirus, was characterized as a pandemic by the World Health Organization. As a provider of healthcare services, we were significantly exposed to the public health and economic effects of the COVID-19 pandemic. NHC’s primary objective was and has remained the same throughout the COVID-19 pandemic: that is to protect the health and safety of our patients, residents, and partners (employees). We continue to follow all guidance from the Centers for Medicare and Medicaid Services (“CMS”), the Centers for Disease Control and Prevention (“CDC”), and state and local health departments to prevent the spread of the disease within our operations. 

 

We began our first vaccination clinics in our skilled nursing facilities in December 2020. As the vaccination clinics progressed and as the vaccine became more accessible, we began to see a significant decline in COVID-19 cases among our operations, as well as a significant decrease in the adverse health events related to COVID. Despite the COVID-19 cases and adverse health events from COVID declining, our operating expenses remained elevated with incentive compensation being paid to attract and retain frontline partners, as well as increased costs of personal protective equipment (“PPE”), sanitizers and cleaning supplies, and COVID-19 testing of our patients and partners. Despite the continued disruption of COVID-19 to our operations, our capital and financial resources, including our overall liquidity, remain strong. Our liquidity provides us with significant flexibility to maintain the strength of our balance sheet in periods of uncertainty or stress. 

 

 

Legislation and Government Stimulus Due to COVID-19

 

The U.S. government enacted several laws beginning in March 2020 designed to help the nation respond to the COVID-19 pandemic. The new laws impacted healthcare providers in a variety of ways, but the largest legislation from a monetary relief perspective was the CARES Act. Through the CARES Act, as well as the PPPCHE, the federal government allocated $178 billion to the Public Health and Social Services Emergency Fund, which is referred to as the Provider Relief Fund. The Provider Relief Fund is administered through grants and other mechanisms to skilled nursing providers, home health providers, hospitals, and other Medicare and Medicaid enrolled providers to cover unreimbursed health care related expenses or lost revenue attributable to the public health emergency resulting from COVID-19.

 

The Provider Relief Fund grants come with terms and condition certifications in which all providers are required to submit documents to ensure the funds are used for healthcare-related expenses or lost revenue attributable to COVID-19. The Company recorded $0 of government stimulus income from the Provider Relief Funds for the three months ended September 30, 2023 and 2022. The Company recorded $0 and $10,940,000 of government stimulus income from the Provider Relief Funds for the nine months ended September 30, 2023 and 2022, respectively. The grant income was determined on a systematic basis in line with the recognition of specific expenses and lost revenues for which the grants are intended to compensate. The Company’s assessment of whether the terms and conditions for amounts received have been met for income recognition and the Company’s related income calculation considered all frequently asked questions and other interpretive guidance issued to date by the U.S. Department of Health and Human Services (“HHS”).

 

We have also received supplemental Medicaid payments from many of the states in which we operate to help mitigate the incremental costs resulting from the COVID-19 public health emergency. We have recorded $4,232,000 and $4,773,000 in net patient revenues for these supplemental Medicaid payments for the three months ended September 30, 2023 and 2022, respectively. We have recorded $15,362,000 and $15,312,000 in net patient revenues for these supplemental Medicaid payments for the nine months ended September 30, 2023 and 2022, respectively.

 

Summary of Goals and Areas of Focus

 

Occupancy

 

A primary area of management focus continues to be the rates of occupancy within our skilled nursing facilities. The overall census in owned and leased skilled nursing facilities for the three months ending September 30, 2023 was 88.1% compared to 83.7% for the same period a year ago.  For the nine months ended September 30, 2023, overall census in our owned and leased skilled nursing facilities was 87.8% compared to 83.4% for the same period a year ago.

 

Due to America’s healthcare labor shortage, the challenge of maintaining desirable patient census levels has been amplified. Management has undertaken a number of steps in order to best position our current and future health care facilities. This includes working internally to examine and improve systems to be most responsive to referral sources and payors, as well as find creative initiatives to retain and attract qualified healthcare professionals. Additionally, NHC is in various stages of partnerships with hospital systems, payors, and other post–acute alliances to better position us so we are an active participant in the delivery of post-acute healthcare services. 

 

 

Quality of Patient Care

 

CMS introduced the Five-Star Quality Rating System to help consumers, their families and caregivers compare skilled nursing facilities more easily. The Five-Star Quality Rating System gives each skilled nursing operation a rating ranging between one and five stars in various categories (five stars being the best). The Company has always strived for patient-centered care and quality outcomes as precursors to outstanding financial performance. 

 

The tables below summarize NHC's overall performance in these Five-Star ratings versus the skilled nursing industry as of September 30, 2023:

 

		NHC Ratings				Industry Ratings
Total number of skilled nursing facilities, end of period			68
Number of 4 and 5-star rated skilled nursing facilities			39
Percentage of 4 and 5-star rated skilled nursing facilities			57	%			36	%
Average rating for all skilled nursing facilities, end of period			3.6				2.9

 

Development and Growth

 

We are undertaking to expand our senior care operations while protecting our existing operations and markets. The following table lists our recent development activities.

 

Type of Operation		Description		Size		Location		Placed in Service
Homecare		New Agency		1 agency		Anderson, SC		January 2022
Hospice		New Agency		1 agency		Tullahoma, TN		March 2022
Behavioral Health Hospital		New Facility		64 beds		Knoxville, TN		April 2022
Behavioral Health Hospital		New Facility		16 beds		St. Louis, MO		June 2022
Hospice		New Agency		1 agency		Cedar Bluff, VA		March 2023
Skilled Nursing		Acquisition		66 beds		Nashville, TN		May 2023
Homecare		New Agency		1 agency		Tallahassee, FL		May 2023
Assisted Living Facility		New Operations		135 units		Vero Beach, FL		July 2023
Assisted Living Facility		New Operations		95 units		Merritt Island, FL		July 2023
Assisted Living Facility		New Operations		100 units		Stuart, FL		July 2023

 

Accrued Risk Reserves

 

Our accrued professional liability and workers’ compensation reserves totaled $108,125,000 at September 30, 2023 and are a primary area of management focus. We have set aside restricted cash and cash equivalents and marketable securities to fund our estimated 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.

 

 

Government Reimbursement Programs

 

Medicare – Skilled Nursing Facilities

 

In July 2022, CMS released its final rule outlining fiscal year 2023 Medicare payment rates and policy changes for skilled nursing facilities, which began on October 1, 2022. The fiscal year 2023 rule provided for an approximate 2.7% increase, or $904 million, compared to 2022 levels. The net increase includes a 3.9% market-basket increase plus a 1.5% market basket forecast error adjustment, less a 0.3% productivity adjustment and a 2.3% decrease in the FY 2023 SNF PPS rates as a result of the recalibrated parity adjustment. The recalibrated parity adjustment is a total of 4.6% and is being phased in over the next two years (2.3% annually).

 

In July 2023, CMS released its final rule outlining fiscal year 2024 Medicare payment rates and policy changes for skilled nursing facilities, which begins on October 1, 2023. The fiscal year 2024 rule equates to a net increase of 4.0%, or approximately $1.4 billion, in Medicare Part A payments to SNFs in fiscal year 2024 compared to 2023 levels. The rule includes a 3.0% market basket rate increase, a 3.6% market basket forecast error adjustment, less a 0.2% productivity adjustment, as well as a negative 2.3%, or approximately $789 million, decrease in 2024 SNF Payment Prospective Systems rates as a result of the second phase of the Patient Driven Payment Model parity adjustment recalibration.

 

 

For the first nine months of 2023, our average Medicare per diem rate for skilled nursing facilities increased 2.2% as compared to the same period in 2022. 

 

Medicaid – Skilled Nursing Facilities

 

Effective July 1, 2023 and for the fiscal year 2024, the state of Tennessee implemented specific individual nursing facility increases. We estimate the resulting increase in revenue for the 2024 fiscal year will be approximately $15,000,000 annually, or $3,750,000 per quarter.

 

Effective October 1, 2023 and for the fiscal year 2024, the state of South Carolina implemented specific individual nursing facility increases. We estimate the resulting increase in revenue for the 2024 fiscal year will be approximately $9,000,000 annually, or $2,250,000 per quarter.

 

Effective July 1, 2023 and for the fiscal year 2024, the state of Missouri implemented specific individual nursing facility increases. We estimate the resulting increase in revenue for the 2024 fiscal year will be approximately $5,000,000 annually, or $1,250,000 per quarter.

 

We have also received from many of the states in which we operate supplemental Medicaid payments to help mitigate the incremental costs resulting from the COVID-19 public health emergency. This funding includes healthcare relief funding under the American Rescue Plan Act (“ARPA”) and increases in the Federal Medical Assistance Percentage (“FMAP”) under the Families First Coronavirus Response Act (“FFCRA”). We have recorded $4,232,000 and $4,773,000 in net patient revenues for these supplemental Medicaid payments for the three months ended September 30, 2023 and 2022, respectively. We have recorded $15,362,000 and $15,312,000 in net patient revenues for these supplemental Medicaid payments for the nine months ended September 30, 2023 and 2022, respectively. The end of the public health emergency created a gradual phase down of the temporary increase in FMAP funding until it is completely phased out at the end of 2023.

 

For the first nine months of 2023, our average Medicaid per diem increased 7.9% compared to the same period in 2022.

 

State Medicaid plans subject to budget constraints are of particular concern to us. Changes in federal funding coupled with state budget problems and Medicaid expansion under the Affordable Care Act have produced an uncertain environment. Some states will not keep pace with post-acute healthcare inflation. States are currently under pressure to pursue other alternatives to skilled nursing care such as community and home–based services. Medicaid programs are funded jointly by the federal government and the states and are administered by states under approved plans. Most state Medicaid payments are made under a prospective payment system or under programs which negotiate payment levels with individual providers. Some states use, or have applied to use, waivers granted by CMS to implement expansion, impose different eligibility or enrollment restrictions, or otherwise implement programs that vary from federal standards. 

 

Medicare – Homecare Programs

 

In October 2022, CMS released its final rule outlining fiscal year 2023 Medicare payment rates. CMS issued a rate increase of 0.7%, or $125 million, effective January 1, 2023. The increase reflects the effects of the home health payment update percentage of 4.0%, a permanent behavioral assumption adjustment resulting in a decrease of 3.5%, and an estimated 0.2% increase that reflects the effects of an update to the fixed-dollar loss ratio used in determining outlier payments.

 

In June 2023, CMS released its proposed rule outlining fiscal year 2024 Medicare payment rates. CMS projects payments to home health agencies in fiscal year 2024 will decrease by 2.2% or $375 million, relative to the prior year. This decrease reflects a 3.0% market basket update, reduced by a 0.3 % productivity adjustment. However, the agency also proposes to apply the full permanent behavioral adjustment due to the implementation of the Patient-Driven Groups Model, resulting in a decrease of 5.1% in CY 2024, which would reduce total payments by an aggregate of $870 million. In addition, the agency also proposes an estimated 0.2% increase in payments for high-cost outlier cases.

 

Medicare – Hospice

 

In July 2022, CMS released its final rule outlining fiscal year 2023 Medicare payment rates. CMS issued a rate increase of 3.8%, or $825 million, effective October 1, 2022. The increase is the result of a 4.1% inpatient hospital market basket increase reduced by a 0.3% productivity adjustment. The FY2023 hospice payment update also includes an update to the statutory aggregate cap amount, which limits the overall payments per patient that are made annually. The cap amount for FY2023 is $32,487.

 

In July 2023, CMS released its final rule outlining fiscal year 2024 Medicare payment rates. CMS issued a rate increase of 3.1%, or $780 million, effective October 1, 2023. This increase is the result of a 3.3% market basket increase reduced by a 0.2% productivity adjustment. The FY2024 hospice payment update also includes an update to the statutory aggregate cap amount, which limits the overall payments per patient that are made annually. The cap amount for FY2024 is $33,494.

 

 

Segment Reporting

 

The Company has two reportable operating segments: (1) inpatient services, which includes the operation of skilled nursing facilities, assisted and independent living facilities, and behavioral health hospitals; and (2) homecare and hospice services. These reportable operating segments are consistent with information used by the Company’s Chief Executive Officer, as chief operating decision maker (“CODM”), to assess performance and allocate resources. The Company also reports an “all other” category that includes revenues from rental income, management and accounting services fees, insurance services, and costs of the corporate office.

 

The Company’s CODM evaluates performance and allocates capital resources to each segment based on an operating model that is designed to improve the quality of patient care and profitability of the Company while enhancing long-term shareholder value. The CODM does not review assets by segment in his resource allocation and therefore, assets by segment are not disclosed below.

 

The following table sets forth the Company’s unaudited interim condensed consolidated statements of operations by business segment (in thousands): 

 

		Three Months Ended September 30, 2023
		Inpatient Services				Homecare and Hospice				All Other				Total
Revenues:
Net patient revenues		$	243,865			$	33,140			$	-			$	277,005
Other revenues			297				-				11,183				11,480
Net operating revenues			244,162				33,140				11,183				288,485
Costs and expenses:
Salaries, wages, and benefits			151,912				20,066				10,686				182,664
Other operating			64,228				5,868				2,394				72,490
Rent			8,186				538				1,370				10,094
Depreciation and amortization			9,203				185				747				10,135
Interest			77				-				-				77
Total costs and expenses			233,606				26,657				15,197				275,460
Income/(loss) from operations			10,556				6,483				(4,014	)			13,025
Non-operating income			-				-				4,097				4,097
Unrealized losses on marketable equity securities			-				-				(3,093	)			(3,093	)
Income/(loss) before income taxes		$	10,556			$	6,483			$	(3,010	)		$	14,029

 

 

		Three Months Ended September 30, 2022
		Inpatient Services				Homecare and Hospice				All Other				Total
Revenues:
Net patient revenues		$	228,138			$	32,109			$	-			$	260,247
Other revenues			(198	)			-				10,794				10,596
Net operating revenues			227,940				32,109				10,794				270,843
Costs and expenses:
Salaries, wages, and benefits			144,047				19,581				9,570				173,198
Other operating			66,522				6,310				51				72,883
Rent			8,088				575				1,631				10,294
Depreciation and amortization			9,198				248				807				10,253
Interest			137				-				-				137
Total costs and expenses			227,992				26,714				12,059				266,765
Income/(loss) from operations			(52	)			5,395				(1,265	)			4,078
Non-operating income			-				-				2,731				2,731
Unrealized losses on marketable equity securities			-				-				(11,056	)			(11,056	)
Income/(loss) before income taxes		$	(52	)		$	5,395			$	(9,590	)		$	(4,247	)

 

 

		Nine Months Ended September 30, 2023
		Inpatient Services				Homecare and Hospice				All Other				Total
Revenues:
Net patient revenues		$	706,795			$	97,822			$	-			$	804,617
Other revenues			894				-				35,119				36,013
Net operating revenues			707,689				97,822				35,119				840,630
Costs and expenses:
Salaries, wages, and benefits			435,517				60,804				29,461				525,782
Other operating			192,473				17,356				7,384				217,213
Rent			24,520				1,639				3,928				30,087
Depreciation and amortization			27,474				555				2,237				30,266
Interest			268				-				-				268
Total costs and expenses			680,252				80,354				43,010				803,616
Income/(loss) from operations			27,437				17,468				(7,891	)			37,014
Non-operating income			-				-				12,116				12,116
Unrealized gains on marketable equity securities			-				-				2,943				2,943
Income before income taxes		$	27,437			$	17,468			$	7,168			$	52,073

 

 

		Nine Months Ended September, 2022
		Inpatient Services				Homecare and Hospice				All Other				Total
Revenues and grant income:
Net patient revenues		$	680,776			$	95,885			$	-			$	776,661
Other revenues			15				-				33,569				33,584
Government stimulus income			10,940				-				-				10,940
Net operating revenues and grant income			691,731				95,885				33,569				821,185
Costs and expenses:
Salaries, wages, and benefits			435,322				58,007				25,499				518,828
Other operating			192,791				19,848				5,640				218,279
Rent			24,498				1,759				4,513				30,770
Depreciation and amortization			27,120				472				2,419				30,011
Interest			451				-				-				451
Total costs and expenses			680,182				80,086				38,071				798,339
Income/(loss) from operations			11,549				15,799				(4,502	)			22,846
Non-operating income			-				-				8,451				8,451
Unrealized losses on marketable equity securities			-				-				(11,479	)			(11,479	)
Income/(loss) before income taxes		$	11,549			$	15,799			$	(7,530	)		$	19,818

 

 

Non-GAAP Financial Presentation

 

The Company is providing certain non-GAAP financial measures as the Company believes that these figures are helpful in allowing investors to more accurately assess the ongoing nature of the Company’s operations and measure the Company’s performance more consistently across periods. Therefore, the Company believes this information is meaningful in addition to the information contained in the GAAP presentation of financial information. The presentation of this additional non-GAAP financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP.

 

Specifically, the Company believes the presentation of non-GAAP financial information that excludes the unrealized gains or losses on our marketable equity securities, operating results for the newly constructed healthcare facilities or start-up operations not at full capacity, and share-based compensation expense is helpful in allowing investors to assess the Company’s operations more accurately.

 

The operating results for the newly constructed healthcare facilities or agencies not at full capacity for the three and nine months ended September 30, 2023 include facilities or agencies that began operations from 2021 to 2023, which is two behavioral health hospitals, two homecare agencies, and two hospice agencies. For the three months and nine months ended September 30, 2022, included are facilities or agencies that began operations from 2020 to 2022, which is two behavioral health hospitals, one homecare agency, and one hospice agency.

 

The tables below provide reconciliations of GAAP to non-GAAP items (dollars in thousands, except per share data):

 

		Three Months Ended September 30								Nine Months Ended September 30
		2023				2022				2023				2022
Net income/(loss) attributable to National Healthcare Corporation		$	10,388			$	(2,429	)		$	38,392			$	16,092
Non-GAAP adjustments:
Unrealized (gains)/losses on marketable equity securities			3,093				11,056				(2,943	)			11,479
Operating results for newly opened facilities or agencies not at full capacity			66				2,105				1,616				4,033
Share-based compensation expense			708				639				2,119				1,980
Income tax provision on non-GAAP adjustments			(1,005	)			(3,588	)			(206	)			(4,548	)
Non-GAAP Net income		$	13,250			$	7,783			$	38,978			$	29,036
GAAP diluted earnings/(loss) per share		$	0.68			$	(0.16	)		$	2.51			$	1.04
Non-GAAP adjustments:
Unrealized (gains)/losses on marketable equity securities			0.15				0.53				(0.14	)			0.56
Operating results for newly opened facilities or agencies not at full capacity			-				0.10				0.07				0.19
Share-based compensation expense			0.03				0.03				0.10				0.09
Non-GAAP diluted earnings per share		$	0.86			$	0.50			$	2.54			$	1.88

 

 

Results of Operations

 

The following table and discussion set forth items from the interim condensed consolidated statements of operations as a percentage of net operating revenues and grant income for the three and nine months ended September 30, 2023 and 2022.

 

Percentage of Net Operating Revenues and Grant Income

 

		Three Months Ended September 30								Nine Months Ended September 30
		2023				2022				2023				2022
Net operating revenues and grant income			100.0	%			100.0	%			100	%			100	%
Costs and expenses:
Salaries, wages, and benefits			63.3				63.9				62.5				63.2
Other operating			25.1				26.9				25.8				26.5
Facility rent			3.5				3.8				3.6				3.7
Depreciation and amortization			3.5				3.8				3.6				3.7
Interest			0.1				0.1				0.1				0.1
Total costs and expenses			95.5				98.5				95.6				97.2
Income from operations			4.5				1.5				4.4				2.8
Non–operating income			1.4				1.0				1.4				1.0
Unrealized gains/(losses) on marketable equity securities			(1.0	)			(4.1	)			0.4				(1.4	)
Income/(loss) before income taxes			4.9				(1.6	)			6.2				2.4
Income tax (provision)/benefit			(1.4	)			0.5				(1.8	)			(0.6	)
Net income/(loss)			3.5				(1.1	)			4.4				1.8
Net loss attributable to noncontrolling interest			0.1				0.2				0.2				0.2
Net income/(loss) attributable to stockholders of NHC			3.6				(0.9	)			4.6				2.0

 

Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022

 

Results for the quarter ended September 30, 2023 compared to the third quarter of 2022 include a 6.5% increase in net operating revenues. The net operating revenues increase was primarily driven by the continued occupancy increase in our skilled nursing facilities, as well as increases in skilled nursing per diems from some of our government payors. Excluding the seven skilled nursing facilities in Massachusetts and New Hampshire in which we ceased operations in September 2022, same-facility net operating revenues increased 11.8% during the third quarter of 2023 compared to the same period a year ago.  

 

For the quarter ended September 30, 2023, GAAP net income attributable to NHC was $10,388,000 compared to a net loss of $2,429,000 for the same period in 2022. Excluding the unrealized losses in our marketable equity securities portfolio and other non-GAAP adjustments, adjusted net income for the quarter ended September 30, 2023 was $13,250,000 compared to $7,783,000 for the same period in 2022. The increase in non-GAAP earnings for the quarter ended September 30, 2023 compared to the third quarter of 2022 was primarily due to the continued occupancy increase in our skilled nursing and assisted living facilities, skilled nursing per diem increases from some of our government payors, and the continued reduction of nurse agency staffing expense within our operations.

 

Net operating revenues

 

Net patient revenues increased $16,758,000, or 6.4%, compared to the same period last year.

 

The total census at owned and leased skilled nursing facilities for the quarter averaged 88.1%, compared to an average of 83.7% for the same quarter a year ago. Overall, the composite skilled nursing facility per diem increased 7.6% compared to the same quarter a year ago. Our Medicare per diem rates increased 3.0% and managed care per diem rates increased 14.0% compared to the same quarter a year ago. Medicaid and private pay per diem rates increased 7.9% and 6.7%, respectively, compared to the same quarter a year ago. For the three months ended September 30, 2023 and 2022, respectively, $4,232,000 and $4,773,000 have been included in our net patient revenues for supplemental COVID-19 Medicaid payments.

 

New operations, which include one skilled nursing facility acquired May 1, 2023, three assisted living facilities that we began operating on July 1, 2023, two behavioral health hospitals, two hospice agencies and two homecare agencies, have attributed to an increase of $9,625,000 in net patient revenues for the three months ended September 30, 2023 compared to the same quarter last year. In September 2022, the Company transferred the operations of seven skilled nursing facilities located in Massachusetts and New Hampshire, which resulted in net patient revenues decreasing $12,876,000 for the three months ended September 30, 2023 compared to the same quarter last year. 

 

Other revenues increased $884,000, or 8.3%, compared to the same quarter last year, as further detailed in Note 5 to our interim condensed consolidated financial statements.

 

 

Total costs and expenses

 

Total costs and expenses for the three months ended September 30, 2023 compared to the same period of 2022 increased $8,695,000, or 3.3% to $275,460,000 from $266,765,000.

 

Salaries, wages, and benefits increased $9,466,000 or 5.5%, to $182,664,000 from $173,198,000. Salaries, wages, and benefits as a percentage of net operating revenues was 63.3% compared to 63.9% for the three months ended September 30, 2023 and 2022, respectively. We continue to face workforce and labor shortages within all of our operations. The labor and workforce shortages have resulted in us contracting with agency nurse staffing companies in certain markets.  The agency nurse staffing companies charge inflated hourly rates; therefore, we are working diligently to find solutions to reduce and eliminate the agency nurse staffing within our healthcare operations. For the quarter ended September 30, 2023, our agency nurse staffing expenses decreased $8,181,000, or approximately 48.4%, compared to the same period a year ago.  

 

New operations, which include one skilled nursing facility acquired May 1, 2023, three assisted living facilities that we began operating on July 1, 2023, two behavioral health hospitals, two hospice agencies and two homecare agencies, have attributed to an increase in salaries, wages, and benefits of $4,778,000 for the three months ended September 30, 2023 compared to the same quarter last year. In September 2022, the Company transferred the operations of seven skilled nursing facilities located in Massachusetts and New Hampshire, which resulted in salaries, wages, and benefits decreasing $8,210,000 for the three months ended September 30, 2023 compared to the same quarter last year.

 

Other operating expenses decreased $393,000, or 0.5%, to $72,490,000 for the 2023 period compared to $72,883,000 for the 2022 period. Other operating expenses as a percentage of net operating revenues was 25.1% and 26.9% for the three months ended September 30, 2023 and 2022, respectively. The transfer of the operations of the seven skilled nursing facilities located in Massachusetts and New Hampshire, as noted above, resulted in other operating expenses decreasing $3,245,000 for the three months ended September 30, 2023 compared to the same quarter last year. We continue to face inflationary pressures in certain categories within other operating expenses as well, such as food/dietary supplies and drugs/pharmaceutical supplies.  

 

Other income

 

Non–operating income increased by $1,366,000 compared to the same period last year, as further detailed in Note 6 to our interim condensed consolidated financial statements.

 

Income taxes

 

The income tax provision for the three months ended September 30, 2023 is $3,908,000 (an effective income tax rate of 27.9%). 

 

Noncontrolling interest

 

The noncontrolling interest in subsidiaries is presented within total equity of the Company’s consolidated balance sheets. The Company presents the noncontrolling interest and the amount of consolidated net income attributable to NHC in its consolidated statements of operations. The Company’s earnings per share is calculated based on net income attributable to NHC’s stockholders. The carrying amount of the noncontrolling interest is adjusted based on an allocation of subsidiary earnings based on ownership interest.

 

Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022

 

Results for the nine months ended September 30, 2023 compared to the same period of 2022 include a 2.4% increase in net operating revenues and grant income. Excluding the government stimulus income and the seven skilled nursing facilities in Massachusetts and New Hampshire in which we ceased operations in September 2022, same-facility net operating revenues increased 10.3% for the nine months ended September 30, 2023 compared to the same period a year ago.  

 

For the nine months ended September 30, 2023, GAAP net income attributable to NHC was $38,392,000 compared to net income of $16,092,000 for the same period in 2022. Excluding the unrealized gains and losses in our marketable equity securities portfolio and other non-GAAP adjustments, adjusted net income for the nine months ended September 30, 2023 was $38,978,000 compared to $29,036,000 for the same period in 2022.  The increase in non-GAAP earnings for the nine months ended September 30, 2023 compared to the same period in the prior year was primarily due to the continued occupancy increase in our skilled nursing facilities, skilled nursing per diem increases from some of our government payors, and the continued reduction of nurse agency staffing expense within our operations.

 

 

Net operating revenues and grant income

 

Net patient revenues increased $27,956,000, or 3.6%, compared to the same period last year.

 

The total census at owned and leased skilled nursing facilities for the nine months ended September 30, 2023 averaged 87.8%, compared to an average of 83.4% for the same period a year ago. Overall, the composite skilled nursing facility per diem increased 6.0% compared to the same period a year ago. Our Medicare per diem rates increased 2.2% and managed care per diem rates increased 8.2% compared to the same period a year ago. Medicaid and private pay per diem rates increased 7.9% and 4.1%, respectively, compared to the same period a year ago. For the nine months ended September 30, 2023 and 2022, respectively, $15,362,000 and $15,312,000 have been included in our net patient revenues for supplemental COVID-19 Medicaid payments.

 

New operations, which include one skilled nursing facility acquired May 1, 2023, three assisted living facilities that we began operating on July 1, 2023, two behavioral health hospitals, two hospice agencies and two homecare agencies, have attributed to an increase of $18,490,000 in net patient revenues for the nine months ended September 30, 2023 compared to the same period last year. In September 2022, the Company transferred the operations of seven skilled nursing facilities located in Massachusetts and New Hampshire, which resulted in net patient revenues decreasing $48,362,000 for the nine months ended September 30, 2023 compared to the same period last year. 

 

Other revenues increased $2,429,000, or 7.2%, compared to the same period last year, as further detailed in Note 5 to our interim condensed consolidated financial statements.

 

During the nine months ended September 30, 2023 and 2022, respectively, we recorded $0 and $10,940,000 in government stimulus income related to funds received from the CARES Act Provider Relief Fund. See Note 3 - Coronavirus Pandemic for additional information.  

 

Total costs and expenses

 

Total costs and expenses for the nine months ended September 30, 2023 compared to the same period of 2022 increased $5,277,000, or 0.7% to $803,616,000 from $798,339,000.

 

Salaries, wages, and benefits increased $6,954,000, or 1.3%, to $525,782,000 from $518,828,000. Salaries, wages, and benefits as a percentage of net operating revenues and grant income was 62.5% compared to 63.2% for the nine months ended September 30, 2023 and 2022, respectively. We continue to face workforce and labor shortages within all of our operations. The labor and workforce shortages have resulted in us contracting with agency nurse staffing companies.  The agency nurse staffing companies charge inflated hourly rates; therefore, we are working diligently to find solutions to reduce and eliminate the agency nurse staffing within our healthcare operations. For the nine months ended September 30, 2023, our agency nurse staffing expenses decreased $23,709,000, or approximately 43.6%, compared to the same period a year ago.  

 

New operations, which include one skilled nursing facility acquired May 1, 2023, three assisted living facilities that we began operating on July 1, 2023, two behavioral health hospitals, two hospice agencies and two homecare agencies, have attributed to an increase in salaries, wages, and benefits of $9,968,000 for the nine months ended September 30, 2023 compared to the same period last year. In September 2022, the Company transferred the operations of seven skilled nursing facilities located in Massachusetts and New Hampshire, which resulted in salaries, wages, and benefits decreasing $31,856,000 for the nine months ended September 30, 2023 compared to the same period last year.

 

Other operating expenses decreased $1,066,000, or 0.5%, to $217,213,000 for the 2023 period compared to $218,279,000 for the 2022 period. Other operating expenses as a percentage of net operating revenues and grant income was 25.8% and 26.6% for the nine months ended September 30, 2023 and 2022, respectively. The transfer of the operations of the seven skilled nursing facilities located in Massachusetts and New Hampshire, as noted above, resulted in other operating expenses decreasing $13,170,000 for the nine months ended September 30, 2023 compared to the same period last year. We continue to face inflationary pressures in certain categories within other operating expenses as well, such as food/dietary supplies and drugs/pharmaceutical supplies.  

 

Other income

 

Non–operating income increased by $3,665,000 compared to the same period last year, as further detailed in Note 6 to our interim condensed consolidated financial statements.

 

Income taxes

 

The income tax provision for the nine months ended September 30, 2023 is $14,750,000 (an effective income tax rate of 28.3%). 

 

Noncontrolling interest

 

The noncontrolling interest in subsidiaries is presented within total equity of the Company’s consolidated balance sheets. The Company presents the noncontrolling interest and the amount of consolidated net income attributable to NHC in its consolidated statements of operations. The Company’s earnings per share is calculated based on net income attributable to NHC’s stockholders. The carrying amount of the noncontrolling interest is adjusted based on an allocation of subsidiary earnings based on ownership interest.

 

 

Liquidity, Capital Resources, and Financial Condition

 

Our primary sources of cash include revenues from the operations of our healthcare and senior living facilities, management and accounting services, rental income, and investment income. 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
		2023				2022				$				%
Cash, cash equivalents, restricted cash, and restricted cash equivalents, at beginning of period		$	74,865			$	119,743			$	(44,878	)			(37.5	)%
Cash provided by/(used in) operating activities			85,483				(3,192	)			88,675				2,778.0
Cash used in investing activities			(7,382	)			(8,810	)			1,428				16.2
Cash used in financing activities			(32,711	)			(35,541	)			2,830				8.0
Cash, cash equivalents, restricted cash, and restricted cash equivalents, at end of period		$	120,255			$	72,200			$	48,055				66.6	%

 

 

Operating Activities

 

Net cash provided by operating activities for the nine months ended September 30, 2023 was $85,483,000 as compared to cash used in operating activities of $3,192,000 in the same period last year. Cash provided by operating activities consisted of net income of $37,323,000 and adjustments for non–cash items of $26,442,000. There was cash provided by working capital in the amount of $20,645,000 for the nine months ended September 30, 2023 compared to cash used for working capital needs of $63,011,000 for the same period a year ago.

 

Included in the adjustments for non-cash items are depreciation expense, equity in earnings of unconsolidated investments, unrealized gains and losses on our marketable equity securities, deferred taxes, and stock compensation. 

 

Investing Activities

 

Net cash used in investing activities totaled $7,382,000 for the nine months ended September 30, 2023, compared to $8,810,000 for the nine months ended September 30, 2022. Cash used for property and equipment additions was $19,300,000 and $24,563,000 for the nine months ended September 30, 2023, and 2022, respectively. On May 1, 2023, we acquired the assets of a 66-bed skilled nursing facility in Nashville, Tennessee. Proceeds from the sale of marketable securities, net of purchases, resulted in cash provided by investing activity of $14,815,000 and $9,397,000 for the nine months ended September 30, 2023 and 2022, respectively. 

 

Financing Activities 

 

Net cash used in financing activities totaled $32,711,000 for the nine months ended September 30, 2023 compared to $35,541,000 for the nine months ended September 30, 2022. We made principal payments under our finance lease obligations in the amount of $3,711,000 and $3,495,000 for the nine months ended September 30, 2023 and 2022, respectively. Cash used for dividend payments to common stockholders totaled $26,520,000 in the current year period compared to $25,830,000 for the same period a year ago. We repurchased common shares outstanding in the amount of $2,482,000 in the current year period compared to $6,907,000 for the same period a year ago. 

 

Short–term liquidity

 

We expect to meet our short-term liquidity requirements primarily from our cash flows from operating activities. In addition to cash flows from operations, our current cash on hand of $100,308,000, our marketable equity and debt securities of $110,186,000, and our borrowing capacity on the $50 million credit facility are expected to be adequate to meet our contractual obligations, operating liquidity, and our growth and development plans in the next twelve months. 

 

Long–term liquidity

 

We expect to meet our long-term liquidity requirements primarily from our cash flows from operating activities, our current cash on hand of $100,308,000, our marketable equity and debt securities of $110,186,000, and our borrowing capacity on the credit facility. At September 30, 2023, we do not have an outstanding balance on our credit facility; therefore, leaving $50 million available for future borrowings. We also have substantial value in our unencumbered real estate assets, which could potentially be used as collateral in future borrowing opportunities.

 

Our ability to meet our long–term contractual obligations, and to finance our operating requirements and growth plans will depend upon our future performance. Our future performance will be affected by business, economic, financial and other factors, including potential changes in state and federal government payment rates for healthcare, customer demand, success of our marketing efforts, pressures from competitors, and the state of the economy, including the state of financial and credit markets, as well as many unforeseen factors.

 

 

Commitment and Contingencies

 

Governmental Regulations

 

Laws and regulations governing Medicare, Medicaid and other federal healthcare programs are complex and subject to interpretation. Management believes that it is following all applicable laws and regulations in all material respects. However, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusions from the Medicare, Medicaid, and other federal healthcare programs.

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

 

Market risk represents the potential economic loss arising from adverse changes in the fair value of financial instruments. Currently, our exposure to market risk relates primarily to our fixed–income and equity portfolios. These investment portfolios are exposed primarily to, but not limited to, interest rate risk, credit risk, equity price risk, and concentration risk. We also have exposure to market risk that includes our cash and cash equivalents. The Company's senior management has established comprehensive risk management policies and procedures to manage these market risks.

 

Interest Rate Risk

 

The fair values of our fixed–income investments fluctuate in response to changes in market interest rates. Increases and decreases in prevailing interest rates generally translate into decreases and increases, respectively, in the fair values of those instruments. Additionally, the fair values of interest rate sensitive instruments may be affected by the creditworthiness of the issuer, prepayment options, the liquidity of the instrument and other general market conditions. At September 30, 2023, we have available for sale marketable debt securities in the amount of $126,911,000. The fixed maturity portfolio is comprised of investments with primarily short–term and intermediate–term maturities. The portfolio composition allows flexibility in reacting to fluctuations of interest rates. The fixed maturity portfolio allows our insurance company subsidiaries to achieve an adequate risk–adjusted return while maintaining sufficient liquidity to meet obligations.

 

Our cash and cash equivalents consist of highly liquid investments with a maturity of less than three months when purchased. As a result of the short–term nature of our cash instruments, a hypothetical 1% change in interest rates would have minimal impact on our future earnings and cash flows related to these instruments.

 

We do not currently use any derivative instruments to hedge our interest rate exposure. We have not used derivative instruments for trading purposes and the use of such instruments in the future would be subject to approval by the Investment Committee of the Board of Directors.

 

Credit Risk

 

Credit risk is managed by diversifying the fixed maturity portfolio to avoid concentrations in any single industry group or issuer and by limiting investments in securities with lower credit ratings.

 

Equity Price and Concentration Risk

 

Our marketable equity securities are recorded at their fair market value based on quoted market prices. Thus, there is exposure to equity price risk, which is the potential change in fair value due to a change in quoted market prices. At September 30, 2023, the fair value of our marketable equity securities is approximately $125,820,000. Of the $125.8 million equity securities portfolio, our investment in NHI comprises approximately $83.7 million, or 66.5%, of the total fair value. We manage our exposure to NHI by closely monitoring the financial condition, performance, and outlook of the company. Hypothetically, a 10% change in quoted market prices would result in a related increase or decrease in the fair value of our equity investments of approximately $12.6 million. At September 30, 2023, our equity securities had net unrealized gains of $71.6 million. Of the $71.6 million of unrealized gains, $59.0 million is related to our investment in NHI. 

 

Item 4.

Controls and Procedures.

 

As of September 30, 2023, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2023.

 

During the period covered by this report, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

 

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings.

 

For a discussion of prior, current, and pending litigation of material significance to NHC, please see Note 17 of this Form 10–Q.

 

Item 1A.

Risk Factors.

 

During the three months ended September 30, 2023, there were no material changes to the risk factors that were disclosed in Item 1A of National HealthCare Corporation’s Annual Report on Form 10-K for the year ended December 31, 2022.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

 

Not applicable

 

Item 3.

Defaults Upon Senior Securities.

 

None

 

Item 4.

Mine Safety Disclosures.

 

Not applicable

 

Item 5.

Other Information.

 

None

 

 

 

Item 6.

Exhibits.

 

(a)        List of exhibits

 

EXHIBIT INDEX

 

Exhibit No.		Description
3.1		Certificate of Incorporation of National HealthCare Corporation (Incorporated by reference to Exhibit 3.1 to the Registrant’s registration statement on Form S-4 (File No. 333-37185) dated October 3, 1997.)
3.2		Certificate of Amendment to the Certificate of Incorporation of National HealthCare Corporation (Incorporated by reference to Exhibit 3.5 to the quarterly report on Form 10-Q filed on August 3, 2017.)
3.3		Certificate of Designation Series B Junior Participating Preferred Stock (Incorporated by reference to Exhibit 3.1 to the Registrant’s registration statement on Form 8-A, dated August 3, 2007.)
3.4		Restated Bylaws as amended February 14, 2013 (Incorporated by reference to Exhibit 3.5 to the quarterly report on Form 10-Q filed on May 8, 2013.)
4.1		Form of Common Stock (Incorporated by reference to Exhibit 4.1 to the quarterly report on Form 10-Q filed on August 3, 2017.)
10.1		Amendment No. 9 to Master Agreement to Lease between National Health Investors, Inc. and National HealthCare Corporation (Incorporated by reference to Exhibit 10.1 to the quarterly report on Form 10-Q filed on November 3, 2022.)
10.2		Amendment No. 10 to Master Agreement to Lease between National Health Investors, Inc. and National HealthCare Corporation (Incorporated by reference to Exhibit 10.2 to the quarterly report on Form 10-Q filed on November 3, 2022.)
31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32		Certification pursuant to 18 U.S.C. Section 1350 by Chief Executive Officer and Chief Financial Officer
101.INS		Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)
101.SCH		Inline XBRL Taxonomy Extension Schema Document
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104		Cover Page Interactive File (embedded within the Inline XBRL document and include in Exhibit 101)

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	NATIONAL HEALTHCARE CORPORATION
	(Registrant)
Date: November 2, 2023	/s/ Stephen F. Flatt
	Stephen F. Flatt
	Chief Executive Officer
Date: November 2, 2023	/s/ Brian F. Kidd
	Brian F. Kidd
	Senior Vice President and Chief Financial Officer