PART 1

 

 

ITEM 1.

BUSINESS

 

General Development of Business

 

National HealthCare Corporation, which we also refer to as NHC or the Company, began business in 1971. Our principal business is the operation of skilled nursing facilities, assisted living facilities, independent living facilities and homecare programs. Our business activities include providing sub–acute and post–acute skilled nursing care, intermediate nursing care, rehabilitative care, memory and Alzheimer’s care, senior living services, and home health care services. We have a non–controlling ownership interest in a hospice care business that services NHC owned health care centers and others. In addition, we provide management services, accounting and financial services, as well as insurance services to third party operators of health care facilities. We also own the real estate of 13 healthcare properties and lease these properties to third party operators. We operate in 10 states, and our owned and leased properties are located in the Southeastern, Northeastern, and Midwestern parts of the United States.

 

Narrative Description of the Business

 

At December 31, 2017, we operated or managed 76 skilled nursing facilities with a total of 9,597 licensed beds. These numbers include 29 facilities that are owned with 3,720 beds, 39 facilities that are leased with 4,962 beds, and eight facilities that are managed for others with 915 beds. Of the 39 leased facilities, 35 are leased from National Health Investors, Inc. ("NHI").

 

Our 24 assisted living facilities (twelve owned, nine leased, and three managed) have 1,132 units (884 units owned, 205 units leased, and 43 units managed).

 

Our five independent living facilities (one owned, three leased, and one managed) have 475 retirement apartments (93 apartments owned, 245 apartments leased, and 137 apartments managed).

 

We operated 36 homecare programs licensed in four states (Tennessee, South Carolina, Missouri and Florida) and provided 416,570 homecare patient visits to 19,743 patients in 2017.

 

We have a partnership agreement and a 75.1% non–controlling ownership interest in Caris Healthcare, LP (“Caris”), a business that specializes in hospice care services in NHC owned health care centers and in other settings. Caris provides hospice care to over 1,000 patients per day in 29 locations in Georgia, Missouri, South Carolina, Tennessee, and Virginia.

 

We operate specialized care units within some of our healthcare facilities such as Alzheimer's disease care units and sub–acute nursing units. Similar specialty units are under consideration at several of our facilities, as well as free standing projects.

 

Net Patient Revenues. Health care services we provide include a comprehensive range of services. In fiscal 2017, 95.1% of our net operating revenues were derived from such health care services. Highlights of health care services activities during 2017 were as follows:

 

Skilled Nursing Facilities. The most significant portion of our business and the base for our other health care services is the operation of our skilled nursing facilities (“SNFs”). In our facilities, experienced medical professionals provide medical services prescribed by physicians. Registered nurses, licensed practical nurses and certified nursing assistants provide comprehensive, individualized nursing care 24 hours a day. In addition, our facilities provide licensed therapy services, quality nutrition services, social services, activities, and housekeeping and laundry services. Revenues from the 68 facilities we own or lease are reported as net patient revenues in our financial statements. Management fee income is recorded as other revenues from the eight facilities that we manage. We generally charge 6% of facility net operating revenues for our management services. Occupancy in skilled nursing facilities we operate was 90.2% during the year ended December 31, 2017.

 

 

Rehabilitative Services. We provide therapy services through Professional Health Services, a subsidiary of NHC. Our licensed therapists provide physical, speech, respiratory and occupational therapy for patients recovering from strokes, heart attacks, orthopedic conditions, neurological illnesses, or other illnesses, injuries or disabilities. We maintained a rehabilitation staff of over 1,700 highly trained, professional therapists in 2017. Most of our rehabilitative services are for patients in our owned and managed skilled nursing facilities. However, we also provide services to over 82 additional health care providers. Our rates for these services are competitive with other market rates.

 

Medical Specialty Units. All our skilled nursing facilities participate in the Medicare program, and we have expanded our range of offerings by the creation of center–specific medical specialty units such as our memory care units and subacute nursing units. Our trained staff provides care for Alzheimer’s patients in early, middle and advanced stages of the disease. We provide specialized care and programs for persons with Alzheimer’s or related disorders in dedicated units within many of our skilled nursing facilities. Our specialized rehabilitation programs are designed to shorten or eliminate hospital stays and help to reduce the cost of quality health care. We develop individualized patient care plans to target appropriate medical and functional planning objectives with a primary goal where feasible for a return to home or a similar environment.

 

Assisted Living Facilities. Our assisted living facilities provide personal care services and assistance with general activities of daily living such as dressing, bathing, meal preparation and medication management. We perform resident assessments to determine what services are desired or required and our qualified staff encourages residents to participate in a range of activities. In 2017, the rate of occupancy was 82.7%. Certificates of Need are not required to build these projects in most states and we believe overbuilding has occurred in some of our markets.

 

Independent Living Facilities. Our independent living facilities offer specially designed residential units for the active and ambulatory elderly and provide various ancillary services for our residents, including restaurants, activity rooms and social areas. Charges for services are paid from private sources without assistance from governmental programs. Independent living centers may be licensed and regulated in some states, but do not require the issuance of a Certificate of Need ("CON") such as is required for skilled nursing facilities. We have, in several cases, developed independent living centers adjacent to our nursing facilities with an initial construction of 40 to 80 units. These units are rented by the month; thus, these centers offer an expansion of our continuum of care. We believe these independent living units offer a positive marketing aspect of our skilled nursing facilities.

 

We have one independent living facility which is a "continuing care community", where the resident pays a substantial entrance fee and a monthly maintenance fee. The resident then receives a full range of services, including home health nursing, without additional charge.

 

Homecare Programs. Our home health care programs (“homecares”) assist those who wish to stay at home or in assisted living residences but still require some degree of medical care or assistance with daily activities. Registered and licensed practical nurses and therapy professionals provide skilled services such as infusion therapy, wound care and physical, occupational and speech therapies. Home health aides may assist with daily activities such as assistance with walking and getting in and out of bed, personal hygiene, medication assistance, light housekeeping and maintaining a safe environment. Medicare reimbursement for homecare services is paid under a prospective payment system. Under this payment system, we receive a prospectively determined amount per patient per 60-day episode as defined by Medicare guidelines. Medicare episodes were 18,962 in 2017 and 20,423 in 2016. We served 19,743 patients in 2017 and 19,610 patients in 2016. Visits provided were 416,570 in 2017 and 424,281 in 2016.

 

Pharmacy Operations. At December 31, 2017, we operated four regional pharmacy locations (two locations in Tennessee and one location each in South Carolina and Missouri). These pharmacies primarily service our patients that are in an inpatient setting using a central location to deliver pharmaceutical supplies. Our regional pharmacies bill Medicare Part D Prescription Drug Plans (PDPs) electronically and directly for inpatients who have selected a PDP.

 

 

Other Revenues. We generate revenues from management, accounting and financial services to third party operators of healthcare facilities, from insurance services to our managed healthcare facilities, and from rental income. In fiscal 2017, 4.9% of our net operating revenues were derived from such sources. The significant sources of our other revenues are described as follows:

 

A.

Management, Accounting and Financial Services. We provide management services to skilled nursing facilities, assisted living facilities and independent living facilities operated by third party operators. We typically charge 6% of the managed centers’ net operating revenues as a fee for these services. Additionally, we provide accounting and financial services to other healthcare operators. No management services are provided for entities in which we provide accounting and financial services. As of December 31, 2017, we perform management services for twelve healthcare facilities (ten management contracts for third parties and two management contracts where we have an equity method investment) and accounting and financial services for 20 healthcare facilities.

 

B.

Insurance Services. NHC owns a Tennessee domestic licensed insurance company. The company is licensed in several states and provides workers’ compensation coverage to substantially all NHC's managed healthcare facilities. A second wholly-owned insurance subsidiary is licensed in the Cayman Islands and provides general and professional liability coverage in substantially all of NHC’s managed healthcare facilities. Finally, we operate a long–term care insurance division, which is licensed to sell commercially underwritten long–term care policies.

 

C.

Rental Income. The healthcare properties currently owned and leased to third party operators include nine skilled nursing facilities and four assisted living communities.

 

Non–Operating Income. We generate non–operating income from equity in earnings of unconsolidated investments, from dividends and realized gains and losses on marketable securities, interest income, and other miscellaneous non–operating income. The significant source of non–operating income is described as follows:

 

Equity in Earnings of Unconsolidated Investments. Earnings from investments in entities in which we lack control but have the ability to exercise significant influence over operating and financial policies are accounted for on the equity method. Our most significant equity method investment is a 75.1% non–controlling ownership interest in Caris, a business that specializes in hospice care services in NHC owned health care centers and in other settings. Caris currently has 28 locations serving five states (Georgia, Missouri, South Carolina, Tennessee, and Virginia).

 

Quality of Patient Care

 

Centers for Medicare and Medicaid Services (“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 of 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 average Five-Star rating for all of our skilled nursing facilities was 4.25 for 2017. The table below summarizes our performance in these quality ratings for the most recent three years:

 

		As of December, 31
		2017			2016			2015
Total number of skilled nursing facilities, end of year		76			74			74
Number of 4 and 5-star rated skilled nursing facilities		62			54			50
Percentage of 4 and 5-star rated skilled nursing facilities		82%			73%			68%

 

 

Development and Growth

 

We are undertaking to expand our post–acute and senior health care operations while protecting our existing operations and markets. The following table lists our recent construction and purchase activities.

 

Type of Operation		Description		Size		Location		Placed in Service
SNF/ALF		New Facility		92 beds/60 units		Gallatin, TN		April, 2015
Memory Care		Partnership		60 beds		St. Peters, MO		November, 2015
SNF		Bed Addition		44 beds		Charleston, SC		May, 2016
SNF/ALF		New Facility		90 beds / 80 units		Nashville, TN		June, 2016
SNF		Bed Addition		8 beds		Kingsport, TN		September, 2016
SNF		New Facility		112 beds		Columbia, TN		January, 2017
ALF		New Facility		78 units		Bluffton, SC		March, 2017
ALF		New Facility		80 units		Garden City, SC		June, 2017
Memory Care		Bed Addition		23 beds		Murfreesboro, TN		July, 2017
SNF		Bed Addition		30 units		Springfield, MO		Under construction
Memory Care		Bed Addition		60 beds		Farragut, TN		Under construction

 

For the projects under construction at December 31, 2017, the 30-bed skilled nursing addition in Springfield, Missouri is expected to open during the first quarter of 2018. The 60-bed memory care addition in Farragut, Tennessee is expected to open during the fourth quarter of 2018.

 

During 2018, we plan to apply for Certificates of Need for additional beds in certain of our markets. We also will evaluate the feasibility of expansion into new markets by building Medicare and private pay health care centers or private pay assisted living communities.

 

Business Segments

 

In the first quarter of 2017 with the leadership change of the Company’s Chief Executive Officer, we reassessed and realigned our reportable operating segments to coincide with the way our new leadership and chief operating decision maker (“CODM”) measures Company performance and allocates resources. The Company now has two reportable operating segments: (1) inpatient services, which includes the operation of skilled nursing facilities and assisted and independent living facilities, and (2) homecare 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 5 in the notes to the consolidated financial statements for further disclosure of the Company’s operating segments.

 

Skilled Nursing Facilities

 

The skilled nursing facilities operated by our subsidiaries provide in–patient skilled and intermediate nursing care services and in–patient and out–patient rehabilitation services. Skilled nursing care consists of 24–hour nursing service by registered or licensed practical nurses and related medical services prescribed by the patient's physician. Intermediate nursing care consists of similar services on a less intensive basis principally provided by non–licensed personnel. These distinctions are generally found in the health care industry although for Medicaid reimbursement purposes, some states in which we operate have additional classifications, while in other states the Medicaid rate is the same regardless of patient classification. Rehabilitative services consist of physical, speech, respiratory, and occupational therapies, which are designed to aid the patient's recovery and to enable the patient to resume functional activities.

 

Each health care facility has a licensed administrator responsible for supervising daily activities, and larger facilities have assistant administrators. All have medical directors, a director of nurses and full–time registered nurse coverage. All centers provide physical, occupational and speech therapy. Each facility is located near at least one hospital and is qualified to accept patients discharged from such hospitals. Each facility has a full dining room, kitchen, treatment and examining room, emergency lighting system, and sprinkler system where required. Management believes that all facilities are in compliance with the existing fire and life safety codes.

 

We provide centralized management and support services to NHC operated healthcare facilities. The management and support services include operational support through the use of regional vice presidents and regional administrators and regional nurses, accounting and financial services, cash management, data processing, legal, consulting and services in rehabilitative care. Our personnel are employed by our administrative services affiliate, National Health Corporation ("National"), which is also responsible for overall services in the area of personnel, loss control, health insurance, education and training. We reimburse the administrative services contractor by paying all the costs of personnel employed for our benefit as well as a fee. National is wholly owned by the National Health Corporation Employee Stock Ownership Plan and provides its services only to us.

 

 

We provide management services to centers operated under management contracts and offsite accounting and financial services to other third-party owners, all pursuant to separate contracts. The term of each contract and the amount of the management fee or accounting and financial services fee is determined on a case–by–case basis. Typically, we charge 6% of net operating revenues of the managed centers for our management contracts and specific item fees for our accounting and financial service agreements. The initial terms of the contracts range from two years to ten years. In certain contracts, we maintain a right of first refusal should the owner desire to sell a managed center.

 

Skilled Nursing Facility Occupancy Rates

 

The following table shows certain information relating to occupancy rates for our owned and leased skilled nursing facilities:

 

		Year Ended December 31,
		2017			2016			2015
Overall census		90.2%			89.5%			90.0%

 

Occupancy rates are calculated by dividing the total number of days of patient care provided by the number of patient days available (which is determined by multiplying the number of licensed beds by 365 or 366).

 

Customers and Sources of Revenues

 

No individual customer, or related group of customers, accounts for a significant portion of our revenues. We do not expect the loss of a single customer or group of related customers would have a material adverse effect.

 

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:

 

		Year Ended December 31,
Source		2017				2016				2015
Medicare			35	%			37	%			40	%
Medicaid			26	%			26	%			25	%
Private Pay and Other			26	%			25	%			24	%
Managed Care			13	%			12	%			11	%
Total			100	%			100	%			100	%

 

We attempt to attract an increased percentage of Medicare, managed care, and private pay patients by providing rehabilitative and other post–acute care services. These services are designed to speed the patient's recovery and allow the patient to return home as soon as it is practical.

 

Medicare is a health insurance program for the aged and certain other chronically disabled individuals operated by the federal government. 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.

 

Medicaid is a medical assistance program for the indigent, 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. Although payment rates vary among these sources, market forces and costs largely determine these rates. Private paying patients, private insurance carriers and the Veterans Administration generally pay based on the center's charges or specifically negotiated contracts.

 

 

We contract with over 60 managed care organizations ("MCO's") and insurance carriers for the provision of subacute and other medical specialty services by our owned and managed healthcare facilities.

 

Regulation and Licenses

 

Health care is an area of extensive regulatory oversight and frequent regulatory change. The federal government and the states in which we operate regulate various aspects of our business. These regulatory bodies, among other things, require us annually to license our skilled nursing facilities, assisted living facilities in some states and other health care businesses, including home health. To operate nursing facilities and provide health care services we must comply with federal, state and local laws relating to the delivery and adequacy of medical care, distribution of pharmaceuticals, equipment, personnel, operating policies, fire prevention, rate–setting, building codes and environmental protection.

 

Governmental and other authorities periodically inspect our skilled nursing facilities and home health agencies to assure that we continue to comply with their various standards. We must pass these inspections to continue our licensing under state law, to obtain certification under the Medicare and Medicaid programs, and to continue our participation in the Veterans Administration program. We can only participate in other third–party programs if our facilities pass these inspections. In addition, these authorities inspect our record keeping and inventory control.

 

From time to time, we, like others in the health care industry, may receive notices from federal and state regulatory agencies alleging that we failed to comply with applicable standards. These notices may require us to take corrective action and may impose civil money penalties and/or other operating restrictions. If our skilled nursing facilities and home health agencies fail to comply with these directives or otherwise fail to comply substantially with licensure and certification laws, rules and regulations, we could lose our certification as a Medicare and Medicaid provider and/or lose our licenses.

 

Local and state health and social service agencies and other regulatory authorities specific to their location regulate, to varying degrees, our assisted living facilities. Although regulations and licensing requirements vary significantly from state to state, they typically address, among other things, personnel education, training and records; facility services, including administration of medication, assistance with supervision of medication management and limited nursing services; physical plant specifications; furnishing of resident units; food and housekeeping services; emergency evacuation plans; and resident rights and responsibilities. If assisted living facilities fail to comply with licensing requirements, these facilities could lose their licenses. Most states also subject assisted living facilities to state or local building codes, fire codes and food service licensure or certification requirements. In addition, the manner and extent to which the assisted living industry is regulated at federal and state levels are evolving.

 

Changes in the laws or new interpretations of existing laws as applied to the skilled nursing facilities, the assisted living facilities or other components of our health care businesses, may have a significant impact on our operations.

 

In all states in which we operate, before a skilled nursing facility can make a capital expenditure exceeding certain specified amounts or construct any new skilled health care beds, approval of the state health care regulatory agency or agencies must be obtained, and a Certificate of Need issued. The appropriate state health planning agency must review the Certificate of Need according to state specific guidelines before a Certificate of Need can be issued. A Certificate of Need is generally issued for a specific maximum amount of expenditure and the project must be completed within a specific time period. There is no advance assurance that we will be able to obtain a Certificate of Need in any instance. In some states, approval is also necessary in order to purchase existing health care beds, although the purchaser is normally permitted to avoid a full-scale Certificate of Need application procedure by giving advance written notice of the acquisition and giving written assurance to the state regulatory agency that the change of ownership will not result in a change in the number of beds, services offered and, in some cases, reimbursement rates at the facility.

 

While there are currently no significant legislative proposals to eliminate Certificates of Need pertaining to skilled nursing care in the states in which we do business, deregulation in the Certificate of Need area would likely result in increased competition and could adversely affect occupancy rates and the supply of licensed and certified personnel.

 

Medicare and Medicaid Participation

 

All health care centers, owned, leased or managed by us are certified to participate in Medicare. All but eight (seven owned and one managed) of our affiliated nursing centers participate in Medicaid. All our homecares participate in Medicare, which comprises the majority of their revenue. Homecares also participate in Medicaid.

 

 

During the fiscal years, we received payments from Medicare and, if participating, from Medicaid. We record as receivables the amounts we ultimately expect to receive under the Medicare and Medicaid programs and record into profit or loss any differences in amounts received at the time of interim or final settlements. Adjustments have not had a material adverse effect within the last three years.

 

Certifications and Participation Requirements; Efforts to Impose Reduced Payments

 

Changes in certification and participation requirements of the Medicare and Medicaid programs have restricted, and are likely to continue to restrict further, eligibility for reimbursement under those programs. Failure to obtain and maintain Medicare and Medicaid certification at our nursing centers would result in denial of Medicare and Medicaid payments which would likely result in a significant loss of revenue. In addition, private payors, including managed care payors, increasingly are demanding that providers accept discounted payments resulting in lost revenue for specific patients. Efforts to impose reduced payments, greater discounts and more stringent cost controls by government and other payors are expected to continue. Any reforms that significantly limit rates of reimbursement under the Medicare and Medicaid programs could have a material adverse effect on our profitability and cash flows. We are unable to predict what reform proposals or reimbursement limitations will be adopted in the future or the effect such changes will have on our operations. No assurance can be given that such reforms will not have a material adverse effect on us.

 

Medicare Legislation and Regulations

 

Federal Health Care Reform  

 

In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act ("PPACA" or, commonly, “ACA”) and the Health Care and Education Reconciliation Act of 2010 ("HCERA"), which represents significant changes to the current U.S. health care system (collectively the "Acts"). The primary goals of the Acts are to: (1) expand coverage to Americans without health insurance, (2) reform the delivery system to improve quality and drive efficiency, (3) and to lower the overall costs of providing health care. The timeline of the enacted provisions spans over several years – some of the provisions were effective immediately in 2010 and others will be phased in through 2020.

 

Since a significant goal of federal health care reform is to transform the delivery of health care by holding providers accountable for the cost and quality of care provided, Medicare and many commercial third-party payors are implementing Accountable Care Organization ("ACO") models in which groups of providers share in the benefit and risk of providing care to an assigned group of individuals. Other reimbursement methodology reforms in which we are participating or expect to participate in include value–based purchasing, in which a portion of provider reimbursement is redistributed based on relative performance on designated economic, clinical quality, and patient satisfaction metrics. Also, CMS is implementing demonstration programs to bundle acute care and post–acute care reimbursement to hold providers accountable for costs across a broader continuum of care. These reimbursement methodologies and similar programs are likely to continue and expand, both in public and commercial health plans. Providers who respond successfully to these trends and can deliver quality care at lower costs are likely to benefit financially.

 

If the ACA is replaced or modified, we cannot predict what the replacement plan or modifications would be or whether any of the existing provisions will remain in place. The potential replacement or modification of ACA on our business is subject to numerous variables and the potential impact on the Company’s financial condition or results of operations is currently unknown.

 

Skilled Nursing Facilities

 

SNF PPS – Medicare is uniform nationwide and reimburses nursing centers under a fixed payment methodology named the Skilled Nursing Facility Prospective Payment System ("SNF PPS"). SNF PPS is an acuity-based classification system that uses nursing and therapy indexes adjusted by geographical wage indexes to calculate per diem rates for each Medicare patient. Payment rates are updated annually and are generally increased or decreased each October when the federal fiscal year begins. The acuity classification system is named RUGs (Resource Utilization Groups IV). There are currently 66 classifications of RUG groups.

 

 

In July 2017, CMS released its final rule outlining the fiscal year 2018 Medicare payments and policy changes for skilled nursing facilities. The 2018 final rule provided for an approximate 1.0% rate update, which began October 1, 2017. CMS estimated a 2.7% market basket increase reduced by 0.4% for a multifactor productivity adjustment required by the ACA; however, the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) mandated that all post-acute care providers receive a maximum market basket update of 1% in fiscal year 2018 to offset part of the cost of the legislation. CMS estimates the update will increase overall payments to skilled nursing facilities in fiscal year 2018 by $370 million compared to fiscal year 2017 levels. CMS also revised and rebased the market basket index by updating the base year from fiscal year 2010 to fiscal year 2014.

 

In July 2016, CMS released its final rule outlining the fiscal year 2017 Medicare payments and policy changes for skilled nursing facilities. The 2017 final rule provided for an approximate 2.4% rate update, which began October 1, 2016. This increase consisted of a 2.7% market basket increase reduced by 0.3% for a multifactor productivity adjustment required by the ACA. The policy changes in the 2017 final rule continue to shift skilled nursing facility Medicare payments from volume to value. The final rule makes changes to the SNF Quality Reporting Program and Value–Based Purchasing Program with some of these changes effective for the fiscal year beginning October 1, 2017.

 

Homecares (HHAs)

 

HH PPS – Medicare is uniform nationwide and reimburses homecares under a fixed payment methodology named the Home Health Prospective Payment System ("HH PPS"). Generally, Medicare makes payments under the HH PPS based on a national standardized 60–day episode payment, adjusted for case mix and geographical wage index. Payment rates are updated at the beginning of each calendar year. The acuity classification system is named HHRGs (Home Health Resource Groups).

 

In November 2017 and effective January 1, 2018, CMS released its final rule for 2018 home health prospective payment system rates. CMS estimated the net impact of the PPS rule resulted in a 0.4% decrease ($80 million) in Medicare payments for agencies in 2018. This decrease reflects the effects of a 1.0% home health payment update percentage; a -0.97% percent adjustment to the national, standardized 60-day episode payment rate to account for nominal case-mix growth; and the sunset of the rural add-on provision for an impact of -0.5%. The rule also finalizes proposals for the Home Health Value-Based Purchasing (HHVBP) Model and the Home Health Quality Reporting Program (HH QRP). CMS is not finalizing the implementation of the Home Health Groupings Model (HHGM) in this final rule.

 

In October 2016 and effective January 1, 2017, CMS released its final rule for 2017 home health prospective payment system rates. CMS estimated the net impact of the PPS rule resulted in a 0.7% decrease ($130 million) in Medicare payments for agencies in 2017. The estimated decrease reflects the effects of a 2.5% home health payment update; rebasing adjustments to the national standardized 60-day episode payment rate, the national per-visit payment rate, and the non-routine medical supplies conversion factor (expected impact of -2.3%), and the effects of an adjustment to the national standardized 60-day episode payment rate to account for nominal case-mix growth (expected impact of -0.9%). However, the freestanding home health agencies are expected to have an overall reduction of 0.8%, and agencies in eight states including the states of South Carolina and Florida are expected to average a reimbursement decrease of 1.9%.

 

Medicaid Legislation and Regulations

 

Skilled Nursing Facilities

 

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. States will more likely than not be unable to keep pace with post-acute healthcare inflation. States are under pressure to pursue other alternatives to skilled nursing care such as community and home–based services.

 

Effective July 1, 2017 and for the fiscal year 2018, the state of Tennessee implemented specific individual nursing facility rate increases. We estimate the resulting increase in revenue for the 2018 fiscal year will be approximately $3,600,000 annually, or $900,000 per quarter.

 

Effective October 1, 2017 and for the fiscal year 2018, South Carolina implemented specific individual nursing facility rate changes. We estimate the resulting increase in revenue for the 2018 fiscal year will be approximately $1,100,000 annually, or $275,000 per quarter.

 

Effective August 1, 2017 and for the fiscal year 2018, the state of Missouri approved a Medicaid rate decrease of $5.37 per patient day, or an approximate 3.5% decrease, to Missouri skilled nursing providers. We estimate the resulting decrease in revenue will be approximately $1,400,000 annually, or $350,000 per quarter.

 

 

Competition

 

In most of the communities in which we operate health care centers, there are other health care centers with which we compete. We own, lease or manage (through subsidiaries) 76 skilled nursing facilities located in nine states. Each of these states is a certificate of need state which generally requires the state to approve the opening of any new skilled nursing facilities. There are hundreds of operators of skilled nursing facilities in each of these states and no single operator, including us, dominates any of these state’s skilled nursing care markets, except for some small rural markets which might have only one skilled nursing facility. In competing for patients and staff with these facilities, we depend upon referrals from acute care hospitals, physicians, residential care facilities, church groups and other community service organizations. The reputation in the community and the physical appearance of our facilities are important in obtaining patients, since members of the patient’s family generally participate to a greater extent in selecting skilled nursing facilities than in selecting an acute care hospital. We believe that by providing and emphasizing rehabilitative as well as skilled care services at our facilities, we can broaden our patient base and to differentiate our facilities from competing skilled nursing facilities.

 

As we continue to expand into the assisted living market, we monitor proposed or existing competing assisted living centers. Our development goal is to link our skilled nursing facilities with our assisted living centers, thereby obtaining a competitive advantage for both.

 

Our homecares compete with other home health agencies (HHA’s) in most communities we serve. Competition occurs for patients and employees. Our homecares depend on hospital and physician referrals and reputation to maintain a healthy census.

 

We experience competition in employing and retaining nurses, technicians, aides and other high quality professional and non–professional employees. To enhance our competitive position, we have an educational tuition loan program, an American Dietetic Association approved internship program, a specially designed nurse's aide training class, and we make financial scholarship aid available to physical therapy vocational programs. We support the Foundation for Geriatric Education. We also conduct an "Administrator in Training" course, 24 months in duration, for the professional training of administrators. Presently, we have eight full–time individuals in this program. Two of our four regional senior vice presidents, one regional vice president, two regional administrators, and 55 of our 76 health care center administrators are graduates of this program.

 

We experience competition in providing management and accounting services to other senior health care providers. Those services are provided primarily to owners with whom we have had previous involvement through ownership or leasing arrangements. Our insurance services are provided primarily to healthcare facilities for which we also provide management and/or accounting services.

 

Our employee benefit package offers a tuition reimbursement program. The goal of the program is to ensure a well–trained qualified work force to meet future demands. While the program is offered to all disciplines, special emphasis has been placed on supporting students in nursing and physical therapy programs. Students are reimbursed at the end of each semester after presenting tuition receipts and grades to management. The program has been successful in providing a means for many bright students to pursue a formal education.

 

Employees

 

As of December 31, 2017, our Administrative Services Contractor (National Health Corporation) had approximately 14,850 full and part time employees, who we call "Partners". No employees are represented by a bargaining unit. We believe our current relations with our employees are good.

 

Investor Information 

 

We are subject to the reporting requirements under the Exchange Act. Consequently, we are required to file reports and information with the Securities and Exchange Commission (“SEC”), including reports on the following forms: annual report on Form 10–K, quarterly reports on Form 10–Q, current reports on Form 8–K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. These reports and other information concerning our company may be accessed through the SEC's website at www.sec.gov.

 

You may also find on our website at www.nhccare.com electronic copies of our annual reports on Form 10–K, quarterly reports on Form 10–Q, current reports on Form 8–K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as well as all press releases. We do not necessarily have these posted the same day as they are filed with the SEC or released to the public, but rather have a policy of placing these on the web site within two (2) business days of public release or SEC filing. All such filings are available free of charge. Information contained in our website is not deemed to be a part of this Annual Report.

 

 

We also maintain the following documents on the website:

 

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The NHC Code of Ethics. This Code has been adopted for all employees of our Administrative Services Contractor, Officers and Directors of the Company. The website will also disclose whether there have been any amendments or waivers to the Code of Ethics and Business Conduct that amended, restated, and replaced the prior Code of Ethics.

 

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Information on our "NHC Valuesline", which allows our staff and investors unrestricted access to our Corporate Compliance Officer, executive officers and directors. The toll-free number is 888–568–8578 and the communications may be incognito, if desired.

 

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The NHC Restated Audit Committee Charter.

 

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The NHC Compensation Committee Charter Restated 2013.

 

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The NHC Nominating and Corporate Governance Committee Charter.

 

We will furnish, free of charge, a copy of any of the above documents to any interested investor upon receipt of a written request.

 

 

ITEM 1A.

RISK FACTORS

 

You should carefully consider the risk factors set forth below, as well as the other information contained in this Annual Report on Form 10–K. These risk factors should be considered in connection with evaluating the forward–looking statements contained in this Annual Report on Form 10–K, because these factors could cause the actual results and conditions to differ materially from those projected in forward–looking statements. The risks described below are not the only risks facing us. Additional risks and uncertainties that are not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business operations. Any of the following risks could materially adversely affect our business, financial condition or results of operations and cash flows.

 

Risks Relating to Our Company

 

We depend on reimbursement from Medicare, Medicaid and other third–party payors and reimbursement rates from such payors may be reduced. We derive a substantial portion of our revenue from third–party payors, including the Medicare and Medicaid programs. Third–party payor programs are highly regulated and are subject to frequent and substantial changes. Changes in the reimbursement rate or methods of payment from third–party payors, including the Medicare and Medicaid programs, or the implementation of other measures to reduce reimbursements for our services has in the past, and could in the future, result in a substantial reduction in our revenues and operating margins. Additionally, net revenue realizable under third–party payor agreements can change after examination and retroactive adjustment by payors during the claims settlement processes or as a result of post–payment audits. Payors may disallow requests for reimbursement based on determinations that certain costs are not reimbursable or reasonable because additional documentation is necessary or because certain services were not covered or were not reasonable and medically necessary. There also continue to be new legislative and regulatory proposals that could impose further limitations on government and private payments to health care providers. In some cases, states have enacted or are considering enacting measures designed to reduce their Medicaid expenditures and to make changes to private health care insurance. We cannot assure you that adequate reimbursement levels will continue to be available for the services provided by us, which are currently being reimbursed by Medicare, Medicaid or private third–party payors. Further limits on the scope of services reimbursed and on reimbursement rates could have a material adverse effect on our liquidity, financial condition and results of operations. It is possible that the effects of further refinements to PPS that result in lower payments to us or cuts in state Medicaid funding could have a material adverse effect on our results of operations. See Item 1, "Business – Regulation and Licenses" and "Medicare Legislation and Regulations" and "Medicaid Legislation and Regulations".

 

 

The Affordable Care Act and its implementation could impact our business. The Affordable Care Act may continue to alter the existing U.S. health care system for the delivery and financing of health care. A significant goal of Federal health care reform is to transform the delivery of health care by changing reimbursement for health care services to hold providers accountable for the cost and quality of care provided. Medicare and many commercial third-party payors are implementing ACO models in which groups of providers share in the benefit and risk of providing care to an assigned group of individuals at lower cost. Other reimbursement methodology reforms include value-based purchasing, in which a portion of provider reimbursement is redistributed based on relative performance on designated economic, clinical quality, and patient satisfaction metrics. In addition, CMS is implementing programs to bundle acute care and post-acute care reimbursement to hold providers accountable for costs across a broader continuum of care. These reimbursement methodologies and similar programs are likely to continue and expand, both in public and commercial health plans. Providers who respond successfully to these trends and can deliver quality care at lower cost are likely to benefit financially. The Affordable Care Act and the programs implemented by the law may reduce reimbursements for our services and may impact the demand for the Company’s products. In addition, various healthcare programs and regulations may be ultimately implemented at the federal or state level. Failure to respond successfully to these trends could negatively impact our business, results of operations and/or financial condition.

 

We cannot predict the effect that further healthcare reform, the possible repeal and replacement of the Affordable Care Act, and other changes in government programs may have on our business, financial condition or results of operations. Since the adoption of the Affordable Care Act in 2010, the law has been challenged before the U.S. Supreme Court, and several bills have been and continue to be introduced in Congress to delay, defund or repeal implementation of or amend significant provisions of the Affordable Care Act.  In addition, there continues to be ongoing litigation over the interpretation and implementation of certain provisions of the law.  Furthermore, on January 20, 2017, newly-inaugurated President Trump issued an executive order that, among other things, stated that it was the intent of his administration to repeal the Affordable Care Act and, pending that repeal, instructed the executive branch of the federal government to defer or delay the implementation of any provision or requirement of the Affordable Care Act that would impose a fiscal burden on any state or a cost, fee, tax or penalty on any individual, family, health care provider, or health insurer. 

 

We cannot predict whether the Affordable Care Act will be repealed, replaced, or modified or the impact that the President’s executive order will have on the implementation and enforcement of the provisions of the Affordable Care Act.  In addition, if the Affordable Care Act is replaced or modified, we cannot predict what the replacement plan or modifications would be, when the replacement plan or modifications would become effective, or whether any of the existing provisions of the Affordable Care Act would remain in place.   

 

The net effect of the Affordable Care Act on our business is subject to numerous variables, including the law’s complexity, lack of complete implementing regulations and interpretive guidance, and the gradual implementation of the numerous programs designed to improve access and quality.  As a result, we are unable to predict the effect on our business, financial condition or results of operations, the reductions in government healthcare reimbursement spending, and numerous other provisions potentially impacted by the possible repeal, replacement or modification of the Affordable Care Act.

 

We conduct business in a heavily regulated industry, and changes in, or violations of regulations may result in increased costs or sanctions that reduce our revenue and profitability. In the ordinary course of our business, we are regularly subject to inquiries, investigations and audits by federal and state agencies to determine whether we are in compliance with regulations governing the operation of, and reimbursement for, skilled nursing, assisted living and independent living facilities, hospice, home health agencies and our other operating areas. These regulations include those relating to licensure, conduct of operations, ownership of facilities, construction of new and additions to existing facilities, allowable costs, services and prices for services. In particular, various laws, including federal and state anti–kickback and anti–fraud statutes, prohibit certain business practices and relationships that might affect the provision and cost of health care services reimbursable under federal and/or state health care programs such as Medicare and Medicaid, including the payment or receipt of remuneration for the referral of patients whose care will be paid by federal governmental programs. Sanctions for violating the anti–kickback and anti–fraud statutes include criminal penalties and civil sanctions, including fines and possible exclusion from governmental programs such as Medicare and Medicaid.

 

In addition, the Stark Law broadly defines the scope of prohibited physician referrals under federal health care programs to providers with which they have ownership or other financial arrangements. Many states have adopted, or are considering, legislative proposals similar to these laws, some of which extend beyond federal health care programs, to prohibit the payment or receipt of remuneration for the referral of patients and physician referrals regardless of the source of the payment for the care. These laws and regulations are complex and limited judicial or regulatory interpretation exists. We cannot assure you that governmental officials charged with responsibility for enforcing the provisions of these laws and regulations will not assert that one or more of our arrangements are in violation of the provisions of such laws and regulations.

 

 

The regulatory environment surrounding the post–acute and long–term care industry has intensified, particularly for larger for–profit, multi–facility providers like us. The federal government has imposed extensive enforcement policies resulting in a significant increase in the number of inspections, citations of regulatory deficiencies and other regulatory sanctions, including terminations from the Medicare and Medicaid programs, denials of payment for new Medicare and Medicaid admissions and civil monetary penalties. If we fail to comply, or are perceived as failing to comply, with the extensive laws and regulations applicable to our business, we could become ineligible to receive government program reimbursement, be required to refund amounts received from Medicare, Medicaid or private payors, suffer civil or criminal penalties, suffer damage to our reputation in various markets or be required to make significant changes to our operations. We are also subject to federal and state laws that govern financial and other arrangements between health care providers. These laws often prohibit certain direct and indirect payments or fee–splitting arrangements between health care providers that are designed to induce the referral of patients to a provider for medical products and services. Possible sanctions for violation of any of these restrictions or prohibitions include loss of eligibility to participate in reimbursement programs and/or civil and criminal penalties. Furthermore, some states restrict certain business relationships between physicians and other providers of health care services. Many states prohibit business corporations from providing, or holding themselves out as a provider of, medical care. From time to time, we may seek guidance as to the interpretation of these laws; however, there can be no assurance that such laws will ultimately be interpreted in a manner consistent with our practices. In addition, we could be forced to expend considerable resources responding to an investigation or other enforcement action under these laws or regulations. Furthermore, should we lose licenses or certifications for many our facilities as a result of regulatory action or otherwise, we could be deemed in default under some of our agreements, including agreements governing outstanding indebtedness. We also are subject to potential lawsuits under a federal whistle–blower statute designed to combat fraud and abuse in the health care industry, known as the federal False Claims Act.  These lawsuits can involve significant monetary awards to private plaintiffs who successfully bring these suits.  When a private party brings a qui tam action under the False Claims Act, it files the complaint with the court under seal, and the defendant will generally not be aware of the lawsuit until the government makes a determination whether it will intervene and take a lead in the litigation. Even if, during an investigation, the court partially unseals a complaint to allow the government and a defendant to work toward a resolution of the complaint's allegations, the defendant is prohibited from revealing to anyone the existence of the compliant or that the partial unsealing has occurred.

 

We have established policies and procedures that we believe are sufficient to ensure that our facilities will operate in substantial compliance with these anti–fraud and abuse requirements. While we believe that our business practices are consistent with Medicare and Medicaid criteria, those criteria are often vague and subject to change and interpretation. Aggressive anti–fraud actions, however, have had and could have an adverse effect on our financial position, results of operations and cash flows. See Item 1, "Business – Regulation and Licenses".

 

We are unable to predict the future course of federal, state and local regulation or legislation, including Medicare and Medicaid statutes and regulations, or the intensity of federal and state enforcement actions. Our failure to obtain or renew required regulatory approvals or licenses or to comply with applicable regulatory requirements, the suspension or revocation of our licenses or our disqualification from participation in certain federal and state reimbursement programs, or the imposition of other harsh enforcement sanctions could have a material adverse effect upon our operations and financial condition.

 

We are required to comply with laws governing the transmission and privacy of health information. The Health Insurance Portability and Accountability Act of 1996, or HIPAA, requires us to comply with standards for the exchange of health information within our Company and with third parties, such as payors, business associates and patients. These include standards for common health care transactions, such as claims information, plan eligibility, payment information and the use of electronic signatures, unique identifiers for providers, employers, health plans and individuals, and security, privacy and enforcement. If we are found to be in violation of the privacy or security rules under HIPAA or other federal or state laws protecting the confidentiality of patient health information, we could be subject to criminal penalties and civil sanctions, which could increase our liabilities, harm our reputation and have a material adverse effect on our business, financial position, results of operations and liquidity.

 

We are defendants in significant legal actions, which are commonplace in our industry, and which could subject us to increased operating costs and substantial uninsured liabilities, which would materially and adversely affect our liquidity and financial condition. As is typical in the health care industry, we are subject to claims that our services have resulted in resident injury or other adverse effects. We, like our industry peers, have experienced an increasing trend in the frequency and severity of professional liability and workers’ compensation claims and litigation asserted against us. In some states in which we have significant operations, insurance coverage for the risk of punitive damages arising from professional liability claims and/or litigation may not, in certain cases, be available due to state law prohibitions or limitations of availability. We cannot assure you that we will not be liable for punitive damage awards that are either not covered or are in excess of our insurance policy limits. We also believe that there have been, and will continue to be, governmental investigations of long–term care providers, particularly in the area of Medicare/Medicaid false claims, as well as an increase in enforcement actions resulting from these investigations. Insurance is not available to cover such losses. Any adverse determination in a legal proceeding or governmental investigation, whether currently asserted or arising in the future, could have a material adverse effect on our financial condition.

 

 

Due to the rising cost and limited availability of professional liability and workers’ compensation insurance, we are largely self–insured on all of these programs and as a result, there is no limit on the maximum number of claims or amount for which we or our insurance subsidiaries can be liable in any policy period. Although we base our loss estimates on independent actuarial analyses using the information we have to date, the amount of the losses could exceed our estimates. In the event our actual liability exceeds our estimates for any given period, our results of operations and financial condition could be materially adversely impacted. In addition, our insurance coverage might not cover all claims made against us. If we are unable to maintain our current insurance coverage, if judgments are obtained in excess of the coverage we maintain, if we are required to pay uninsured punitive damages, or if the number of claims settled within the self–insured retention currently in place significantly increases, we could be exposed to substantial additional liabilities. We cannot assure you that the claims we pay under our self–insurance programs will not exceed the reserves we have set aside to pay claims. The number of claims within the self–insured retention may increase.

 

Failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes–Oxley Act could result in a restatement of our financial statements, cause investors to lose confidence in our financial statements and our company and have a material adverse effect on our business and stock price. We produce our consolidated financial statements in accordance with the requirements of U.S. GAAP. Effective internal controls are necessary for us to provide reliable financial reports to help mitigate the risk of fraud and to operate successfully as a publicly traded company. As a public company, we are required to document and test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes–Oxley Act of 2002, or Section 404, which requires annual management assessments of the effectiveness of our internal controls over financial reporting.

 

Testing and maintaining internal controls can divert our management's attention from other matters that are important to our business. We may not be able to conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 or our independent registered public accounting firm may not be able to issue an unqualified report if we conclude that our internal controls over financial reporting are not effective. If either we are unable to conclude that we have effective internal controls over financial reporting or our independent registered public accounting firm is unable to provide us with an unqualified report as required by Section 404, investors could lose confidence in our reported financial information and our company, which could result in a decline in the market price of our common stock, and cause us to fail to meet our reporting obligations in the future, which in turn could impact our ability to raise additional financing if needed in the future.

 

Increasing costs of being publicly owned are likely to impact our future consolidated financial position and results of operations. In connection with the Sarbanes–Oxley Act of 2002, we are subject to rules requiring our management to report on the effectiveness of our internal control over financial reporting. If we fail to have effective internal controls and procedures for financial reporting in place, we could be unable to provide timely and reliable financial information which could, in turn, have an adverse effect on our business, results of operations, financial condition and cash flows.

 

Significant regulatory changes, including the Sarbanes–Oxley Act and rules and regulations promulgated as a result of the Sarbanes–Oxley Act, have increased, and in the future, are likely to further increase general and administrative costs. In order to comply with the Sarbanes–Oxley Act of 2002, the listing standards of the NYSE exchange, and rules implemented by the Securities and Exchange Commission (SEC), we have had to hire additional personnel and utilize additional outside legal, accounting and advisory services, and may continue to require such additional resources. Moreover, in the rapidly changing regulatory environment in which we operate, there is significant uncertainty as to what will be required to comply with many of the regulations. As a result, we may be required to spend substantially more than we currently estimate, and may need to divert resources from other activities, as we develop our compliance plans.

 

New accounting pronouncements or new interpretations of existing standards could require us to make adjustments in our accounting policies that could affect our financial statements. The Financial Accounting Standards Board, the SEC, or other accounting organizations or governmental entities issue new pronouncements or new interpretations of existing accounting standards that sometimes require us to change our accounting policies and procedures. Future pronouncements or interpretations could require us to change our policies or procedures and have a significant impact on our future financial statements.

 

 

By undertaking to provide management services, advisory services, and/or financial services to other entities, we become at least partially responsible for meeting the regulatory requirements of those entities. We provide management and/or financial services to skilled nursing facilities, assisting living facilities and independent living facilities owned by third parties. At December 31, 2017, we perform management services (which include financial services) for 11 such centers and accounting and financial services for an additional 20 such centers. The "Risk Factors" contained herein as applying to us may in many instances apply equally to these other entities for which we provide services. We have in the past and may in the future be subject to claims from the entities to which we provide management, advisory or financial services, or to the claims of third parties to those entities. Any adverse determination in any legal proceeding regarding such claims could have a material adverse effect on our business, our results of operation, our financial condition and cash flows.

 

We provide management services to skilled nursing facilities and other healthcare facilities under terms whereby the payments for our services are subject to subordination to other expenditures of the healthcare facility. Furthermore, there are certain third parties with whom we have contracted to provide services and which we have determined, based on insufficient historical collections and the lack of expected future collections, that the service revenue realization is uncertain. We may, therefore, make expenditures related to the provision of services for which we are not paid.

 

The cost to replace or retain qualified nurses, health care professionals and other key personnel may adversely affect our financial performance, and we may not be able to comply with certain states’ staffing requirements. We could experience significant increases in our operating costs due to shortages in qualified nurses, health care professionals and other key personnel. The market for these key personnel is highly competitive. We, like other health care providers, have experienced difficulties in attracting and retaining qualified personnel, especially facility administrators, nurses, certified nurses' aides and other important health care providers. There is currently a shortage of nurses, and trends indicate this shortage will continue or worsen in the future. The difficulty our skilled nursing facilities are experiencing in hiring and retaining qualified personnel has increased our average wage rate. We may continue to experience increases in our labor costs due to higher wages and greater benefits required to attract and retain qualified health care personnel. Our ability to control labor costs will significantly affect our future operating results.

 

Certain states in which we operate skilled nursing facilities have adopted minimum staffing standards and additional states may also establish similar requirements in the future. Our ability to satisfy these requirements will depend upon our ability to attract and retain qualified nurses, certified nurses' assistants and other staff. Failure to comply with these requirements may result in the imposition of fines or other sanctions. If states do not appropriate sufficient additional funds (through Medicaid program appropriations or otherwise) to pay for any additional operating costs resulting from minimum staffing requirements, our profitability may be adversely affected.

 

Although we currently have no collective bargaining agreements with unions at our facilities, there is no assurance this will continue to be the case. If any of our facilities enter into collective bargaining agreements with unions, we could experience or incur additional administrative expenses associated with union representation of our employees.

 

Our senior management team has extensive experience in the healthcare industry. We believe they have been instrumental in guiding our business, instituting valuable performance and quality monitoring, and driving innovation. Accordingly, our future performance is substantially dependent upon the continued services of our senior management team. The loss of the services of any of these persons could have a material adverse effect upon us.

 

Future acquisitions may be difficult to complete, use significant resources, or be unsuccessful and could expose us to unforeseen liabilities. We may selectively pursue acquisitions or new developments in our target markets. Acquisitions and new developments may involve significant cash expenditures, debt incurrence, capital expenditures, additional operating losses, amortization of the intangible assets of acquired companies, dilutive issuances of equity securities and other expenses that could have a material adverse effect on our financial condition and results of operations. Acquisitions also involve numerous other risks, including difficulties integrating acquired operations, personnel and information systems, diversion of management's time from existing operations, potential losses of key employees or customers of acquired companies, assumptions of significant liabilities, exposure to unforeseen liabilities of acquired companies and increases in our indebtedness.

 

We cannot assure that we will succeed in obtaining financing for any acquisitions at a reasonable cost or that any financing will not contain restrictive covenants that limit our operating flexibility. We also may be unable to operate acquired facilities profitably or succeed in achieving improvements in their financial performance.

 

 

We also may face competition in acquiring any facilities. Our competitors may acquire or seek to acquire many of the facilities that would be suitable acquisition candidates for us. This could limit our ability to grow by acquisitions or increase the cost of our acquisitions.

 

Upkeep of healthcare properties is capital intensive, requiring us to continually direct financial resources to the maintenance and enhancement of our physical plant and equipment. As of December 31, 2017, we leased or owned 68 skilled nursing facilities, 21 assisted living facilities, and four independent living facilities. Our ability to maintain and enhance our physical plant and equipment in a suitable condition to meet regulatory standards, operate efficiently and remain competitive in our markets requires us to commit a substantial portion of our free cash flow to continued investment in our physical plant and equipment. Certain of our competitors may operate centers that are not as old as our centers, or may appear more modernized than our centers, and therefore may be more attractive to prospective customers. In addition, the cost to replace our existing centers through acquisition or construction is substantially higher than the carrying value of our centers. We are undertaking a process to allocate more aggressively capital spending within our owned and leased facilities in an effort to address issues that arise in connection with an aging physical plant.

 

If factors, including factors indicated in these "Risk Factors" and other factors beyond our control render us unable to direct the necessary financial and human resources to the maintenance, upgrade and modernization of our physical plant and equipment, our business, results of operations, financial condition and cash flow could be adversely impacted.

 

Our business is subject to a variety of federal, state and local environmental laws and regulations. As a healthcare provider, we face regulatory requirements in areas of air and water quality control, medical and low–level radioactive waste management and disposal, asbestos management, response to mold and lead–based paint in our facilities and employee safety.

 

As an operator of healthcare facilities, we also may be required to investigate and remediate hazardous substances that are located on and/or under the property, including any such substances that may have migrated off, or may have been discharged or transported from the property. Part of our operations involves the handling, use, storage, transportation, disposal and discharge of medical, biological, infectious, toxic, flammable and other hazardous materials, wastes, pollutants or contaminants. In addition, we are sometimes unable to determine with certainty whether prior uses of our facilities and properties or surrounding properties may have produced continuing environmental contamination or noncompliance, particularly where the timing or cost of making such determinations is not deemed cost–effective. These activities, as well as the possible presence of such materials in, on and under our properties, may result in damage to individuals, property or the environment; may interrupt operations or increase costs; may result in legal liability, damages, injunctions or fines; may result in investigations, administrative proceedings, penalties or other governmental agency actions; and may not be covered by insurance.

 

We believe that we are in material compliance with applicable environmental and occupational health and safety requirements. However, we cannot assure you that we will not encounter environmental liabilities in the future, and such liabilities may result in material adverse consequences to our operations or financial condition.

 

Provision for losses in our financial statements may not be adequate. Loss provisions in our financial statements for self–insured programs are made on an undiscounted basis in the relevant period. These provisions are based on internal and external evaluations of the merits of individual claims, analysis of claims history and independent actuarially determined estimates. Our management reviews the methods of determining these estimates and establishing the resulting accrued liabilities frequently, with any material adjustments resulting therefrom being reflected in current earnings. Although we believe that our provisions for self–insured losses in our financial statements are adequate, the ultimate liability may be in excess of the amounts recorded. In the event the provisions for loss reflected in our financial statements are inadequate, our financial condition and results of operations may be materially affected.

 

Implementation of new information technology could cause business interruptions and negatively affect our profitability and cash flows. We continue to refine and implement our information technology to improve customer service, enhance operating efficiencies and provide more effective management of business operations. Implementation of information technology carries risks such as cost overruns, project delays and business interruptions and delays. If we experience a material business interruption as a result of the implementation of our existing or future information technology infrastructure or are unable to obtain the projected benefits of this new infrastructure, it could adversely affect us and could have a material adverse effect on our business, results of operations, financial condition and cash flows.

 

 

We depend on the proper function and availability of our information systems. We are dependent on the proper function and availability of our information systems. Though we have taken steps to protect the safety and security of our information systems and the data maintained within those systems, there can be no assurance that our safety and security measures and disaster recovery plan will prevent damage or interruption of our systems and operations and we may be vulnerable to losses associated with the improper functioning, security breach or unavailability of our information systems. Failure to maintain proper function and availability of our information systems could have a material adverse effect on our business, financial position, results of operations and liquidity.

 

In addition, certain software supporting our business and information systems are licensed to us by independent software developers. Our inability or the inability of these developers, to continue to maintain and upgrade our information systems and software could disrupt or reduce the efficiency of our operations. In addition, costs and potential problems and interruptions associated with the implementation of new or upgraded systems and technology or with maintenance or adequate support of existing systems also could disrupt or reduce the efficiency of our operations and could have a material adverse effect on our business, financial position, results of operations and liquidity.

 

Cybersecurity risks could harm our ability to operate effectively. Cybersecurity refers to the combination of technologies, processes and procedures established to protect information technology systems and data from unauthorized access, attack, or damage. We rely on our information systems to provide security for processing, transmission and storage of confidential patient, resident and other customer information, such as individually identifiable information, including information relating to health protected by HIPAA. Although we have taken steps to protect the security of our information systems and the data maintained in those systems, it is possible that our safety and security measures will not prevent the systems' improper functioning or damage or the improper access or disclosure of personally identifiable information such as in the event of cyber–attacks. Security breaches, including physical or electronic break–ins, computer viruses, attacks by hackers and similar breaches can create system disruptions or shutdowns or the unauthorized disclosure of confidential information. If personal or otherwise protected information of our patients is improperly accessed, tampered with or distributed, we may incur significant costs to remediate possible injury to the affected patients and we may be subject to sanctions and civil or criminal penalties if we are found to be in violation of the privacy or security rules under HIPAA or other similar federal or state laws protecting confidential patient health information.

 

As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any cybersecurity vulnerabilities. The occurrence of any of these events could result in harm to patients; business interruptions and delays; the loss, misappropriation, corruption or unauthorized access of data; litigation and potential liability under privacy, security and consumer protection laws or other applicable laws; reputational damage; or federal and state governmental inquiries. Any failure to maintain proper functionality and security of our information systems could have a material adverse effect on our business, financial condition and results of operations.

 

If we fail to compete effectively with other health care providers, our revenues and profitability may decline. The health care services industry is highly competitive. Our skilled nursing facilities, assisted living centers, independent living facilities, home care services and other operations compete on a local and regional basis with other nursing centers, health care providers, and senior living service providers. Some of our competitors' facilities are located in newer buildings and may offer services not provided by us or are operated by entities having greater financial and other resources than us. Our skilled nursing facilities face competition from skilled nursing, assisted living, independent living facilities, homecare services, and other operations that provide services comparable to those offered by our skilled nursing facilities. Many competing general acute care hospitals are larger and more established than our facilities.

 

The health care industry is divided into a variety of competitive areas that market similar services. These competitors include skilled nursing, assisted living, independent living facilities, homecare services, hospice providers and other operations. Our facilities generally operate in communities that also are served by similar facilities operated by our competitors. Certain of our competitors are operated by not–for–profit, non–taxpaying or governmental agencies that can finance capital expenditures on a tax-exempt basis and that receive funds and charitable contributions unavailable to us. Our facilities compete based on factors such as our reputation for quality care; the commitment and expertise of our staff; the quality and comprehensiveness of our treatment programs; the physical appearance, location and condition of our facilities and to a limited extend, the charges for services. In addition, we compete with other health care providers for customer referrals from hospitals. As a result, a failure to compete effectively with respect to referrals may have an adverse impact on our business. Many of these competing companies have greater financial and other resources than we have. We cannot assure that increased competition in the future will not adversely affect our financial condition and results of operations.

 

 

Possible changes in the case mix of patients as well as payor mix and payment methodologies may significantly affect our profitability. The sources and amounts of our patient revenues will be determined by a number of factors, including licensed bed capacity and occupancy rates of our facilities, the mix of patients and the rates of reimbursement among payors. Likewise, reimbursement for therapy services will vary based upon payor and payment methodologies. Changes in the case mix of the patients as well as payor mix among private pay, Medicare and Medicaid will significantly affect our profitability. Particularly, any significant increase in our Medicaid population could have a material adverse effect on our financial position, results of operations and cash flow, especially if states operating these programs continue to limit, or more aggressively seek limits on, reimbursement rates.

 

Private third–party payors continue to try to reduce health care costs. Private third–party payors are continuing their efforts to control health care costs through direct contracts with health care providers, increased utilization review and greater enrollment in managed care programs and preferred provider organizations. These private payors increasingly are demanding discounted fee structures and the assumption by health care providers of all or a portion of the financial risk. We could be adversely affected by the continuing efforts of private third–party payors to limit the amount of reimbursement we receive for health care services. We cannot assure you that reimbursement payment under private third–party payor programs will remain at levels comparable to present levels or will be sufficient to cover the costs allocable to patients eligible for reimbursement pursuant to such programs. Future changes in the reimbursement rates or methods of private or third–party payors, including the Medicare and Medicaid programs, or the implementation of other measures to reduce reimbursement for our services could result in a substantial reduction in our net operating revenues. Finally, as a result of competitive pressures, our ability to maintain operating margins through price increases to private patients is limited.

 

We are exposed to market risk due to the fact that outstanding debt and future borrowings are or will be subject to wide fluctuations based on changing interest rates. Market risk is the risk of loss arising from adverse changes in market rates and prices such as interest rates, foreign currency exchange rates and commodity prices. Our primary exposure to market risk is interest rate risk associated with variable rate borrowings. We currently have a $175,000,000 credit agreement. The credit agreement provides for variable rates and if market interest rates rise, so will our required interest payments on any future borrowings under the credit facility.

 

We currently have $100 million of debt outstanding and expect to borrow in the future to fund development and acquisitions. In the event we incur additional indebtedness, this could have important consequences to you. For example, it could:

 

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make it more difficult for us to satisfy our financial obligations;

 

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increase our vulnerability to general adverse economic and industry conditions, including material adverse regulatory changes such as reductions in reimbursement;

 

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limit our ability to obtain financing to fund future working capital, capital expenditures and other general corporate requirement, or to carry out other aspects of our business plan;

 

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require us to dedicate a substantial portion of our cash flow from operations to payments on indebtedness, thereby reducing the availability of such cash flow to fund working capital, capital expenditures or other general corporate purposes, or to carry out other aspects of our business plan;

 

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require us to pledge as collateral substantially all of our assets;

 

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require us to maintain certain debt coverage and financial ratios at specified levels, thereby reducing our financial flexibility;

 

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limit our ability to make material acquisitions or take advantage of business opportunities that may arise;

 

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expose us to fluctuations in interest rates, to the extent our borrowings bear variable rates of interest;

 

●

limit our flexibility in planning for, or reacting to, changes in our business and the industry; and

 

●

place us at a competitive disadvantage compared to our competitors that have less debt.

 

 

Covenants in our Credit Agreement could restrict our activities and adversely affect our business. Our Credit Agreement contains customary representations and financial covenants which could limit our operating flexibility and prevent us from taking advantage of business opportunities, which would put us at a competitive disadvantage. Our ability to meet these requirements may be affected by events beyond our control, and we may not meet these requirements. Our failure to comply with these covenants may result in an event of default. If such event of default is not cured or waiver, we could suffer adverse effects on our operations, business or financial condition.

 

We are permitted to incur substantially more debt, which could further exacerbate the risks described above. We and our subsidiaries may be able to incur substantial additional indebtedness in the future. The terms of our current debt do not completely prohibit us or our subsidiaries from incurring additional indebtedness. If new debt is added to our current debt levels, the related risks that we now face could intensify.

 

To service our current as well as anticipated indebtedness and future dividends, we will require a significant amount of cash, the availability of which depends on many factors beyond our control. Our ability to make payments on and to refinance our indebtedness, including our present indebtedness, to fund planned capital expenditures, and to fund future dividend payments will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

 

We may not be able to meet all our capital needs. We cannot assure you that our business will generate cash flow from operations that anticipated revenue growth and improvement of operating efficiencies will be realized or that future borrowings will be available to us in an amount sufficient to enable us to service our indebtedness or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness on or before maturity, sell assets or certain discretionary capital expenditures.

 

The performances of our fixed–income and our equity investment portfolios are subject to a variety of investment risks. Our investment portfolios are comprised principally of fixed–income securities and common equities. Our fixed–income portfolio is actively managed by an investment group and includes short–term investments and fixed–maturity securities. The performances of our fixed–income and our equity portfolios are subject to a number of risks, including:

 

●

Interest rate risk – the risk of adverse changes in the value of fixed–income securities as a result of increases in market interest rates.

 

●

Investment credit risk – the risk that the value of certain investments may decrease in value due to the deterioration in financial condition of, or the liquidity available to, one or more issuers of those securities or, in the case of asset–backed securities, due to the deterioration of the loans or other assets that underlie the securities, which, in each case, also includes the risk of permanent loss.

 

●

Concentration risk – the risk that the portfolio may be too heavily concentrated in the securities of NHI, or certain sectors or industries, which could result in a significant decrease in the value of the portfolio in the event of a deterioration of the financial condition, performance, or outlook of NHI, or those certain sectors or industries.

 

●

Liquidity risk – the risk that we will not be able to convert investments into cash on favorable terms and on a timely basis or that we will not be able to sell them at all, when we desire to do so. Disruptions in the financial markets or a lack of buyers for the specific securities that we are trying to sell, could prevent us from liquidating securities or cause a reduction in prices to levels that are not acceptable to us.

 

In addition, the success of our investment strategies and asset allocations in the fixed–income portfolio may vary depending on the market environment. The fixed–income portfolio's performance also may be adversely impacted if, among other factors: there is a lack of transparency regarding the underlying businesses of the issuers of the securities that we purchase; credit ratings assigned to such securities by nationally recognized credit rating agencies are based on incomplete information or prove unwarranted; or our risk mitigation strategies are ineffective for the applicable market conditions.

 

The common equity portfolio is subject to general movements in the values of equity markets and to the changes in the prices of the securities we hold. Equity markets, sectors, industries, and individual securities may be subject to high volatility and to long periods of depressed or declining valuations.

 

If the fixed–income or equity portfolios, or both, were to suffer a decrease in value due to market, sector, or issuer–specific conditions to a substantial degree, our liquidity, financial position, and financial results could be materially adversely affected.

 

 

Disasters and similar events may seriously harm our business. Natural and man–made disasters and similar events, including terrorist attacks and acts of nature such as hurricanes, tornados, earthquakes and wildfires, may cause damage or disruption to us, our employees and our facilities, which could have an adverse impact on our patients and our business. In order to provide care for our patients, we are dependent on consistent and reliable delivery of food, pharmaceuticals, utilities and other goods to our facilities, and the availability of employees to provide services at our facilities. If the delivery of goods or the ability of employees to reach our facilities were interrupted in any material respect due to a natural disaster or other reasons, it would have a significant impact on our facilities and our business. Furthermore, the impact, or impending threat, of a natural disaster has in the past and may in the future require that we evacuate one or more facilities, which would be costly and would involve risks, including potentially fatal risks, for the patients. The impact of disasters and similar events is inherently uncertain. Such events could harm our patients and employees, severely damage or destroy one or more of our facilities, harm our business, reputation and financial performance, or otherwise cause our business to suffer in ways that we currently cannot predict.

 

Our stock price is volatile and fluctuations in our operating results, quarterly earnings and other factors may result in declines in the price of our common stock. Equity markets are prone to, and in the last few years have experienced, extreme price and volume fluctuations. Volatility over the past few years has had a significant impact on the market price of securities issued by many companies, including us and other companies in the healthcare industry. If we are unable to operate our businesses as profitably as we have in the past or as our stockholders expect us to in the future, the market price of our common stock will likely decline as stockholders could sell shares of our common stock when it becomes apparent that the market expectations may not be realized. In addition to our operating results, many economic and other factors beyond our control could have an adverse effect on the price of our common stock including:

 

●

general economic conditions;

●

developments generally affecting the healthcare industry;

●

strategic actions, such as acquisitions or restructurings, or the introduction of new services by us or our competitors;

●

new laws or regulations or new interpretations of existing laws or regulations applicable to our business;

●

litigation and governmental investigations;

●

changes in accounting standards, policies, guidance, interpretations or principles;

●

investor perceptions of us and our business;

●

actions by institutional or other large stockholders;

●

quarterly variations in operating results;

●

changes in financial estimates and recommendations by securities analysts;

●

press releases or negative publicity relating to our competitors or us or relating to trends in health care;

●

sales of stock by insiders;

●

natural disasters, terrorist attacks and pandemics; and

●

additions or departures of key personnel.

 

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS

 

None.

 

 

ITEM 2.

PROPERTIES

 

Skilled Nursing Facilities
State		City		Center Name		Affiliation		Licensed Beds
Alabama		Anniston		NHC HealthCare, Anniston		Leased(1)		151
		Moulton		NHC HealthCare, Moulton		Leased(1)		136
Georgia		Fort Oglethorpe		NHC HealthCare, Fort Oglethorpe		Owned		135
		Rossville		NHC HealthCare, Rossville		Owned		112
Kentucky		Glasgow		NHC HealthCare, Glasgow		Leased(1)		194
		Madisonville		NHC HealthCare, Madisonville		Owned		94
Massachusetts		Greenfield		Buckley–Greenfield Health Care Center		Leased(1)		120
		Holyoke		Holyoke Health Care Center		Leased(1)		102
		Quincy		John Adams Health Care Center		Leased(1)		71
		Taunton		Longmeadow of Taunton		Leased(1)		100
Missouri		Desloge		NHC HealthCare, Desloge		Leased(1)		120
		Independence		The Villages of Jackson Creek		Leased		120
		Independence		The Villages of Jackson Creek Memory Care		Leased		70
		Joplin		NHC HealthCare, Joplin		Leased(1)		126
		Kennett		NHC HealthCare, Kennett		Leased(1)		170
		Macon		Macon Health Care Center		Owned		120
		Osage Beach		Osage Beach Rehabilitation and Health Care Center		Owned		94
		St. Charles		NHC HealthCare, St. Charles		Leased(1)		120
		St. Louis		NHC HealthCare, Maryland Heights		Leased(1)		220
		St. Peters		Villages of St. Peters		Leased		130
		Springfield		Springfield Rehabilitation and Health Care Center		Leased		120
		Town & Country		NHC HealthCare, Town & Country		Owned		200
		West Plains		NHC HealthCare, West Plains		Owned		120
New Hampshire		Epsom		Epsom Health Care Center		Leased(1)		108
		Manchester		Maple Leaf Health Care Center		Leased(1)		114
		Manchester		Villa Crest Health Care Center		Leased(1)		126

 

Skilled Nursing Facilities
(continued)
State		City		Center Name		Affiliation		Licensed Beds
South Carolina		Anderson		NHC HealthCare, Anderson		Leased(1)		290
		Bluffton		NHC HealthCare, Bluffton		Owned		120
		Charleston		NHC HealthCare, Charleston		Owned		132
		Clinton		NHC HealthCare, Clinton		Owned		131
		Columbia		NHC HealthCare, Parklane		Owned		180
		Greenwood		NHC HealthCare, Greenwood		Leased(1)		152
		Greenville		NHC HealthCare, Greenville		Owned		176
		Laurens		NHC HealthCare, Laurens		Leased(1)		176
		Lexington		NHC HealthCare, Lexington		Owned		170
		Mauldin		NHC HealthCare, Mauldin		Owned		180
		Murrells Inlet		NHC HealthCare, Garden City		Owned		148
		North Augusta		NHC HealthCare, North Augusta		Owned		192
		Sumter		NHC HealthCare, Sumter		Managed		138
Tennessee		Athens		NHC HealthCare, Athens		Leased(1)		88
		Chattanooga		NHC HealthCare, Chattanooga		Leased(1)		200
		Columbia		NHC HealthCare, Columbia		Owned		106
		Columbia		NHC-Maury Regional Transitional Care Center		Owned		112
		Cookeville		NHC HealthCare, Cookeville		Managed		94
		Dickson		NHC HealthCare, Dickson		Leased(1)		191
		Dunlap		NHC HealthCare, Sequatchie		Leased(1)		110
		Farragut		NHC HealthCare, Farragut		Owned		100
		Franklin		NHC Place, Cool Springs		Owned		180
		Franklin		NHC HealthCare, Franklin		Leased(1)		80
		Gallatin		NHC Place, Sumner		Owned		92
		Hendersonville		NHC HealthCare, Hendersonville		Leased(1)		122
		Johnson City		NHC HealthCare, Johnson City		Leased(1)		160
		Kingsport		NHC HealthCare, Kingsport		Owned		60
		Knoxville		NHC HealthCare, Fort Sanders		Owned(2)		166
		Knoxville		Holston Health & Rehabilitation Center		Owned		94
		Knoxville		NHC HealthCare, Knoxville		Owned		129
		Lawrenceburg		NHC HealthCare, Lawrenceburg		Managed		96
		Lawrenceburg		NHC HealthCare, Scott		Leased(1)		60
		Lewisburg		NHC HealthCare, Lewisburg		Leased(1)		100
		Lewisburg		NHC HealthCare, Oakwood		Leased(1)		60
		McMinnville		NHC HealthCare, McMinnville		Leased(1)		125
		Milan		NHC HealthCare, Milan		Leased(1)		117
		Murfreesboro		AdamsPlace		Owned		90
		Murfreesboro		NHC HealthCare, Murfreesboro		Managed		181
		Nashville		Lakeshore, Heartland		Managed		66
		Nashville		Lakeshore, The Meadows		Managed		113
		Nashville		The Health Center of Richland Place		Managed		107
		Nashville		NHC Place at The Trace		Owned		90
		Oak Ridge		NHC HealthCare, Oak Ridge		Managed		120
		Pulaski		NHC HealthCare, Pulaski		Leased(1)		102
		Smithville		NHC HealthCare, Smithville		Leased(1)		114
		Somerville		NHC HealthCare, Somerville		Leased(1)		72
		Sparta		NHC HealthCare, Sparta		Leased(1)		105
		Springfield		NHC HealthCare, Springfield		Owned		107
		Tullahoma		NHC HealthCare, Tullahoma		Owned		90
Virginia		Bristol		NHC HealthCare, Bristol		Leased(1)		120

 

Assisted Living Units
State		City		Center		Affiliation		Units
Alabama		Anniston		NHC Place/Anniston		Owned		67
Kentucky		Glasgow		NHC HealthCare, Glasgow		Leased(1)		12
Missouri		St. Charles		Lake St. Charles Retirement Center		Leased(1)		26
		Independence		The Villages of Jackson Creek		Leased		52
		St. Peters		Villages of St. Peters		Leased		52
		St. Peters		Villages of St. Peters Memory Care		Owned(3)		60
New Hampshire		Manchester		Villa Crest Assisted Living		Leased(1)		29
South Carolina		Bluffton		The Palmettos of Bluffton		Owned		78
		Charleston		The Palmettos of Charleston		Owned		60
		Columbia		The Palmettos of Parklane		Owned		75
		Greenville		The Palmettos of Mauldin		Owned		45
		Murrells Inlet		The Palmettos of Garden City		Owned		80
Tennessee		Dickson		NHC HealthCare, Dickson		Leased(1)		20
		Farragut		NHC Place, Farragut		Owned		84
		Franklin		NHC Place, Cool Springs		Owned		89
		Gallatin		NHC Place, Sumner		Owned		60
		Johnson City		NHC HealthCare, Johnson City		Leased(1)		2
		Murfreesboro		AdamsPlace		Owned		106
		Nashville		Lakeshore Heartland		Managed		9
		Nashville		Lakeshore, The Meadows		Managed		10
		Nashville		Richland Place		Managed		24
		Nashville		The Place at the Trace		Owned		80
		Smithville		NHC HealthCare, Smithville		Leased(1)		6
		Somerville		NHC HealthCare, Somerville		Leased(1)		6
Retirement Apartments
State		City		Retirement Apartments		Affiliation		Units
Missouri		St. Charles		Lake St. Charles Retirement Apts.		Leased(1)		152
Tennessee		Chattanooga		Parkwood Retirement Apartments		Leased(1)		30
		Johnson City		Colonial Hill Retirement Apartments		Leased(1)		63
		Murfreesboro		AdamsPlace		Owned		93
		Nashville		Richland Place Retirement Apts.		Managed		137

 

 

Homecare Programs
State		City		Homecare Programs
Florida		Carrabelle		NHC HomeCare of Carrabelle
		Chipley		NHC HomeCare of Chipley
		Crawfordville		NHC HomeCare of Crawfordville
		Merritt Island		NHC HomeCare of Merritt Island
		Panama City		NHC HomeCare of Panama City
		Port St. Joe		NHC HomeCare of Port St. Joe
		Quincy		NHC HomeCare of Quincy
		Vero Beach		NHC HomeCare of Vero Beach
Missouri		St. Louis		NHC HomeCare of St. Louis
South Carolina		Aiken		NHC HomeCare of Aiken
		Bluffton		NHC HomeCare of Beaufort
		Greenville		NHC HomeCare of Greenville
		Greenwood		NHC HomeCare of Greenwood
		Laurens		NHC HomeCare of Laurens
		Murrells Inlet		NHC HomeCare of Murrells Inlet
		Rock Hill		NHC HomeCare of Piedmont
		Summerville		NHC HomeCare of Low Country
		West Columbia		NHC HomeCare of Midlands
Tennessee		Athens		NHC HomeCare of Athens
		Chattanooga		NHC HomeCare of Chattanooga
		Columbia		NHC HomeCare of Columbia
		Cookeville		NHC HomeCare of Cookeville
		Dickson		NHC HomeCare of Dickson
		Franklin		NHC HomeCare of Franklin
		Hendersonville		NHC HomeCare of Hendersonville
		Johnson City		NHC HomeCare of Johnson City
		Knoxville		NHC HomeCare of Knoxville
		Lawrenceburg		NHC HomeCare of Lawrenceburg
		Lewisburg		NHC HomeCare of Lewisburg
		McMinnville		NHC HomeCare of McMinnville
		Milan		NHC HomeCare of Milan
		Murfreesboro		NHC HomeCare of Murfreesboro
		Pulaski		NHC HomeCare of Pulaski
		Somerville		NHC HomeCare of Somerville
		Sparta		NHC HomeCare of Sparta
		Springfield		NHC HomeCare of Springfield

 

 

Hospice Programs
State		City		Hospice Programs		Affiliation
Georgia		Rossville		Caris Healthcare – Rossville		Partnership
Missouri		St. Louis		Caris Healthcare – St. Louis		Partnership
		Kansas City		Caris Healthcare – Kansas City		Partnership
South Carolina		Anderson		Caris Healthcare – Anderson		Partnership
		Bluffton		Caris Healthcare – Bluffton		Partnership
		Charleston		Caris Healthcare – Charleston		Partnership
		Columbia		Caris Healthcare – Columbia		Partnership
		Greenville		Caris Healthcare – Greenville		Partnership
		Greenwood		Caris Healthcare – Greenwood		Partnership
		Myrtle Beach		Caris Healthcare – Myrtle Beach		Partnership
		Sumter		Caris Healthcare – Sumter		Partnership
Tennessee		Athens		Caris Healthcare – Athens		Partnership
		Chattanooga		Caris Healthcare – Chattanooga		Partnership
		Columbia		Caris Healthcare – Columbia		Partnership
		Cookeville		Caris Healthcare – Cookeville		Partnership
		Crossville		Caris Healthcare – Crossville		Partnership
		Dickson		Caris Healthcare – Dickson		Partnership
		Greenville		Caris Healthcare – Greenville		Partnership
		Johnson City		Caris Healthcare – Johnson City		Partnership
		Knoxville		Caris Healthcare – Knoxville		Partnership
		Lenoir City		Caris Healthcare – Lenoir City		Partnership
		Milan		Caris Healthcare – Milan		Partnership
		Murfreesboro		Caris Healthcare – Murfreesboro		Partnership
		Nashville		Caris Healthcare – Nashville		Partnership
		Sevierville		Caris Healthcare – Sevierville		Partnership
		Somerville		Caris Healthcare – Somerville		Partnership
		Springfield		Caris Healthcare – Springfield		Partnership
Virginia		Bristol		Caris Healthcare – Bristol		Partnership

 

(1)	Leased from NHI

(2)	NHC HealthCare/Fort Sanders is owned by a separate limited partnership. The Company owns 25% of the partnership interest and provides management services to Fort Sanders.

(3)	Villages of St. Peters Memory Care is owned by a separate limited liability company. The Company owns 25% of the partnership interest and provides management services to the Villages of St. Peters Memory Care.

 

 

Healthcare Facilities Leased to Others

 

The following table includes certain information regarding healthcare facilities which are owned by us and leased to others:

 

Name of Facility		Location		No. of Beds
Skilled Nursing Facilities
Solaris HealthCare North Naples		Naples, FL		60
Solaris HealthCare Coconut Creek		Coconut Creek, FL		120
Solaris HealthCare Daytona		Daytona Beach, FL		73
Solaris HealthCare Imperial		Naples, FL		113
Solaris HealthCare Windermere		Orlando, FL		120
Solaris HealthCare Charlotte Harbor		Port Charlotte, FL		180
The Health Center at Standifer Place		Chattanooga, TN		444
Solaris HealthCare Lake City		Lake City, FL		120
Solaris HealthCare Pensacola		Pensacola, FL		180

 

Assisted Living				No. of Units
Solaris Senior Living Vero Beach		Vero Beach, FL		135
Solaris Senior Living Merritt Island		Merritt Island, FL		95
Solaris Senior Living Stuart		Stuart, FL		100
Standifer Place Assisted Living		Chattanooga, TN		74

 

 

ITEM 3.

LEGAL PROCEEDINGS

 

General and Professional Liability Insurance and Lawsuits

 

The health 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. As of December 31, 2017, we and/or our managed facilities are currently defendants in 60 claims.

 

Insurance coverage for all years includes both primary policies and excess policies. The primary coverage is in the amount of $1.0 million per incident, $3.0 million per location with an annual primary policy aggregate limit that is adjusted from time to time. For 2017, the excess coverage is $9.0 million per occurrence. Additional insurance is purchased through third party providers that serve to supplement the coverage provided through our wholly–owned captive insurance company.

 

As a result of the terms of our insurance policies and our use of a wholly–owned insurance company, we have retained significant self–insured risk with respect to general and professional liability. We use independent actuaries to assist management in estimating our exposures for claims obligations (for both asserted and unasserted claims) related to exposures in excess of coverage limits, and we maintain reserves for these obligations. It is possible that claims against us could exceed our coverage limits and our reserves, which would have a material adverse effect on our financial position, results of operations and cash flows.

 

General Litigation

 

Civil Investigation Demand  

 

On December 19, 2013, the Company was served with a civil investigative demand (“CID”) from the U.S. Department of Justice and the Office of the U.S. Attorney for the Eastern District of Tennessee (“DOJ Investigation”) requesting the production of documents and interrogatory responses regarding the billing for and medical necessity of certain rehabilitative therapy services. Based upon our review, the CID appears to relate to services provided at our facilities based in Knoxville, Tennessee.

 

On October 7, 2014, the Company received a subpoena from the Office of Inspector General of the United Department of Health and Human Services (“OIG Subpoena”) related to the current DOJ Investigation.  The OIG Subpoena requests certain financial and organizational documents from the Company and certain of its subsidiaries and SNFs and medical records from certain of the Company’s Tennessee–based SNFs. 

 

 

The Company is cooperating fully with these requests. We are unable to evaluate the outcome of this investigation at this time.  It is possible that this investigation could lead to a claim that could have a material adverse effect on our consolidated financial position, results of operations and cash flows.

 

Caris HealthCare, L.P. Investigation

 

On December 9, 2014, Caris Healthcare, L.P., a business that specializes in hospice care services in Company–owned health care centers and in other settings, received notice from the U.S. Attorney’s Office for the Eastern District of Tennessee and the Attorney Generals’ Offices for the State of Tennessee and State of Virginia that those government entities were conducting an investigation regarding patient eligibility for hospice services provided by Caris precipitated by a qui tam lawsuit.  We have a 75.1% non–controlling ownership interest in Caris.

 

A qui tam lawsuit was filed on May 22, 2014, in the U.S. District Court for the Eastern District of Tennessee by a former Caris employee, Barbara Hinkle, and is captioned United States of America, State of Tennessee, and State of Virginia ex rel. Barbara Hinkle v. Caris Healthcare, L.P., No. 3:14–cv–212 (E.D. Tenn.).

 

On June 16, 2016, the State of Tennessee and the State of Virginia declined to intervene in the qui tam lawsuit.  On June 20, 2016, the Court ordered that the complaint be unsealed.  On October 11, 2016, the United States filed a Complaint in Intervention against Caris Healthcare, L.P. and Caris Healthcare, LLC, a wholly owned subsidiary of Caris Healthcare, L.P. The United States' complaint alleges that Caris billed the government for ineligible hospice patients between June 2013 and December 2013 and retained overpayments regarding ineligible hospice patients from April 2010 through June 2013. It seeks treble damages and civil penalties under the Federal False Claims Act and asserts claims for payment under mistake of fact, unjust enrichment, and conversion. The relator has filed a notice of voluntary dismissal without prejudice of the non–intervened claims asserted in her qui tam complaint. On May 30, 2017, the district court denied Caris’ motion to dismiss, and the parties are engaged in discovery. This matter is set for trial in March 2019.

 

Caris denies the allegations in the United States' complaint and intends to defend itself vigorously. Given the early stage of this action, we are unable to assess the probable outcome or potential liability, if any, arising from this action.  It is possible that this claim could have a material adverse effect on our consolidated financial position, results of operations and cash flows.

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

 

Not applicable.

 

 

PART II

 

 

ITEM 5.

MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

 

The shares of common stock of National HealthCare Corporation are listed on the NYSE-American exchange under the symbol NHC. The closing price for the NHC common shares on February 8, 2018 was $60.03. On December 31, 2017, NHC had approximately 6,300 stockholders, comprised of approximately 2,000 stockholders of record and an additional 4,300 stockholders indicated by security position listings. The following table sets out the quarterly high and low sales prices and cash dividends declared of NHC's common shares.

 

		Stock Prices								Cash Dividends
		High				Low				Declared
2017
1st Quarter		$	77.00			$	69.61			$	.45
2nd Quarter			75.20				68.40				.48
3rd Quarter			71.12				60.00				.48
4th Quarter			67.88				60.70				.48
2016
1st Quarter		$	67.50			$	57.16			$	.40
2nd Quarter			66.21				60.81				.45
3rd Quarter			67.95				62.58				.45
4th Quarter			78.45				62.65				.45

 

Although we intend to declare and pay regular quarterly cash dividends, there can be no assurance that any dividends will be declared, paid or increased in the future.

 

Stock Repurchase Programs

 

In August 2017, the Board of Directors authorized a new common stock purchase program. The program will allow for repurchase of up to $25 million of its common stock. The stock repurchase plan began on September 1, 2017 and will expire on August 31, 2018. No repurchases of common stock have been executed under this current program.

 

On August 5, 2016 and under a previously authorized repurchase program, the Company repurchased 130,000 shares of its common stock for a total cost of $8,195,000. The shares were funded from cash on hand and were cancelled and returned to the status of authorized but unissued.

 

Under the common stock repurchase program, the Company may repurchase its common stock from time to time, in amounts and at prices the Company deems appropriate, subject to market conditions and other considerations. The Company’s repurchases may be executed using open market purchases, privately negotiated agreements or other transactions. The Company intends to fund repurchases under the new stock repurchase programs from cash on hand, available borrowings or proceeds from potential debt or other capital market sources. The stock repurchase programs may be suspended or discontinued at any time without prior notice. The Company will provide an update regarding any purchases made pursuant to the stock repurchase programs each time it reports its results of operations.

 

Equity Compensation Plans

 

The following table sets forth information regarding our equity compensation plans:

 

Plan Category		Number of securities to be issued upon exercise of outstanding options, warrants and rights			Weighted–average exercise price of outstanding options, warrants and rights			Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
		(a)			(b)			(c)
Equity compensation plans approved by security holders		1,239,407			$71.19			568,744
Equity compensation plans not approved by security holders		–			–			–
Total		1,239,407			$71.19			568,744

 

 

The following graph and chart compare the cumulative total stockholder return for the period from December 31, 2012 through December 31, 2017 on an investment of $100 in (i) NHC’s common stock, (ii) the Standard & Poor’s 500 Stock Index ("S&P 500 Index") and (iii) the Standard & Poor’s Health Care Index ("S&P Health Care Index"). Cumulative total stockholder return assumes the reinvestment of all dividends. Stock price performances shown in the graph are not necessarily indicative of future price performances.

 

 

 

ITEM 6.

SELECTED FINANCIAL DATA

 

The following selected financial information has been derived from the consolidated financial statements of National HealthCare Corporation and should be read in conjunction with those financial statements, accompanying footnotes and Management’s Discussion and Analysis.

 

		As of and for the Year Ended December 31,
		2017				2016				2015				2014				2013
		(in thousands, except per share data)
Operating Data:
Net operating revenues		$	966,996			$	926,638			$	906,622			$	871,683			$	788,957
Total costs and expenses			(912,886	)			(866,096	)			(839,496	)			(803,672	)			(716,876	)
Non–operating income			20,439				19,665				18,148				17,182				30,095
Income before income taxes			74,549				80,207				85,274				85,193				102,176
Income tax provision			(18,867	)			(29,669	)			(32,131	)			(31,824	)			(37,563	)
Net income			55,682				50,538				53,143				53,369				64,613
Net loss attributable to noncontrolling interest			523				–				–				–				–
Dividends to preferred stockholders			–				–				(6,819	)			(8,670	)			(8,671	)
Net income attributable to common stockholders of NHC		$	56,205			$	50,538			$	46,324			$	44,699			$	55,942
Earnings per common share:
Basic		$	3.70			$	3.34			$	3.34			$	3.24			$	4.05
Diluted			3.69				3.32				3.20				3.14				3.87
Cash dividends declared:
Per common share		$	1.89			$	1.75			$	1.54			$	1.34			$	1.26
Per preferred share			–				–				.64				.80				.80
Balance Sheet Data:
Total assets		$	1,096,526			$	1,087,447			$	1,045,329			$	1,074,123			$	984,358
Accrued risk reserves			93,275				91,162				98,508				106,218				110,557
Long–term debt			100,000				120,000				120,000				10,000				10,000
NHC stockholders’ equity			702,738				669,611				630,996				734,148				688,112

 

 

ITEM 7.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview

 

National HealthCare Corporation, which we also refer to as NHC or the Company, is a leading provider of post–acute care and senior health care services. At December 31, 2017 we operate or manage 76 skilled nursing facilities with 9,597 licensed beds, 24 assisted living facilities, five independent living facilities, and 36 homecare programs located in 10 states. These operations are provided by separately funded and maintained subsidiaries. We have a non–controlling ownership interest in a hospice care business that services NHC owned health care centers and others. In addition, we provide management services, accounting and financial services, and insurance services to third party operators of healthcare properties. We also own the real estate of 13 healthcare properties and lease these properties to third party operators.

 

 

Executive Summary

 

Earnings

 

To monitor our earnings, we have developed budgets and management reports to monitor labor, census, and the composition of revenues. Inflationary increases in our costs may cause net earnings from patient services to decline.

 

 

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 2017 was 90.2% compared to 89.5% and 90.0% in 2016 and 2015, respectively. With the average length of stay decreasing for a skilled nursing patient, as well as the increased availability of assisted living facilities and home and community-based services, 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. Additionally, NHC is in various stages of partnerships with hospital systems, payors, and other post–acute alliances in positioning ourselves to be an active participant in the health delivery systems as they develop.

 

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 of 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 average Five-Star rating for all of our skilled nursing facilities was 4.25 for 2017. The table below summarizes our performance in these quality ratings for the most recent three years:

 

		As of December, 31
		2017			2016			2015
Total number of skilled nursing facilities, end of year		76			74			74
Number of 4 and 5-star rated skilled nursing facilities		62			54			50
Percentage of 4 and 5-star rated skilled nursing facilities		82%			73%			68%

 

Development and Growth 

 

We are undertaking to expand our post–acute and senior health care operations while protecting our existing operations and markets. The following table lists our recent construction and purchase activities.

 

Type of Operation		Description		Size		Location		Placed in Service
SNF/ALF		New Facility		92 beds/60 units		Gallatin, TN		April, 2015
Memory Care		Partnership		60 beds		St. Peters, MO		November, 2015
SNF		Bed Addition		44 beds		Charleston, SC		May, 2016
SNF/ALF		New Facility		90 beds / 80 units		Nashville, TN		June, 2016
SNF		Bed Addition		8 beds		Kingsport, TN		September, 2016
SNF		New Facility		112 beds		Columbia, TN		January, 2017
ALF		New Facility		78 units		Bluffton, SC		March, 2017
ALF		New Facility		80 units		Garden City, SC		June, 2017
Memory Care		Bed Addition		23 beds		Murfreesboro, TN		July, 2017
SNF		Bed Addition		30 units		Springfield, MO		Under construction
Memory Care		Bed Addition		60 beds		Farragut, TN		Under construction

 

For the projects under construction at December 31, 2017, the 30-bed skilled nursing addition in Springfield, Missouri is expected to open during the first quarter of 2018. The 60-bed memory care addition in Farragut, Tennessee is expected to open during the fourth quarter of 2018.

 

During 2017, we plan to apply for Certificates of Need for additional beds in certain of our markets. We also will evaluate the feasibility of expansion into new markets by building Medicare and private pay health care facilities or private pay assisted living communities.

 

Impact of U.S. Tax Reform

 

In connection with the enactment of The U.S. Tax Cuts and Jobs Act (the “Tax Act”) in December 2017, we recorded a tax benefit of $8,488,000 during the fourth quarter of 2017. This estimated benefit was due from the revaluation of our net deferred tax liability based on the new lower corporate income tax rate.

 

This recently passed Tax Act will have a favorable impact on our net income, earnings per share, and operating cash flow in 2018. Like most companies, we continue to evaluate the details within this legislation, but our preliminary estimate indicates our effective tax rate in 2018 should be between 22% to 26% (down from 36% to 39% in prior periods). The Company is evaluating the cash benefit of the Tax Act and believes that it will complement our existing cash usage priorities such as business and capital expenditures that result in growth, dividends to our shareholders, share buybacks, and debt reduction.

 

 

Accrued Risk Reserves

 

Our accrued professional liability reserves, workers’ compensation reserves and health insurance reserves totaled $93,275,000 and $91,162,000 at December 31, 2017 and 2016, respectively, and are a primary area of management focus. We have set aside restricted cash and marketable securities to fund our professional liability and workers’ compensation reserves.

 

As to exposure for professional liability claims, we have developed for our centers performance certification criteria to measure and bring focus to the patient care issues most likely to produce professional liability exposure, including in–house acquired pressure ulcers, significant weight loss and numbers of falls. These programs for certification, which we regularly modify and improve, have produced measurable improvements in reducing these incidents. Our experience is that achieving goals in these patient care areas improves both patient and employee satisfaction.

 

 

Government Program Financial Changes

 

Medicare – Skilled Nursing Facilities

 

In July 2017, CMS released its final rule outlining the fiscal year 2018 Medicare payments and policy changes for skilled nursing facilities. The 2018 final rule provided for an approximate 1.0% rate update, which began October 1, 2017. CMS estimated a 2.7% market basket increase reduced by 0.4% for a multifactor productivity adjustment required by the ACA; however, the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) mandated that all post-acute care providers receive a maximum market basket update of 1% in fiscal year 2018 to offset part of the cost of the legislation. CMS estimates the update will increase overall payments to skilled nursing facilities in fiscal year 2018 by $370 million compared to fiscal year 2017 levels. CMS also revised and rebased the market basket index by updating the base year from fiscal year 2010 to fiscal year 2014.

 

In July 2016, CMS released its final rule outlining the fiscal year 2017 Medicare payments and policy changes for skilled nursing facilities. The 2017 final rule provided for an approximate 2.4% rate update, which began October 1, 2016. This increase consisted of a 2.7% market basket increase reduced by 0.3% for a multifactor productivity adjustment required by the ACA. The policy changes in the 2017 final rule continue to shift skilled nursing facility Medicare payments from volume to value. The final rule makes changes to the SNF Quality Reporting Program and Value–Based Purchasing Program with some of these changes effective for the fiscal year beginning October 1, 2017.

 

For 2017, our average Medicare per diem rate for skilled nursing facilities increased 1.8% compared to the same period in 2016. No assurances can be given as to whether Congress will increase or decrease reimbursement in the future, the timing of any action or the form of relief, if any, that may be enacted.

 

Medicaid – Skilled Nursing Facilities

 

Effective July 1, 2017 and for the fiscal year 2018, the state of Tennessee implemented specific individual nursing facility rate increases. We estimate the resulting increase in revenue for the 2018 fiscal year will be approximately $3,600,000 annually, or $900,000 per quarter.

 

Effective October 1, 2017 and for the fiscal year 2018, South Carolina implemented specific individual nursing facility rate changes. We estimate the resulting increase in revenue for the 2018 fiscal year will be approximately $1,100,000 annually, or $275,000 per quarter.

 

Effective August 1, 2017 and for the fiscal year 2018, the state of Missouri approved a Medicaid rate decrease of $5.37 per patient day, or an approximate 3.5% decrease, to Missouri skilled nursing providers. We estimate the resulting decrease in revenue will be approximately $1,400,000 annually, or $350,000 per quarter.

 

Overall our average Medicaid per diem increased 2.0 % in 2017 compared to 2016. We face challenges with respect to states’ Medicaid payments, because many currently do not cover the total costs incurred in providing care to those patients. States will continue to control Medicaid expenditures and also look for adequate funding sources, including provider assessments or increasing state funding for home and community–based services, potentially having an impact on funding for skilled nursing facilities.

 

 

Medicare – Homecare Programs

 

In November 2017 and effective January 1, 2018, CMS released its final rule for 2018 home health prospective payment system rates. CMS estimated the net impact of the PPS rule resulted in a 0.4% decrease ($80 million) in Medicare payments for agencies in 2018. This decrease reflects the effects of a 1.0% home health payment update percentage; a -0.97% percent adjustment to the national, standardized 60-day episode payment rate to account for nominal case-mix growth; and the sunset of the rural add-on provision for an impact of -0.5%. The rule also finalizes proposals for the Home Health Value-Based Purchasing (HHVBP) Model and the Home Health Quality Reporting Program (HH QRP). CMS is not finalizing the implementation of the Home Health Groupings Model (HHGM) in this final rule.

 

In October 2016 and effective January 1, 2017, CMS released its final rule for 2017 home health prospective payment system rates. CMS estimated the net impact of the PPS rule resulted in a 0.7% decrease ($130 million) in Medicare payments for agencies in 2017. The estimated decrease reflects the effects of a 2.5% home health payment update; rebasing adjustments to the national standardized 60-day episode payment rate, the national per-visit payment rate, and the non-routine medical supplies conversion factor (expected impact of -2.3%), and the effects of an adjustment to the national standardized 60-day episode payment rate to account for nominal case-mix growth (expected impact of -0.9%). However, the freestanding home health agencies were expected to have an overall reduction of 0.8%, and agencies in eight states including the states of South Carolina and Florida were expected to average a reimbursement decrease of 1.9%.

 

 

Segment Reporting

 

Beginning in the first quarter of 2017 with the leadership change of the Company’s Chief Executive Officer, we reassessed and realigned our reportable operating segments to coincide with the way our new leadership and CODM measures Company performance and allocates resources. The Company has two reportable operating segments: (1) inpatient services, which includes the operation of skilled nursing facilities and assisted and independent living facilities, and (2) homecare services. These reportable operating segments are consistent with information used by the Company’s Chief Executive Officer, as 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 has presented the financial information for the years ended December 31, 2017, 2016 and 2015 on a comparative basis to conform with the current year segment presentation. For additional information on these reportable segments see Note 1 - “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 condensed consolidated statements of income by business segment (in thousands):

 

		Year Ended December 31, 2017
		Inpatient Services				Homecare				All Other				Total
Revenues:
Net patient revenues		$	856,763			$	63,080			$	-			$	919,843
Other revenues			663				-				46,490				47,153
Net operating revenues			857,426				63,080				46,490				966,996
Costs and Expenses:
Salaries, wages and benefits			501,510				33,059				37,474				572,043
Other operating			224,515				20,855				7,564				252,934
Facility rent			32,744				1,980				5,643				40,367
Depreciation and amortization			38,246				177				4,229				42,652
Interest			1,719				-				3,171				4,890
Total costs and expenses			798,734				56,071				58,081				912,886
Income (loss) before non-operating income			58,692				7,009				(11,591	)			54,110
Non-operating income			-				-				20,439				20,439
Income before income taxes		$	58,692			$	7,009			$	8,848			$	74,549

 

 

		Year Ended December 31, 2016
		Inpatient Services				Homecare				All Other				Total
Revenues:
Net patient revenues		$	817,068			$	63,656			$	-			$	880,724
Other revenues			651				-				45,263				45,914
Net operating revenues			817,719				63,656				45,263				926,638
Costs and Expenses:
Salaries, wages and benefits			480,058				32,597				35,352				548,007
Other operating			205,885				20,705				7,243				233,833
Facility rent			33,129				1,932				6,231				41,292
Depreciation and amortization			34,423				190				4,410				39,023
Interest			1,921				-				2,020				3,941
Total costs and expenses			755,416				55,424				55,256				866,096
Income (loss) before non-operating income			62,303				8,232				(9,993	)			60,542
Non-operating income			-				-				19,665				19,665
Income before income taxes		$	62,303			$	8,232			$	9,672			$	80,207

 

 

		Year Ended December 31, 2015
		Inpatient Services				Homecare				All Other				Total
Revenues:
Net patient revenues		$	799,409			$	65,437			$	-			$	864,846
Other revenues			626				-				41,150				41,776
Net operating revenues			800,035				65,437				41,150				906,622
Costs and Expenses:
Salaries, wages and benefits			461,216				33,740				37,779				532,735
Other operating			198,585				20,600				7,887				227,072
Facility rent			32,072				1,863				6,032				39,967
Depreciation and amortization			32,451				211				4,452				37,114
Interest			2,112				-				496				2,608
Total costs and expenses			726,436				56,414				56,646				839,496
Income (loss) before non-operating income			73,599				9,023				(15,496	)			67,126
Non-operating income			-				-				18,148				18,148
Income before income taxes		$	73,599			$	9,023			$	2,652			$	85,274

 

 

Results of Operations

 

The following table and discussion sets forth items from the consolidated statements of income as a percentage of net operating revenues for the years ended December 31, 2017, 2016 and 2015.

 

Percentage of Net Operating Revenues

 

		Year Ended December 31,
		2017				2016				2015
Revenues:
Net patient revenues			95.1	%			95.0	%			95.4	%
Other revenues			4.9				5.0				4.6
Net operating revenues			100.0				100.0				100.0
Costs and Expenses:
Salaries, wages and benefits			59.2				59.1				58.8
Other operating			26.1				25.2				25.0
Facility rent			4.2				4.5				4.4
Depreciation and amortization			4.4				4.2				4.1
Interest			0.5				0.4				0.3
Total costs and expenses			94.4				93.4				92.6
Income before non–operating income			5.6				6.6				7.4
Non–operating income			2.1				2.1				2.0
Income before income taxes			7.7				8.7				9.4
Income tax provision			(2.0	)			(3.2	)			(3.5	)
Net income			5.7				5.5				5.9
Net loss attributable to noncontrolling interest			0.1				0.0				0.0
Dividends to preferred stockholders			0.0				0.0				(0.8	)
Net income attributable to common stockholders of NHC			5.8	%			5.5	%			5.1	%

 

 

The following table sets forth the increase or (decrease) in certain items from the consolidated statements of income as compared to the prior period.

 

Period to Period Increase (Decrease)

 

		2017 vs. 2016								2016 vs. 2015
(dollars in thousands)		Amount				Percent				Amount				Percent
Revenues:
Net patient revenues		$	39,119				4.4			$	15,878				1.8
Other revenues			1,239				2.7				4,138				9.9
Net operating revenues			40,358				4.4				20,016				2.2
Costs and Expenses:
Salaries, wages and benefits			24,036				4.4				15,272				2.9
Other operating			19,101				8.2				6,761				3.0
Facility rent			(925	)			(2.2	)			1,325				3.3
Depreciation and amortization			3,629				9.3				1,909				5.1
Interest			949				24.1				1,333				51.1
Total costs and expenses			46,790				5.4				26,600				3.2
Income before non–operating income			(6,432	)			(10.6	)			(6,584	)			(9.8	)
Non–operating income			774				3.9				1,517				8.4
Income before income taxes			(5,658	)			(7.1	)			(5,067	)			(5.9	)
Income tax provision			10,802				(36.4	)			2,462				(7.7	)
Net income			5,144				10.2				(2,605	)			(4.9	)
Net loss attributable to noncontrolling interest			523				-				-				-
Dividends paid to preferred stockholders			-				-				6,819				(100.0	)
Net income attributable to common stockholders of NHC		$	5,667				11.2			$	4,214				9.1

 

 

2017 Compared to 2016

 

In order to facilitate the comparison of the current year financial performance to the prior year, this summary table highlights the impact of the Tax Act on the Company’s 2017 financial performance. During the fourth quarter of 2017, the Company recorded a tax benefit in the amount of $8,488,000 from the revaluation of our net deferred tax liability based on the new lower corporate income tax rate. The two columns in 2017 below outline the financial performance including and excluding the tax reform adjustment, which is in comparison to the 2016 financial performance.

 

		2017
(dollars in thousands)		Including tax reform adjustment (GAAP)				Excluding tax reform adjustment				2016
Net operating revenues		$	966,996			$	966,996			$	926,638
Income before income taxes			74,549				74,549				80,207
Provision for income taxes			(18,867	)			(27,355	)			(29,669	)
Net income			55,682				47,194				50,538
Net loss attributable to noncontrolling interest			523				523				-
Net income attributable to NHC			56,205				47,717				50,538
Effective income tax rate			25.3	%			36.7	%			37.0	%
Diluted earnings per share			3.69				3.14				3.32

 

Results for the year ended December 31, 2017 compared to 2016 include a 4.4% increase in net operating revenues and an 11.2% increase in net income attributable to NHC, which includes the 2017 fourth quarter tax reform adjustment. There have been five newly constructed healthcare facilities placed in service during 2016 and 2017 (two skilled nursing facilities and three assisted living facilities). The operating losses before income taxes for these entities were approximately $7,003,000 and $3,882,000 for the years ended December 31, 2017 and 2016, respectively. Therefore, excluding the operating losses from these five newly constructed facilities and the 2017 fourth quarter tax reform benefit, net income attributable to NHC would have been $51,526,000 and $52,906,000 for the years ended December 31, 2017 and 2016, respectively.

 

 

The overall average census in owned and leased skilled nursing facilities for 2017 was 90.2% compared to 89.5% in 2016. The composite skilled nursing facility per diem increased 2.6% in 2017 compared to 2016. Medicare and Managed Care per diem rates increased 1.8% and 0.2%, respectively, in 2017 compared to 2016. Medicaid and private pay per diem rates increased 2.0% and 3.2%, respectively, in 2017 compared to 2016.

 

Net patient revenues totaled $919,843,000, an increase of $39,119,000, or 4.4%, compared to the prior year. The newly constructed healthcare facilities placed in service during 2016 and 2017 helped increase net patient revenues $17,441,000 compared to a year ago. The remaining increase in our net patient revenues is primarily due to the census increase and per diem increases in our existing skilled nursing facility operations.

  

Other revenues this year were $47,153,000, an increase of $1,239,000, or 2.7%, as further detailed in Note 3 of the consolidated financial statements. Other revenues in 2017 include management and accounting service fees of $16,169,000 ($15,953,000 in 2016), insurance services revenue of $8,003,000 ($7,195,000 in 2016) and rental revenues of $21,957,000 ($21,835,000 in 2016). During the first quarter of 2017, we began management contract services for a third-party owner of two skilled nursing facilities in the middle Tennessee area. These two contracts helped increase management fee and insurance services revenues by $827,000 compared to the prior year.

 

Total costs and expenses for 2017 increased $46,790,000, or 5.4%, to $912,886,000 from $866,096,000 in 2016.

 

Salaries, wages and benefits, the largest operating costs of the company, increased $24,036,000, or 4.4%, to $572,043,000 from $548,007,000. These costs were 59.2% and 59.1% of net operating revenues for 2017 and 2016, respectively. The newly constructed healthcare facilities placed in service during 2016 and 2017 helped increase salaries, wages and benefits by $8,220,000 compared to a year ago. The remaining increase in salaries, wages and benefits in 2017 is due to the increase in our existing skilled nursing facilities and the continued wage pressure in certain markets in which we operate.

 

Other operating expenses increased $19,101,000, or 8.2%, to $252,934,000 for 2017 compared to $233,833,000 in 2016. These costs were 26.1% and 25.2% of net operating revenues for 2017 and 2016, respectively. The increase in other operating expenses for 2017 was primarily due to the operations of the newly constructed healthcare facilities compared to a year ago ($9,098,000). We also had unfavorable results within our self-insurance accrued risk reserve programs compared to a year ago ($6,368,000) due to the increase in professional liability lawsuits during 2017. As of December 31, 2017, we and/or our managed facilities are currently defendants in 60 claims. At December 31, 2016, we and/or our managed facilities were defendants in 43 claims.

  

Facility rent expense decreased $925,000, or 2.2%, to $40,367,000.

 

Depreciation and amortization increased 9.3% to $42,652,000. The majority of the increase in depreciation expense is due to the five newly constructed healthcare facilities.

 

Interest expense increased $949,000 to $4,890,000 in 2017 from $3,941,000 in 2016. The increase in interest expense is primarily from the increased interest rate on the line of credit borrowings compared to a year ago. At December 31, 2017, we had $90 million outstanding on our credit facility.

 

Non–operating income in 2017 increased $774,000, or 3.9% to $20,439,000, as further detailed in Note 4 of the consolidated financial statements. The increase in non-operating income is primarily from the sale of the 83-unit assisted living facility in Evans, Georgia during the third quarter of 2017 in which we had an equity method investment and 10% ownership stake. This sale transaction increased non-operating income $1,310,000 in comparison to a year ago. We also received approximately $250,000 annually in management services revenue from this entity, in which we no longer provided management services after September 30, 2017.

 

The noncontrolling interest in a subsidiary is the joint venture operations of a skilled nursing facility in Columbia, Tennessee. This facility opened and began operating in January 2017 in which NHC owns 80% of the operating entity and Maury Regional Medical Center owns 20% of the entity.

 

The income tax provision for 2017 is $18,867,000 (an effective income tax rate of 25.3%). As stated above, we recorded a tax benefit of $8,488,000 during the fourth quarter of 2017 due to the U.S. tax reform legislation. This estimated benefit was due from the revaluation of our net deferred tax liabilities based on the new lower federal corporate income tax rate. The income tax provision and effective tax rate for 2017 were also favorably impacted by statute of limitation expirations resulting in a benefit to the provision of $1,753,000 or 2.4% of income before taxes in 2017.

 

 

The income tax provision for 2016 is $29,669,000 (an effective income tax rate of 37.0%). The income tax provision and effective tax rate for 2016 were favorably impacted by statute of limitation expirations resulting in a benefit to the provision of $1,368,000 or 1.7% of income before taxes in 2016.

 

2016 Compared to 2015

 

Results for the year ended December 31, 2016 compared to 2015 include a 2.2% increase in net operating revenues and a 9.1% increase in net income available to common stockholders. There have been four newly constructed healthcare facilities placed in service during 2015 and 2016 (two skilled nursing facilities and two assisted living facilities). The operating losses before income taxes for these entities were approximately $7,583,000 and $3,705,000 for the years ended December 31, 2016 and 2015, respectively. Therefore, excluding the operating losses from these four newly constructed facilities, net income attributable to NHC would have been $55,164,000 and $48,584,000 for the years ended December 31, 2016 and 2015, respectively.

 

The overall average census in owned and leased skilled nursing facilities for 2016 was 89.5% compared to 90.0% in 2015. The composite skilled nursing facility per diem increased 1.0% in 2016 compared to 2015. Medicare and Managed Care per diem rates increased 2.9% and 0.5%, respectively, in 2016 compared to 2015. Medicaid and private pay per diem rates increased 1.8% and 3.2%, respectively, in 2016 compared to 2015.

 

Net patient revenues totaled $880,724,000, an increase of $15,878,000, or 1.8%, compared to the prior year. The majority of the increase in net patient revenues was derived from the four newly constructed healthcare facilities placed in service in 2015 and 2016 ($10,491,000). In the fourth quarter of 2016, we recorded revenue of $1,374,000 for the settlement and the withdrawal of our administrative appeals process with South Carolina Health and Human Services surrounding the audit of our 2013 and 2014 cost reports.

 

Other revenues this year were $45,914,000, an increase of $4,138,000, or 9.9%, as further detailed in Note 3 of the consolidated financial statements. Other revenues in 2016 include management and accounting service fees of $15,953,000 ($14,586,000 in 2015), insurance services revenue of $7,195,000 ($7,012,000 in 2015) and rental revenues of $21,835,000 ($19,191,000 in 2015).

 

As to rental revenues, effective January 1, 2016, we entered into a new triple net lease agreement for 11 of the 13 healthcare properties that we own and lease to third party operators. The new lease agreement is for a ten-year period and increased rental income for the year ended December 31, 2016 by approximately $2,283,000 over 2015 and the previous lease agreement.

 

Total costs and expenses for 2016 increased $26,600,000, or 3.2%, to $866,096,000 from $839,496,000 in 2015.

 

Salaries, wages and benefits, the largest operating costs of the company, increased $15,272,000, or 2.9%, to $548,007,000 from $532,735,000. These costs were 59.1% and 58.8% of net operating revenues for 2016 and 2015, respectively. The majority of the increase in salaries, wages and benefits was derived from our same–facility nursing centers ($7,353,000), which was to retain and attract quality partners. The remaining increase in salaries and wages in 2016 was from the four newly constructed healthcare facilities placed in service in 2015 and 2016 ($6,527,000).

 

Other operating expenses increased $6,761,000, or 3.0%, to $233,833,000 for 2016 compared to $227,072,000 in 2015. These costs were 25.2% and 25.0% of net operating revenues for 2016 and 2015, respectively. The increase in other operating expenses is primarily due to the increased general and professional liability costs ($3,380,000). As of December 31, 2016, we and/or our managed facilities are currently defendants in 43 claims. At December 31, 2015, we and/or our managed facilities were defendants in 32 claims. In addition to the increased professional liability costs, the remaining other operating expense increase was derived from the new operations of the four healthcare facilities placed in service in 2015 and 2016.

 

Facility rent expense increased $1,325,000, or 3.3%, to $41,292,000.

 

Depreciation and amortization increased 5.1% to $39,023,000. The majority of the increase in depreciation expense is due to the four newly constructed healthcare facilities.

 

Interest expense increased $1,333,000 to $3,941,000 in 2016 from $2,608,000 in 2015. The increase in interest expense is due from twelve months of borrowings on the credit facility compared to just two months of borrowings during 2015. The Company’s Preferred Stock was redeemed in November 2015; therefore, initiating the borrowings on the credit facility. At December 31, 2016 and 2015, we had $110 million outstanding on our credit facility.

 

 

Non–operating income in 2016 increased $1,517,000, or 8.4%, to $19,665,000, as further detailed in Note 4 of the consolidated financial statements. The increase in non–operating income is primarily from the increased equity in earnings from our geriatric psychiatric hospital in Osage Beach, Missouri ($1,416,000).

 

The income tax provision for 2016 is $29,669,000 (an effective income tax rate of 37.0%). The income tax provision and effective tax rate for 2016 were favorably impacted by statute of limitation expirations resulting in a benefit to the provision of $1,368,000 or 1.7% of income before taxes in 2016.

 

The income tax provision for 2015 was $32,131,000 (an effective income tax rate of 37.7%). The income tax provision and effective tax rate for 2015 were favorably impacted by statute of limitation expirations resulting in a benefit to the provision of $2,141,000 or 2.5% of income before taxes in 2015.

 

 

Liquidity, Capital Resources and Financial Condition

 

Sources and Uses of Funds

 

Our primary sources of cash include revenues from the healthcare and senior living facilities we operate, homecare services, insurance services, management services and accounting services. Our primary uses of cash include salaries, wages and benefits, operating costs of the healthcare facilities, the cost of additions to and acquisitions of real property, rent expenses, and dividend distributions. These sources and uses of cash are reflected in our 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):

 

		Year Ended								One Year Change								Year Ended								One Year Change
		12/31/17				12/31/16				$				%				12/31/16				12/31/15				$				%
Cash, cash equivalents, restricted cash, and restricted cash equivalents at beginning of period		$	31,589			$	49,314			$	(17,725	)			(35.9	)		$	49,314			$	80,418			$	(31,104	)			(38.7	)
Cash provided by operating activities			94,466				90,882				3,584				3.9				90,882				83,355				7,527				9.0
Cash used in investing activities			(9,560	)			(81,476	)			71,916				88.2				(81,476	)			(72,784	)			(8,692	)			(11.9	)
Cash used in financing activities			(49,074	)			(27,131	)			(21,943	)			(80.9	)			(27,131	)			(41,675	)			14,544				34.9
Cash, cash equivalents, restricted cash, and restricted cash equivalents at end of period		$	67,421			$	31,589			$	35,832				113.4			$	31,589			$	49,314			$	(17,725	)			(35.9	)

 

Operating Activities

 

Net cash provided by operating activities for the year ended December 31, 2017 was $94,466,000 as compared to $90,882,000 and $83,355,000 for the years ended December 31, 2016 and 2015, respectively. In 2017, cash provided by operating activities consisted of net income of $55,682,000, adjustments for non–cash items of $44,872,000, gains on the sale of marketable securities of $262,000, and cash distributions in excess of earnings from equity method investments of $897,000. There was cash used for working capital needs in the amount of $6,723,000 in 2017 compared to $10,553,000 and $14,913,000 in 2016 and 2015, respectively.

 

In 2017, working capital primarily consisted of an increase in accounts receivable of $9,492,000. The increase in accounts receivable is from the new operations of the five healthcare facilities that began operating during the 2016 and 2017 years.

 

 

Investing Activities

 

Cash used in investing activities totaled $9,560,000 for the year ended December 31, 2017, as compared to $81,476,000 and $72,784,000 for the years ended December 31, 2016 and 2015, respectively. Cash used for property and equipment additions was $32,347,000, $62,601,000, and $58,416,000 for the years ended December 31, 2017 and 2016 and 2015, respectively. Sales of restricted marketable securities, net of purchases, resulted in positive cash flow in 2017 of $18,953,000. This is compared to a net use of cash from the purchasing of restricted marketable securities in the amount of $13,978,000 and $12,966,000 in 2016 and 2015, respectively.

 

In 2017, construction costs included in additions to property and equipment include $2,502,000 for the construction and completion of the 112–bed skilled nursing facility in Columbia, Tennessee that began operations in 2017, which is the partnership between NHC and Maury Regional Medical Center; $3,337,000 for the final construction and furnishings of the two assisted living facilities in South Carolina that began operations in 2017; $3,865,000 for the construction and completion of the 23 unit memory care addition located in Murfreesboro, Tennessee that opened during the third quarter of 2017; and $3,728,000 for the construction of the 30 bed addition to a skilled nursing facility in Springfield, Missouri that will begin operations in 2018.

 

Financing Activities

 

Net cash used in financing activities totaled $49,074,000, $27,131,000 and $41,675,000 for the years ended December 31, 2017, 2016, and 2015, respectively.

 

During the fourth quarter of 2017, $20,000,000 was used to pay down the outstanding principal balance on our credit facility. Dividends paid to common stockholders for the 2017 and 2016 years were $28,237,000 and $25,795,000, respectively. For the 2015 year, $30,075,000 was used to pay dividends to the Company’s common and preferred stockholders. Proceeds from the issuance of common stock, primarily from the exercise of stock options, totaled $2,524,000 in 2017 compared to $10,772,000 and $10,634,000 for 2016 and 2015, respectively. On August 5, 2016, the Company repurchased 130,000 shares of its common stock for a total cost of $8,195,000.

 

In November 2015, the Company’s Series A Convertible Preferred Stock was redeemed for cash at a redemption price of $15.75 per share. The mandatory redemption required the Company to pay stockholders approximately $130,538,000, of which $110,000,000 of the funding came from borrowings under our credit facility. Therefore, the Company used approximately $20,538,000 of cash for the redemption of the Preferred Stock.

 

 

Table of Contractual Cash Obligations

 

Our contractual cash obligations for periods subsequent to December 31, 2017 are as follows (in 000’s):

 

		Total				Less than 1 year				1–3 Years				3–5 Years				After 5 Years
Long–term debt principal		$	100,000			$	–			$	90,000			$	–			$	10,000
Long–term debt – interest			11,214				3,039				5,496				765				1,914
Construction obligations			11,441				11,441				–				–				–
Operating and capital leases			345,617				39,400				78,800				78,800				148,617
Total contractual cash obligations		$	468,272			$	53,880			$	174,296			$	79,565			$	160,531

 

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 $59,118,000, marketable securities of $139,085,000 and as needed, our borrowing capacity on the 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 $59,118,000, marketable securities of $139,085,000, and our borrowing capacity on the credit facility. At December 31, 2017, the outstanding balance on the credit facility is $90,000,000; therefore, leaving $85,000,000 available for future borrowings. The maturity date on the credit facility is October 7, 2020. The credit facility is available for general corporate purposes, including working capital and acquisitions.

 

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

 

 

Contingencies

 

Impact of Inflation

 

Inflation has remained relatively low during the past three years. However, rates paid under the Medicare and Medicaid programs do not necessarily reflect all inflationary changes and are subject to cuts unrelated to inflationary costs. Therefore, there can be no assurance that future rate increases will be sufficient to offset future inflation increases in our labor and other health care service costs.

 

See Note 16 to the consolidated financial statements for additional information on pending litigation and other contingencies.

 

 

Guarantees

 

At December 31, 2017, we have no agreements to guarantee the debt obligations of other parties.

 

We have no outstanding letters of credit. We may or may not in the future elect to use financial derivative instruments to hedge interest rate exposure in the future. At December 31, 2017, we did not participate in any such financial investments.

 

 

New Accounting Pronouncements

 

See Note 1 to the consolidated financial statements for the impact of new accounting standards.

 

 

Application of Critical Accounting Policies

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and cause our reported net income to vary significantly from period to period.

 

Our critical accounting policies that are both important to the portrayal of our financial condition and results and require our most difficult, subjective or complex judgments are as follows:

 

Revenue Recognition – Third Party Payors

 

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. In our opinion, adequate provision has been made for any adjustments that may result from these reviews. Any differences between our original estimates of reimbursements and subsequent revisions are reflected in operations in the period in which the revisions are made often due to final determination or the period of payment no longer being subject to audit or review. We have made provisions of approximately $17,389,000 and $17,019,000 as of December 31, 2017 and 2016, respectively, for various Medicare, Medicaid, and Managed Care claims reviews and current and prior year cost reports.

 

Revenue Recognition – Private Pay

 

For private pay patients in skilled nursing or assisted living facilities, we bill room and board charges for the current month with payment being due upon receipt of the statement in the month the services are performed. Charges for ancillary, pharmacy, therapy and other services to private patients are billed in the month following the performance of services; however, all billings are recognized as revenue when the services are performed.

 

 

Revenue Recognition – Subordination of Fees and Uncertain Collections

 

We provide management services to healthcare operators and to others we provide accounting and financial services. We generally charge 6% of net operating revenues for our management services and a predetermined fixed rate per bed for the accounting and financial services. Our policy is to recognize revenues associated with both management services and accounting and financial services on an accrual basis as the services are provided. However, under the terms of our management contracts, payments for our management services are subject to subordination to other expenditures of the long–term care center being managed. Furthermore, for certain of the third parties with whom we have contracted to provide services and which we have determined, based on insufficient historical collections and the lack of expected future collections, that collection is not reasonably assured, our policy is to recognize revenues only in the period in which the amounts are realized. We may receive payment for the unpaid and unrecognized management fees in whole or in part in the future only if cash flows from the operating and investing activities of the centers or proceeds from the sale of the centers are sufficient to pay the fees. There can be no assurance that such future cash flows will occur. The realization of such previously unrecognized revenue could cause our reported net income to vary significantly from period to period.

 

We agree to subordinate our fees to the other expenses of a managed center because we believe we know how to improve the quality of patient services and finances of a skilled nursing or assisted living facility and because subordinating our fees demonstrates to the owner and employees of the managed center how confident we are of the impact we can have in making the center operations successful. We may continue to provide services to certain managed centers despite not being fully paid currently so that we may be able to collect unpaid fees in the future from improved operating results and because the incremental savings from discontinuing services to a center may be small compared to the potential benefit. Also, we may benefit from providing other ancillary services to the managed center.

 

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. As of December 31, 2017, we and/or our managed centers are defendants in 60 claims. It remains possible that those pending matters plus potential unasserted claims could exceed our reserves, which 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.

 

 

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURE 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, notes receivable, revolving credit facility, and long–term debt. 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 December 31, 2017, we have available for sale debt marketable securities in the amount of $166,395,000. The fixed income 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 income portfolio allows our insurance company subsidiaries to achieve an adequate risk–adjusted return while maintaining sufficient liquidity to meet obligations. At December 31, 2017, our debt marketable securities had gross realized gains of $823,000 and gross unrealized losses of $1,705,000.

 

 

As of December 31, 2017, both our long–term debt and credit facility bear interest at variable interest rates. Currently, we have long–term debt outstanding of $100.0 million. Based on our outstanding long–term debt, a 1% change in interest rates would change our interest cost by approximately $1,000,000.

 

Approximately $967,000 of our notes receivable bear interest at variable rates (generally at the prime rate plus 2%). Because the interest rates of these instruments are variable, a hypothetical 1% change in interest rates would result in a related increase or decrease in interest income of approximately $10,000.

 

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 approvals by the Investment Committee of the Board.

 

Credit Risk

 

Credit risk is managed by diversifying the fixed income portfolio to avoid concentrations in any single industry group or issuer and by limiting investments in securities with lower credit ratings. Corporate debt securities and asset–backed securities comprise approximately 72% of the fair value of the fixed income portfolio. At December 31, 2017, the credit quality ratings for our fixed income portfolio consisted of the following investment grades (as a percent of fair value): 29% AAA rated, 16% AA rated, 41% A rated, and 14% BBB rated.

 

Equity Price and Concentration Risk

 

Our available for sale 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 December 31, 2017, the fair value of our equity marketable securities is approximately $139,085,000. Of the $139.1 million equity securities portfolio, our investment in NHI comprises approximately $122.9 million, or 88%, 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 $13.9 million. At December 31, 2017, our equity marketable securities had unrealized gains of $108.9 million. Of the $108.9 million unrealized gains, $98.2 million is related to NHI.

 

 

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

 

The Board of Directors and Stockholders

National HealthCare Corporation

 

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of National HealthCare Corporation (the Company) as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the "consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2017 and 2016, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 20, 2018 expressed an unqualified opinion thereon.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements and schedule based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Ernst & Young LLP

 

 

 

We have served as the Company’s auditor since 2009.

 

Nashville, Tennessee

February 20, 2018

 

 

NATIONAL HEALTHCARE CORPORATION

Consolidated Statements of Income

(in thousands, except share and per share amounts)

 

 

 

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

 

 

NATIONAL HEALTHCARE CORPORATION

Consolidated Statements of Comprehensive Income

(in thousands)

 

 

 

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

 

 

NATIONAL HEALTHCARE CORPORATION

Consolidated Balance Sheets

(in thousands)

 

 

 

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

 

 

NATIONAL HEALTHCARE CORPORATION

Consolidated Balance Sheets

(in thousands, except share and per share amounts)

 

 

 

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

 

 

NATIONAL HEALTHCARE CORPORATION

Consolidated Statements of Cash Flows

(in thousands)

 

 

 

 

NATIONAL HEALTHCARE CORPORATION

Consolidated Statements of Cash Flows

(continued, in thousands)

 

 

 

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

 

 

NATIONAL HEALTHCARE CORPORATION

Consolidated Statements of Equity

(in thousands, except for share and per share amounts)

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

 

ITEM 9A.

CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Based on their evaluation as of December 31, 2017, the Chief Executive Officer and Principal Accounting Officer of the Company have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a–15(e) and 15d–15(e) under the Securities Exchange Act of 1934, as amended) were effective to ensure that the information required to be disclosed by us in this Annual Report on Form 10–K was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and instructions for Form 10–K.

  

 

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

 

We are responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a–15(f) under the Securities Exchange Act of 1934, as amended). We assessed the effectiveness of our internal control over financial reporting as of December 31, 2017. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control–Integrated Framework (2013 Framework). We have concluded that, as of December 31, 2017, our internal control over financial reporting is effective based on these criteria. Our independent registered public accounting firm, Ernst & Young, LLP, has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting included herein.

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

The Board of Directors and Stockholders

National HealthCare Corporation

 

Opinion on Internal Control over Financial Reporting

 

We have audited National HealthCare Corporation’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, National HealthCare Corporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of National HealthCare Corporation as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and financial statement schedule listed in the Index at Item 15(a) and our report dated February 20, 2018 expressed an unqualified opinion thereon.

 

Basis for Opinion

 

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

 

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

 

Definition and Limitations of Internal Control Over Financial Reporting

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/s/ Ernst & Young LLP

 

Nashville, Tennessee

February 20, 2018

 

 

Changes in Internal Control

 

There were no changes in our internal control over financial reporting during the quarter ended December 31, 2017 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

 

ITEM 9B.

OTHER INFORMATION

 

None.

 

 

PART III

 

 

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

The information in our definitive 2018 proxy statement set forth under the captions Directors of the Company and Executive Officers of the Company is hereby incorporated by reference.

 

 

ITEM 11.

EXECUTIVE COMPENSATION

 

The information in our definitive 2018 proxy statement set forth under the caption Compensation Discussion & Analysis is hereby incorporated by reference.

 

 

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The information in our definitive 2018 proxy statement set forth under the captions Section 16(A) Beneficial Ownership Reporting Compliance is hereby incorporated by reference.

 

 

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

 

The information in our definitive 2018 proxy statement set forth under the caption Certain Relationships and Related Transactions is hereby incorporated by reference.      

 

 

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

The information in our definitive 2018 proxy statement set forth under the caption Report of the Audit Committee is hereby incorporated by reference (which will be filed within 120 days of the end of the fiscal year to which this report relates).

 

 

PART IV

 

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULE

 

The following documents are filed as a part of this report:

 

(a)

(1)

Financial Statements:

 

The Financial Statements are included in Item 8 and are filed as part of this report.

 

 

(2)

Financial Statement Schedule:

 

 

 

(3)

Exhibits:

 

EXHIBIT INDEX
Exhibit No.		Description		Page No. or Location
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		Specifically incorporated by reference to Exhibit 3.5 attached to Form 10-Q filed on August 3, 2017
3.3		Certificate of Designations of Series A Convertible Preferred Stock of National HealthCare Corporation		Incorporated by reference to Exhibit 2.1 to the current report on Form 8–K filed on December 20, 2006
3.4		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
3.5		Restated Bylaws as amended February 14, 2013		Specifically 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		Specifically incorporated by reference to Exhibit 4.1 attached to Form 10-Q filed on August 3, 2017
4.4		Notice of Redemption of Series A Convertible Preferred Stock dated October 2, 2015		Incorporated by reference to Exhibit 99.1 to the Registrant's current report on Form 8–K filed on October 2, 2015
10.1		Master Agreement of Lease dated as of October 17, 1991 by and among National Health Investors, Inc. and National HealthCorp, L.P.		Incorporated by reference to Exhibit 10.1 to the Registrant's registration statement on Form S–4 filed October 3, 1997

 

 

10.2		Form of Service Agreement by and between National Health Corporation and National HealthCare Corporation		Incorporated by reference to Exhibit 10.5.1 to the Registrant's registration statement on Form S–4 filed October 3, 1997
10.5		Amendment No. 1 to Master Agreement to Lease between National Health Investors, Inc. and National HealthCorp L.P.		Incorporated by reference to Exhibit 10.19 from 2005 Form 10–K filed March 16, 2006
10.6		Amendment No. 2 to Master Agreement to Lease between National Health Investors, Inc. and National HealthCare L.P.		Incorporated by reference to Exhibit 10.20 from 2005 Form 10–K filed March 16, 2006
10.7		Amendment No. 3 to Master Agreement to Lease between National Health Investors, Inc. and National HealthCare L.P.		Incorporated by reference to Exhibit 10.21 from 2005 Form 10–K filed March 16, 2006
10.8		Amendment No. 4 to Master Agreement to Lease between National Health Investors, Inc. and National HealthCare L.P.		Incorporated by reference to Exhibit 10.22 from 2005 Form 10–K filed March 16, 2006
10.9		Amendment No. 5 to Master Agreement to Lease between National Health Investors, Inc. and National HealthCare Corporation		Incorporated by reference to Exhibit 10.23 from 2005 Form 10–K filed March 16, 2006
*10.10		National HealthCare Corporation's 2010 Omnibus Equity Incentive Plan		Incorporated by reference to Exhibit A to 2010 Proxy Statement filed April 1, 2010.
*10.11		First Amendment dated February 14, 2011 to the National HealthCare Corporation 2010 Omnibus Equity Incentive Plan		Incorporated by reference to Exhibit 10.16 from 2015 Form 10-K filed February 19, 2016.
*10.12		Amendment dated March 10, 2015 to National HealthCare Corporation's 2010 Omnibus Equity Incentive Plan		Incorporated by reference to Appendix A to 2015 Proxy Statement filed April 1, 2015.
*10.13		2017 NHC Executive Officer Performance Based Compensation Plan		Incorporated by reference to Appendix B to 2017 Proxy Statement filed April 4, 2017.
10.14		Amendment to Purchase and Sale Agreement with Modifications to Master Agreement to Lease between National Health Investors, Inc. and National HealthCare Corporation		Incorporated by reference to Exhibit 10.1 of National HealthCare Corporation's Form 10–Q filed on November 5, 2013
10.15		Agreement to Lease between NHI–REIT of Northeast, LLC, Landlord and NHC/OP, L.P. and National HealthCare Corporation, Co–Tenants		Incorporated by reference to Exhibit 10.4 of National HealthCare Corporation's Form 10–Q filed on November 5, 2013

 

 

10.16		Amended and Restated Amendment No. 6 to Master Agreement to Lease between National Health Investors, Inc. and National HealthCare Corporation		Incorporated by reference to Exhibit 10.2 of National HealthCare Corporation's Form 10–Q filed on November 5, 2013
10.17		Amendment No. 7 to Master Agreement to Lease between National Health Investors, Inc. and National HealthCare Corporation		Incorporated by reference to Exhibit 10.3 of National HealthCare Corporation's Form 10–Q filed on November 5, 2013
10.18		Credit Agreement dated as of October 7, 2015 among National HealthCare Corporation and Bank of America		Incorporated by reference to Exhibit 10.1 of National HealthCare Corporation's quarterly report on Form 10–Q filed on November 5, 2015
10.19		Pledge and Security Agreement dated as of October 7, 2015 between National HealthCare Corporation and Bank of America		Incorporated by reference to Exhibit 10.2 of National HealthCare Corporation's quarterly report on Form 10–Q filed on November 5, 2015
10.20		Note dated October 7, 2015 between National HealthCare Corporation and Bank of America		Incorporated by reference to Exhibit 10.3 of National HealthCare Corporation's quarterly report on Form 10–Q filed on November 5, 2015
10.21		Contribution Agreement dated December 29, 2011 between National HealthCare Corporation and Caris HealthCare, L.P. pursuant to which NHC acquired a 7.5% interest in Caris from McRae in exchange for $7,500,000		Incorporated by reference to Exhibit 10.26 to National HealthCare Corporation's annual report on Form 10–K filed on February 21, 2014
10.22		Assignment of membership interest in Solaris Hospice, LLC dated December 29, 2011 and effective on January 1, 2012, whereby NHC assigned its membership interest to Caris in exchange for an additional 2.7% limited partnership interest in Caris.		Incorporated by reference to Exhibit 10.27 to National HealthCare Corporation's annual report on Form 10–K filed on February 21, 2014
10.23		Purchase and Sale Agreement and Extension of Master Lease dated December 26, 2012 between National Health Investors, Inc. and National HealthCare Corporation		Incorporated by reference to Exhibit 10.29 to National HealthCare Corporation's annual report on Form 10–K filed on February 21, 2014

 

 

21		Subsidiaries of Registrant			Filed Herewith
23		Consent of Independent Registered Public Accounting Firm – Ernst & Young LLP			Filed Herewith
31.1		Rule 13a–14(a)/15d–14(a) Certification of Chief Executive Officer			Filed Herewith
31.2		Rule 13a–14(a)/15d–14(a) Certification of Principal Accounting Officer			Filed Herewith
32		Certification pursuant to 18 U.S.C. Section 1350 by Chief Executive Officer and Principal Accounting Officer			Filed Herewith
**101.INS		XBRL Instance Document
**101.SCH		XBRL Taxonomy Extension Schema Document
**101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
**101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
**101.LAB		XBRL Taxonomy Extension Label Linkbase Document
**101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document
*Indicates management contract or compensatory plan or arrangement.   **As provided in Rule 406T of Regulation S–T, this information shall not be deemed "filed" for purposes of Sections 11 and 12 of the Securities Act and Section 18 of the Securities Exchange Act or otherwise subject to liability under those sections.

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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
Date:  February 20, 2018	BY: /s/ Stephen F. Flatt
	Stephen F. Flatt
	Chief Executive Officer and Director

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Date: February 20, 2018	/s/ Stephen F. Flatt
	Stephen F. Flatt
	Chief Executive Officer and Director
	(Principal Executive Officer)
Date: February 20, 2018	/s/ Brian F. Kidd
	Brian F. Kidd
	Senior Vice President and Controller
	(Principal Financial Officer)
	(Principal Accounting Officer)
Date: February 20, 2018	/s/ Robert G. Adams
	Robert G. Adams
	Chairman of the Board
Date: February 20, 2018	/s/ J. Paul Abernathy
	J. Paul Abernathy
	Director
Date: February 20, 2018	/s/ W. Andrew Adams
	W. Andrew Adams
	Director
Date: February 20, 2018	/s/ Ernest G. Burgess
	Ernest G. Burgess
	Director
Date: February 20, 2018	/s/ Emil E. Hassan
	Emil E. Hassan
	Director
Date: February 20, 2018	/s/ Richard F. LaRoche, Jr.
	Richard F. LaRoche, Jr.
	Director
Date: February 20, 2018	/s/ Lawrence C. Tucker
	Lawrence C. Tucker
	Director

 

92