Notes to Interim Condensed Consolidated Financial Statements
September 30, 2022
(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, 2022, we operate or manage, through certain affiliates, 68 skilled nursing facilities with a total of 8,726 licensed beds, 23 assisted living facilities, five independent living facilities, three behavioral health hospitals, 35 homecare agencies, and 29 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, 2021 consolidated financial statements and notes thereto which contain accounting policies and other disclosures required by U.S. GAAP. Our audited December 31, 2021 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, 2021 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, including but not limited to, the potential future effects of the novel coronavirus (“COVID-19”).
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, and hospice 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.
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 $1,685,000 and $6,026,000 for the three and nine months ended September 30, 2022. For the three and nine months ended September 30, 2021, bad debt expense was $1,452,000 and $3,473,000, respectively. As of September 30, 2022, and December 31, 2021, the Company has recorded allowance for doubtful accounts of $7,841,000 and $6,411,000, 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, management and accounting services to other long–term care 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, which were $6,050,000 and $16,636,000 for the three and nine months ended September 30, 2022. General and administrative costs were $5,361,000 and $15,615,000 for the three and nine months ended September 30, 2021, 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 not recorded and 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.
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 carrying amount of the intangible asset may not be recoverable.
Accrued Risk Reserves
We are self–insured for risks related to health insurance and have wholly–owned limited purpose insurance companies that insure risks related to workers’ compensation and general and professional liability insurance claims. 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 coverages include 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.
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, 2022, and December 31, 2021, we have recorded a future service obligation liability in the amount of $2,338,000. 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.
Reclassifications
Certain accounts in the prior-year financial statements have been reclassified for comparative purposes to conform to the presentation in the current-year financial statements.
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 is 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.
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 and $10,429,000 of government stimulus income from the Provider Relief Funds for the three months ended September 30, 2022 and 2021, respectively. The Company recorded $10,940,000 and $48,304,000 of government stimulus income from the Provider Relief Funds for the nine months ended September 30, 2022 and 2021, respectively. The grant income was determined on a systemic 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”).
Additionally, as part of the CARES Act, the legislation included an expansion of the Medicare Accelerated and Advance Payment Program. The expanded Medicare Accelerated and Advance Payment Program is a streamlined version of existing policy that allows the Medicare Administrative Contractors (“MAC’s”) to issue up to three months of advance Medicare payments to help increase cash flow and liquidity to Medicare Part A and Part B providers in certain circumstances that include national emergencies. In the second quarter of 2020, we received approximately $51,253,000 as part of this program. These funds are applied against claims for services provided to Medicare patients after approximately one year from the date we received the funds. During the first eleven months after repayment began, repayment occurs through an automatic recoupment of twenty-five percent of Medicare payments. During the succeeding nine months, repayment occurs through an automatic recoupment of fifty percent of Medicare payments. Any remaining balance that was not paid through the recoupment process within twenty-nine months of receipt of the funds will be required to be paid on-demand, subject to an interest rate of four percent. As of September 30, 2022 and December 31, 2021, $138,000 and $15,022,000, respectively, of the accelerated payments remain and are reflected within contract liabilities in the interim condensed consolidated balance sheet.
The CARES Act and subsequent related legislation temporarily suspended Medicare sequestration beginning May 1, 2020 through March 31, 2022. The Medicare sequestration policy reduced fee-for-service Medicare payments by 2 percent. Beginning April 1, 2022, the sequestration reductions were 1% from April 1, 2022 through June 30, 2022. The full 2% reduction went back into effect July 1, 2022. The CARES Act extends the sequestration policy through 2030 in exchange for this temporary suspension, which the sequestration reduction for 2030 has been increased up to 3%.
The CARES Act also temporarily permitted employers to defer the deposit and payment of the employer’s portion of the social security taxes (6.2% of employee wages) that otherwise would have been due between March 27, 2020 and December 31, 2020. The provision requires that the deferred taxes be paid over a two-year period with half the amount required to be paid by December 31, 2021, and the other half by December 31, 2022. At September 30, 2022 and December 31, 2021, we have deferred $10,545,000 of the Company’s share of the social security taxes included in the current liabilities section of the consolidated balance sheet.
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 $4,773,000 and $5,053,000 in net patient revenues for these supplemental Medicaid payments for the three months ended September 30, 2022 and 2021, respectively. We have recorded $15,312,000 and $16,102,000 in net patient revenues for these supplemental Medicaid payments for the nine months ended September 30, 2022 and 2021, 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 | |
| | | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| Net patient revenues: | | | | | | | | | | | | | | | | |
| Inpatient services | | $ | 228,138 | | | $ | 222,884 | | | $ | 680,776 | | | $ | 644,986 | |
| Homecare and hospice | | | 32,109 | | | | 31,933 | | | | 95,885 | | | | 63,662 | |
| Total net patient revenue | | $ | 260,247 | | | $ | 254,817 | | | $ | 776,661 | | | $ | 708,648 | |
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 | | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| Medicare | | | 37% | | | | 36% | | | | 37% | | | | 35% | |
| Managed Care | | | 9% | | | | 10% | | | | 10% | | | | 12% | |
| Medicaid | | | 29% | | | | 30% | | | | 28% | | | | 29% | |
| Private Pay and Other | | | 25% | | | | 24% | | | | 25% | | | | 24% | |
| 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 (there is temporary relief from the three-day hospital stay during the COVID-19 emergency). 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.
Contract Liabilities
Included in the Company’s interim condensed consolidated balance sheets are contract liabilities, which represent payments the Company receives in advance of services provided. As of September 30, 2022 and December 31, 2021, the Company has recorded $138,000 and $15,022,000, respectively, in contract liabilities related to receipts from the Medicare Accelerated and Advance Payment Program. Recoupment of the accelerated payments began in the second quarter of 2021.
A summary of the contract liabilities are as follows (in thousands):
| Balance at December 31, 2021 | | $ | 15,022 | |
| Payments received | | | - | |
| Payments recouped | | | (14,884 | ) |
| Balance at September 30, 2022 | | $ | 138 | |
Third Party Payors
Laws and regulations governing the 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 $15,496,000 and $17,595,000 as of September 30, 2022 and December 31, 2021, 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 | |
| | | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| Rental income | | $ | 5,830 | | | $ | 5,792 | | | $ | 17,642 | | | $ | 16,954 | |
| Management and accounting services fees | | | 3,922 | | | | 4,244 | | | | 11,993 | | | | 12,703 | |
| Insurance services | | | 1,015 | | | | 1,291 | | | | 3,497 | | | | 3,832 | |
| Other | | | (171 | ) | | | 164 | | | | 452 | | | | 427 | |
| Total other revenues | | $ | 10,596 | | | $ | 11,491 | | | $ | 33,584 | | | $ | 33,916 | |
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 $1,029,000 and $970,000 for the three months ended September 30, 2022 and 2021, respectively. We recognized management fees and interest on management fees of $3,012,000 and $2,806,000 from these facilities for the nine months ended September 30, 2022 and 2021, respectively.
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, 2022 and 2021 were $496,000 and $780,000, respectively. The premium revenues reflected in the interim condensed consolidated statements of operations for the nine months ended September 30, 2022 and 2021 were $1,939,000 and $2,298,000, 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, 2022 and 2021 were $519,000 and $511,000, respectively. The premium revenues reflected in the interim condensed consolidated statements of operations for the nine months ended September 30, 2022 and 2021 were $1,558,000 and $1,534,000, 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 | |
| | | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| Dividends and net realized gains and losses on sales of securities | | $ | 1,324 | | | $ | 2,365 | | | $ | 4,381 | | | $ | 6,242 | |
| Interest income | | | 1,373 | | | | 1,020 | | | | 3,572 | | | | 3,683 | |
| Equity in earnings of unconsolidated investments | | | 34 | | | | 14 | | | | 498 | | | | 5,320 | |
| Total non-operating income | | $ | 2,731 | | | $ | 3,399 | | | $ | 8,451 | | | $ | 15,245 | |
Caris HealthCare, L.P.
On June 11, 2021, the Company acquired the remaining 24.9% equity interest in Caris HealthCare, L.P. (“Caris”). Prior to the June 11, 2021 acquisition date, Caris was our most significant equity method investment with a 75.1% non-controlling ownership interest. From the respective acquisition date, Caris’ financial information is now included in the Company’s consolidated financial statements and is no longer accounted for as an equity method investment.
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. For additional information on these reportable segments see Note 2 – Summary of Significant Accounting Policies.
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, 2022 | |
| | | Inpatient
Services | | | Homecare and Hospice | | | All Other | | | Total | |
| Revenues and grant income: | | | | | | | | | | | | | | | | |
| Net patient revenues | | $ | 228,138 | | | $ | 32,109 | | | $ | - | | | $ | 260,247 | |
| Other revenues | | | (198 | ) | | | - | | | | 10,794 | | | | 10,596 | |
| Net operating revenues and grant income | | | 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 | ) |
| | | Three Months Ended September 30, 2021 | |
| | | Inpatient
Services | | | Homecare and Hospice | | | All Other | | | Total | |
| Revenues: | | | | | | | | | | | | | | | | |
| Net patient revenues | | $ | 222,884 | | | $ | 31,933 | | | $ | - | | | $ | 254,817 | |
| Other revenues | | | 128 | | | | - | | | | 11,363 | | | | 11,491 | |
| Government stimulus income | | | 10,429 | | | | - | | | | - | | | | 10,429 | |
| Net operating revenues and grant income | | | 233,441 | | | | 31,933 | | | | 11,363 | | | | 276,737 | |
| | | | | | | | | | | | | | | | | |
| Costs and expenses: | | | | | | | | | | | | | | | | |
| Salaries, wages, and benefits | | | 141,318 | | | | 18,771 | | | | 10,146 | | | | 170,235 | |
| Other operating | | | 64,755 | | | | 5,618 | | | | 2,736 | | | | 73,109 | |
| Rent | | | 7,998 | | | | 594 | | | | 1,612 | | | | 10,204 | |
| Depreciation and amortization | | | 9,300 | | | | 118 | | | | 811 | | | | 10,229 | |
| Interest | | | 198 | | | | - | | | | - | | | | 198 | |
| Total costs and expenses | | | 223,569 | | | | 25,101 | | | | 15,305 | | | | 263,975 | |
| | | | | | | | | | | | | | | | | |
| Income/(loss) from operations | | | 9,872 | | | | 6,832 | | | | (3,942 | ) | | | 12,762 | |
| Non-operating income | | | - | | | | - | | | | 3,399 | | | | 3,399 | |
| Unrealized losses on marketable equity securities | | | - | | | | - | | | | (23,797 | ) | | | (23,797 | ) |
| | | | | | | | | | | | | | | | | |
| Income/(loss) before income taxes | | $ | 9,872 | | | $ | 6,832 | | | $ | (24,340 | ) | | $ | (7,636 | ) |
| | | Nine Months Ended September 30, 2022 | |
| | | Inpatient
Services | | | Homecare and Hospice | | | All Other | | | Total | |
| Revenues: | | | | | | | | | | | | | | | | |
| 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 | |
| | | Nine Months Ended September 30, 2021 | |
| | | Inpatient
Services | | | Homecare and Hospice | | | All Other | | | Total | |
| Revenues and grant income: | | | | | | | | | | | | | | | | |
| Net patient revenues | | $ | 644,986 | | | $ | 63,662 | | | $ | - | | | $ | 708,648 | |
| Other revenues | | | 324 | | | | - | | | | 33,592 | | | | 33,916 | |
| Government stimulus income | | | 48,304 | | | | - | | | | - | | | | 48,304 | |
| Net operating revenues and grant income | | | 693,614 | | | | 63,662 | | | | 33,592 | | | | 790,868 | |
| | | | | | | | | | | | | | | | | |
| Costs and expenses: | | | | | | | | | | | | | | | | |
| Salaries, wages, and benefits | | | 407,534 | | | | 39,922 | | | | 35,807 | | | | 483,263 | |
| Other operating | | | 185,860 | | | | 10,291 | | | | 8,060 | | | | 204,211 | |
| Rent | | | 24,129 | | | | 1,478 | | | | 4,830 | | | | 30,437 | |
| Depreciation and amortization | | | 27,790 | | | | 299 | | | | 2,432 | | | | 30,521 | |
| Interest | | | 657 | | | | - | | | | - | | | | 657 | |
| Total costs and expenses | | | 645,970 | | | | 51,990 | | | | 51,129 | | | | 749,089 | |
| | | | | | | | | | | | | | | | | |
| Income/(loss) from operations | | | 47,644 | | | | 11,672 | | | | (17,537 | ) | | | 41,779 | |
| Non-operating income | | | - | | | | - | | | | 15,245 | | | | 15,245 | |
| Gain on acquisition of equity method investment | | | - | | | | - | | | | 95,202 | | | | 95,202 | |
| Unrealized losses on marketable equity securities | | | - | | | | - | | | | (23,227 | ) | | | (23,227 | ) |
| | | | | | | | | | | | | | | | | |
| Income before income taxes | | $ | 47,644 | | | $ | 11,672 | | | $ | 69,683 | | | $ | 128,999 | |
Note 8 – Long-Term Leases
Operating Leases
At September 30, 2022, 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 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 $9,478,000 and $9,026,000 for the three months ended September 30, 2022 and 2021, respectively. Total facility rent expense to NHI was $28,293,000 and $28,336,000 for the nine months ended September 30, 2022 and 2021, respectively.
On September 1, 2022, we transferred the operations of seven skilled nursing facilities located in Massachusetts and New Hampshire to a third-party operator. We leased the real property of these seven facilities from NHI. In conjunction with the transfer of the operations to a third party, we terminated our lease agreement for the seven skilled nursing facilities and amended our master lease agreement with NHI. The amendment was accounted for as a lease modification under ASC 842, Leases. The base rent within the amended master lease agreement increased approximately $8,775,000 over the next four and one-third years. Therefore, for the remainder of 2022 ( September- December), our base rent increased $875,000. The annual base rent in 2023 increased from $30,750,000 to $34,075,000, in 2024 from $30,750,000 to $32,625,000, in 2025 from $30,750,000 to $32,225,000, and in 2026 from $30,750,000 to $31,975,000.
Finance Leases
At September 30, 2022, 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. 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, 2022 (in thousands):
| | | Finance Leases | | | Operating Leases | |
| 2023 | | $ | 5,200 | | | $ | 35,950 | |
| 2024 | | | 2,167 | | | | 34,353 | |
| 2025 | | | - | | | | 33,278 | |
| 2026 | | | - | | | | 32,613 | |
| 2027 | | | - | | | | 8,148 | |
| Thereafter | | | - | | | | - | |
| Total minimum lease payments | | | 7,367 | | | | 144,342 | |
| Less: amounts representing interest | | | (322 | ) | | | (17,843 | ) |
| Present value of future minimum lease payments | | | 7,045 | | | | 126,499 | |
| Less: current portion | | | (4,911 | ) | | | (28,611 | ) |
| Noncurrent lease liabilities | | $ | 2,134 | | | $ | 97,888 | |
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 | |
| | | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| Basic: | | | | | | | | | | | | | | | | |
| Weighted average common shares outstanding | | | 15,445,569 | | | | 15,364,043 | | | | 15,438,375 | | | | 15,347,042 | |
| Net income/(loss) attributable to National HealthCare Corporation | | $ | (2,429 | ) | | $ | (3,348 | ) | | $ | 16,092 | | | $ | 122,802 | |
| Earnings/(loss) per common share, basic | | $ | (0.16 | ) | | $ | (0.22 | ) | | $ | 1.04 | | | $ | 8.00 | |
| | | | | | | | | | | | | | | | | |
| Diluted: | | | | | | | | | | | | | | | | |
| Weighted average common shares outstanding | | | 15,445,569 | | | | 15,364,043 | | | | 15,438,375 | | | | 15,347,042 | |
| Effects of dilutive instruments | | | - | | | | - | | | | 38,728 | | | | 67,641 | |
| Weighted average common shares outstanding | | | 15,445,569 | | | | 15,364,043 | | | | 15,477,103 | | | | 15,414,683 | |
| | | | | | | | | | | | | | | | | |
| Net income/(loss) attributable to National HealthCare Corporation | | $ | (2,429 | ) | | $ | (3,348 | ) | | $ | 16,092 | | | $ | 122,802 | |
| Earnings/(loss) per common share, diluted | | $ | (0.16 | ) | | $ | (0.22 | ) | | $ | 1.04 | | | $ | 7.97 | |
In the above table, options to purchase 389,781 and 620,076 shares of our common stock have been excluded for the nine months ended September 30, 2022 and 2021, 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 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, 2022 | | | December 31, 2021 | |
| | | Amortized Cost | | | Fair Value | | | Amortized Cost | | | Fair Value | |
| Investments available for sale: | | | | | | | | | | | | | | | | |
| Marketable equity securities | | $ | 30,176 | | | $ | 107,655 | | | $ | 30,176 | | | $ | 113,108 | |
| Corporate debt securities | | | 15,457 | | | | 14,912 | | | | 19,038 | | | | 18,843 | |
| Asset-backed securities | | | 501 | | | | 490 | | | | 1,481 | | | | 1,469 | |
| U.S. Treasury securities | | | 9,464 | | | | 9,157 | | | | 15,082 | | | | 14,998 | |
| Restricted investments available for sale: | | | | | | | | | | | | | | | | |
| Marketable equity securities | | | 24,851 | | | | 20,341 | | | | 25,442 | | | | 26,958 | |
| Corporate debt securities | | | 60,262 | | | | 56,273 | | | | 60,816 | | | | 62,936 | |
| Asset-based securities | | | 26,855 | | | | 24,746 | | | | 32,918 | | | | 33,301 | |
| U.S. Treasury securities | | | 43,083 | | | | 38,149 | | | | 33,052 | | | | 32,630 | |
| State and municipal securities | | | 4,908 | | | | 4,704 | | | | 7,700 | | | | 7,923 | |
| | | $ | 215,557 | | | $ | 276,427 | | | $ | 225,705 | | | | 312,166 | |
Included in the marketable equity securities are the following (in thousands, except share amounts):
| | | September 30, 2022 | | | December 31, 2021 | |
| | | Shares | | | Cost | | | Fair Value | | | Shares | | | Cost | | | Fair Value | |
| NHI Common Stock | | | 1,630,642 | | | $ | 24,734 | | | $ | 92,180 | | | | 1,630,642 | | | $ | 24,734 | | | $ | 93,713 | |
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, 2022 | | | December 31, 2021 | |
| | | Cost | | | Fair Value | | | Cost | | | Fair Value | |
| Maturities: | | | | | | | | | | | | | | | | |
| Within 1 year | | $ | 39,584 | | | $ | 38,955 | | | $ | 32,718 | | | $ | 32,843 | |
| 1 to 5 years | | | 78,047 | | | | 72,953 | | | | 95,293 | | | | 96,937 | |
| 6 to 10 years | | | 42,899 | | | | 36,523 | | | | 41,580 | | | | 41,835 | |
| Over 10 years | | | - | | | | - | | | | 496 | | | | 485 | |
| | | $ | 160,530 | | | $ | 148,431 | | | $ | 170,087 | | | $ | 172,100 | |
Gross unrealized gains related to marketable equity securities are $77,991,000 and $85,394,000 as of September 30, 2022 and December 31, 2021, respectively. Gross unrealized losses related to marketable equity securities are $5,022,000 and $946,000 as of September 30, 2022 and December 31, 2021, respectively. For the three months ended September 30, 2022 and 2021, the Company recognized net unrealized losses of $11,056,000 and $23,797,000, 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, 2022 and 2021, the Company recognized a net unrealized losses of $11,479,000 and a net unrealized loss of $23,227,000, 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 $0 and $3,189,000 as of September 30, 2022 and December 31, 2021, respectively. Gross unrealized losses related to available for sale marketable debt securities are $12,099,000 and $1,176,000 as of September 30, 2022 and December 31, 2021, respectively. As of September 30, 2022, a total of 52 debt securities with a total market value of $45,367,000 have been in an unrealized loss position for greater than 12 months.
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, 2022 and 2021.
For the marketable 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 marketable securities during the nine months ended September 30, 2022 and 2021 were $38,114,000 and $89,129,000, respectively. Investment losses of $756,000 and investment gains of $941,000 were realized on these sales during the nine months ended September 30, 2022 and 2021, 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. |
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, 2022 and December 31, 2021 for assets and liabilities measured at fair value on a recurring basis (in thousands):
| | | Fair Value Measurements Using | |
| September 30, 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 | | $ | 44,515 | | | $ | 44,515 | | | $ | – | | | $ | – | |
| Restricted cash and cash equivalents | | | 27,685 | | | | 27,685 | | | | – | | | | – | |
| Marketable equity securities | | | 127,996 | | | | 127,996 | | | | – | | | | – | |
| Corporate debt securities | | | 71,185 | | | | 36,516 | | | | 34,669 | | | | – | |
| Mortgage–backed securities | | | 25,236 | | | | – | | | | 25,236 | | | | – | |
| U.S. Treasury securities | | | 47,306 | | | | 47,306 | | | | – | | | | – | |
| State and municipal securities | | | 4,704 | | | | – | | | | 4,704 | | | | – | |
| Total financial assets | | $ | 348,627 | | | $ | 284,018 | | | $ | 64,609 | | | $ | – | |
| | | Fair Value Measurements Using | |
| December 31, 2021 | | 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 | | $ | 107,607 | | | $ | 107,607 | | | $ | – | | | $ | – | |
| Restricted cash and cash equivalents | | | 12,136 | | | | 12,136 | | | | – | | | | – | |
| Marketable equity securities | | | 140,066 | | | | 140,066 | | | | – | | | | – | |
| Corporate debt securities | | | 81,779 | | | | 50,005 | | | | 31,774 | | | | – | |
| Asset–backed securities | | | 34,770 | | | | – | | | | 34,770 | | | | – | |
| U.S. Treasury securities | | | 47,628 | | | | 47,628 | | | | – | | | | – | |
| State and municipal securities | | | 7,923 | | | | – | | | | 7,923 | | | | – | |
| Total financial assets | | $ | 431,909 | | | $ | 357,442 | | | $ | 74,467 | | | $ | – | |
Note 12 – Goodwill and Other Intangible Assets
At September 30, 2022, the Company reviewed the carrying value of goodwill for impairment indicators, including due to the events and circumstances surrounding the Coronavirus Pandemic ("COVID-19"). 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, including those driven by COVID-19. 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, 2022, the following table represents the activity related to our goodwill by segment (in thousands):
| | | Inpatient Services | | | Homecare and Hospice | | | All Other | | | Total | |
| January 1, 2022 | | $ | 3,741 | | | $ | 164,554 | | | $ | – | | | $ | 168,295 | |
| Additions | | | – | | | | – | | | | – | | | | – | |
| September 30, 2022 | | $ | 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).
Note 13 - Stock Repurchase Program
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. During the nine months ended September 30, 2021, the Company repurchased 3,936 shares of its common stock for a total cost of $278,000. 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 $638,000 and $726,000 for the three months ended September 30, 2022 and 2021, respectively. Stock-based compensation totaled $1,980,000 and $1,905,000 for the nine months ended September 30, 2022 and 2021, respectively. Stock–based compensation is included in “Salaries, wages and benefits” in the interim condensed consolidated statements of operations.
At September 30, 2022, the Company had $3,846,000 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, 2022 and for the year ended December 31, 2021.
| | | September 30, 2022 | | | December 31,
2021 | |
| Risk–free interest rate | | | 1.84 | % | | | 0.21 | % |
| Expected volatility | | | 31.46 | % | | | 34.90 | % |
| Expected life, in years | | | 2.9 | | | | 2.2 | |
| Expected dividend yield | | | 3.57 | % | | | 3.00 | % |
The following table summarizes our outstanding stock options for the nine months ended September 30, 2022 and for the year ended December 31, 2021.
| | | Number of Shares | | | Weighted Average Exercise Price | | | Aggregate Intrinsic Value | |
| Options outstanding at January 1, 2021 | | | 866,956 | | | $ | 72.11 | | | $ | – | |
| Options granted | | | 55,706 | | | | 70.80 | | | | – | |
| Options exercised | | | (541,736 | ) | | | 71.39 | | | | – | |
| Options cancelled | | | (6,000 | ) | | | 72.94 | | | | – | |
| Options outstanding at December 31, 2021 | | | 374,926 | | | | 72.95 | | | | – | |
| Options granted | | | 301,386 | | | | 65.02 | | | | – | |
| Options exercised | | | (18,954 | ) | | | 66.91 | | | | – | |
| Options cancelled | | | (196,051 | ) | | | 76.19 | | | | – | |
| Options outstanding at September 30, 2022 | | | 461,307 | | | | 66.63 | | | $ | 44,582 | |
| | | | | | | | | | | | | |
| Options exercisable at September 30, 2022 | | | 159,921 | | | | 69.68 | | | $ | 44,582 | |
| Options Outstanding September 30, 2022 | | | Exercise Prices | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Life in Years | |
| 372,912 | | | | 61.90 | - | 69.19 | | | | 64.72 | | | | 3.8 | |
| 88,395 | | | | 71.64 | - | 77.92 | | | | 74.72 | | | | 2.6 | |
| 461,307 | | | | | | | | | | 66.63 | | | | 3.6 | |
Note 15 – Income Taxes
The Company's income tax benefit as a percentage of our income before income taxes was 26.8% and 53.6% for the three months ended September 30, 2022 and 2021, respectively.
The Company's income tax provision as a percentage of our income before income taxes was 27.3% and 4.6% for the nine months ended September 30, 2022 and 2021, 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 $437,000 for the three and nine months ended September 30, 2022. The tax benefit related to the statute of limitation expirations was $1,444,000 for the three and nine months ended September 30, 2021. For the nine months ended September 30, 2021, the income tax provision and effective tax rate were favorably impacted by the nontaxable gain recognized upon re-measurement of our existing equity investment in Caris Healthcare, L.P.
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 – Contingencies and Commitments
Accrued Risk Reserves
We are self–insured for risks related to health insurance and 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 $103,710,000 and $98,048,000 at September 30, 2022 and December 31, 2021, 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.
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 Plaintiff filed an amended Complaint against Dr. Sanja Malhotra, Integrated Behavioral Health, Inc. and other entities that Dr. Malhotra is alleged to own or in which he has 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 alleges 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 denies the allegations and is vigorously defending the claim. A motion to dismiss was filed 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. The U.S. Supreme Court has recently denied the petition for certiorari, but the district court has not yet lifted the stay in this matter. We expect that the motion to dismiss will be renewed once the stay is lifted. There is no expected timeline for the lifting of the stay.
Governmental Regulations
Laws and regulations governing the 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. There have been several enacted federal and state relief measures as a result of COVID-19 which have provided substantial support to us during this pandemic.
Note 17 – Massachusetts and New Hampshire Skilled Nursing Facilities
On September 1, 2022, we transferred the operations of seven skilled nursing facilities located in Massachusetts and New Hampshire to a third-party operator. NHC leased the real property of these seven facilities from NHI. In conjunction with the transfer of the operations to a third party, we terminated our lease agreement with NHI for the seven skilled nursing facilities and amended our master lease agreement with NHI, see Note 8 – Long-Term Leases.
The seven skilled nursing facilities had net patient revenues of $13,214,000 and $17,907,000 for the three months ended September 30, 2022 and 2021, respectively. The seven skilled nursing facilities had net patient revenues of $48,697,000 and $50,149,000 for the nine months ended September 30, 2022 and 2021, respectively. Excluding stimulus funds, the seven skilled nursing facilities had losses before income taxes of $259,000 and $1,360,000 for the three months ended September 30, 2022 and 2021, respectively. Excluding stimulus funds, the seven skilled nursing facilities had losses before income taxes of $2,831,000 and $7,257,000 for the nine months ended September 30, 2022 and 2021, respectively.