EDGAR 10-K Filing

Company CIK: 1303313
Filing Year: 2023
Filename: 1303313_10-K_2023_0001303313-23-000020.json

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ITEM 1. BUSINESS
Item 1. Business.
LHC Group, Inc. and UnitedHealth Group Incorporated Merger
On March 28, 2022, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with UnitedHealth Group Incorporated ("Parent") and Lightning Merger Sub Inc., a wholly owned subsidiary of Parent ("Merger Sub"), pursuant to which Merger Sub will be merged with and into the Company (the "Merger"), with the Company surviving the Merger as a wholly owned subsidiary of Parent. At a Special Meeting of Stockholders held on June 21, 2022, the stockholders of the Company approved the Merger. The parties to the Merger continue to work toward the expected consummation of the Merger prior to the end of the first quarter of 2023.
Overview
We provide quality, cost-effective post-acute health care services to our patients. As of December 31, 2022, we have 920 service providers in 37 states within the continental United States and the District of Columbia. Our services are classified into five segments: (1) home health services, (2) hospice services, (3) home and community-based services, (4) facility-based services, primarily offered through our long-term acute care hospitals ("LTACHs"), and (5) healthcare innovations ("HCI").
Our home health service locations offer a wide range of services, including skilled nursing, medically-oriented social services and physical, occupational, and speech therapy. The nurses, home health aides, and therapists in our home health agencies work closely with patients and their families to design and implement individualized treatment plans in accordance with a physician-prescribed plan of care. As of December 31, 2022, we operated 527 home health service locations, of which 320 are wholly-owned by us, 203 are majority-owned by us through equity joint ventures, two are under license lease arrangements, and the operations of the remaining two locations are managed by us.
Our hospices provide end-of-life care to patients with terminal illnesses through interdisciplinary teams of physicians, nurses, home health aides, counselors, and volunteers. We offer a wide range of services, including pain and symptom management, emotional and spiritual support, inpatient and respite care, homemaker services, and counseling. As of December 31, 2022, we operated 159 hospice locations, of which 96 are wholly-owned by us, 61 are majority-owned by us through equity joint ventures, and two are under license lease arrangements.
Our home and community-based locations offer assistance with activities of daily living to elderly, chronically ill, and disabled patients, performed by skilled nursing and paraprofessional personnel. As of December 31, 2022, we operated 128 locations, of which 119 are wholly-owned by us and 9 are majority-owned by us through equity joint ventures.
Our LTACH locations provide services primarily to patients with complex medical conditions who have transitioned out of a hospital intensive care unit but whose conditions remain too severe for treatment in a non-acute setting. As of December 31, 2022, our LTACHs had 367 licensed beds. We operated 11 LTACHs with 12 locations, of which all but two are located within host hospitals. As part of our facility-based services segment, we also own and operate two skilled nursing facilities, two rural health clinics, one physician practice, one family health center, and 81 physical therapy clinics. Of these 99 facility-based services locations, 88 are wholly-owned by us and 11 are majority-owned by us through equity joint ventures.
Our HCI segment reports on our developmental activities outside its other business segments. The HCI segment includes (a) Imperium Health Management, LLC, an Accountable Care Organization ("ACO") enablement and management company, (b) Long Term Solutions, Inc., an in-home assessment company serving the long-term care insurance industry, and (c) Advance Care House Calls, which provides primary medical care for patients with chronic and acute illnesses who have difficulty traveling to a doctor's office. These activities are intended ultimately, whether directly or indirectly, to benefit our patients and/or payors through the enhanced provision of services in our other segments. The activities all share a common goal of improving patient experiences and quality outcomes, while lowering costs. They include, but are not limited to, items such as: technology, information, population health management, risk-sharing, care-coordination and transitions, clinical advancements, enhanced patient engagement and informed clinical decision and technology enabled in-home clinical assessments. We have seven HCI locations, of which all are wholly-owned by us.
Our net service revenue by segment for the years ended December 31, 2022, 2021 and 2020 was as follows (amounts in thousands):
Year Ended December 31,
2022 2021 2020
Home Health $ 1,531,491 $ 1,551,542 $ 1,463,779
Hospice 407,489 311,218 243,806
Home and Community-Based 180,587 189,561 194,584
Facility-Based 127,916 132,098 128,578
HCI 35,288 35,203 32,457
Consolidated Net Service Revenue $ 2,282,771 $ 2,219,622 $ 2,063,204
For further information regarding the financial performance of our segments, see Note 11 to the Consolidated Financial Statements included in this Annual Report on Form 10-K.
Our founders began operations in September 1994 as St. Landry Home Health, Inc. in Palmetto, Louisiana. After several years of expansion, our founders reorganized their business and began operating as Louisiana Healthcare Group, Inc. in June 2000. In March 2001, Louisiana Healthcare Group, Inc. reorganized and became a wholly owned subsidiary of The Healthcare Group, Inc., a Louisiana business corporation. In December 2002, The Healthcare Group, Inc. merged into LHC Group, LLC, a Louisiana limited liability company, with LHC Group, LLC being the surviving entity. In January 2005, LHC Group, LLC established a wholly owned Delaware subsidiary, LHC Group, Inc. and on February 9, 2005, LHC Group, LLC merged into LHC Group, Inc., a Delaware corporation with LHC Group, Inc. being the surviving entity. Our principal executive offices are located at 901 Hugh Wallis Road South, Lafayette, Louisiana, 70508. Our telephone number is (337) 233-1307. Our website is www.lhcgroup.com. Information contained on our website is not part of or incorporated by reference into this Annual Report on Form 10-K.
Business Strategy
Our objective is to become the leading provider of in-home healthcare services in the United States, while also providing a complementary suite of other post-acute healthcare service offerings through our facility-based and HCI segments. To achieve this objective, we intend to:
Drive internal growth in existing markets. We intend to drive internal growth in our current markets by increasing the number of (health care) providers from whom we receive referrals and by expanding the breadth of our services in each market. We intend to achieve this growth by: (1) continuing to educate health care providers about the benefits of our services, (2) reinforcing the position of our agencies and facilities as community assets, (3) maintaining our emphasis on high-quality medical care for our patients, (4) identifying related products and services needed by our patients and their communities, and (5) providing a superior work environment for our employees.
Achieve margin improvement through the active management of costs. Net service revenue generated from Medicare is under the Patient Driven Groupings Model ("PDGM"), which is paid at pre-determined rates based upon the patient's clinical condition. Because our profitability in a fixed payment system depends upon our ability to manage the costs of providing care, we will continue to pursue initiatives to improve our margins and net income.
Expand into new markets. We intend to continue expanding into new markets by utilizing our point of care technology, developing de novo locations, and acquiring existing Medicare and/or Medicaid-certified agencies in attractive markets throughout the United States. We will also continue our unique strategy of partnering with hospitals and health systems, as these ventures provide significant return on investment. In addition, we plan to continue acquiring freestanding agencies that can serve as growth platforms in markets we do not currently serve in order to support our growth into new markets.
Pursue strategic acquisitions and develop joint ventures. We will continue to identify and evaluate opportunities for strategic acquisitions in new and existing markets that will enhance our market position, increase our referral base, and expand the breadth of services we offer. We will aim to continue entering into joint ventures with hospitals to provide our current post-acute care services to their patients upon discharge from the hospital setting.
Services
We provide post-acute care services in the United States by providing quality, cost-effective health care services to patients within the comfort and privacy of their home, place of residence, or long-term acute care hospital facility. Our services can be broadly classified into five principal segments: (1) home health services, (2) hospice services, (3) home and community-based, (4) facility-based services offered through our LTACHs, and (5) HCI.
Home Health Services
Our registered nurses and licensed practical nurses provide a variety of medically necessary services to homebound patients who are suffering from acute or chronic illness, recovering from injury or surgery, or who otherwise require care, teaching or monitoring. These services include, but are not limited to:
•wound care and dressing changes,
•cardiac rehabilitation,
•infusion therapy,
•pain management,
•pharmaceutical administration,
•skilled observation and assessment, and
•patient education.
We have also designed proprietary clinical pathways to treat chronic diseases and conditions, including diabetes, hypertension, arthritis, Alzheimer’s disease, low vision, spinal stenosis, Parkinson’s disease, osteoporosis, complex wounds, and chronic pain. Through our medical social workers, we counsel patients and their families with regard to financial, personal, and social concerns that arise from a patient’s health-related problems. We provide skilled nursing, ventilator and tracheotomy services, extended care specialties, medication administration and management, and patient and family assistance and education. We also provide management services to third-party home nursing agencies, often as an interim solution until proper state and regulatory approvals for an acquisition can be obtained.
Our physical, occupational, and speech therapists provide therapy services to patients in their home. Our therapists coordinate multi-disciplinary treatment plans with physicians, nurses, and social workers to restore basic mobility skills such as getting out of bed and walking safely with crutches or a walker. As part of the treatment and rehabilitation process, a therapist will stretch and strengthen muscles, test balance and coordination abilities, and teach home exercise programs. Our therapists assist patients and their families with improving and maintaining a patient’s ability to perform functional activities of daily living, such as the ability to dress, cook, clean, and manage other activities safely in the home environment. Our speech and language therapists provide corrective and rehabilitative treatment to patients who suffer from physical or cognitive deficits or disorders that create difficulty with verbal communication or swallowing.
Hospice Services
Our Medicare-certified hospice operations provide a full range of hospice services designed to meet the individual physical, spiritual, and psychosocial needs of terminally ill patients and their families. Our hospice services are primarily provided in a patient’s home, but can also be provided in a nursing home, assisted living facility, or hospital. The key services provided through our hospice agencies include pain and symptom management accompanied by palliative medication, emotional and spiritual support, inpatient and respite care, homemaker services, dietary counseling, and family bereavement counseling and social worker visits for up to 13 months after a patient’s death.
Home and Community-Based Services
Our home and community-based operations offer a wide range of services to patients in their home or in a medical facility. The services range from assistance with grooming, medication reminders, meal preparation, assistance with feeding, light housekeeping, respite care, transportation, and errand services.
Facility-Based Services
LTACHs is a reporting unit within our Facility-Based services segment. Our LTACHs treat patients with severe medical conditions who require a high-level of care and frequent monitoring by physicians and other clinical personnel. Patients who receive our services in an LTACH have been diagnosed as being too medically unstable for treatment in a non-acute setting. For example, our LTACHs typically serve patients suffering from respiratory failure, neuromuscular disorders, cardiac disorders, non-healing wounds, renal disorders, cancer, head and neck injuries, and mental disorders. We also treat patients diagnosed with musculoskeletal impairments that restrict their ability to perform normal activities of daily living. We also operate two skilled nursing facilities, family health center, rural health clinics, a physician practice, and physical therapy providers that staff both facilities and outpatient clinics.
Healthcare Innovations Services
Our HCI segment reports on our developmental activities outside our other business segments. The HCI segment includes (a) Imperium Health Management, LLC, an ACO enablement and management company, (b) Long Term Solutions, Inc., an in-home assessment company serving the long-term care insurance industry, and (c) Advanced Care House Calls, which provides primary medical care for patients with chronic and acute illnesses who have difficulty traveling to a doctor’s office. These activities are intended ultimately, whether directly or indirectly, to benefit our patients and/or payors through the
enhanced provision of services in our other segments. The activities all share a common goal of improving patient experiences and quality outcomes, while lowering costs. They include, but are not limited to, items such as: technology, information, population health management, risk-sharing, care-coordination and transitions, clinical advancements, enhanced patient engagement and informed clinical decision and technology enabled in-home clinical assessments.
Operations
Financial information relating to the home health, hospice, home and community-based, facility-based, and HCI operating segments of our business, including their contributions to our net service revenue, operating income, and total assets for each of the twelve months ended December 31, 2022, 2021, and 2020, respectively, can be found in Note 11 to the Consolidated Financial Statements included in this Annual Report on Form 10-K.
Our home health agencies are operated in one segment that is separated into multiple geographical regions and further separated into individual operating markets or clusters. Our hospice agencies are operated in one segment that is separated into multiple geographical regions. Our home and community-based agencies are operated in one segment separated into multiple geographic regions. Each of our home health and hospice agencies are staffed with experienced clinical home health and administrative professionals who provide a wide range of patient care services. Each of our home health agencies, hospice agencies, and home and community-based agencies are licensed and certified by the state and federal governments.
Our facility-based service locations are operated in one segment separated into multiple geographic regions. Our facility-based services, through our LTACHs, follow a clinical approach under which each patient is discussed in weekly, multidisciplinary team meetings. In these meetings, patient progress is assessed and compared to goals and future goals are set. We believe that this model results in higher quality care and more predictable discharge patterns and avoids unnecessary delays.
Our home health service locations use our Service Value Point system, a proprietary clinical resource allocation model and cost management system. The system is a quantitative tool that assigns a target level of resource units to a group of patients based upon their initial assessment and estimated skilled nursing and therapy needs. The Service Value Point system allows the Director of Nursing or Branch Manager to allocate adequate resources throughout the group of patients assigned to his or her care to allow for them to provide the highest quality care possible.
Patient care is coordinated on-site at the agency level of each home health service, hospice service, and home and community-based location. All coding, medical records, case management, utilization review, and medical staff credentialing are provided on-site at the hospital level of each facility-based service location. Centralized functions such as payroll, accounting, financial reporting, billing, collections, regulatory and legal compliance, risk management, information technology, and general clinical oversight accomplished by periodic on-site surveys are provided from our home offices.
Our HCI business lines primarily provide assessments and related services to the long-term care insurance industry and management services to ACOs with over 400,000 Medicare lives under management.
Equity Joint Ventures
As of December 31, 2022, we had 82 equity joint ventures including 75 with hospital and health systems, which are comprised of over 350 hospitals, four with physicians, and three with other parties.
Our equity joint ventures are generally structured as limited liability companies in which we own a majority equity interest and our partner(s) own(s) a minority equity interest. At the time of formation, each party contributes capital to the equity joint venture in the form of cash or property. We believe that the amount contributed by each party to the equity joint venture represents their pro-rata portion of the fair market value of the equity joint venture, and we maintain processes to confirm and document those determinations. None of our equity joint venture partners are required to make or influence referrals to our equity joint ventures. In fact, agreements with our hospital joint venture partners require that they follow the same Medicare discharge planning regulations that, among other things, require the hospitals to offer each Medicare patient a list of available Medicare-certified home nursing agency options and to allow the patient to choose his or her own provider.
We structure our equity joint ventures as either manager-managed or board-managed. We control our manager-managed joint ventures, since LHC Group, Inc. is typically designated as the manager to oversee the day-to-day operations of the joint venture. We control our board-managed joint ventures, since we typically hold a majority of the votes required to take board action and/or we control the senior officer positions, although a majority of our joint ventures require super majority board approval for certain actions. Our equity joint venture partners participate in the profits and losses of the joint venture in proportion to their equity interests. Distributions from our equity joint ventures are made pro-rata based on percentage ownership interests and are not based on referrals made to the equity joint venture by any of the partners.
Most of our equity joint ventures include a buy/sell option that grants to us and our equity joint venture partners the right to require the other party to either purchase all of the exercising member’s membership interests or sell to the exercising
member all of the non-exercising member’s membership interests, at the non-exercising member’s option, within 30 days of the receipt of notice of the exercise of the buy/sell option. In some instances, the purchase price under these buy/sell provisions is based on a multiple of the historical or future earnings before income taxes, depreciation and amortization of the equity joint venture at the time the buy/sell option is exercised. In other instances, the buy/sell purchase price will be negotiated by the parties but will be subject to a fair market valuation process.
Competition
The markets supporting post-acute care are highly fragmented. According to the Medicare Payment Advisory Commission (“MedPac”), an independent agency that advises Congress on various Medicare issues, there were approximately 11,356 Medicare-certified home nursing agencies in the United States in 2019. MedPac estimated that in 2019 approximately 18% of Medicare-certified home health agencies provided a majority of their services in rural areas, and 87% of agencies were proprietary. MedPac also disclosed that 4,840 hospice agencies were participating in the Medicare Program in 2018. We believe we are well positioned to build and maintain long-term relationships with local hospitals, physicians, and other health care providers and to become the highest quality post-acute provider in our markets. In our experience, because most rural areas do not have the population size to support more than one or two general acute care hospitals, the local community hospital often plays a significant role in rural market health care delivery systems. Rural patients who require home nursing frequently receive care from a small home care agency or an agency that, while owned and run by the local community hospital, is not an area of focus for that hospital. Similarly, patients in these markets who require services typically offered by LTACHs are more likely to remain in the community hospital because it is often the only local facility equipped to deal with severe and complex medical conditions. We choose to enter these rural markets through affiliations with local hospitals, since we typically experience significantly less competition for the services we provide.
As we expand into new markets, we may encounter competitors that have greater resources or greater access to capital. Generally, competition in our home health service markets comes from local and regional providers. These providers include facility- and hospital-based providers, visiting nurse associations, and nurse registries. We are unaware of any competitor offering our breadth of services and focusing on the needs of rural markets.
We believe our diverse service offerings, collaborative approach to working with health care providers, concentrated house of brands market strategy, our size as one of the nation's largest home care providers, business experience gained from focusing on rural markets, and patient-oriented operating model provide our principal competitive advantages over local providers.
Quality Assurance & Performance Improvement
The LHC Group Quality Assurance and Performance Improvement Department, overseen by our Vice President of Quality and Care Delivery and Chief Medical Officer, is responsible for formulating quality of care indicators, identifying performance improvement priorities, and facilitating best practices for quality care. Company-wide, we have adopted a “Plan, Do, Check, Act” methodology for our quality/performance improvement activities and initiatives. We also set forth a quality platform that reviews:
•performance improvement audits,
•state and regulatory surveys,
•publicly reported quality data, and
•patient perception of care.
The Quality Department is also responsible for ensuring that the infrastructure of the quality initiatives throughout the Company is appropriate, overseeing and evaluating the effectiveness of the quality plans and initiatives, and recommending appropriate quality and performance improvement initiatives.
The Clinical Quality Committee of the Board of Directors is responsible for advising our clinical leadership, monitoring the performance of our locations based on internal and external benchmarks, overseeing and evaluating the effectiveness of the performance improvement and quality plans, facilitating best practices based on internal and external comparisons, and fostering enhanced awareness of clinical performance by the Board of Directors.
As part of our ongoing quality control, internal auditing, and monitoring programs, we conduct internal regulatory audits and mock surveys at each of our agencies and facilities at least once a year. If an agency or facility does not achieve a satisfactory rating, we require that it prepare and implement a plan of correction. We then follow-up to verify that all deficiencies identified in the initial audit and survey have been corrected.
As required under the Medicare conditions of participation, we maintain a continuous quality improvement program, which involves:
•ongoing education of staff and quarterly continuous quality improvement meetings at each of our agencies, facilities, and principal home offices,
•monthly comprehensive audits of patient charts performed at each of our agencies and facilities,
•a comprehensive survey readiness assessment on each of our agencies and facilities, annually at a minimum,
•review of Home Health Compare scores,
•employee benchmarking software to track real time patient quality of care
•assessment of patients' and/or family members' perception of care using third party data, and
•assessment of infection control practices and risk events.
We constantly expand and refine our continuous quality improvement programs. Specific written policies, procedures, training, and educational materials and programs, as well as auditing and monitoring activities, have been prepared and implemented to address the functional and operational aspects of our business. Our programs also address specific areas identified for improvement through regulatory interpretation and enforcement activities. We believe our consistent focus on continuous quality improvement programs provide us with a competitive advantage in the markets we serve.
With the January 2023 Home Health Compare update, 90% of our providers were 4 Stars or above for the quality of care rating and 64% of our providers are at or above 4 stars for the HHCAPS (Home Health Care Consumer Assessment of Healthcare Providers and Systems) star rating.
Compliance
We have established and continually maintain a comprehensive compliance and ethics program that is designed to assist all of our employees to exceed applicable standards established by federal and state laws and regulations and industry practice. Our goal is to foster and maintain the highest standards of compliance, ethics, integrity, and professionalism in every aspect of our business dealings, and we utilize our compliance and ethics program to assist our employees toward achieving that goal.
The purpose of our compliance and ethics program is to promote and foster compliance with applicable legal and regulatory requirements, the requirements of the Medicare and Medicaid programs and other government healthcare programs, industry standards, our Code of Conduct and Ethics, and our other policies and procedures that support and enhance overall compliance within our Company. Our compliance and ethics program focuses on regulations related to the federal False Claims Act, the Stark Law, the federal Anti-Kickback Law, billing and overall adherence to health care regulations.
To ensure the independence of our compliance department staff, we have implemented the following:
•our Chief Compliance Officer reports to and has direct oversight by the Audit Committee and Quality Committee of the Board of Directors,
•our compliance department has its own operating budget, and
•our compliance department has the authority to independently investigate any compliance or ethical concerns, including, when deemed necessary, the authority to interview any company personnel, access any company property, including electronic communications, and engage counsel to assist in any investigation.
Among other activities, our compliance department staff is responsible for the following activities:
•drafting and revising the Company’s policies and procedures related to compliance and ethics issues,
•reviewing, making recommended revisions, disseminating and tracking attestations to our Code of Conduct and Ethics,
•measuring compliance with our policies and procedures, Code of Conduct and Ethics and legal and regulatory requirements related to the Medicare and Medicaid programs and other government healthcare programs, laws and regulations,
•developing and providing compliance-related training and education to all of our employees and, as appropriate, directors, contractors and other representatives and agents, including new-hire compliance training for all new employees, annual compliance training for all employees, sales compliance training to all members of our sales team, billing compliance training to all members of our billing and revenue cycle team and other job-specific and role-based compliance training of certain employees,
•performing a bi-annual company-wide risk assessment, with ongoing review and revision,
•implementing an annual compliance auditing and monitoring work plan and performing and following up on various risk-based auditing and monitoring activities, including both clinical and non-clinical auditing and monitoring activities at the corporate level and at the local agency/facility level,
•developing, implementing and overseeing our Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) privacy and security compliance program,
•monitoring, responding to and overseeing the resolution of issues and concerns raised through our anonymous compliance hotline,
•monitoring, responding to and resolving all compliance and ethics-related issues and concerns raised through any other form of communication, and
•ensuring that we take appropriate corrective and disciplinary action when noncompliant or improper conduct is identified.
All employees are required to report incidents, issues or other concerns that they believe in good faith may be in violation of our Code of Conduct and Ethics, our policies and procedures, applicable legal and regulatory requirements or the requirements of the Medicare and Medicaid programs and other government health care programs. All employees are encouraged to either contact our Chief Compliance Officer directly or to contact our 24-hour toll-free or web-based compliance hotline when they have questions or concerns about any compliance or ethics issues. All reports to our compliance hotline are kept confidential to the extent allowed by law, and employees have the option to remain anonymous. When cases reported to our compliance hotline involve a compliance or ethics issue or any possible violation of law or regulation, the matter is referred to the compliance department for investigation. Retaliation against employees in connection with reporting compliance or ethical concerns is considered a serious violation of our Code of Conduct and Ethics, and, if it occurs, will result in discipline, up to and including termination of employment.
We continually expand and refine our compliance and ethics programs. We promote a culture of compliance, ethics, integrity and professionalism within the Company through persistent messages from our senior leadership concerning the necessity of strict compliance with legal requirements and company policies and procedures. We believe our consistent focus on our compliance and ethics program provides us with a competitive advantage in the markets we serve.
Technology and Intellectual Property
Technology plays a key role in the day-to-day operation of our business, our ability to grow our business organically and through acquisitions, and in maintaining effective managerial oversight and controls. The technology solutions we use are highly scalable. We believe that our ability to implement, maintain, and leverage our technology solutions provides us with a competitive advantage that allows us to grow our business in a cost-efficient manner and provide better patient care.
Our Service Value Point system is a proprietary information system that assists us in, among other things, monitoring clinical utilization and other cost factors, supporting our health care management techniques, internal benchmarking, clinical analysis, outcomes monitoring and claims generation, revenue cycle management, and revenue reporting at our home nursing agencies. We were issued a patent for our Service Value Point system during 2009 by the U.S. Patent and Trademark Office. This proprietary home nursing clinical resource and cost management system is a quantitative tool that assigns a target level of resource units to each patient based upon our staff's initial assessment of the patient's estimated skilled nursing and therapy needs. We designed this system to empower our direct care employees to make appropriate day-to-day clinical care decisions while also allowing us to monitor and manage the quality and delivery of care across our system, including the cost of providing that care, on both a patient-specific and agency-specific basis. In 2019, we updated our Service Value Point system for the new PDGM payment system adopted by CMS and other payors.
All of our home nursing and hospice locations utilize our point of care ("POC") system. Our POC system allows a visiting clinician to access records and other information from the patient’s home or at the POC, complete required documentation at the POC and submit it electronically into our patient record system. HomeCare HomeBase is our solution of choice for home health and hospice operations. Currently, all of our home health and hospice locations are using HomeCare HomeBase. All of our home and community-based locations are using Continulink. Our advance practice services utilize eMD’s Aprima solution and our long-term acute care hospitals and skilled nursing facility services utilize WellSky’s HCS solution.
Each of these applications support their respective lines of business and locations with administrative, office, clinical, and operating information system needs, including assisting with the compliance of our operating systems with HIPAA requirements. Each application also assists our staff in gathering information to improve the quality of patient care, optimizing financial performance, promoting regulatory compliance, and enhancing staff efficiency. Each application (with the exception of WellSky’s HCS solution) is hosted by the vendor in a secure data center, with multiple redundancies for storage, power, bandwidth, and security. WellSky’s HCS solution is hosted at a co-located data center that is managed by the Company.
We have built an enterprise data warehouse that aggregates data from our ERP solution, and various health record/billing systems in use. We use various third-party solutions and several LHC-developed applications to provide historical, current, and forward-looking operational performance analysis. Our dashboards and reports provide high-level and detailed, historical and current, views to measure performance against budget and deliver insights into factors that drive our execution against our financial, operational, and compliance goals. These dashboards and reports are available in summary and detailed views to accommodate user needs from senior management down to the operators in the field.
We utilize a variety of third-party solutions for human resource management and use their services and products to manage our payroll processing, leave of absence (“LOA”) processes, flexible spending account (“FSA”) administration, time, and attendance. We also utilize third-party solutions for financial management, including budgeting, forecasting, and financial reporting, including but not limited to general ledger, accounts payable, and fixed assets.
We are also deploying solutions across all of our home health, hospice, and home and community-based locations to comply with the requirements for electronic visit verification (“EVV”). In order to comply with current and future state and federal regulations for EVV, we utilize several different solutions. In states with an “open” model, we are able to choose our EVV vendor, and we use Continulink, or HomeCare HomeBase (in partnership with CellTrak) as our preferred EVV solution provider. In “closed” systems where states mandate the EVV vendor, we utilize the state-mandated EVV solution provider. In all cases, we have built interfaces between the EVV solution providers and our electronic health record and billing systems.
Reimbursement
The following describes the payment models in effect during the year ended December 31, 2022. Such payment models have been subject to temporary adjustments made by CMS in response COVID-19 pandemic as described elsewhere in this Annual Report on Form 10-K.
Medicare
The federal government’s Medicare program, governed by the Social Security Act of 1965 (the “Social Security Act”), reimburses health care providers for services furnished to Medicare beneficiaries. These beneficiaries generally include persons age 65 and older and those who are chronically disabled. The program is primarily administered by the Department of Health and Human Services (“HHS”) and CMS. Medicare services accounted for 59.6%, 59.8% and 62.1%, of our net service revenue for the years ended December 31, 2022, 2021, and 2020, respectively. Medicare reimburses us based upon the setting in which we provide our services or the Medicare category in which those services fall.
In 2011, sequestration was implemented in the Budget Control Act of 2011(BCA, P.L. 112-25) as a tool in federal budget control. The sequestration cut to Medicare payments began on April 1, 2013, and reduced Medicare payments for patients whose service dates ended on or after April 1, 2013 by 2%. In response to COVID-19, the U.S. Government enacted the Coronavirus Aid, Relief, and Economic Security ("CARES Act") on March 27, 2020. The CARES Act suspended the 2% sequestration payment adjustments on Medicare patient claims with periods that ended on May 1, 2020 through December 31, 2020. On April 14, 2021, Congress passed legislation to continue the suspension of the 2% sequestration payment adjustments on Medicare patient claims with dates of service through December 31, 2021. On December 10, 2021, the Protecting Medicare and American Farmers from Sequester Cuts Act legislation passed, which will continue the suspension of the sequestration payment adjustments for Medicare patient claims with dates of service through March 31, 2022. Medicare patient claims with dates of services between April 1 through June 30, 2022 had a 1% sequestration adjustment and Medicare patient claims with dates of services beginning July 1, 2022 returned to a 2% sequestration adjustment.
Home Health
The Medicare home nursing benefit is available to patients who need care following discharge from a hospital, as well as patients who suffer from chronic conditions that require skilled intermittent care. While the services received need not be rehabilitative or of a finite duration, patients who require full-time skilled nursing for an extended period of time generally do not qualify for Medicare home nursing benefits. As a condition of coverage under Medicare, beneficiaries must: (1) be homebound, meaning they are unable to leave their home without a considerable and taxing effort; (2) require intermittent skilled nursing, physical therapy, or speech therapy services that are covered by Medicare; and (3) receive treatment under a plan of care that is established and periodically reviewed by a physician. Qualifying patients also may receive reimbursement for occupational therapy, medical social services, and home health aide services if these additional services are part of a plan of care prescribed by a physician.
We record revenue as services are provided under PDGM. For each 30-day period, the patient is classified into one of 432 home health resource groups prior to receiving services. Each 30-day period is placed into a subgroup falling under the following categories: (i) timing being early or late, (ii) admission source being community or institutional, (iii) one of 12 clinical groupings based on the patient's principal diagnosis, (iv) functional impairment level of low, medium, or high, and (v) a co-morbidity adjustment of none, low, or high based on the patient's secondary diagnoses.
Each 30-day period payment from Medicare reflects base payment adjustments for case-mix and geographic wage differences. In addition, payments may reflect one of three retroactive adjustments to the total reimbursement: (a) an outlier payment if the patient’s care was unusually costly; (b) a low utilization adjustment whereby the number of visits is dependent on the clinical grouping; and/or (c) a partial payment if the patient transferred to another provider or from another provider before completing the episode. The retroactive adjustments outlined above are recognized in net service revenue when the event causing the adjustment occurs and during the period in which the services are provided to the patient. We review these adjustments to ensure that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the retroactive adjustments is subsequently resolved. Net service revenue and related patient accounts receivable are recorded at amounts estimated to be realized from Medicare for services rendered.
Under PDGM, the initial certification of Medicare patient eligibility, plan of care, and comprehensive assessment remains valid for 60-day episodes of care but payments for Medicare home health services are made based upon 30-day payment periods. The national, standardized 30-day Medicare payment amount was $2,031.64, resulting in a 3.2% increase in payments over fiscal year 2021. The rule reflected the 2.6% payment update, 0.7% increase due to the reduction of the fixed-dollar loss ratio for outliers, and a 0.1% reduction due to the rural add-on percentages mandated by the Bipartisan Budget Act of 2018. The final rule expanded the Home Health Value-Based Purchasing ("HHVBP") model nationally, with the first performance year of January 1, 2023. Starting in 2025, fee-for-service payments to home health agencies will be adjusted based on the quality of care provided to beneficiaries during the calendar year 2023 performance year.
On October 31, 2022, CMS released the final rule for fiscal year 2023. The final rule states the Medicare base payments will increase by 0.7%. The increase reflects the effects of the 4.0% home health payment update, a 3.5% decrease from the effects of the prospective permanent behavioral assumption adjustment of -3.925% that is being phased-in, and 0.2% increase from the effects of an update to the fixed-dollar ratio used in determining outlier payments. The impact of the -3.925% permanent behavioral assumption adjustment is -3.5%, as the permanent adjustment is only made to the 30-day payment rate and not the Low Utilization Payment Adjustment per visit payment rates. CMS also finalized a permanent 5% cap on negative wage index changes regardless of the underlying reason for the decrease.
We verify a patient’s eligibility for home health benefits at the time of admission.
Home health payment rates are updated annually by the home health market basket percentage as adjusted by Congress. CMS establishes the home health market basket index, which measures inflation in the prices of an appropriate mix of goods and services included in home health services.
Hospice
In order for a Medicare beneficiary to qualify for the Medicare hospice benefit, two physicians must certify that, in their clinical judgment, the beneficiary has less than six months to live, assuming the beneficiary’s disease runs its normal course. In addition, the Medicare beneficiary must affirmatively elect hospice care and waive any rights to other Medicare curative benefits related to his or her terminal illness. At the end of each benefit period (described below), a physician must recertify that the Medicare beneficiary’s life expectancy is six months or less in order for the beneficiary to continue to qualify for and to receive the Medicare hospice benefit. The first two benefit periods are 90 days and subsequent benefit periods are 60 days. A Medicare beneficiary may revoke his or her election at any time and resume receiving traditional Medicare benefits. There is no limit on how long a Medicare beneficiary can receive hospice benefits and services, provided that the beneficiary continues to meet Medicare hospice eligibility criteria.
Medicare reimburses for hospice care using one of four predetermined daily rates based upon the level of care we furnish to a beneficiary. These rates are subject to annual adjustments based on inflation and geographic wage considerations. The base Medicare rate for services that we provide to a beneficiary depends upon which of the following four levels of care we provide to that beneficiary:
•Routine Care. Care that is not classified under any of the other levels of care, such as the work of nurses, social workers or home health aides.
•General Inpatient Care. Pain control or acute or chronic symptom management that cannot be managed in a setting other than an inpatient Medicare certified facility, such as a hospital, skilled nursing facility or hospice inpatient facility.
•Continuous Home Care. Care for patients experiencing a medical crisis that requires nursing services to achieve palliation and symptom control, if the agency provides a minimum of eight hours of care within a 24-hour period.
•Respite Care. Short-term, inpatient care to give temporary relief to the caregiver who regularly provides care to the patient.
Medicare limits the reimbursement we may receive for inpatient care services (both respite and general care) for hospice patients. Under the “80-20 rule,” if the number of inpatient care days of hospice care furnished by us to Medicare hospice beneficiaries under a unique provider number exceeds 20% of the total days of hospice care furnished by us to all Medicare hospice beneficiaries for both inpatient and in-home care, Medicare payments to us for inpatient care days exceeding the inpatient cap will be reduced to the routine home care rate, with excess amounts due back to Medicare. This determination is made annually based on the twelve-month period beginning on October 1 each year. Our Medicare hospice reimbursement is also subject to a cap amount calculated at the end of the hospice cap period, based on the twelve-month period beginning on October 1 each year, which determines the maximum allowable payments per provider.
On July 29, 2021, CMS released the final rule for fiscal year 2022. The final hospice payment update was a 2.0% increase of payment rates, which applied a 2.7% market basket update and a 0.7% decrease for productivity. The final rule also increased the aggregate cap value of $31,297.61 for fiscal year 2022.
On July 27, 2022, CMS released the final rule for fiscal year 2023 to update payment rates and the wage index. The final hospice payment update is an increase of 3.8%, which applies a 4.1% market basket update and a 0.3 percentage point reduction for productivity. Hospice agencies that fail to meet quality reporting requirements will receive a two percentage point reduction to the annual market basket update. The final rule increased the aggregate cap value of $32,486.92, as compared to $31,297.61 for the fiscal year 2022.
Long-Term Acute Care Hospitals
All Medicare payments to our LTACHs are made in accordance with a PPS specifically applicable to LTACHs, referred to as “LTACH-PPS.” The LTACH-PPS was established by CMS final regulations published in 2002, that require each patient discharged from an LTACH to be assigned a distinct long-term care diagnosis-related group (“MS-LTC-DRG”), which take into account (among other things) the severity of a patient's condition. Our LTACHs are paid a predetermined fixed amount based upon the assigned MS-LTC-DRG (adjusted for area wage differences), which includes adjustments for short stay and high cost outlier patients (described in further detail below). The payment amount for each MS-LTC-DRG classification is intended to reflect the average cost of treating a Medicare patient assigned to that MS-LTC-DRG in an LTACH.
Adjustments to MS-LTC-DRG payments might include:
•Short Stay Outlier Policy. CMS has established a modified payment methodology for Medicare patients with a length-of-stay less than or equal to five-sixths of the geometric average length-of-stay for that particular MS-LTC-DRG, referred to as a short stay outlier, or “SSO.” When LTACH-PPS was established, SSO cases were paid based on the lesser of (1) 120% of the average cost of the case; (2) 120% of the LTC-DRG specific per diem amount multiplied by the patient’s length-of-stay; or (3) the full LTC-DRG payment. CMS modified the payment methodology for discharges occurring on or after July 1, 2006, which changed the limitation in clause (1) above to reduce payment for SSO cases to 100% (rather than 120%) of the average cost of the case, and also added a fourth limitation, potentially further limiting payment for SSO cases at a per diem rate derived from blending 120% of the MS-LTC-DRG specific per diem amount with a per diem rate based on the general acute care hospital inpatient prospective payment system, or “IPPS”. Under this methodology, as a patient’s length-of-stay increases, the percentage of the per diem amount based upon the IPPS component will decrease and the percentage based on the MS-LTC-DRG component will increase.
•High Cost Outliers. Some cases are extraordinarily costly, producing losses that may be too large for healthcare providers to offset. Cases with unusually high costs, referred to as “high cost outliers,” receive a payment adjustment to reflect the additional resources utilized. CMS provides an additional payment if the estimated costs for the patient exceed the adjusted MS-LTC-DRG payment plus a fixed-loss amount that is established in the annual payment rate update.
•Interrupted Stays. An interrupted stay occurs when an LTACH patient is admitted upon discharge to a general acute care hospital, inpatient rehab facility, skilled nursing facility or a swing-bed hospital and returns to the same LTACH within a specified period of time. If the length-of-stay at the receiving provider is equal to or less than the applicable fixed period of time, it is considered to be an interrupted stay case and is treated as a single discharge for the purposes of payment to the LTACH.
Freestanding, HwH and Satellite LTACHs
LTACHs may be organized and operated as freestanding facilities or as a hospital within a hospital, or “HwH”. A HwH is an LTACH that is located on the "campus" of another hospital, meaning the physical area immediately adjacent to a hospital’s main buildings, other areas and structures that are not strictly contiguous to a hospital’s main buildings but are located within 250 yards of its main buildings, and any other area determined, on an individual case basis by the applicable CMS regional office, to be part of a hospital's campus. An LTACH that uses the same Medicare provider number of an affiliated “primary site” LTACH is known as a “satellite”. Under Medicare policy, a satellite LTACH must be located within 35 miles of its primary site LTACH and be administered by such primary site LTACH. As of December 31, 2022, we had a total of 12 LTACH facilities, with 367 licensed beds. Ten of our LTACH facilities were classified as HwHs and two were classified as freestanding. Of the 12 facilities, eight were located in Metropolitan Statistical Area (“MSA”) or urban areas and four were located in non-MSA or rural areas. One of our HwH facilities was a satellite location of a parent hospital located in an MSA. Both of our freestanding locations are in MSAs, with one being located adjacent to a tertiary care facility.
An LTACH must have an average inpatient length-of-stay for Medicare patients (including both Medicare covered and non-covered days) of greater than 25 days during each annual cost reporting period. LTACHs that fail to exceed an average length-of-stay of 25 days during any cost reporting period may be paid under the general acute care hospital IPPS.
Fiscal Year Rates
On August 2, 2021, CMS issued a final rule for the fiscal year 2022. LTACH-PPS payments increased by 1.1% for fiscal year 2022. LTACH-PPS payments for fiscal year 2022 for discharges paid using the standard LTACH payment rate increased by 0.9% due primarily to the annual standard Federal rate update for fiscal year 2022 of 1.9% and 0.8% decrease in high cost outlier payments. LTACH-PPS payments for fiscal year 2022 for discharges paid using the site neutral payment rate increased by 3%.
On August 1, 2022, CMS issued the final rule for the fiscal year 2023 stating LTACH-PPS payments will increase 2.3% due primarily to the annual standard federal rate update (the productivity-adjusted market basket increase) of 3.8% and a decrease in high cost outlier payments.
In response to COVID-19, the CARES Act suspended the application of site-neutral payments for LTACH admissions that were admitted during the Public Health Emergency ("PHE"). On February 9, 2023, the U.S. Department of Health and Human Services extended the PHE until May 11, 2023.
Medicaid
Medicaid is a joint federal and state funded health insurance program for certain low-income individuals administered by the states. Medicaid reimburses health care providers using a number of different systems, including cost-based, prospective payment and negotiated rate systems. Rates are also subject to adjustment based on statutory and regulatory changes, administrative rulings, government funding limitations and interpretations of policy by individual state agencies.
Non-Governmental Payors
Payments from non-governmental payor sources are based on episodic-based rates or per visit based rates depending upon the terms and conditions of the payor. This reimbursement category includes payors such as insurance companies, workers’ compensation programs, health maintenance organizations, preferred provider organizations, other managed care companies and employers, as well as payments received directly from patients.
Patients are generally not responsible for any difference between customary charges for our services and amounts paid by Medicare and Medicaid programs and the non-governmental payors, but are responsible for services not covered by these programs or plans, as well as co-payments for deductibles and co-insurance obligations of their coverage. Patient out-of-pocket costs for the payment of deductibles and co-insurance have increased in recent years. Collection of amounts due from individuals is typically more difficult than collection of amounts due from government or business payors. Because the majority of our billed services are paid in full by Medicare, Medicaid or private insurance, co-payments from patients do not represent a material portion of our billed revenue and corresponding accounts receivable. To further reduce their health care costs, most commercial payors such as insurance companies, health maintenance organizations, preferred provider organizations and other managed care companies have negotiated discounted fee structures or fixed amounts for services performed, rather than paying health care providers the amounts normally billed.
In response to the challenges associated with collecting from commercial payors, we began negotiating higher reimbursement rates with a majority of our commercial payors. As of December 31, 2022, our managed care contracts included over 325 different payors between all of our divisions. If we are unable to continue negotiating higher reimbursement rates with commercial payors, if commercial payor continues to outpace traditional governmental payor growth, or if commercial payors reduce health care costs through reduction in home health reimbursement, it could have a material adverse impact on our financial results.
Human Capital Resources
Our culture and values, along with approximately 30,000 employees in 37 states and the District of Columbia, are our most valuable assets. In pursuit of our Company’s purpose - It’s All About Helping People - we strive to provide exceptional care and unparalleled service to patients and families who have placed their trust in us. We are led in this pursuit by our operating philosophy, rooted in the principles of service excellence, and our actions are guided by our Six Pillars of Excellence:
People: Ours is a business of people helping people.
Service: We are here to serve patients, families and communities.
Quality: In all we do, our focus is quality above all else.
Efficiency: We operate with discipline and efficiency to remain strong.
Growth: It is our obligation to care for as many as we can.
Ethics: We conduct ourselves with the highest standards of ethics, integrity and professionalism.
In order to ensure we live our values and our culture stays unique and strong, our Board of Directors and executive team have committed substantial efforts to focus on our human capital resources. These are some of the key aspects of our human capital strategy:
Employee Recruitment & Retention
We work diligently to attract the best talent from a diverse range of sources in order to meet the current and future demands of our businesses. We have established relationships with over 350 hospitals and hospital systems, world-class universities, trade schools, professional associations, and industry groups to proactively attract talent.
We provide a strong employee value proposition that leverages our unique culture, collaborative working environment, shared sense of purpose, and desire to do the right thing to attract talent to our Company.
As of December 31, 2022, we employed approximately 30,000 employees, which includes 13,900 in our home health operations, 3,500 in our hospice operations, 7,500 in our home and community-based services operations, and 1,000 in our LTACHs.
Diversity, Equity, and Inclusion
We aspire to be a diverse, equitable, and inclusive workplace, where people feel empowered and free to make the most of their talents. As we invest in our employees, diversity, equity, and inclusion ("DE&I") are major priorities. Women make up more than 87% of our workforce, and approximately 36% identify as a minority. Our senior management team is 62% women, and approximately 20% identify as a minority. In addition, our Board of Directors is 22% women and 11% minority, and women serve as the chairs of our Nominating and Governance Committee and Audit Committee.
The success of our Company has been, and will continue to be, highly dependent upon our ability to maintain a culture where we value, respect, and provide fair treatment and equal opportunities for all employees. By recognizing and celebrating our differences, we cultivate an environment that welcomes a diverse group of talented individuals.
In the interest of furthering these goals, the Company established the role of Vice President and Chief Diversity Officer in 2021. This individual serves as the chair for our Diversity, Equity, and Inclusion Committee, which was established in 2020 to formulate and implement actionable diversity, equity, and inclusion initiatives for the Company in pursuit of our DE&I objectives:
•Provide opportunities to increase DE&I awareness and education.
•Increase diversity through hiring, retention, and promotion of employees.
•Demonstrate commitment to a diverse, inclusive work environment.
•Identify and reduce barriers impeding the employment, opportunity, or inclusion of individuals.
Compensation Programs and Employee Benefits
The main objective of our compensation and benefits programs is to provide a compensation and benefits package that will attract, retain, motivate, and reward employees who succeed in operating in a highly competitive and challenging environment. We seek to do this by linking annual changes in compensation to our overall performance, as well as each individual’s contribution to the results achieved. The emphasis on our overall performance is intended to align the employee’s interests with the provision of quality patient care and our success. We also seek fairness in total compensation that is competitive and consistent with employee positions, skill levels, knowledge, and geographic locations with reference to external comparisons, internal comparisons, and the relationship between management and non-management remuneration.
We are committed to providing comprehensive benefit options and it is our intention to offer benefits that will allow our employees and their families to live healthier and more secure lives. Some examples of our wide-ranging benefits offered are: medical insurance, participation in our 401 (k) plan, prescription drug benefits, dental insurance, vision insurance, hospital indemnity insurance, accident insurance, critical illness insurance, life insurance, disability insurance, health savings accounts, flexible spending accounts, and identity theft insurance.
Training and Education
All new employees and contractors, and all existing employees and contractors on an annual basis, must complete a one-hour program on our corporate compliance and ethics program. We also require annual distribution of the Code of Conduct and Ethics, and require each employee, including contractors, to acknowledge their receipt, review, and attestation to abide by the terms of the Code.
To empower employees to unleash their potential, we provide a range of development programs and opportunities, skills, and resources that our employees need and desire to be successful. For example, our iTrain platform provides additional specialized training in areas such as eligibility for home health and hospice, HIPAA, privacy, and security, clinical and quality, coding, billing and reimbursement, and sales and marketing through webcasts, online courses and instructor-led sessions. Additionally, our Excellence by Design program provides a robust and formal curriculum for employees to obtain a deeper understanding of all facets of the Company, including accounting and finance, employee recruitment and retention,
regulatory and licensure compliance, and supervisory management training, to support the development of the next generation of our management and leaders. Participants in our training programs are able to develop more advanced skills leading to higher contribution and satisfaction within their roles, while helping us to identify top performers, improve employee performance and retention, increase our organizational learning, and support the promotion of our current employees within our Company. During the twelve months ended December 31, 2022, a total of 42,462 employees and contract workers received education and training through company-provided programs, with an average of 30 courses being completed by each participant with an average of 21 training hours.
We also maintain a full suite of compliance policies and procedures. We perform a routine review and revision of our policies and procedures to stay abreast of both internal and external developments. All employees receive updated policies and procedures for review, specifically those that are directly related to job function. Our compliance policies include a Code of Conduct related to sales, marketing, education, and entertainment activities with referral sources. These policies establish rules and procedures governing our employees’ interactions with current and potential referral sources as well as those with the ability to influence or recommend a referral to one of our providers, helping ensure current regulations and laws are followed.
Corporate Social Responsibility
Our values, rooted in trust, integrity, and service, lay the foundation for our commitment to corporate social responsibility. Beyond providing quality healthcare to some of the most vulnerable members of our society, we believe that to be truly successful, it's crucial that we do our part to improve healthcare in the United States. For us, that means we are contributing our time, talent, and resources to strengthen the communities where we do business, and we are engaging in ethical practices. We are committed to the principle that when our local communities thrive, we succeed.
Across the country, our agencies and employees contribute to worthy causes both locally and nationally, including United Way, Boys & Girls Clubs, Toys for Tots, and the American Heart Association, among countless other worthy social organizations. In 2022, we made approximately $2.0 million in charitable contributions. From a national perspective, we are proud to be among a handful of global companies and brands that sponsor the American Red Cross at its highest sponsorship level - the Annual Disaster Giving Program, including monetary donations, volunteering, sponsorships, regular shared communications, shared trainings, and co-branded initiatives.
Compliance and Business Ethics
We are firmly committed to the highest standards of ethics, integrity, professionalism, and compliance. Our compliance and ethics program includes auditing and monitoring, enhanced lines of communication between the Chief Compliance Officer and employees, consistency in the standards we set for ethics, and compliance and increased awareness of these standards through a robust training and education program. We also operate an independent third-party “Integrity Line” that encourages employees to report any concerns about unethical behavior, conflicts of interest, harassment, discrimination, abuse, or workplace safety violations.
Our code of conduct and ethics provides guidance to all of our employees, contractors and board members on carrying out daily activities within appropriate ethical and legal standards. The code of conduct and ethics was developed to help ensure we meet our ethical standards and comply with applicable laws, rules and regulations. It is a critical component of our overall compliance and ethics program and is an important resource - especially in situations where questions may arise about determining the right thing to do.
Safety, Health, & Wellness
The health and safety of our clinicians and other employees is our highest priority, and this is consistent with our operating philosophy. We continue to undertake numerous tangible measures to promote the safety of our clinicians and other employees. For example, we continue to provide our clinicians across the country with personal protective equipment and other supplies needed to properly treat our patients based on the patient's clinical diagnosis. In addition to offering health insurance benefits options to all full-time employees, we also offer numerous other health and wellness benefit options including dental insurance, optical insurance, company-paid time off, company-paid holidays, tuition reimbursement, an employee hardship financial-assistance program, employee discount programs for health and wellness service memberships, company-paid short term disability insurance, and preferred rates on life, disability, and other insurance programs.
Government Regulations
General
The health care industry is highly regulated and we are required to comply with federal, state and local laws which significantly affect our business. These laws and regulations are extremely complex and, in many instances, the industry does not have the benefit of significant regulatory or judicial interpretation. Regulations and policies frequently change, and
we monitor these changes through trade and governmental publications and associations. The significant areas of federal and state regulation that could affect our ability to conduct our business include the following:
•Medicare and Medicaid participation and reimbursement regulations;
•the federal Anti-Kickback Statute and similar state laws;
•the federal Stark Law and similar state laws;
•false claims laws and regulations;
•HIPAA;
•laws and regulations imposing civil monetary penalties;
•environmental health and safety laws;
•licensing laws and regulations; and
•laws and regulations governing certificates of need and permits of approval.
If we fail to comply with these applicable laws and regulations, we could suffer civil or criminal penalties, including the loss of our licenses to operate and our ability to participate in federal and state health care programs, which would materially adversely affect our financial condition and results of operations. Although we believe we are in material compliance with all applicable laws and regulations, these are complex matters and a review of our practices by a court or law enforcement or regulatory authority could result in an adverse determination that could harm our business. Furthermore, the laws applicable to us are subject to change, interpretation, and amendment; which could adversely affect our ability to conduct our business.
Medicare Participation
To participate in the Medicare program and receive Medicare payments, our agencies and facilities must comply with regulations promulgated by CMS. Among other things, these requirements, known as “conditions of participation,” relate to the type of facility, its personnel, and its standards of medical care. While we intend to continue to participate in the Medicare reimbursement programs, we cannot guarantee that our agencies, facilities, and programs will continue to qualify for Medicare participation.
Federal Anti-Kickback Statute
Certain provisions of the Social Security Act, commonly referred to as the Anti-Kickback Statute, prohibit the payment or receipt of anything of value in return for the referral of patients or arranging for the referral of patients, or in return for the recommendation, arrangement, purchase, lease, or order of items or services that are covered by a federal health care program such as Medicare and Medicaid. Violation of the Anti-Kickback Statute is a felony and sanctions include imprisonment of up to five years, criminal fines of up to $25,000, civil monetary penalties of up to $50,000 per act plus three times the amount claimed or three times the remuneration offered and exclusion from federal health care programs (including the Medicare and Medicaid programs). Many states have adopted similar prohibitions against payments intended to induce referrals of Medicaid and other third-party payor patients.
The OIG has published numerous “safe harbors” that exempt some practices from enforcement action under the Anti-Kickback Statute. These safe harbors exempt specified activities, including bona-fide employment relationships, contracts for the rental of space or equipment, personal service arrangements, and management contracts, so long as all of the requirements of the safe harbor are met. The OIG has recognized that the failure of an arrangement to satisfy all of the requirements of a particular safe harbor does not necessarily mean that the arrangement violates the Anti-Kickback Statute. Instead, each arrangement is analyzed on a case-by-case basis, which is very fact specific. While we operate our business to comply with the prohibitions of the Anti-Kickback Statute, we cannot guarantee that all our arrangements will satisfy a safe harbor or will ultimately be viewed as being compliant with the Anti-Kickback Statute.
We endeavor to conduct our operations in compliance with federal and state health care fraud and abuse laws, including the Anti-Kickback Statute and similar state laws. However, our practices may be challenged in the future and the fraud and abuse laws may be interpreted in a way that finds us in violation of these laws. If we are found to be in violation of the Anti-Kickback Statute, we could be subject to civil and criminal penalties, and we could be excluded from participating in federal health care programs such as Medicare and Medicaid. The occurrence of any of these events could significantly harm our business and financial condition and results of operations.
Stark Law
Congress has passed significant prohibitions against physician self-referrals of patients for certain designated health care services, commonly known as the Stark Law, which prohibits a physician from making referrals for particular health care services (called designated health services) to entities with which the physician, or an immediate family member of the physician, has a financial relationship.
The term “financial relationship” is defined very broadly to include most types of ownership or compensation relationships. The Stark Law defines a financial relationship to include: (1) a physician’s ownership or investment interest in an entity and (2) a compensation relationship between a physician and an entity. Under the Stark Law, financial relationships include both direct and indirect relationships. The Stark Law also prohibits the entity receiving the referral from seeking payment under the Medicare or Medicaid programs for services rendered pursuant to a prohibited referral. If an entity is paid for services rendered pursuant to a prohibited referral, it may incur civil penalties and could be excluded from participating in the Medicare or Medicaid programs. If an arrangement is covered by the Stark Law, the requirements of a Stark Law exception must be met for the physician to be able to make referrals to the entity for designated health services and for the entity to be able to bill for these services.
“Designated health services” under the Stark Law is defined to include home health services, inpatient and outpatient hospital services, clinical laboratory services, physical therapy services, occupational therapy services, radiology services (including magnetic resonance imaging, computerized axial tomography scans and ultrasound services), radiation therapy services and supplies, and the provision of durable medical equipment and supplies, parenteral and enteral nutrients, equipment and supplies, prosthetics, orthotics and prosthetic devices and supplies, and outpatient prescription drugs.
Physicians refer patients to us for several Stark Law designated health services, including home health services, inpatient and outpatient hospital services and physical therapy services. We have compensation arrangements with some of these physicians or their professional practices in the form of medical director and consulting agreements. We also have operations owned by joint ventures in which physicians have an investment interest. In addition, other physicians who refer patients to our agencies and facilities may own shares of our stock. As a result of these relationships, we could be deemed to have a financial relationship with physicians who refer patients to our facilities and agencies for designated health services. If so, the Stark Law would prohibit the physicians from making those referrals and would prohibit us from billing for the services unless a Stark Law exception applies.
The Stark Law contains exceptions for certain physician ownership or investment interests and physician compensation arrangements. If an investment relationship or compensation agreement between a physician, or a physician’s immediate family member, and the subject entity satisfies all requirements for a Stark Law exception, the Stark Law will not prohibit the physician from referring patients to the entity for designated health services. The exceptions for a physician investment relationship include ownership in an entire hospital and ownership in rural providers. The exceptions for compensation arrangements cover employment relationships, personal services contracts and space and equipment leases, among others. We believe our physician investment relationships and compensation arrangements with referring physicians meet the requirements as exceptions under the Stark Law and that our operations comply with the Stark Law.
The Stark Law also includes an exception for a physician’s ownership or investment interest in certain entities through the ownership of stock that is listed on the New York Stock Exchange or NASDAQ. If the ownership meets certain other requirements, the Stark Law will not apply to prohibit the physician from referring to the entity for designated health services. For example, this Stark Law exception requires that the entity issuing the stock have at least $75.0 million in stockholders’ equity at the end of its most recent fiscal year or on average during the previous three fiscal years. As of December 31, 2022, 2021 and 2020, we have in excess of $75.0 million in stockholders’ equity.
If an entity violates the Stark Law, it could be subject to civil penalties of up to $15,000 per prohibited claim and up to $100,000 for knowingly entering into certain prohibited referral schemes. The entity also may be excluded from participating in federal health care programs (including Medicare and Medicaid). There are no criminal penalties for violations of Stark Law. If the Stark Law was found to apply to our relationships with referring physicians and those relationships did not meet the requirement of an exception under the Stark Law, we would be required to restructure these relationships or refuse to accept referrals for designated health services from these physicians. If we were found to have submitted claims to Medicare or Medicaid for services provided pursuant to a referral prohibited by the Stark Law, we would be required to repay any amounts we received from Medicare for those services and could be subject to civil monetary penalties. Further, we could be excluded from participating in Medicare and Medicaid. If we were required to repay any amounts to Medicare, subjected to fines, or excluded from the Medicare and Medicaid Programs, our business and financial condition would be harmed significantly.
Many states have physician relationship and referral statutes that are similar to the Stark Law. Some of these laws generally apply without regard to whether the payor is a governmental body (such as Medicare) or a commercial party (such as an insurance company). While we believe that our operations are structured to comply with applicable state laws with respect to physician relationships and referrals, any finding that we are not in compliance with these state laws could require us to change our operations or could subject us to penalties. This, in turn, could have a significantly negative impact on our operations.
False Claims
The submission of claims to a federal or state health care program for items and services that are “not provided as claimed” may lead to the imposition of civil monetary penalties, criminal fines and imprisonment and/or exclusion from participation in state and federally funded health care programs, including the Medicare and Medicaid programs, under false claims statutes such as the federal False Claims Act. Under the federal False Claims Act, actions against a provider can be initiated by the federal government or by a private party on behalf of the federal government. These private parties are often referred to as qui tam relators, and relators are entitled to share in any amounts recovered by the government. Both direct enforcement activity by the government and qui tam actions have increased significantly in recent years, increasing the risk that a health care company like us will have to defend a false claims action, pay fines or be excluded from the Medicare and Medicaid programs as a result of an investigation. Many states have enacted similar laws providing for the imposition of civil and criminal penalties for the filing of fraudulent claims. While we operate our business to avoid exposure under the federal False Claims Act and similar state laws, because of the complexity of the government regulations applicable to our industry, we cannot guarantee that we will not be the subject of an action under the federal False Claims Act or similar state law.
Anti-fraud Provisions of the HIPAA
In an effort to combat health care fraud, Congress included several anti-fraud measures in HIPAA. Among other things, HIPAA broadened the scope of certain fraud and abuse laws, extended criminal penalties for Medicare and Medicaid fraud to other federal health care programs and expanded the authority of the OIG to exclude persons and entities from participating in the Medicare and Medicaid programs. HIPAA also extended the Medicare and Medicaid civil monetary penalty provisions to other federal health care programs, increased the amounts of civil monetary penalties and established a criminal health care fraud statute.
Federal health care offenses under HIPAA include health care fraud and making false statements relating to health care matters. Under HIPAA, among other things, any person or entity that knowingly and willfully defrauds or attempts to defraud a health care benefit program is subject to a fine, imprisonment or both. Also under HIPAA, any person or entity that knowingly and willfully falsifies or conceals or covers up a material fact or makes any materially false or fraudulent statements in connection with the delivery of or payment of health care services by a health care benefit plan is subject to a fine, imprisonment or both. HIPAA applies not only to governmental plans but also to private payors.
Administrative Simplification Provisions of HIPAA
HHS’s final regulations governing electronic transactions involving health information are part of the administrative simplification provisions of HIPAA, commonly referred to as the Transaction Standards rule. The rule establishes standards for eight of the most common health care transactions by reference to technical standards promulgated by recognized standards publishing organizations. Under the rule, any party transmitting or receiving health transactions electronically must send and receive data in a single format, rather than the large number of different data formats currently used. This rule applies to us in connection with submitting and processing health claims, and also applies to many of our payors and to our relationships with those payors. We believe that our operations materially comply with the Transaction Standards rule.
These regulatory requirements impose significant administrative and financial obligations on companies like us that use or disclose electronic health information. We have modified our existing HIPAA privacy and security policies and procedures to comply with the HIPAA regulations.
Civil Monetary Penalties
The Secretary of HHS may impose civil monetary penalties on any person or entity that presents, or causes to be presented, certain ineligible claims for medical items or services. The severity of penalties varies depending on the offense, from $2,000 to $50,000 per violation, plus treble damages for the amount at issue and may include exclusion from federal health care programs such as Medicare and Medicaid.
HHS can also impose penalties on a person or entity who offers inducements to beneficiaries for program services, who violates rules regarding the assignment of payments, or who knowingly gives false or misleading information that could reasonably influence the discharge of patients from a hospital. Persons who have been excluded from a federal health care program and who retain ownership in a participating entity, as well as persons who contract with excluded persons may be penalized.
HHS can also impose penalties for false or fraudulent claims and those that include services not provided as claimed. In addition, HHS may impose penalties on claims:
•for physician services that the person or entity knew or should have known were rendered by a person who was unlicensed, or by a person who misrepresented either their qualifications in obtaining their license or their certification in a medical specialty;
•for services furnished by a person who was, at the time the claim was made, excluded from the program to which the claim was made; or
•that show a pattern of medically unnecessary items or services.
Penalties also are applicable in certain other cases, including violations of the federal Anti-Kickback Statute, payments to limit certain patient services and improper execution of statements of medical necessity.
Governmental Review, Audits, and Investigations
DHHS, CMS, DOJ, and other federal and state agencies continue to impose intensive enforcement policies and conduct random and directed audits, reviews, and investigations designed to ensure compliance with applicable healthcare program participation and payment laws and regulations. As a result, we are routinely the subject of such audits, reviews, and investigations.
In addition, CMS engages third party contractors to conduct Additional Documentation Requests ("ADR") and other third party firms, including Unified Program Integrity Contractors ("UPICs"), Zone Program Integrity Contractors (“ZPICs”) and Recovery Audit Contractors (“RACs”), to conduct extensive reviews of claims data and state and Federal Government health care program laws and regulations applicable to healthcare providers. These audits evaluate the appropriateness of billings submitted for payment. Audit contractors identify overpayments resulting from incorrect payment amounts, non-covered services, medically unnecessary services, incorrectly coded services, and duplicate services, and are paid on a contingency basis. In addition to identifying overpayments, audit contractors can refer suspected violations of law to government enforcement authorities.
The Department of Justice, CMS, or other federal and state enforcement and regulatory agencies may conduct additional investigations related to the Company's businesses in the future. These audits and investigations have caused and could potentially continue to cause delays in collections, recoupments, retroactive adjustment to amounts previously paid from governmental payors. Currently, the Company has recorded $12.0 million in other assets, which are from government payors related to the disputed finding of pending ZPIC audits. Additionally, these audits and investigations may subject the Company to sanctions, damages, extrapolation of damage findings, additional recoupments, fines, and other penalties (some of which may not be covered by insurance), termination from the Medicare and Medicaid programs, bars on Medicare and Medicaid payments for new admissions, any of which may, either individually or in the aggregate, have a material adverse effect on the Company's business and financial condition and results of operations.
We cannot predict the ultimate outcome of any regulatory and other governmental audits and investigations. While such audits and investigations are the subject of administrative appeals, the appeals process, even if successful, may take several years to resolve. The Company’s costs to respond to and defend any such audits, reviews and investigations could be significant and are likely to increase in the current enforcement environment.
Environmental, Health, and Safety Laws
We are subject to federal, state, and local regulations governing the storage, use, and disposal of materials and waste products. Although we believe that our safety procedures for storing, handling, and disposing of these hazardous materials comply with the standards prescribed by law and regulation, we cannot completely eliminate the risk of accidental contamination or injury from those hazardous materials. In the event of an accident, we could be held liable for any damages that result, and any liability could exceed the limits or fall outside the coverage of our insurance. We may not be able to maintain insurance on acceptable terms, or at all. We could incur significant costs and the diversion of our management’s attention to comply with current or future environmental laws and regulations. We are not aware of any violations related to compliance with environmental, health and safety laws through 2022.
Licensing
Our agencies and facilities are subject to state and local licensing regulations ranging from the adequacy of medical care to compliance with building codes and environmental protection laws. To assure continued compliance with these various regulations, governmental and other authorities periodically inspect our agencies and facilities. Additionally, health care professionals at our agencies and facilities are required to be individually licensed or certified under applicable state law. We operate our business to ensure that our employees and agents possess all necessary licenses and certifications.
The institutional pharmacy operations within our facility-based services segment are also subject to regulation by the various states in which we conduct the pharmacy business, as well as by the federal government. The pharmacies are regulated under the Food, Drug and Cosmetic Act and the Prescription Drug Marketing Act, which are administered by the United States Food and Drug Administration. Under the Comprehensive Drug Abuse Prevention and Control Act of 1970, administered by the United States Drug Enforcement Administration, as a dispenser of controlled substances, our pharmacy operations must register with the Drug Enforcement Administration, file reports of inventories and transactions and provide adequate security
measures. Failure to comply with such requirements could result in civil or criminal penalties. We are not aware of any violations of applicable laws relating to our institutional pharmacy operations through December 31, 2022.
Certificate of Need and Permit of Approval Laws
In addition to state licensing laws, some states require a provider to obtain a certificate of need or permit of approval prior to establishing, constructing, acquiring, or expanding certain health services, operations, or facilities. In these states, approvals are required for capital expenditures exceeding certain amounts that involve certain facilities or services, including home nursing agencies. The certificate of need or permit of approval issued by the state determines the service areas for the applicable agency or program. The following U.S. jurisdictions require certificates of need or permits of approval for home nursing agencies: Alabama, Alaska, Arkansas, Georgia, Hawaii, Kentucky, Maryland, Mississippi, Montana, New Jersey, New York, North Carolina, Rhode Island, South Carolina, Tennessee, Vermont, Washington, West Virginia, and the District of Columbia. In addition, the states of Louisiana and Mississippi continue to have state issued moratorium on the issuance of new licenses for home nursing agencies that we expect to remain in effect for 2023. As of December 31, 2022, we operated 376 home health and hospice locations in certificates of need or moratorium states, with the majority of locations being in Tennessee, Kentucky, Arkansas, Alabama, and Louisiana, respectively.
State certificate of need and permit of approval laws generally provide that, prior to the addition of new capacity, the construction of new facilities or the introduction of new services, a designated state health planning agency must determine that a need exists for those beds, facilities, or services. The process is intended to promote comprehensive health care planning, assist in providing high quality health care at the lowest possible cost and avoid unnecessary duplication by ensuring that only needed health care facilities and operations are built and opened.
Employees
As of December 31, 2022, we had approximately 30,000 employees, of which 16,000 were full-time. None of our employees are subject to a collective bargaining agreement. We consider our relationships with our employees and independent contractors to be good.
Insurance
We are subject to claims and legal actions in the ordinary course of our business. To cover claims that may arise, we maintain commercial insurance for healthcare professional liability, general liability, automobile liability, employed lawyers liability, fiduciary liability, crime liability, information security and privacy liabilities, and workers’ compensation/employer’s liability in amounts that we believe are appropriate and sufficient for our operations. We maintain claims-made healthcare professional liability and occurrence based general liability insurance that provides primary limits of $1.0 million per incident/ occurrence and $3.0 million in annual aggregate amounts. We maintain workers’ compensation insurance that meets state statutory requirements and provides a primary employer liability limit of $1.0 million to cover claims that may arise in the states in which we operate, excluding Washington. Coverage for workers' compensation matters within the State of Washington is procured from the State's respective mandated program. Under our workers’ compensation insurance policies, the Company maintains a deductible of the first $1.0 million in workers' compensation liability. We maintain automobile liability insurance for all owned, hired and non-owned autos with a primary limit of $1.0 million. In addition, we currently maintain multiple layers of umbrella coverage in the aggregate amount of $40.0 million that provides excess coverage for healthcare professional liability, general liability, automobile liability and employer’s liability. We also maintain directors' and officers' liability insurance in the aggregate amount of $80.0 million. The cost and availability of insurance coverage has varied widely in recent years. While we believe that our insurance policies and coverage are adequate for a business enterprise of our type, we cannot guarantee that our insurance coverage is sufficient to cover all future claims or that it will continue to be available in adequate amounts or at a reasonable cost.
Available Information
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements, and amendments to those reports are available free of charge on our internet website at http://investor.lhcgroup.com as soon as reasonably practicable after such reports are electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). The SEC also maintains an internet site at www.sec.gov that contains such reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. These reports may also be obtained at the SEC’s Public Reference Room at 100 F Street NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room is available by calling the SEC at (800) SEC-0330. Information contained on our website is not part of or incorporated by reference into this Annual Report on Form 10-K.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors.
The risks and uncertainties described below and elsewhere in this Annual Report on Form 10-K could cause our actual results to differ materially from past or expected results and are not the only ones we face. Other risks and uncertainties that we have not predicted or assessed may also adversely affect us.
If any of the negative effects associated with the following risks occur, our earnings, financial condition or business could be materially harmed and the trading price of our common stock could decline, resulting in the loss of all or part of stockholders’ investments.
Risk Factors Related to the Proposed Transaction with UnitedHealth Group
The conditions under the UHG Agreement to UnitedHealth Group’s consummation of the transaction with a subsidiary of UnitedHealth Group may not be satisfied at all or in the anticipated timeframe.
Under the terms of that certain Agreement and Plan of Merger (the “UHG Agreement”) with UnitedHealth Group Incorporated (“UnitedHealth Group”) and Lightning Merger Sub Inc., a wholly owned subsidiary of UnitedHealth Group (“Merger Sub”), dated March 28, 2022, the consummation of our transaction with Merger Sub is subject to customary conditions. Satisfaction of certain of the conditions, including receipt of the required regulatory approvals, is not within our control, and difficulties in otherwise satisfying the conditions may prevent, delay or otherwise materially adversely affect the consummation of the transaction. It also is possible that an event, occurrence, revelation or development of a state of circumstances or facts since the date of the UHG Agreement may have or reasonably be expected to have a material adverse effect (as defined in the UHG Agreement) on the Company, the non-occurrence of which is a condition to the consummation of the transaction. We cannot predict with certainty whether and when any of the required conditions will be satisfied. If the transaction does not receive, or timely receive, the required regulatory approvals and clearances, or if another event occurs delaying or preventing the transaction, such delay or failure to complete the transaction may create uncertainty or otherwise have negative consequences that may materially and adversely affect our sales, financial condition and results of operations, as well as the price per share for our common stock.
While the proposed transaction is pending, we are subject to business uncertainties and contractual restrictions that could disrupt our business.
Whether or not the proposed transaction is consummated, the proposed transaction may disrupt our current plans and operations, which could have an adverse effect on our business and financial results. The pendency of the transaction may also divert management’s attention and our resources from ongoing business and operations and our employees and other key personnel may have uncertainties about the effect of the pending transaction, and the uncertainties may impact our ability to retain, recruit and hire key personnel while the transaction is pending or if it fails to close. We may incur unexpected costs, charges or expenses resulting from the transaction. Furthermore, we cannot predict how our customers, vendors or strategic partners will view or react to the transaction upon consummation. If we are unable to reassure our customers, vendors and strategic partners to continue their relationships with us, our revenues, financial condition and results of operations may be adversely affected. The preparations for integration between UnitedHealth Group and us have placed, and we expect will continue to place a significant burden on many of our teammates and on our internal resources. If, despite our efforts, key teammates depart because of these uncertainties and burdens, or because they do not wish to remain with the combined company, our business and results of operations may be adversely affected. In addition, whether or not the transaction is consummated, while it is pending we will continue to incur costs, fees, expenses and charges related to the proposed transaction, which may materially and adversely affect our financial condition and results of operations.
In addition, the UHG Agreement generally requires us to operate our business in the ordinary course of business consistent with past practice pending consummation of the merger and also restricts us from taking certain actions with respect to our business and financial affairs without UnitedHealth Group’s consent. Such restrictions will be in place until either the merger is consummated or the UHG Agreement is terminated. For these and other reasons, the pendency of the merger could adversely affect our business and results of operations.
In the event that our proposed transaction with a wholly-owned subsidiary of UnitedHealth Group is not consummated, the trading price of our common stock and our future business and results of operations may be negatively affected.
The conditions to the consummation of the proposed transaction may not be satisfied as noted above. If the transaction is not consummated, we would remain liable for significant transaction costs, and the focus of our management would have been diverted from seeking other potential strategic opportunities, in each case without realizing any benefits of the proposed transaction. For these and other reasons, not consummating the transaction could adversely affect our business and results of operations. Furthermore, if we do not consummate the transaction, the price of our common stock may decline significantly from the current market price, which we believe reflects a market assumption that the transaction will be consummated.
Certain costs associated with the transaction have already been incurred or may be payable even if the transaction is not consummated. Further, a failed transaction may result in negative publicity and a negative impression of us in the investment community. Finally, any disruptions to our business resulting from the announcement and pendency of the transaction, including any adverse changes in our relationships with our customers, vendors and employees or recruiting and retention efforts, could continue or accelerate in the event of a failed acquisition.
Risk Factors Related to Reimbursement and Government Regulation
We derive a majority of our consolidated net service revenue from Medicare. If there are changes in Medicare rates or methods governing Medicare payments for our services, or if we are unable to control our costs, our results of operations and cash flows could decline materially.
For the years ended December 31, 2022 and 2021, we received 59.6% and 59.8%, respectively, of our net service revenue from Medicare. Reductions in Medicare rates or changes in the way Medicare pays for services could cause our net service revenue and net income to decline, perhaps materially. See Part I, Item 1. Reimbursement in this Annual Report on Form 10-K for additional information regarding reimbursements. Reductions in Medicare reimbursement could be caused by many factors, including:
•administrative or legislative changes to the base rates under the applicable prospective payment systems,
•the reduction or elimination of annual rate increases,
•the imposition or increase by Medicare of mechanisms shifting more responsibility for a portion of payment to beneficiaries, such as co-payments,
•adjustments to the relative components of the wage index used in determining reimbursement rates,
•changes to case mix or therapy thresholds,
•the reclassification of home health resource groups or long-term care diagnosis-related groups, or
•further limitations on referrals to long-term acute care hospitals from host hospitals.
We receive fixed payments from Medicare for our services based on the level of care provided to our patients. Consequently, our profitability largely depends upon our ability to manage the cost of providing these services. We cannot be assured that reimbursement payments under governmental payor programs, including Medicare, will remain at levels comparable to present levels or will be sufficient to cover the costs allocable to patients eligible for reimbursement pursuant to these programs. Any such changes could have a material adverse effect on our business and consolidated financial condition, results of operations, and cash flows. Medicare currently provides for an annual adjustment of the various payment rates, such as the base episode rate for our home nursing services, based upon the increase or decrease of the medical care expenditure, which may be less than actual inflation. This adjustment could be eliminated or reduced in any given year.
Additionally, the CARES Act reversed prior reductions in Medicare reimbursement through the 2% sequestration mandated by earlier legislation, and legislation passed in 2022 to phase-in the 2% beginning with Medicare patient claims with dates of service beginning April 1, 2022. Further, Medicare routinely reclassifies home health resource groups and long-term care diagnosis-related groups. As a result of those reclassifications, we could receive lower reimbursement rates depending on the case mix of the patients we service. If our cost of providing services increases by more than the annual Medicare price adjustment, or if these reclassifications result in lower reimbursement rates, our results of operations, net income and cash flows could be adversely impacted.
We are subject to extensive government regulation. Any changes in the laws and regulations governing our business, or the interpretation and enforcement of those laws or regulations, could require us to modify our operations and could negatively impact our operating results and cash flows.
As a provider of health care services, we are subject to extensive regulation on the federal, state, and local levels. The laws and regulations governing our operations, along with the terms of participation in various government programs, regulate how we conduct business, the services we offer, and our interactions with patients and other providers. See Part I, Item 1. Government Regulations in this Annual Report on Form 10-K for additional information concerning applicable laws and regulations. These laws and regulations, and their interpretations, are subject to frequent change. Changes in existing laws, regulations, their interpretations or the enactment of new laws or regulations could increase our costs of doing business, disrupt our business practices and cause our net income to decline. If we fail to comply with these applicable laws and regulations, we could suffer civil or criminal penalties, including the loss of our licenses to operate and our ability to participate in federal and state reimbursement programs. Furthermore, complying with these regulations requires significant compliance related costs.
We cannot predict the effect that health care reform and other changes in government programs may have on our business, financial condition, or results of operations.
The laws and regulations governing our operations are subject to constant change as a result of continued healthcare reform. Health care reform and other changes can result in significant costs to us, require us to change our methods of doing business and may be difficult to comply with. While we cannot predict the extent of future health care reform and changing healthcare laws or its impact on our business, financial condition, or results of operations, such reform and changes could materially and adversely affect us. Any proposed federal health care reforms could have a meaningful impact on our business.
In addition, various health care reform proposals similar to recent federal reforms have also emerged at the state level, including in several states in which we operate. We cannot predict with certainty what health care initiatives, if any, will be implemented at the state level, or what the ultimate effect of state health care reform or any future legislation or regulation may have on us or on our business and consolidated financial condition, results of operations and cash flows.
There are also continuing efforts to reform governmental health care programs that could result in major changes in the health care delivery and reimbursement system on a national and state level, including changes directly impacting the reimbursement systems for our home health and hospice care services. Though we cannot predict what, if any, reform proposals will be adopted, healthcare reform and legislation may have a material adverse effect on our business and our financial condition, results of operations, and cash flows through decreasing payments made for our services.
Changes in our “Quality of Patient Care Star Ratings” could adversely affect our business.
CMS has instituted a star rating methodology for home health agencies to meet the Patient Protection and Affordable Care Act's ("PPACA") call for more transparent public information on provider quality. All Medicare-certified home health agencies would be eligible to receive a star rating (from 1 to 5 stars) based on a number of quality measures, such as timely initiation of care, drug education provided to patients, fall risk assessment, depression assessments, improvements in bed transferring, and bathing, among others. The “Quality of Patient Care Star Ratings” were first published in July 2015, and are updated quarterly thereafter based upon new data that is published with the ratings on the “Home Health Compare” section of the medicare.gov website. While we are pleased with the ratings received by our home health agencies and are striving to improve our results, failing to maintain satisfactory star rating scores could affect our rates of reimbursement and have a material adverse effect on our business and consolidated financial condition, results of operations, and cash flows.
We face reviews, audits and investigations under our contracts with federal and state government agencies and private payors, and these audits could have adverse findings that may negatively impact our business.
We are subject to various routine and non-routine governmental reviews, audits and investigations. CMS engages third party contractors to conduct ADRs and other third party firms, including ZPICs and RACs, to conduct extensive reviews of claims data and non-medical and other records to identify potential improper payments under the Medicare program. In recent years, federal and state civil and criminal enforcement agencies have heightened and coordinated their oversight efforts related to the health care industry, including with respect to referral practices, cost reporting, billing practices, joint ventures and other financial relationships among health care providers. Although we have invested substantial time and effort in implementing policies and procedures to comply with laws and regulations, we could be subject to liabilities arising from violations. A violation of the laws governing our operations, or changes in the interpretation of those laws, could result in the imposition of fines, civil or criminal penalties, and the termination of our rights to participate in federal and state-sponsored programs or the suspension or revocation of our licenses to operate. Our costs to respond to and defend reviews, audits, and investigations may be significant and could have a material adverse effect on our business and consolidated financial condition, results of operations, and cash flows. Moreover, an adverse review, audit, or investigation could result in:
•required refunding or retroactive adjustment of amounts we have been paid pursuant to the federal or state programs or from private payors,
•state or federal agencies imposing fines, penalties, and other sanctions on us,
•loss of our right to participate in the Medicare program, state programs, or one or more private payor networks, or
•damage to our business and reputation in various markets.
These results could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows.
If any of our agencies or facilities fail to comply with the conditions of participation in the Medicare program, that agency or facility could be terminated from Medicare, which could adversely affect our net service revenue and net income.
Our agencies and facilities must comply with the extensive conditions of participation in the Medicare program. These conditions of participation vary depending on the type of agency or facility, but, in general, require our agencies and facilities to meet specified standards relating to personnel, patient rights, patient care, patient records, administrative reporting, and legal compliance. If an agency or facility fails to meet any of the Medicare conditions of participation, that agency or facility may receive a notice of deficiency from the applicable state surveyor. If that agency or facility then fails to institute a plan of
correction to correct the deficiency within the time period provided by the state surveyor, that agency or facility could be terminated from the Medicare program. We respond in the ordinary course to deficiency notices issued by state surveyors and none of our facilities or agencies have ever been terminated from the Medicare program for failure to comply with the conditions of participation. Any termination of one or more of our agencies or facilities from the Medicare program for failure to satisfy the Medicare conditions of participation could materially and adversely affect our net service revenue and net income.
Our revenue may be negatively impacted by a failure to appropriately document services, resulting in delays in reimbursement.
Reimbursement to us is conditioned upon providing the correct administrative and billing codes and properly documenting the services themselves, including the level of service provided, and the necessity for the services. If incorrect or incomplete documentation is provided or inaccurate reimbursement codes are utilized, this could result in nonpayment for services rendered and could lead to allegations of billing fraud. This could subsequently lead to civil and criminal penalties, including exclusion from government healthcare programs, such as Medicare and Medicaid. In addition, third-party payors may disallow, in whole or in part, requests for reimbursement based on determinations that certain amounts are not covered, services provided were not medically necessary, or supporting documentation was not adequate.
The inability of our long-term acute care hospitals to maintain their certification as long-term acute care hospitals could have an adverse effect on our results of operations and cash flows.
Following the expiration of exemptions provided under the CARES Act, if our LTACHs fail to meet or maintain the standards for Medicare certification as LTACHs, such as for average minimum patient length-of-stay and restrictions on sources of referral (e.g. the 25 Percent rule), they will receive reimbursement under the prospective payment system applicable to general acute care hospitals rather than the system applicable to long-term acute care hospitals. Payments at rates applicable to general acute care hospitals would likely result in our LTACHs receiving less Medicare reimbursement than they currently receive for their patient services. If any of our LTACHs were subject to payment as general acute care hospitals, our net service revenue and net income would decline.
Our hospice operations are subject to two annual Medicare caps. If any of our hospice providers exceeds such caps, our business and consolidated financial condition, results of operations and cash flows could be materially adversely affected.
Overall payments made by Medicare to each hospice provider number (generally corresponding to each of our hospice agencies) are subject to an inpatient cap amount and an overall payment cap amount, which are calculated and published by the Medicare fiscal intermediary on an annual basis covering the period from October 1 through September 30. If payments received under any of our hospice provider numbers exceeds either of these caps, we may be required to reimburse Medicare for payments received in excess of the caps, which could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows.
If the structures or operations of our joint ventures are found to violate the law, it could have a material adverse impact on our financial condition and consolidated results of operations.
Several of our joint ventures are with hospitals and physicians, which are governed by the federal Anti-Kickback Statute and similar state laws. These anti-kickback statutes prohibit the payment or receipt of anything of value in return for referrals of patients or services covered by governmental health care programs, such as Medicare. The OIG has published numerous safe harbors that exempt qualifying arrangements from enforcement under the federal Anti-Kickback Statute. We have sought to satisfy as many safe harbor requirements as possible in structuring our joint ventures.
Despite our efforts to meet the safe harbor requirements where possible, our joint ventures may not satisfy all elements of the safe harbor requirements. If any of our joint ventures were found to be in violation of federal or state anti-kickback or physician referral laws, we could be required to restructure them or refuse to accept referrals from the physicians or hospitals with which we have entered into a joint venture. We also could be required to repay to Medicare amounts we have received pursuant to any prohibited referrals, and we could suffer civil or criminal penalties, including the loss of our licenses to operate and our ability to participate in federal and state health care programs. If any of our joint ventures were subject to any of these penalties, our business could be materially adversely affected. If the structure of any of our joint ventures were found to violate federal or state anti-kickback statutes or physician referral laws, we may be unable to implement our growth strategy, which could have an adverse impact on our future net income and consolidated results of operations.
The application of state certificate of need and permit of approval regulations and compliance with federal and state licensing requirements could substantially limit our ability to operate and grow our business.
Our ability to expand operations in a state will depend on our ability to obtain a state license to operate. States may have a limit on the number of licenses they issue. For example, Louisiana currently has a moratorium on the issuance of new home
nursing agency licenses. We cannot predict whether the moratorium in Louisiana will be extended. In addition, we cannot predict whether any other states in which we operate, or may wish to operate in the future, may adopt a similar moratorium.
As of December 31, 2022, we operated in 16 states that require health care providers to obtain prior approval, known as a certificate of need or a permit of approval, for the purchase, construction, or expansion of health care facilities, to make certain capital expenditures, or to make changes in services or bed capacity. The failure to obtain any requested certificate of need, permit of approval or other license could impair our ability to operate or expand our business.
Quality reporting requirements may negatively impact Medicare reimbursement.
Many of our business are subject to reporting requirements that if we fail to comply with may negatively impact future Medicare reimbursement. In particular, the PPACA established quality reporting requirements for hospice programs. Failure to submit required quality data will result in a 2 percentage point reduction to the market basket percentage increase for that fiscal year. The Improving Medicare Post-Acute Care Transformation Act of 2014 (the “IMPACT Act”) established requirements for home health agencies and other providers to submit standardized data. Failure to report data as required by the IMPACT ACT will subject providers to a 2% reduction in market basket prices then in effect. Similarly, CMS established a new “Pay-for-Reporting Performance Requirement” with which provider compliance with quality reporting program requirements can be measured. Home health agencies that do not submit quality measure data to CMS are subject to a 2% reduction in their annual home health payment update percentage. There can be no assurance that all of our agencies will continue to meet quality reporting requirements in the future which may result in one or more of our agencies seeing a reduction in its Medicare reimbursements. Regardless, these reporting requirements are costly and we, like other healthcare providers, will incur meaningful expenses in an effort to comply with these and future quality reporting requirements.
Risk Factors Related to Operations and our Growth Strategy
The ongoing COVID-19 pandemic has materially impacted our business, and could continue to impact our business in the future.
While the level of disruption caused by, and the economic impact of, the COVID-19 pandemic lessened in 2022, there is no assurance that the pandemic will not worsen again, included as a result of the emergence of new strains of the virus, or another health related emergency will not emerge. Any worsening of the pandemic, a new health related emergency and their effects on the economy could further impact our business, financial condition and results of operations.
We face competition, including from competitors with greater resources, which may make it difficult for us to compete effectively as a provider of post-acute health care services.
We compete with national, regional, and local home nursing and hospice companies, hospitals and other businesses that provide post-acute health care services, some of which are large, established companies that have significantly greater resources than we do. We expect our competitors to develop joint ventures with providers, referral sources, and payors, which could result in increased competition. The introduction by our competitors of new and enhanced service offerings, in combination with industry consolidation and the development of strategic relationships by our competitors, could cause a decline in our net service revenue and loss of market acceptance of our services. Future increases in competition from existing competitors or new entrants may limit our ability to maintain or increase our market share. Additionally, we compete with a number of non-profit organizations that can finance acquisitions and capital expenditures on a tax-exempt basis or receive charitable contributions that are unavailable to us. We may not be able to compete successfully against current or future competitors and competitive pressures may have a material adverse impact on our business, financial condition, and results of operations.
Managed care organizations and other third party payors continue to consolidate, which enhances their ability to influence the delivery of health care services. Consequently, the health care needs of patients in the United States are increasingly served by a smaller number of managed care organizations, and these organizations generally enter into service agreements with a limited number of providers. Our business and consolidated financial condition, results of operations, and cash flows could be materially adversely affected if these organizations do not contract with us as a provider and/or engage our competitors as a preferred or exclusive providers. In addition, should private payors, including managed care payors, seek to negotiate additional discounted fee structures or the assumption by health care providers of all or a portion of the financial risk through prepaid capitation arrangements, our business and consolidated financial condition, results of operations, and cash flows could be materially adversely affected.
If we are unable to react competitively to new developments, our operating results may suffer. State certificates of need or permit of approval laws often limit the ability of competitors to enter into a given market, are not uniform throughout the United States and are frequently the subject of efforts to limit or repeal such laws. If states remove existing certificates of need or permit of approvals, we could face increased competition in these states. There can be no assurances that states will not seek to eliminate or limit their existing certificates of need or permit of approval programs, which could lead to increased
competition in these states. Further, we may not be able to compete successfully against current or future competitors, which could have a material adverse effect on our business and consolidated financial condition, results of operations, and cash flows.
Changes in the case mix of patients, as well as payor mix and payment methodologies, may have a material adverse effect on our results of operations and cash flows.
The sources and amounts of our patient revenue are determined by a number of factors, including the mix of patients and the rates of reimbursement among payors. Changes in the case mix of the patients, payment methodologies, or payor mix among private pay, Medicare, and Medicaid may significantly affect our results of operations and cash flows.
Our failure to negotiate favorable managed care contracts, or adapt to and comply with innovative reimbursement models, or our loss of existing favorable managed care contracts, could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows.
One of our strategies is to diversify our payor sources by increasing the business we do with managed care companies, and we strive to secure favorable contracts with managed care payors. However, we may not be successful in these efforts and we may not successfully adapt to and comply with increasingly innovative reimbursement models being sought by payors. Additionally, there is a risk that any favorable managed care contracts that we can secure may be terminated on short notice, since managed care contracts typically permit the payor to terminate without cause, typically on 60 days' notice. Such provisions can provide payors with leverage to reduce volume or obtain favorable pricing. Our failure to negotiate, secure, and maintain favorable managed care contracts and our inability to adapt to and comply with innovative reimbursement models could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows.
Shortages in qualified nurses and other health care professionals could increase our operating costs significantly or constrain our ability to grow.
We rely on our ability to attract and retain qualified nurses and other health care professionals. The availability of qualified nurses nationwide has declined in recent years and competition for these and other health care professionals has increased, especially under the healthcare and economic crises experienced during the peak of the COVID-19 pandemic, and, therefore, salary and benefit costs have risen accordingly. Our ability to attract and retain nurses and other health care professionals depends on several factors, including our ability to provide desirable assignments and competitive benefits and salaries. We may not be able to attract and retain qualified nurses or other health care professionals in the future. During the past several years, we have experienced increased costs to attract and retain qualified skilled nursing and paraprofessional personnel and faced challenges in staffing patient care due to reductions in available work force. If the costs of attracting and retaining these professionals and providing them with attractive benefit packages continue to increase or we experience prolonged staffing shortages, our net income could decline. Moreover, if we are unable to attract and retain qualified professionals, the quality of services offered to our patients may decline or our ability to grow may be constrained. In addition, if we expand our operations into geographic areas where health care providers historically have been unionized, or if any of our care center employees become unionized, being subject to a collective bargaining agreement may have a negative impact on our ability to timely and successfully recruit qualified personnel and may increase our operating costs.
Additionally, a number of states require that direct care workers, such as our nurses, receive state-mandated minimum wage and/or overtime pay. Opponents of such policies argue that the new protections will make in-home care more expensive for government programs that pay for such services, and that these new rules and regulations could result in a reduction in covered services. We will continue to evaluate the effect of these various new rules and regulations on our operations.
The loss of certain Board of Directors, executive management, or key employees could have a material adverse effect on our operations and financial performance.
Our success depends upon the continued service of our Board of Directors and employment of our executive management team and key employees and our ability to retain and motivate these individuals. If we lose the services of one or more of our Board of Directors, executive officers, or key employees, we may not be able to successfully manage our business, achieve our business goals, or replace them with equally qualified personnel. The loss of any of our executive officers or key employees could have a material adverse effect on our operations and financial performance. Furthermore, while our board has undertaken succession planning there is no guarantee that such succession planning will be successful and any management succession or transition involves inherent risk that could hinder our strategic planning, execution and future performance.
We may close additional underperforming agencies in the future.
We regularly review the performance of our various agencies. Our review considers the current financial performance, market penetration, forecasted market growth and current and future reimbursement payment forecasts. We will continue to monitor the performance of our agencies on an ongoing basis, and closures may from time to time occur in the future. If we take any further action to close agencies, we will incur additional costs and expenses, which may require us to record significant
charges in future periods. While any such closures would be made in connection with our constant efforts to improve our profitability, associated charges would have a negative impact on our revenue and possibly our operating results during the short-term.
Future acquisitions may be unsuccessful and could expose us to unforeseen liabilities. Further, our acquisition and internal development activity may impose strains on our existing resources.
Our growth strategy involves the acquisition of agencies throughout the United States. These acquisitions involve significant risks and uncertainties, including difficulties integrating acquired personnel and other corporate cultures into our business, the potential loss of key employees or patients of acquired agencies, the delay in payments associated with change in ownership, control, and the internal process of the Medicare fiscal intermediary, and the exposure to unforeseen liabilities of acquired agencies. Additionally, operations that we acquire must be integrated into our various information systems in an efficient and effective manner. If we are unable to integrate and transition any acquired business into our information systems, we could incur unanticipated expenses, suffer disruptions in service, experience regulatory issues, lose revenue from the operation of such business and fail to realize the anticipated benefits of such acquisitions.
Further, the financial benefits we expect to realize from many of our acquisitions are largely dependent upon our ability to improve clinical performance, overcome regulatory deficiencies, and improve the reputation of the acquired business in the community and control costs. We may not be able to fully integrate the operations of the acquired businesses with our current business structure in an efficient and cost-effective manner, having a material adverse effect on our operations. In addition, we may be exposed to unforeseen liabilities of an acquired company, which liabilities may not be covered by insurance or indemnification from sellers and may be material.
In addition, as we continue to expand our markets, our growth could strain our resources, including management, information and accounting systems, regulatory compliance, logistics, and other internal controls. Our resources may not keep pace with our anticipated growth. If we do not manage our expected growth effectively, our future prospects could be affected adversely.
We may face increased competition for attractive acquisition and joint venture candidates.
We intend to continue growing through the acquisition of additional home-based and hospice agencies and the formation of joint ventures with hospitals for the operation of home-based and hospice agencies. We face competition for acquisition and joint venture candidates, which may limit the number of acquisition and joint venture opportunities available to us or lead to the payment of higher prices for our acquisitions and joint ventures. We cannot guarantee that we will be able to identify suitable acquisition or joint venture opportunities in the future or that any such opportunities, if identified, will be consummated on favorable terms, if at all. Without successful acquisitions or joint ventures, our future growth rate could decline. In addition, we cannot guarantee that any future acquisitions or joint ventures, if consummated, will result in further growth.
Federal regulation may impair our ability to consummate acquisitions or open new agencies.
Changes in federal laws or regulations may materially adversely impact our ability to acquire home nursing agencies or open new start-up home nursing agencies. For example, CMS has adopted a regulation known as the “36 Month Rule” that is applicable to home health agency acquisitions. Subject to certain exceptions, the 36 Month Rule prohibits buyers of certain home health agencies - those that either enrolled in Medicare or underwent a change in ownership fewer than 36 months prior to the acquisitions - from assuming the Medicare billing privileges of the acquired agency. Instead, the acquired home health agencies must enroll as new providers with Medicare. As a result, the 36 Month Rule may further increase competition for acquisition targets that are not subject to the rule, and may cause significant Medicare billing delays for the purchases of home health agencies that are subject to the rule.
We have invested in development stage companies which may require further funding to support their respective business plans, which may ultimately prove unsuccessful.
We have controlling interests in (a) Imperium Health Management, LLC, an Accountable Care Organization ("ACO") enablement and management company, (b) Long Term Solutions, Inc., a provider of in-home nursing assessments for the long-term care insurance industry, and (c) Advanced Care House Calls, which provides primary medical care for home-bound or home-limited patients with chronic and acute illnesses who have difficulty traveling to a doctor's office. These investments, which make up our HCI segment, remain speculative, and may ultimately provide no return or could lead to a total loss of our investment.
Furthermore, portions of our HCI segment compete in new and developing markets with new competitors or solutions developed and introduced to the market regularly. Such new products may capture market share more quickly or may have access to more capital than the capital we have allocated for such projects. Our efforts to bring new solutions to the market may prove unsuccessful, may prove to be unprofitable, or may prove to be costlier to bring to market than anticipated. Our investments in these activities are highly speculative in nature and subject to loss. Specifically, our assessment subsidiary
competes with larger, better capitalized competitors, while also being particularly reliant on a small number of large customers, the loss of which could significantly and adversely impact its results.
Our HCI segment also primarily provides strategic health management services to ACOs that have been approved to participate in the Medicare Shared Savings Program (“MSSP”) and other risk-based reimbursement programs. ACO’s and their reimbursement programs are relatively new and are subject to meaningful regulation with various regulators having adopted or considering the adoption of new legislation, rules, regulations and guidance relating to formation and operation of ACOs. Failure to comply with legal or regulatory restrictions may result in CMS terminating the ACO's agreement with CMS and/or subjecting the ACO to loss of the right to engage in some or all business in a state, payments fines or penalties, or may implicate federal and state fraud and abuse laws relating to anti-trust, physician fee-sharing arrangements, anti-kickback prohibitions, prohibited referrals, any of which may adversely affect our HCI segment’s operations and/or profitability.
Failure of, or problems with, our critical software or information systems could harm our business and operating results.
We depend upon reliable and secure information systems to provide valuable tools by which we manage our business, comply with legal requirements, provide services, and bill and collect for our services. In addition to our Service Value Point system, our business is also substantially dependent on non-proprietary software provided by third-party vendors. For example, we utilize third-party software information systems for billing and maintaining patient claim receivables. Our business also depends on a comprehensive payroll and human resources system for basic payroll functions and reporting, payroll tax reporting, managing wage assignments and garnishments. Our business also supports the use of Electronic Visit Verification ("EVV") to collect visit submission information through our delivery of home and community-based, and we rely on third-party software vendors to provide continual maintenance, enhancements, as well as security of collected data. To the extent that our EVV vendors fail to support these processes, our internal operations could be negatively affected.
Our agencies also depend upon our information systems for accounting, billing, collections, risk management, quality assurance, payroll, education tracking, and operational performance. If we experience a reduction in the performance, reliability, availability, or accuracy of our information systems, our operations and financial performance, and ability to report timely and accurate information, could be adversely affected.
Our systems require constant maintenance, upgrades, and enhancements to preserve system capabilities and security and to meet our operational needs. Our information systems require an ongoing commitment of significant resources to maintain, protect, and enhance existing systems and develop new systems to keep pace with continuing changes in technology, evolving industry and regulatory standards, and changing customer preferences. Problems with, or the failure of, our information systems or software could negatively impact our clinical performance and our management and reporting capabilities. To the extent third-party software vendors fail to support our licensed software or systems, or if we lose our licenses, our operations could be materially and negatively affected. Any significant problems with or failures of our information systems or software could materially and adversely affect our operations and reputation, result in significant costs to us, cause delays in our ability to bill and collect from Medicare or other payors for our services, or impair our data capture, medical documentation, or ability to provide our services in the future. The costs incurred in correcting any errors or problems with our proprietary and non-proprietary software may be substantial and could adversely affect our net income.
Additionally, operations that we acquire must be integrated into our various information systems in an efficient and effective manner. For certain aspects, we rely upon third party contractors to assist us with those activities. If we are unable to integrate and transition any acquired business into our information systems, due to our failures or any failure of our third party contractors, we could incur unanticipated expenses, suffer disruptions in service, experience regulatory issues, and lose revenue from the operation of such business.
Our information systems are networked via public network infrastructure and standards based encryption tools that meet regulatory requirements for transmission of protected health information over such networks. We have built redundancy into our networks and installed privacy protection systems on our network and POC devices to prevent unauthorized access to proprietary, sensitive, and legally protected information. However, our technology may fail to adequately secure the confidential health information and personally identifiable information we maintain in our databases. Additionally, threats from computer viruses, instability of the public network on which our data transit relies, or other instances that might render those networks unstable or disabled would create operational difficulties for us, including difficulties effectively transmitting claims and maintaining efficient clinical oversight of our patients, as well as disrupting revenue reporting and billing and collections management, which could adversely affect our business or operations. If personal information or protected information of our patients, employees, or others with whom we do business is tampered with, stolen, or otherwise improperly accessed, we may incur fines and penalties associated with the breach of security or be required to take other action in response to judicial or regulatory actions arising out of the incident, including under HIPAA or other judicial acts.
Our information systems are also subject to damage or service interruption due to natural disasters, floods, fires, loss of power, loss of telecommunications connectivity, and other events that may be beyond our immediate control. While we maintain and
test various disaster recovery plans and procedures, our failure to successfully implement and execute upon such plans and procedures, and restore the full operational capabilities of our information systems and software in an effective and efficient manner, could have a material adverse effect on the functionality of our information systems and our business, financial condition, results of operations and cash flows, and cause a possible significant disruption of our operations and services.
We develop and maintain portions of our clinical systems in-house. Failure of, or problems with, these systems could harm our business and operating results.
We develop and maintain proprietary software systems to collect assessment data, log patient visits, generate medical orders, and monitor treatments and outcomes in accordance with established medical standards. These systems integrate billing and collections functionality as well as accounting, human resource, payroll, and employee benefits programs provided by third parties. Problems with, or the failure of, such technologies and systems could negatively impact data capture, billing, collections, and management and reporting capabilities. Any such problems or failures could adversely affect our operations and reputation, result in significant costs to us, and impair our ability to provide our services in the future. The costs incurred in correcting any errors or problems may be substantial and could adversely affect our profitability.
Our ability to maintain the security of patient, employee, third-party, or company information could have an impact on our reputation, our financial position, and the results of our operations.
The risk of a disruption or breach of our operational systems, or the compromise of the data processed in connection with our operations, has increased as attempted attacks have advanced in sophistication and number around the world. We have been, and likely will continue to be, subject to attempts of computer hacking, vandalism and theft, malware, computer viruses, ransomware, and other malicious codes, phishing, employee error and malfeasance, catastrophes, unforeseen events, or other cyber-attacks. To date, we have seen no material impact on our business or operations from these attacks or events. Any future significant compromise or breach of our data security, whether external or internal, or misuse of patient, employee, third-party or Company data, could result in significant costs, lost revenue, fines, lawsuits, and damage to our reputation. The proliferation of ever-evolving threats mean that we and our third-party service providers and vendors must continually evaluate and adapt our respective systems and processes and overall security environment, as well as those of any operations we acquire, and incur significant expenses on such security measures. Efforts by us and our vendors to develop, implement, and maintain security measures, including malware and anti-virus software and controls, may not be successful in preventing these events from occurring, and any network and information systems-related events could require us to expend significant resources to remedy such event. In the future, we may be required to expend additional resources to continue to enhance our information security measures and/or to investigate and remediate information security vulnerabilities.
A cybersecurity or ransomware attack or other incident that affects our information systems security could cause a security breach that may lead to a material disruption to our information systems infrastructure or business and may involve a significant loss of business or patient health information. If a cybersecurity attack or other unauthorized attempt to access our systems or facilities were to be successful, it could result in the theft, destruction, loss, misappropriation, or release of confidential information or intellectual property, and could cause operational or business delays that may materially impact our ability to provide various healthcare services. Any successful cybersecurity attack or other unauthorized attempt to access our systems or facilities also could result in negative publicity which could damage our reputation or brand with our patients, referral sources, payors, or other third parties and could subject us to substantial sanctions, fines, and damages and other additional civil and criminal penalties under HIPAA, HITECH, the Omnibus Rule and other federal and state privacy laws, in addition to litigation with those affected.
While we provide our employees with training and regular reminders on important measures they can take to prevent breaches or phishing schemes, given the rapidly evolving nature and proliferation of cyber threats, there can be no assurance our training and network security measures or other controls will detect, prevent, or remediate security or data breaches in a timely manner or otherwise prevent unauthorized access to, damage to, or interruption of our systems and operations.
We may be required to expend significant capital and other resources to protect against the threat of security breaches or to alleviate problems caused by breaches, including unauthorized access to patient data and personally identifiable information stored in our information systems, and the introduction of computer viruses or other malicious software programs to our systems, and cyber-attacks, email phishing schemes, malware, and ransomware. Moreover, a security breach, or threat thereof, could require that we expend significant resources to repair or improve our information systems and infrastructure and could distract management and other key personnel from performing their primary operational duties. In the case of a material breach or cyber-attack, the associated expenses and losses may exceed our current insurance coverage for such events. Some adverse consequences are not insurable, such as reputational harm and third-party business interruption. Failure to maintain proper function, security, or availability of our information systems or protect our data against unauthorized access could have a material adverse effect on our business, financial position, results of operations, and cash flows.
If we are subject to substantial malpractice or other similar claims, it could materially adversely impact our results of operations and financial condition.
The services we offer have an inherent risk of professional liability and substantial damage awards. At December 31, 2022, we have approximately 30,000 employees. In addition, we employ direct care workers on a contractual basis to support our existing workforce. We, and the nurses and other health care professionals who provide services on our behalf, may be the subject of medical malpractice claims. These nurses and other health care professionals could be considered our agents and, as a result, we could be held liable for their medical negligence. We cannot predict the effect that any claims of this nature, regardless of their ultimate outcome, could have on our business or reputation or on our ability to attract and retain patients and employees. We maintain malpractice liability insurance that provides primary coverage on a claims-made basis of $1.0 million per incident and $3.0 million in annual aggregate amounts. In addition, we maintain multiple layers of umbrella coverage in the aggregate amount of $40.0 million that provide excess coverage for professional malpractice and other liabilities. We are responsible for deductibles and amounts in excess of the limits of our coverage. Claims that could be made in the future in excess of the limits of such insurance, if successful, could materially adversely affect our financial condition. In addition, our insurance coverage may not continue to be available to us at commercially reasonable rates, in adequate amounts or on satisfactory terms.
Risk Factors Related to Capital and Liquidity
Delays in reimbursement may cause liquidity problems.
Our business is characterized by delays in reimbursement, from the time we request payment for our services to the time we receive reimbursement or payment. If we have information system problems or issues arise with Medicare or other payors, we may encounter further delays in our payment cycle. For example, in the past we have experienced delays resulting from problems arising out of the implementation by Medicare of new or modified reimbursement methodologies or as a result of natural disasters, such as hurricanes. We have also experienced delays in reimbursement resulting from our implementation of new information systems related to our accounts receivable and billing functions.
In addition, timing delays in billings and collections may cause working capital shortages. Working capital management, including prompt and diligent billing and collection, is an important factor in achieving our financial results and maintaining liquidity. It is possible that documentation support, system problems, Medicare, state Medicaid, or other payor issues, or industry trends may extend our collection period, which may materially adversely affect our working capital, and our working capital management procedures may not successfully mitigate this risk.
Our implicit price concessions may not be sufficient to cover uncollectible amounts.
On an ongoing basis, we review historical net cash realization for Medicare, Medicaid, and private insurance revenue that we will not be able to collect. This allows us to calculate the expected loss on our revenue for the period we are reporting. Our implicit price concessions may underestimate actual uncollectible revenue for various reasons, including:
•adverse changes in our estimates as a result of changes in related collection rates,
•inability to collect funds due to missed filing deadlines or inability to prove that timely filings were made,
•adverse changes in the economy generally exceeding our expectations, or
•unanticipated changes in reimbursement from Medicare, Medicaid and private insurance companies.
If our implicit price concessions are insufficient to cover losses on our revenue, our business, financial position and results of operations could be materially adversely affected.
The condition of the financial markets, including volatility and weakness in the equity, capital, and credit markets, could limit the availability and terms of debt and equity financing sources to fund the capital and liquidity requirements of our business.
Financial markets may experience significant disruptions, which could impact liquidity in the debt markets, making financing terms for borrowers less attractive and, in certain cases, significantly reducing the availability of certain types of debt financing. While we have not experienced any individual lender limitations to extend credit under our revolving credit facility, the obligations of each of the lending institutions in our revolving credit facility are independent and the availability of future borrowings under our revolving credit facility could be impacted by further volatility and disruptions in the financial credit markets or other events. Our inability to access our revolving credit facility or refinance the revolving credit facility would have a material adverse effect on our business, financial position, results of operations and liquidity.
Based on our current plan of operations, including acquisitions, we believe our existing cash balance, when combined with expected cash flows from operations and amounts available under our revolving credit facility, will be sufficient to fund our growth strategy and to meet our anticipated operating expenses, capital expenditures, and debt service obligations for at least the next 12 months. If our future net service revenue or cash flow from operations is less than we currently anticipate, we may not have sufficient funds to implement our growth strategy. Further, we cannot readily predict the timing, size, and success of
our acquisition and internal development efforts and the associated capital commitments. If we do not have sufficient cash resources, our growth could be limited unless we are able to obtain additional equity or debt financing.
The agreement governing our revolving credit facility contains, and future debt agreements may contain, various covenants that limit our discretion in the operation of our business.
The agreement and instruments governing our revolving credit facility contain, and the agreements and instruments governing future debt agreements may contain various restrictive covenants that, among other things, require us to seek consent or comply with or maintain certain financial tests and ratios in order to:
•incur more debt,
•redeem or repurchase stock, pay dividends or make other distributions,
•make certain investments,
•create liens,
•enter into transactions with affiliates,
•make unapproved acquisitions,
•enter into joint ventures,
•merge or consolidate,
•transfer or sell assets, and/or
•make fundamental changes in our corporate existence and principal business.
In addition, events beyond our control could affect our ability to comply with and maintain such financial tests and ratios. Any failure by us to comply with or maintain all applicable financial tests and ratios and to comply with all applicable covenants could result in an event of default with respect to our revolving credit facility or any other future debt agreements. An event of default could lead to the acceleration of the maturity of any outstanding loans and the termination of the commitments to make further extensions of credit. Even if we are able to comply with all applicable covenants, the restrictions on our ability to operate our business at our sole discretion could harm our business by, among other things, limiting our ability to take advantage of financing, mergers, acquisitions and other corporate opportunities.
If we are required to either repurchase or sell a substantial portion of the equity interests in our joint ventures, our capital resources and financial condition could be materially adversely impacted.
Upon the occurrence of fundamental changes to the laws and regulations applicable to our joint ventures, or if a substantial number of our joint venture partners were to exercise the buy/sell provisions contained in many of our joint venture agreements, we may be obligated to purchase or sell the equity interests held by us or our joint venture partners. In some instances, the purchase price under these buy/sell provisions is based on a multiple of the historical or future earnings before income taxes, depreciation and amortization of the equity joint venture at the time the buy/sell option is exercised. In other instances, the buy/sell purchase price will be negotiated by the joint ventures partners but will be subject to a fair market valuation process. In the event the buy/sell provisions are exercised and we lack sufficient capital to purchase the interest of our joint venture partners, we may be obligated to sell our equity interest in these joint ventures. If we are forced to sell our equity interest, we will lose the benefit of those particular joint venture operations. If these buy/sell provisions are exercised and we choose to purchase the interest of our joint venture partners, we may be obligated to expend significant capital in order to complete such acquisitions. If either of these events occurs, our net service revenue and net income could decline or we may not have sufficient capital necessary to implement our growth strategy.
We could be required to record a material non-cash charge to income if our recorded goodwill or intangible assets are impaired.
As of December 31, 2022, we had $2.2 billion of goodwill and intangible assets. We review goodwill and indefinite-lived intangible assets annually for impairment or whenever events or changes in circumstances indicate potential impairment. The goodwill assessment includes comparing the estimated fair value of each reporting unit to the carrying value of the reporting unit. If we determine that the estimated fair value of our goodwill or intangible assets is less than the applicable book value or carrying value, we could be required to record a non-cash impairment charge to our consolidated statements of operations. Because goodwill and intangible assets represent a significant portion of the assets reflected on our consolidated balance sheets, any future impairment of these assets could result in a non-cash charge to our consolidated statements of operations and have a material adverse effect on our earnings, debt covenants, and ability to access capital.
Risk Factors Related to General Economic and Market Conditions
Current economic conditions and continued decline in spending by the federal and state governments could adversely affect our results of operations and cash flows.
While our services are not typically sensitive to general declines in the federal and state economies, the erosion in the tax base caused by a general economic downturn has caused, and will likely cause, restrictions on the federal and state governments’ abilities to obtain financing and a decline in spending. As a result, we may face reimbursement rate cuts or reimbursement delays from Medicare and Medicaid and other governmental payors, which could adversely impact our results of operations and cash flows.
Adverse economic developments in the United States could lead to a reduction in federal government expenditures, including governmentally funded programs in which we participate, such as Medicare and Medicaid. In addition, if at any time the federal government is not able to meet its debt payments unless the federal debt ceiling is raised, and legislation increasing the debt ceiling is not enacted, the federal government may stop or delay making payments on its obligations, including funding for government programs in which we participate, such as Medicare and Medicaid. Failure of the government to make payments under these programs could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows. Further, any failure by the United States Congress to complete the federal budget process and fund government operations may result in a federal government shutdown, potentially causing us to incur substantial costs without reimbursement under the Medicare program, which could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows. Historically, state budget pressures have resulted in reductions in state spending. Given that Medicaid outlays are a significant component of state budgets, we can expect continuing cost containment pressures on Medicaid outlays for our services.
We may be more vulnerable to the effects of a public health catastrophe than other businesses due to the nature of our patients.
The majority of our patients are older individuals and others with complex medical challenges, many of whom may be more vulnerable than the general public during a pandemic or other public health catastrophe. Our employees are also at greater risk of contracting contagious diseases due to their increased exposure to vulnerable patients. For example, in connection with the COVID-19 pandemic, we suffered losses to our consumer population and faced reductions in the availability of our clinical and para-professional employees. Additionally, we incurred higher than expected labor costs for existing staff and were required to hire replacements for affected workers at higher costs. Accordingly, the occurrence of certain public health catastrophes could cause material adverse effect on our financial condition and results of operations.
Hurricanes or other adverse weather events could negatively affect the local economies in which we operate or disrupt our operations, which could have an adverse effect on our business or results of operations.
Our operations along coastal areas in the United States are particularly susceptible to adverse weather events, such as hurricanes and flooding. Adverse weather events could disrupt our business and results of operations, result in damage to our properties, and negatively affect the local economies in which we operate. Furthermore, climate change may increase the frequency and severity of such adverse weather events. Although we maintain insurance coverage, we cannot guarantee that our insurance coverage will be adequate to cover any losses or that we will be able to maintain insurance at a reasonable cost in the future. If our losses from business interruption or property damage exceed the amount for which we are insured, our results of operations and financial condition would be adversely affected.
Certain provisions of our charter, bylaws, and Delaware law may delay or prevent a change in control of the Company.
Delaware law and our governing documents contain provisions that may enable our Board of Directors to resist a change in control of us. These provisions include:
•staggered terms for our Board of Directors,
•limitations on persons authorized to call a special meeting of stockholders,
•the authorization of undesignated preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval,
•no cumulative voting for directors,
•director vacancies are filled by remaining directors (including vacancies resulting from removal), and
•advance notice procedures required for stockholders to nominate candidates for election as directors or to bring
matters before an annual meeting of stockholders.
These anti-takeover defenses could discourage, delay, or prevent a transaction to acquire us and may permit our Board of Directors to choose not to entertain offers to purchase us, even if such offers include a substantial premium to the market price of our stock. Therefore, our stockholders may be deprived of opportunities to profit from a sale of control. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors or cause us to take other corporate actions.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments.
We have no unresolved written comments from the staff of the SEC regarding our periodic or current reports filed under the Exchange Act.

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ITEM 2. PROPERTIES
Item 2. Properties.
Our principal executive office is located in Lafayette, Louisiana in a 270,000 square foot building. The Company owns the land and building, which houses the principal executive office. The home office expansion project was completed during 2021 for a total cost of $69 million.
Of our operating service locations, seven locations reside in buildings owned by us and the remaining locations are in leased facilities. Most of our operating service locations are located in general commercial office space. Generally, the office leases have initial terms ranging from one to five years. Most of the leases either contain multiple options to extend the lease period ranging in one to three year increments or convert to a month-to-month lease upon the expiration of the initial lease term.
Ten of our LTACHs are HwHs, meaning we have a lease or sublease for space with the host hospital. Generally, our leases or subleases for LTACHs have initial terms of five years, but range from three to ten years. Most of our leases and subleases for our LTACHs contain multiple options to extend the term in the range of one to five year increments.
We believe that our properties and facilities are well maintained and are generally suitable and adequate for the purposes for which they are used.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings.
We provide services in a highly regulated industry and are a party to various proceedings (regulatory and other governmental), and internal audits and investigations in the ordinary course of business (including audits by ZPICs, RACs, and investigations resulting from our obligation to self-report suspected violations of law). We cannot predict the ultimate outcome of any regulatory and other governmental and internal audits and investigations. While such audits and investigations are the subject of administrative appeals, the appeals process, even if successful, may take several years to resolve. The Department of Justice, CMS, or other federal and state enforcement and regulatory agencies may conduct additional investigations related to our businesses in the future. These audits and investigations have caused and could potentially continue to cause delays in collections and recoupments from governmental payors. Currently, the Company has recorded $12.0 million in other assets, which are from government payors related to the disputed finding of pending ZPIC audits. Additionally, these audits may subject us to sanctions, damages, extrapolation of damage findings, additional recoupments, fines, and other penalties (some of which may not be covered by insurance), which may, either individually or in the aggregate, have a material adverse effect on our business and financial condition and results of operations.
We are involved in various legal proceedings arising in the ordinary course of business. Although the results of litigation cannot be predicted with certainty, we believe the outcome of pending litigation will not have a material adverse effect, after considering the effect of our insurance coverage, on our consolidated financial information.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures.
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Sales of Unregistered Common Stock
None.
Market Information and Holders
Our common stock trades on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “LHCG.” As of February 9, 2023, there were approximately 446 registered holders of record of our common stock.
Dividend Policy
We have not paid any dividends on our common stock since our initial public offering in 2005 and do not anticipate paying dividends in the foreseeable future. We currently intend to retain future earnings, if any, to support the development and growth of our business. Payment of future dividends, if any, will be at the discretion of our Board of Directors and subject to any requirements under our credit facility or any future debt instruments.
Performance Graph
The following graph matches the cumulative five-year total shareholder return on LHC Group, Inc.'s common stock with the cumulative total return of the NASDAQ Composite Index, the S&P Health Care Index, and a customized peer group of three companies that include: Addus Homecare Corp, Amedisys Inc., and Encompass Health Corp. The graph assumes that the value of the investment in our common stock, in each index, and in the peer group, including reinvestment of dividends, was $100 on December 31, 2017 through December 31, 2022.
December 31,
2017 2018 2019 2020 2021 2022
LHC Group, Inc. $ 100.00 $ 153.27 $ 224.91 $ 348.28 $ 224.05 $ 263.98
NASDAQ Composite 100.00 97.16 132.81 192.47 235.15 158.65
S&P Health Care 100.00 106.47 128.64 145.93 184.07 180.47
Peer Group 100.00 159.91 205.29 298.16 199.42 173.24
Issuer Purchases of Equity Securities
None.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. Reserved

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis contains forward-looking statements about future revenues, operating results, plans and expectations. Forward-looking statements are based on a number of assumptions and estimates that are inherently subject to significant risks and uncertainties and our results could differ materially from the results anticipated by our forward-looking statements as a result of many known or unknown factors, including, but not limited to, those factors discussed in Part I, Item 1A. Risk Factors. Also, please read the “Cautionary Statement Regarding Forward-Looking Statements” set forth at the beginning of this Annual Report on Form 10-K.
In addition, read the following discussion in conjunction with Part 1 of this Annual Report on Form 10-K as well as our Consolidated Financial Statements and the related Notes contained elsewhere in this Annual Report on Form 10-K.
Overview
We provide post-acute health care services primarily to Medicare beneficiaries throughout the United States, through our home health agencies, hospice agencies, home and community-based, long-term acute care hospitals, and HCI. Our net service revenue increased $63.1 million to $2.283 billion for the year ending December 31, 2022 from $2.220 billion for the year ending December 31, 2021, largely due to acquired growth and offset by the impact from the COVID-19 pandemic. During 2022, we acquired 13 agencies, such that, as of December 31, 2022, we operated 920 locations in 37 states within the continental United States and the District of Columbia.
Segments
Our services are classified into five segments: (1) home health, (2) hospice, (3) home and community-based, (4) facility-based services, offered primarily through our LTACHs, and (5) HCI.
Through our home health services segment, we offer a wide range of services, including skilled nursing, medically-oriented social services, and physical, occupational and speech therapy. As of December 31, 2022, we operated 527 home health service locations, of which 320 are wholly-owned by us, 203 are majority-owned or controlled by us through equity joint ventures, two are controlled by us through license lease arrangements, and the remaining two are only managed by us.
Through our hospice services segment, we offer a wide range of services, including pain and symptom management, emotional and spiritual support, inpatient and respite care, homemaker services, and counseling. As of December 31, 2022, we operated 159 hospice locations, of which 96 are wholly-owned by us, 61 are majority-owned by us through equity joint ventures and two, are controlled by us through license lease arrangements.
Through our home and community-based, our services are performed by paraprofessional personnel, and include assistance to elderly, chronically ill, and disabled patients with activities of daily living. As of December 31, 2022, we operated 128 community-based services locations, of which 119 are wholly-owned and nine are majority-owned through an equity joint venture.
We provide facility-based services principally through our LTACHs. As of December 31, 2022, we operated 11 LTACHs with 12 locations, of which all but two are located within host hospitals. We also operate two skilled nursing facilities, two rural health clinics, one physician practice, one family health center, and 81 physical therapy clinics. Of these 99 facility-based services locations as of December 31, 2022, 88 are wholly-owned by us and 11 are controlled by us through equity joint ventures.
Our HCI segment reports on our developmental activities outside its other business segments. The HCI segment includes (a) Imperium Health Management, LLC, an ACO enablement and management company, (b) Long Term Solutions, Inc., an in-home assessment company serving the long-term care insurance industry, and (c) Advanced Care House Calls, which provides primary medical care for patients with chronic and acute illnesses who have difficulty traveling to a doctor’s office. These activities are intended ultimately, whether directly or indirectly, to benefit our patients and/or payors through the enhanced provision of services in our other segments. The activities all share a common goal of improving patient experiences and quality outcomes, while lowering costs. They include, but are not limited to, items such as: technology, information, population health management, risk-sharing, care-coordination and transitions, clinical advancements, enhanced patient engagement and informed clinical decision and technology enabled in-home clinical assessments. We have seven HCI wholly-owned locations.
Development Activities
The following table provides a summary of our acquisitions, divestitures and internal development activities from January 1, 2021 through December 31, 2022. This table does not include two skilled nursing facilities, family health center, rural health clinics, physician practice, and physical therapy clinics through our facility-based services segment.
Home Health
Agencies Hospice
Agencies Home and Community -Based Agencies Long-Term Acute Care
Hospitals HCI
Total at January 1, 2021 537 120 124 12 12
Developed - 1 13 - 2
Acquired 27 49 1 - -
Divested/Merged (7) - (2) - -
Total at December 31, 2021 557 170 136 12 14
Developed - - - - 0
Acquired 12 - 1 - -
Divested/Merged (42) (11) (9) - (7)
Total at December 31, 2022 527 159 128 12 7
Recent Developments
Coronavirus and Coronavirus Aid, Relief, and Economic Security Act
In response to COVID-19, the U.S. Government enacted the CARES Act on March 27, 2020. The following portions of the CARES Act impacted us during the twelve months ended December 31, 2022:
•Accelerated and Advance Payments Program (CAAP): During the twelve months December 31, 2022, CMS recouped $106.5 million and as of December 31, 2022, the contract liabilities - deferred revenue was satisfied.
•Suspension of the 2% sequestration payment adjustment: CMS suspended the 2% sequestration payment adjustment for patient claims with dates of services or end of period dates from May 1 through December 31, 2020. The Consolidated Appropriations Act, 2021, signed into law on December 27, 2020, extended the suspension of the 2% sequestration payment adjustment to March 31, 2021. On April 14, 2021, Congress passed legislation to continue the suspension of the 2% sequestration payment adjustments on Medicare patient claims with dates of service through December 31, 2021. On December 10, 2021, the Protecting Medicare and American Farmers from Sequester Cuts Act legislation passed, which continued the suspension of the sequestration payment adjustments for Medicare patient claims with dates of service through March 31, 2022. Medicare patient claims with dates of service between April 1 through June 30, 2022 had a 1% sequestration adjustment and Medicare patient claims with dates of service beginning July 1, 2022 have a 2% sequestration adjustment. During the twelve months ended December 31, 2022 and 2021, we recognized $10.0 million and $26.8 million, respectively, of net service revenue due to the suspension of the 2% sequestration payment adjustment.
•Waiver of the application of site-neutral payment: Under Section 1886(m)(6)(A)(i) of the Act, the claims processing systems will be updated to pay all LTACH cases admitted during the COVID-19 PHE period at the LTACH PPS standard federal rate, effective for claims with an admission date occurring on or after January 27, 2020 through the end of the PHE period. On January 11, 2023, the U.S. Department of Health and Human Services extended the PHE until April 11, 2023. During the twelve months ended December 31, 2022 and 2021, respectively, we recognized $20.3 million and $25.7 million of net service revenue due to the suspension of site-neutral payments.
•Delaying payment of the employer portion of social security tax: The Company deferred payments of the employer portion of social security tax for 2020, which was due in 50% increments, with the first due by December 31, 2021 and the second 50% due by December 31, 2022. During the twelve months ended December 31, 2022, we paid the remaining $26.8 million of these deferred payments.
During the twelve months ended December 31, 2022, we did experience higher costs related to higher contract labor utilization due to an increase in our clinicians being on quarantine from COVID-19 exposure or potential exposure. There is no guarantee that we won’t experience similar impacts in the future or experience a decrease in demand for our services as a result of COVID-19. The rapid development and fluidity of this situation makes it difficult to predict the ultimate impact of COVID-19 on our business and operations. Nevertheless, COVID-19 presents a material uncertainty which could materially impact our business and results of operations in the future.
Home Health Services
On October 31, 2022, CMS released the final rule for fiscal year 2023. The final rule states the Medicare base payments will
increase by 0.7%. The increase reflects the effects of the 4.0% home health payment update, a 3.5% decrease from the effects
of the prospective permanent behavioral assumption adjustment of -3.925% that is being phased-in, and 0.2% increase from the effects of an update to the fixed-dollar ratio used in determining outlier payments. The impact of the -3.925% permanent
behavioral assumption adjustment is -3.5%, as the permanent adjustment is only made to the 30-day payment rate and not the
Low Utilization Payment Adjustment per visit payment rates. CMS also finalized a permanent 5% cap on negative wage index changes regardless of the underlying reason for the decrease.
Hospice
On July 27, 2022, CMS released the final rule for fiscal year 2023 to update payment rates and the wage index. The final rule states the following:
•A payment increase of 3.8%, which applies a 4.1% market basket update and 0.3 percentage point reduction for productivity.
•Hospice agencies that fail to meet quality reporting requirements will receive a two percentage point reduction to the annual market basket update.
•An increase of the aggregate cap value of $32,486.92, as compared to $31,297.61 for fiscal year 2022.
•A permanent cap on negative wage index changes greater than a 5% decrease from the prior year, regardless of the underlying reason for the decrease.
The following are the final fiscal year 2023 base payment rates for various levels of care, which began on October 1, 2022 and will end on September 30, 2023 and fiscal year 2022 base payment rates for various levels of care, which began on October 1, 2021 and ended September 30, 2022 (payment rates for hospice providers not complying with the hospice quality reporting requirements will be 2% lower than the values referenced below):
Description Fiscal Year 2023
Rate per patient day Fiscal Year 2022
Rate per patient day
Routine Home Care days 1-60 $ 211.34 $ 203.4
Routine Home Care days 61+ $ 167.00 $ 160.74
Continuous Home Care $ 1,522.04 $ 1,462.52
Full Rate = 24 hours of care
$60.94 = hourly rate for 2022
$63.42 = hourly rate for 2023
Inpatient Respite Care $ 492.10 $ 473.75
General Inpatient Care $ 1,110.76 $ 1,068.28
Facility-Based Services
On August 1, 2022, CMS issued the final rule for the fiscal year 2023 Long-Term Care Hospital Prospective Payment System ("LTCH PPS"). LTCH PPS payments will increase 2.3% due primarily to the annual standard federal rate update (the productivity-adjusted market basket increase) of 3.8% and a decrease in high cost outlier payments.
Medicare Accountable Care Organizations
The Affordable Care Act established ACOs as a tool to improve quality and lower costs through increased care coordination in the Medicare fee-for-service ("FFS") program, also known as "Original Medicare." The Medicare FFS program covers approximately 70% of the Medicare recipients or approximately 36 million eligible Medicare beneficiaries. ACOs are typically formed as legal entities by groups of doctors and other healthcare providers who endeavor to work together to provide high quality services and care for their patients through three-year contracts with CMS. Provider and beneficiary participation in an ACO is purely voluntary and Medicare beneficiaries retain their current ability to seek treatment from any provider they wish. Beneficiaries are assigned to ACOs using an "attribution" model based on a plurality of services provided by the primary care physician. Beneficiaries retain the right to use any doctor or hospital who accepts Medicare, at any time.
CMS established the MSSP to facilitate coordination and cooperation among providers to improve the quality of care for Medicare FFS beneficiaries and to reduce costs. Eligible providers, hospitals, and suppliers may participate in the MSSP by creating, participating in or contracting with an ACO. The MSSP is designed to improve beneficiary outcomes and increase
value of care by (1) promoting accountability for the care of Medicare FFS beneficiaries, (2) requiring coordinated care for all services provided under Medicare FFS, and (3) encouraging investment in infrastructure and redesigned care processes. The MSSP will reward ACOs that provide healthcare services at a cost for the ACO's patients during a relevant measurement year that is below the ACO's benchmark costs established by CMS, while also meeting performance standards on quality of care. Under the final MSSP rules, Medicare is to reimburse individual providers and suppliers for specific items and services as Medicare currently does under the FFS payment methodologies. MSSP rules require CMS to develop a benchmark for savings to be achieved by each ACO, if the ACO is to receive shared savings or for ACOs that have elected to accept responsibility for losses. An ACO that meets the program's quality performance standards will be eligible to receive a share of the savings to the extent its assigned beneficiary medical expenditures are below its own medical expenditure benchmark provided by CMS. The Company's HCI services provides specialized management services to ACOs, and in return, the Company shares in any MSSP payments received by the ACO.
Operational Data
This section of this Annual Report on Form 10-K generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 that are not included in this Annual Report on Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed on February 24, 2022.
Consolidated Results of Operations
The following table sets forth, for the period indicated, our consolidated results (amounts in thousands):
Year Ended December 31,
2022 2021
Consolidated Services Data:
Net service revenue $ 2,282,771 $ 2,219,622
Cost of service revenue (excluding depreciation and amortization) 1,399,158 1,336,609
Gross margin 883,613 883,013
General and administrative expenses 764,239 696,435
Impairment of intangibles and other 10,854 937
Operating income 108,520 185,641
Interest expense (31,311) (4,338)
Income tax expense 16,961 37,687
Income attributable to noncontrolling interests 20,377 27,888
Net income available to LHC Group, Inc.’s common stockholders $ 39,871 $ 115,728
The following table sets forth our consolidated results as a percentage of net service revenue, except income tax expense, which is presented as a percentage of income attributable to LHC Group, Inc's common stockholders:
Year Ended December 31,
2022 2021
Consolidated Services Data:
Cost of service revenue (excluding depreciation and amortization) 61.3 % 60.2 %
Gross margin 38.7 39.8
General and administrative expenses 33.5 31.4
Impairment of intangibles and other 0.5 -
Operating income 4.8 8.4
Interest expense (1.4) (0.2)
Income tax expense 29.9 24.6
Income attributable to noncontrolling interests 0.9 1.3
Net income attributable to LHC Group, Inc.’s common stockholders 1.7 5.2
Consolidated net service revenue was comprised of the following for the periods ending December 31:
Segment 2022 2021
Home Health 67.1 % 69.9 %
Hospice 17.9 14.0
Home and Community-Based 7.9 8.5
Facility-Based 5.6 6.0
Healthcare Innovations 1.5 1.6
100.0 % 100.0 %
Cost of Service Revenue
The following table summarizes cost of service revenue (amounts in thousands, except percentages, which are percentages of the segment's respective net service revenue):
2022 2021
Home Health
Salaries, wages, and benefits $ 813,516 53.1 % $ 819,041 52.8 %
Transportation 39,507 2.6 37,416 2.4
Supplies and services 40,979 2.7 45,228 2.9
Total $ 894,002 58.4 % $ 901,685 58.1 %
Hospice
Salaries, wages, and benefits $ 198,656 48.8 % $ 142,070 45.6 %
Transportation 12,730 3.1 9,204 3.0
Supplies and services 58,791 14.4 43,621 14.0
Total $ 270,177 66.3 % $ 194,895 62.6 %
Home and Community-Based
Salaries, wages, and benefits $ 127,572 70.6 % $ 134,852 71.1 %
Transportation 1,718 1.0 1,681 0.9
Supplies and services 852 0.5 1,319 0.7
Total $ 130,142 72.1 % $ 137,852 72.7 %
Facility-Based
Salaries, wages, and benefits $ 73,133 57.2 % $ 66,067 50.0 %
Transportation 250 0.2 68 0.1
Supplies and services 19,953 15.6 23,135 17.5
Total $ 93,336 73.0 % $ 89,270 67.6 %
Healthcare Innovations
Salaries, wages, and benefits $ 11,270 31.9 % $ 12,620 35.8 %
Transportation 193 0.5 220 0.6
Supplies and services 38 0.1 67 0.2
Total $ 11,501 32.5 % $ 12,907 36.6 %
Consolidated
Salaries, wages, and benefits $ 1,224,147 53.6 % $ 1,174,650 52.9 %
Transportation 54,398 2.4 48,589 2.2
Supplies and services 120,613 5.3 113,370 5.1
Total $ 1,399,158 61.3 % $ 1,336,609 60.2 %
Consolidated cost of service revenue for the year ended December 31, 2022 was $1.40 billion compared to $1.34 billion for the same period in 2021, an increase of approximately $62.5 million, or 4.7%. During 2022, cost of service revenue in our home health, hospice, and facility-based segments were impacted by the continued labor market challenges. These
challenges are, but not limited to, consistent utilization of nursing contract labor at a higher cost-per-visit rate, payments of sign-on and retention bonuses, increased clinician wages, and labor costs associated with acquisitions purchased during the latter half of 2021.
General and Administrative Expenses
The following table summarizes general and administrative expenses (amounts in thousands, except percentages, which are percentages of the segment's respective net service revenue):
2022 2021
Home Health
General and administrative $ 508,554 33.2 % $ 489,092 31.5 %
Depreciation and amortization 12,630 0.8 12,040 0.8
Total $ 521,184 34.0 % $ 501,132 32.3 %
Hospice
General and administrative $ 124,391 30.5 % $ 86,781 27.9 %
Depreciation and amortization 4,846 1.2 2,912 0.9
Total $ 129,237 31.7 % $ 89,693 28.8 %
Home and Community-Based
General and administrative $ 46,959 26.0 % $ 45,062 23.8 %
Depreciation 1,271 0.7 1,662 0.9
Total $ 48,230 26.7 % $ 46,724 24.7 %
Facility-Based
General and administrative $ 44,630 34.9 % $ 41,975 31.8 %
Depreciation and amortization 3,443 2.7 3,329 2.5
Total $ 48,073 37.6 % $ 45,304 34.3 %
Healthcare Innovations
General and administrative $ 16,562 46.9 % $ 12,608 35.8 %
Depreciation 953 2.7 974 2.8
Total $ 17,515 49.6 % $ 13,582 38.6 %
Consolidated
General and administrative $ 741,096 32.5 % $ 675,518 30.4 %
Depreciation 23,143 1.0 20,917 0.9
Total $ 764,239 33.5 % $ 696,435 31.4 %
Consolidated general and administrative expenses for the year ended December 31, 2022 were $764.2 million compared to $696.4 million for the same period in 2021, an increase of approximately $67.8 million, or 9.7%. We incurred higher administrative costs related to acquisitions purchased during the latter half of 2021 and costs associated with the continued work of the expected consummation of the Merger.
Impairment of intangibles and other
Consolidated impairment of intangibles and other for the year ended December 31, 2022 was $10.9 million compared to $0.9 million for the same period in 2021. We closed 69 underperforming locations during 2022, of which we recorded the disposal of goodwill of $5.3 million and recorded the impairment of $5.6 million related to Certificates of Need/ Medicare licenses for these closed locations.
Interest Expense
Consolidated interest expense for the year ended December 31, 2022 was $31.3 million compared to $4.3 million for the same period in 2021. Our effective interest rate was 6.39% in 2022 as compared to 1.81% in 2021. We utilized our credit agreement during the latter half of 2021 and twelve months ended December 31, 2022 for the funding of acquisitions, the share repurchase plan, and recoupments of the CAAP.
Income Tax Expense
Consolidated income tax expense for the year ended December 31, 2022 was $17.0 million compared to $37.7 million for the same period in 2021. The decrease in income tax expense was primarily attributable to the decrease in our results of operations in 2022 as compared to 2021.
Liquidity and Capital Resources
Our cash balance at December 31, 2022 was $17.9 million, compared to $9.8 million at December 31, 2021. We have $260.8 million of available liquidity from cash and our revolving credit facility. At December 31, 2022, we have additional capacity in our revolving credit facility of $300.0 million per our accordion expansion. Based on our current plan of operations, including acquisitions, we believe this amount, when combined with expected cash flows from operations, will be sufficient to fund our growth strategy and to meet our anticipated operating expenses, capital expenditures, and debt service obligations for at least the next 12 months.
Liquidity
Our reported cash flows are affected by various external and internal factors, including the following:
•Operating Results - Our net income has a significant effect on our operating cash flows. Any significant increase or decrease in our net income could have a material effect on our operating cash flows.
•Timing of Acquisitions - We use a portion of our operating and/or financing cash flows for acquisitions. When the acquisitions occur at or near the end of a period, our cash outflows significantly increase.
•Timing of Payroll - Some of our employees are paid bi-weekly on Fridays, while others are paid weekly on Fridays. Operating cash outflows increase in reporting periods that end on a Friday.
•Self-Insurance Plan Funding - We are self-funded for health insurance and workers compensation insurance. Any significant changes in the amount of insurance claims submitted could have a direct effect on our operating cash flows.
Cash used in investing activities primarily relates to acquisitions of home nursing and hospice agencies, while cash used by financing activities primarily relates to borrowings or payments on outstanding debt agreements and payments to our noncontrolling interest partners.
The following table summarizes changes in cash flows (amounts in thousands):
Year Ended December 31,
2022 2021
Net cash provided by (used in):
Operating activities $ 49,974 $ (100,332)
Investing activities (58,360) (607,778)
Financing activities 16,488 431,350
Change in cash $ 8,102 $ (276,760)
Cash at beginning of period 9,809 286,569
Cash at end of period $ 17,911 $ 9,809
We experienced a decline in net income during the twelve months ended December 31, 2022 as compared to the twelve months ended December 31, 2021. The decline was related to decreased census, increased labor costs, and increased general and administrative costs related to the Merger and acquisitions purchased during the latter part of 2021. Our accounts payables and accrued expenses increased as we implemented a new enterprise system and utilized payment management strategies incorporated within the new system. During the twelve months ended December 31, 2022, CMS recouped $106.5 million of CAAP as compared to $211.5 million during the twelve months ended December 31, 2021.
We acquired $23.6 million in business combinations during the twelve months ended December 31, 2022 as compared to $569.6 million of business combinations during the twelve months ended December 31, 2021.
In addition, we utilized our credit agreement for funding of the share repurchase plan and recoupments of the CAAP during the twelve months ended December 31, 2022.
Credit Facility
On August 3, 2021, we entered into an Amended and Restated Senior Credit Facility (the "2021 Amended Credit Agreement"), which provided a senior, secured revolving line of credit commitment with a maximum principal borrowing limit of $800.0 million, which included an additional $500.0 million accordion expansion, and a letter of credit sub-limit equal to $75.0 million. On December 31, 2021, the aggregate commitment was increased to a maximum borrowing limit of $1.0 billion, with an additional $300.0 million accordion expansion. Our obligations under the 2021 Amended Credit Agreement are secured by substantially all of the assets of the Company and its wholly-owned subsidiaries, which assets include the Company's equity ownership of its wholly-owned subsidiaries and its equity ownership in joint venture entities. Our wholly-owned subsidiaries also guarantee the obligations of the Company under the 2021 Amended Credit Agreement.
Revolving loans under the 2021 Amended Credit Agreement bear interest at, as selected by us, either a (i) the prevailing London Interbank Offered Rate ("LIBOR") (with interest periods of one, three, or six months at the Company's option) plus a spread of 1.25% to 2.00% based on our quarterly consolidated Leverage Ratio or (ii) the prevailing prime or base rate plus a spread of 0.25% to 1.00% based on our quarterly consolidated Leverage Ratio. Swing line loans bear interest at the Base Rate. We are limited to 15 Eurodollar borrowings outstanding at any time. We are required to pay a commitment fee for the unused commitments at rates ranging from 0.15% to 0.30% per annum depending upon our quarterly consolidated Leverage Ratio. The Base Rate at December 31, 2022 was 8.50% and the Eurodollar Rate was 6.44%. As of December 31, 2022, the effective interest rate on outstanding borrowings under the 2021 Amended Credit Agreement was 6.39%.
On March 5, 2021, the ICE Benchmark Administration, the administrator of LIBOR, announced its intention to cease the publication of LIBOR settings for 1-month, 3-month, 6-month, and 12-month LIBOR borrowings immediately on June 30, 2023. JPMorgan Chase Bank, N.A will transition our 2021 Amended Credit Agreement to an alternate rate to CME Term SOFR Reference Rate ("SOFR"), which is administered by CME Group Benchmark Administration Ltd ("CME"). Due to the differences observed between LIBOR rates and SOFR published rates, JPMorgan Chase Bank, N.A. will use a credit spread adjustment ("CSA") in order to minimize value transfer and leave the existing margin applicable to our 2021 Amended Credit Agreement. The CSA used by JPMorgan Chase Bank, N.A. is based on the average of the differences between LIBOR and SOFR over a 12-month period and will be added to SOFR.
At December 31, 2022, we had $733.0 million drawn, letters of credit in the amount of $24.1 million outstanding under the credit facility, and $242.9 million remaining borrowing capacity available under the 2021 Amended Credit Agreement. At December 31, 2021, we had $661.2 million drawn and letters of credit in the amount of $24.3 million outstanding under the 2021 Amended Credit Agreement.
Under the terms of the 2021 Amended Credit Agreement, we are required to maintain certain financial ratios and comply with certain financial covenants. The 2021 Amended Credit Agreement permits us to make certain restricted payments, such as purchasing shares of its stock, within certain parameters, provided we maintain compliance with those financial ratios and covenants after giving effect to such restricted payments. We were in compliance with its debt covenants under the 2021 Amended Credit Agreement at December 31, 2022.
Borrowings accrue interest under the Credit Agreement at either the Base Rate or Eurodollar rate are subject to the applicable margins as set forth below:
Leverage Ratio Eurodollar
Margin Base Rate
Margin Commitment Fee Rate
≤ 1.00:1.00 1.25 % 0.25 % 0.15 %
>1.00:1.00 ≤ 2.00:1.00 1.50 % 0.50 % 0.20 %
>2.00:1.00 ≤ 3.00:1.00 1.75 % 0.75 % 0.25 %
>3.00:1.00 2.00 % 1.00 % 0.30 %
Our 2021 Amended Credit Agreement contains customary affirmative, negative and financial covenants, which are subject to customary carve-outs, thresholds, and materiality qualifiers. These include bankruptcy and other insolvency events, cross-defaults to other debt agreements, a change in control involving us or any subsidiary guarantor and the failure to comply with certain covenants. The Credit Facility allows us to make certain restricted payments within certain parameters provided we maintain compliance with those financial ratios and covenants after giving effect to such restricted payments or, in the case of repurchasing shares of its stock, so long as such repurchases are within certain specified baskets.
At December 31, 2022, we were in compliance with all debt covenants contained in the Credit Agreement governing our credit facility.
Off-Balance Sheet Arrangements
We currently do not have any off-balance sheet arrangements with unconsolidated entities, financial partnerships or entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.
Recently Issued Accounting Pronouncements
For a discussion of recently issued accounting pronouncements, see Note 2 of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K, which is incorporated herein by reference.
Critical Accounting Policies
The following discussion describes our critical accounting policies which we believe requires the most significant judgment and estimates used in the preparation of our consolidated financial statements.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management 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 revenue and expenses during the reporting period. Changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ materially from our estimates. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations will be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances and we evaluate these estimates on an ongoing basis.
Revenue Recognition
For a detailed discussion of revenue recognition, see Part I, Item 1. Reimbursement in this Annual Report on Form 10-K which is incorporated here by reference.
Net service revenue from contracts with customers is recognized in the period the performance obligations are satisfied under our contracts by transferring the requested services to our patients in amounts that reflect the consideration to which is expected to be received in exchange for providing patient care, which is the transaction price allocated to the services provided in accordance with ASU 2014-09, Revenue from Contracts with Customers ("Topic 606") and ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (collectively, "ASC 606").
Net service revenue is recognized as performance obligations are satisfied, which can vary depending on the type of services provided. The performance obligation is the delivery of patient care in accordance with the requested services outlined in physicians' orders, which are based on specific goals for each patient.
The performance obligations are associated with contracts in duration of less than one year; therefore, the optional exemption provided by ASC 606 was elected resulting in us not being required to disclose the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied or partially unsatisfied as of the end of the reporting period. Our unsatisfied or partially unsatisfied performance obligations are primarily completed when the patients are discharged and typically occur within days or weeks of the end of the period.
We determine the transaction price based on gross charges for services provided, reduced by explicit price concessions and estimates of implicit price concessions. Explicit price concessions include contractual adjustments provided to patients and third-party payors. Implicit price concessions include discounts provided to self-pay, uninsured patients or other payors, adjustments resulting from regulatory reviews, audits, billing reviews and other matters. Subsequent changes to the estimate of the transaction price are recorded as adjustments to net service revenue in the period of change. Subsequent changes that are determined to be the result of an adverse change in the patient's ability to pay (i.e. change in credit risk) are recorded as a provision for doubtful accounts within general and administrative expenses.
Explicit price concessions are recorded for the difference between our standard rates and the contracted rates to be realized from patients, third party payors and others for services provided.
Implicit price concessions are recorded for self-pay, uninsured patients and other payors by major payor class based on historical collection experience and current economic conditions, representing the difference between amounts billed and amounts expected to be collected. We assess our ability to collect for the healthcare services provided at the time of patient admission based on the verification of the patient's insurance coverage under Medicare, Medicaid, and other commercial or managed care insurance programs.
Amounts due from third-party payors, primarily commercial health insurers and government programs (Medicare and Medicaid), include variable consideration for retroactive revenue adjustments due to settlements of audits and reviews. We have determined estimates for price concessions related to regulatory reviews based on our historical experience and success rates in the claim appeals and adjudication process. Revenue is recorded at amounts estimated to be realizable for services provided.
The following table sets forth the percentage of net service revenue earned by category of payor for the respective years ending December 31:
Payor 2022 2021 2020
Medicare 59.6 % 59.8 % 62.1 %
Medicaid 3.2 3.1 2.5
Other 37.2 37.1 35.4
100.0 % 100.0 % 100.0 %
Medicare
The following describes the payment models in effect during the twelve months-ended December 31, 2022. Such payment models have been subject to temporary adjustments made by CMS in response to COVID-19 pandemic as described elsewhere in this Annual Report on Form 10-K. The 2% sequestration reduction adjustment was suspended for patient claims with dates of service that began May 1, 2020 through March 31, 2022. Medicare patient claims with dates of service between April 1 through June 30, 2022 had a 1% sequestration payment adjustment. Medicare patient claims with dates of service beginning July 1, 2022 had the full 2% sequestration adjustment.
Home Health Services
We record revenue as services are provided under PDGM. For each 30-day period, the patient is classified into one of 432 home health resource groups prior to receiving services. Each 30-day period is placed into a subgroup falling under the following categories: (i) timing being early or late, (ii) admission source being community or institutional, (iii) one of 12 clinical groupings based on the patient's principal diagnosis, (iv) functional impairment level of low, medium, or high, and (v) a co-morbidity adjustment of none, low, or high based on the patient's secondary diagnoses.
Each 30-day period payment from Medicare reflects base payment adjustments for case-mix and geographic wage differences. In addition, payments may reflect one of three retroactive adjustments to the total reimbursement: (a) an outlier payment if the patient’s care was unusually costly; (b) a low utilization adjustment whereby the number of visits is dependent on the clinical grouping; and/or (c) a partial payment if the patient transferred to another provider or from another provider before completing the episode. The retroactive adjustments outlined above are recognized in net service revenue when the event causing the adjustment occurs and during the period in which the services are provided to the patient. We review these adjustments to ensure that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the retroactive adjustments is subsequently resolved. Net service revenue and related patient accounts receivable are recorded at amounts estimated to be realized from Medicare for services rendered.
Hospice Services
We record revenue based upon the date of service at amounts equal to the estimated payment rates. We receive one of four predetermined daily rates based upon the level of care provided by us, which can be routine care, general inpatient care, continuous home care and respite care. There are two separate payment rates for routine care: payments for the first 60 days of care and care beyond 60 days. In addition to the two routine rates, we may also receive a service intensity add-on (“SIA”). The SIA is based on visits made in the last seven days of life by a registered nurse or medical social worker for patients in a routine level of care.
The performance obligation is the delivery of hospice services to the patient, as determined by a physician, each day the patient is on hospice care.
Adjustments to Medicare revenue are made from regulatory reviews, audits, billing reviews and other matters. We estimate the impact of these adjustments based on our historical experience.
We are subject to variable consideration through an inpatient cap limit and an overall Medicare payment cap for each provider number. The inpatient cap relates to individual programs receiving more than 20% of their total Medicare reimbursement from inpatient care services, and the overall Medicare payment cap relates to individual programs receiving reimbursements in excess of a "cap amount", determined by Medicare to be payment equal to 12 months of hospice care for
the aggregate base of hospice patients, indexed for inflation. The determination for each cap is made annually based on the 12-month period ending on September 30 of each year. We monitor our limits on a provider-by-provider basis and record estimates of our liability for reimbursements in excess of the cap amount, if any, in the reporting period.
Facility-Based Services
Long-Term Acute Care Services
Gross revenue is recorded as services are provided under the LTACH prospective payment system. Each patient is assigned a long-term care diagnosis-related group. Payments are made at a predetermined fixed amount intended to reflect the average cost of treating a Medicare LTACH patient classified in that particular long-term care diagnosis-related group. For selected LTACH patients, the amount may be further adjusted based on length-of-stay and facility-specific costs, as well as in instances where a patient is discharged and subsequently re-admitted, among other factors. We calculate the adjustments based on historical averages of these types of adjustments for LTACH claims paid. Similar to other Medicare prospective payment systems, the rate is also adjusted for geographic wage differences. Net service revenue adjustments resulting from reviews and audits of Medicare cost report settlements are considered implicit price concessions for LTACHs and are measured at expected value.
Medicaid, managed care and other payors
Other sources of net service revenue for all our segments fall into Medicaid, managed care or other payors of our services. Our Medicaid reimbursement is based on a predetermined fee schedule applied to each service provided. Therefore, revenue is recognized for Medicaid services as services are provided based on this fee schedule. Our managed care and other payors reimburse us based upon a predetermined fee schedule or an episodic basis, depending on the terms of the applicable contract. Accordingly, we recognize revenue from managed care and other payors as services are provided, such costs are incurred, and estimates of expected payments are known for each different payor, thus our revenue is recorded at the estimated transaction price.
Healthcare Innovations Services
The Company’s HCI segment provides strategic health management services to ACOs that have been approved to participate in the MSSP. The HCI segment has service agreements with ACOs that provide for sharing of MSSP payments received by the ACO, if any. ACOs are legal entities that contract with CMS to provide services to the Medicare fee-for-service population for a specified annual period with the goal of providing better care for individuals, improving health for populations and lowering costs. ACOs share savings with CMS to the extent that the actual costs of serving assigned beneficiaries are below certain trended benchmarks of such beneficiaries and certain quality performance measures are achieved. The generation of shared savings is the performance obligation of each ACO, which only become certain upon the final issuance of unembargoed calculations by CMS, generally in the third quarter of each year. During the years ended December 31, 2022 and 2021, the HCI segment recorded net service revenue of $15.6 million and $12.1 million, respectively, related to the 2021 and 2020 ACO respective service periods, as certain ACO's served by the HCI segment received unembargoed calculations from CMS confirming the performance obligation had been met.
Goodwill
Goodwill represents the excess of amounts paid for acquisitions over the fair value of net identifiable assets acquired less liabilities assumed. We assign assets acquired, including goodwill, and liabilities assumed to one or more reporting units as of the date of the acquisition. Our reporting units are home health, hospice, home and community-based, LTACHs, and HCI. The LTACHs are incorporated in the Company's facility-based operating segment. The other locations within the facility-based segment do not share in the economic benefits of the LTACH reporting unit, and as such, are excluded from the annual impairment testing.
Goodwill and purchased intangible assets with indefinite useful lives are not amortized. ASC 350, "Intangibles - Goodwill and Other" ("ASC 350") requires that all indefinite-lived intangible assets, such as goodwill, be tested for impairment at least annually or sooner whenever events or changes in circumstances indicate that the asset is impaired. An entity may perform a qualitative assessment to determine whether it is necessary to perform the quantitative impairment test. In assessing whether the asset is impaired, we asses all relevant events and circumstances for each of our reporting units.
We perform our goodwill impairment testing on an annual basis as of November 30, and whenever events or changes in circumstances indicate that the carrying value of a reporting unit likely exceeds its fair value. This involves estimating the fair value of the reporting units using discounted cash flow models. For 2022, we performed our annual impairment review of goodwill at November 30. We assessed and reviewed factors such as: labor cost; financial performance, such as cash flows and planned revenue; regulatory factors; market considerations, such as market-dependent multiples; and access of capital. For 2022, we performed a qualitative assessment of goodwill for each of our reporting units. When performing our qualitative assessment, we determined the existence of events and circumstances that would lead to a determination that is
more likely than not that the fair value of the reporting units for hospice, home and community-based, and LTACHs could be less than its carrying amount. We were required to perform a quantitative assessment on these reporting units.
Our quantitative assessment for the determination of impairment was made by comparing the carrying amount of the hospice, home and community-based, and LTACH reporting units with its fair value, calculated by a combination of market and discounted cash flow approaches. Minor changes to assumptions used in our approaches could have had a significant effect on our assessment of the fair value of our reporting units. Our home and community-based and LTACH reporting units fair value exceeded its respective carrying value by 5% and 1%, respectively. Both reporting units are at risk of failing step one of the impairment test in future quarters if financial performance continues to decrease and the cost of debt continues to increase.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Our exposure to market risk relates to fluctuations in interest rates from borrowings under the credit facility. Our letter of credit fees and interest accrued on our debt borrowings are subject to the applicable Eurodollar Rate or Base Rate. A hypothetical 100 basis point increase in interest rates on the average daily amounts outstanding under the credit facility would have increased interest expense by $7.8 million and $4.6 million for the years ended December 31, 2022 and 2021, respectively.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements and financial statement schedules in Part IV, Item 15. Exhibits, Financial Statement, Schedules of this Annual Report on Form 10-K are incorporated by reference into this Item 8.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Disclosure Controls and Procedures.
Evaluation of Disclosure Control and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the Company's management evaluated the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2022. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) under the Exchange Act, means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act, is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, the Company’s Chief Executive Officer and its Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2022.
Management’s Annual Report on Internal Control Over Financial Reporting
Under the Exchange Act, the Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as that term is defined in Rule 13a-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including the Company’s Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of its internal control over financial reporting based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
The Company's internal control over financial reporting should be designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance us U.S. generally accepted accounting principles and includes those policies and procedures that:
•pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the Company's transactions and dispositions of its assets;
•provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and directors; and
•provides reasonable assurance to prevent or timely detect unauthorized acquisition, use, or disposition of assets that could have a material effect on the financial statements.
Material weakness describes a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis
During 2022, management, including the Company's principal executive officer and principal financial officer, and under the oversight of the Board of Directors, conducted an assessment of the effectiveness of our internal control over financial reporting based upon the framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013) ("COSO 2013").
Based on management’s testing and evaluation under the framework in Internal Control - Integrated Framework, management concluded that our internal control over financial reporting was effective as of December 31, 2022.
The attestation report of KPMG LLP, the independent registered public accounting firm that audited the financial statements included in this Annual Report on Form 10-K, is included herein.
Changes in Internal Control Over Financial Reporting
During the fourth quarter, management identified a material weakness related to ineffective segregation of duties ("SOD") and user access controls over IT operating applications and including the application related to the Company's financial reporting. Specifically, management did not have effective segregation of duty controls and controls to ensure appropriate approval of new users and timely removal of users. At this time, the Company did not have effective processes in place to monitor its components of internal control. Accordingly, all automated controls affecting the Company's financial reporting and all manual controls that are dependent upon the completeness and accuracy of information derived from IT systems were also deemed ineffective in these earlier periods.
During the quarter ended December 31, 2022, management designed and implemented controls for the core financial reporting system to compensate for the ineffective user access and SOD conflicts noted above.
Except for remediation of the material weaknesses in internal control described above, there were no other changes in the Company's internal control over financial reporting during the quarter ended December 31, 2022 that materially affected, or are reasonably likely to materially affect, the internal control over financial reporting.
Management is committed to ensuring that the Company's controls continue to mature and operate effectively. The Company's Board of Directors and management have prioritized the implementation of additional remediation, taking the necessary actions to remove all SOD conflicts and has removed all inappropriate user access and will continue to operate the compensating controls put in place in the fourth quarter until direct controls over SOD have been operating for a sufficient period of time and have been tested to determine they are operating effectively.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
LHC Group, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited LHC Group, Inc. and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2022 and 2021, the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively, the consolidated financial statements), and our report dated February 22, 2023 expressed an unqualified opinion on those consolidated financial statements.
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 Annual 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 of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included 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/ KPMG LLP
KPMG LLP
Baton Rouge, Louisiana
February 22, 2023

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information.
None noted.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance.
DIRECTORS
The following table sets forth below certain information with respect to the Company’s board of directors:
Name Position (s) Age Director Since Class
Monica F. Azare Director 56 2007 Class II
Teri G. Fontenot Director 69 2019 Class II
Jonathan Goldberg Director 71 2018 Class III
Clifford S. Holtz Lead Independent Director 64 2018 Class III
John L. Indest Director 71 2000 Class II
Keith G. Myers Director, Chairman,
Chief Executive Officer 64 1994 Class I
Ronald T. Nixon Director 67 2001 Class I
W. Earl Reed, III Director 71 2018 Class I
Brent Turner Director 57 2014 Class III
The term of Class I directors expires at the Annual Meeting of the Company's stockholders in 2024. Since the Company did not hold an Annual Meeting of its stockholders in 2022 due to the pending Merger, the terms of each of the Class II and Class III directors expire at the Annual Meeting of the Company's stockholders in 2023.
The following information describes the business experience for each of the Company’s board of directors:
Monica F. Azare has served as a director since November 2007. Ms. Azare is currently Vice President, and Deputy General Counsel for Video Franchising, and served as Senior Vice President of Corporate Internal Communications, for Verizon Communications Inc. Ms. Azare also served as President, New York Region - Public Policy and Government Affairs for Verizon Communications Inc. from 2006 to 2008, and before that she served as Executive Director and Senior Counsel of Federal Affairs for Verizon Wireless from 2000 to 2006. Ms. Azare’s distinguished career also includes service as Vice President, Federal Affairs for Insight Communications Company, Inc. in New York and Chief Counsel to House Energy and Commerce Committee Chairman Billy Tauzin.
Ms. Azare is a member of the Federal Communications Bar Association, Louisiana State Bar Association and the Corporate Counsel Women of Color, Association of Corporate Counsel. She currently serves on several Boards of Directors, including the New York City Partnership Foundation, Inc. and the Louisiana State University College Advisory Board. Ms. Azare is also a member of the Executive Leadership Council. Ms. Azare was named to WomenInc. Magazine's "2019 Most Influential Corporate Board Directors."
We believe that Ms. Azare’s extensive experience in governmental affairs, combined with her executive leadership roles provides our Board of Directors with significant experience and insight into legislative and regulatory matters as well as communication with stockholders, employees, and other constituents.
Teri G. Fontenot was appointed as a director in 2019. In March 2019, Ms. Fontenot retired from Woman's Hospital, a tax-exempt health system located in Baton Rouge, Louisiana, after serving as its President and Chief Executive Officer since 1996. Prior to 1996, Ms. Fontenot served as the Chief Financial Officer and Executive Vice President of Woman's Hospital. Mrs. Fontenot also served as Chief Financial Officer of three other hospitals located in Louisiana and Florida prior to joining Woman's Hospital.
Ms. Fontenot also has served on numerous boards at a local, state and national level, including the Board of Directors of the American Hospital Association, where she served as Chairperson in 2012, and the Sixth District Board of Directors for the
Federal Reserve Bank, where she served as Audit Committee Chairperson. Ms. Fontenot currently serves on the Board of Directors of Amerisafe (NASDAQ: AMSF), AMH Healthcare Services (NYSE: AMN), and the Baton Rouge Water Company (a privately held company). On each of these boards, she has served as a member of the Audit Committee. She also serves on the Board of Directors for Dynamic Infusion Therapy, Orlando Health Inc., and the Hospice Promise Foundation (not-for-profit). She was a member of the Board of Directors of Landauer (a formerly publicly-held company) until its sale in October 2017, and the Louisiana Hospital Association Insurance Funds, where she served as Chairperson for over ten years.
Ms. Fontenot is a Certified Public Accountant (inactive) and is a Fellow of the American College of Healthcare Executives and presents frequently on women's health and leadership topics. Ms. Fontenot was named to WomenInc. Magazine's "2019 Most Influential Corporate Board Directors."
We believe Ms. Fontenot's extensive experience as a healthcare executive provides a significant addition to our Board of Directors and company.
Jonathan D. Goldberg has served as a director since the effectiveness of our merger with Almost Family in April 2018 (the "Merger"). Formerly, Mr. Goldberg served as a director of Almost Family since 1997 through the Merger. Mr. Goldberg is the managing partner of the law firm of Goldberg and Simpson in Louisville, Kentucky, and has served in that capacity since 1991. Mr. Goldberg is also the past chairman of the Louisville Visual Arts Association and the Louisville Theatrical Association, and is a member of the board of directors of the Greater Louisville Fund for the Arts and a trustee of the Jewish Hospital Heritage Fund for Excellence, a foundation whose purpose is to fund medical research and support the Jewish community of Kentucky.
We believe that Mr. Goldberg’s legal background brings a different perspective to the Board and that his expertise in labor, employment and business law provides the Board important regulatory and governance experience.
Clifford S. Holtz has served as a director since the effectiveness of the Merger. Formerly, Mr. Holtz served as a director of Almost Family since November 2017 through the Merger. Mr. Holtz has served as the Chief Operating Officer of the American Red Cross since July 2017, and has been instrumental in that organization’s growth and development, having served in a number of roles since 2011, including as President of Humanitarian Services. Before employment at the American Red Cross, Mr. Holtz enjoyed a long and successful business career in key roles at AT&T, Nortel Networks and Qwest Communications.
We believe that Mr. Holtz’s experience with the American Red Cross provides the Board with unique expertise and insight into regulatory affairs gained from his leadership roles with one of the country’s largest and most recognizable non-profits.
John L. Indest has served as a director since June 2000 and as a consultant to the company since September 1, 2011. Mr. Indest previously served as Special Advisor to the Chief Executive Officer, a position he held from August 2009 to August 2011, as our President from September 2007 to August 2009, and as our Chief Operating Officer from 2005 to June 2009. Prior to that, he served as one of our Executive Vice Presidents and as our Senior Vice President and Chief Operating Officer of Home-Based Services, beginning in May 2001. From November 1998 to May 2001, Mr. Indest served as our Vice President. Prior to joining us in November 1998, Mr. Indest served as President, Chief Executive Officer, and co-owner of Homebound Care, Inc., a regional home health provider.
Mr. Indest has testified before the Subcommittee on Health of the U.S. House of Representatives’ Ways and Means Committee and was Co-Chairman of the Louisiana Task Force on Ethics, overseeing compliance issues applicable to home health and hospice in the State of Louisiana. He formerly served on the Board of Directors of the National Association for Home Care & Hospice. Mr. Indest is also a registered nurse. We believe that Mr. Indest’s experience as a registered nurse, combined with his extensive experience in home health operations, contributes greatly to our board’s composition and to the company’s leadership role within the home care industry.
Keith G. Myers is our co-founder and has served as our Chairman of the Board and Chief Executive Officer (or similar positions in our predecessors) since 1994. Mr. Myers served as our President from 1994 to 1997, and again assumed the role as President from August 2009 to November 2010. Prior to founding the company, Mr. Myers founded, co-owned and operated Louisiana Premium Seafoods, Inc., an international food processing, procurement, and distribution company. Mr. Myers serves on the board of directors of the National Association for Home Care and Hospice, representing Region VI. He is co-founder and past chairman of the board of the Partnership for Quality Home Healthcare and is also a co-founder and director of the Alliance for Home Health Quality and Innovation. Mr. Myers served as chair of the research working group of the Alliance for Home Health Quality and Innovation and guided the clinically appropriate and cost-effective placement research conducted by Dobson DaVanzo and Associates.
Mr. Myers has been an active participant in the Home Health Top 100 since 2002 and has participated in the preparation of numerous white papers and presentations to members of both the U.S. Senate and House of Representatives, specifically related to health care reimbursement methodologies.
We believe that Mr. Myers’s extensive experience in the home care industry, combined with his leadership role as our Chief Executive Officer, provides great value to the ability of our Board of Directors to establish and oversee our strategic initiatives.
Ronald T. Nixon has served as a director since July 2001. Mr. Nixon is a founding principal of The Catalyst Group, formed in 1990, which has managed two small business investment companies, one participating preferred SBIC and seven private equity investment funds. Prior to founding The Catalyst Group, Mr. Nixon operated companies in the manufacturing, distribution, and service sectors. Mr. Nixon has served or presently serves on the Board of Directors of numerous private companies, including chairman for the publicly traded company Sanara MedTech, Inc. (“SMTI”).
We believe that Mr. Nixon’s extensive experience with acquisitions and the capital markets contributes greatly to our board’s composition and ability to oversee the company’s strategic growth strategy.
W. Earl Reed, III has served as a director since the effectiveness of the Merger. Formerly, Mr. Reed served as a director of Almost Family since 2000 through the Merger. Mr. Reed is the founder and former chairman of the Board of Springstone, LLC, a private equity sponsored owner operator of psychiatric hospitals and served in that capacity since 2010. He was a board member and chairman of the Audit Committee of Springstone, LLC, until its sale in October 2021. He also is the current chairman of the University of Louisville Foundation and has served in that capacity since 2016. From 1998 to 2010, Mr. Reed served as Chief Executive Officer of The Allegro Group, a healthcare financial advisory firm that advises public and private healthcare organizations including providing interim management services. From August 2005 to September 2007, Mr. Reed served as Chief Executive Officer and Chairman of the Board of LifeCare Holdings, Inc., a privately owned operator of 18 long-term hospitals.
We believe that Mr. Reed brings extensive leadership, financial, and strategic experience to the Board, particularly in the healthcare industry, which is invaluable to our Audit and Corporate Development Committees.
Brent Turner has served as a director since August 2014. Mr. Turner is currently the Chief Executive Officer of Summit BHC, a leading provider of behavioral health services. From 2011 to 2019, Mr. Turner served as President of Acadia Healthcare Company, Inc., one of the country's leading providers of inpatient behavioral healthcare. He previously served as the Executive Vice President, Finance and Administration of Psychiatric Solutions, Inc. from 2005 to 2010 and as the Vice President, Treasurer, and Investor Relations of Psychiatric Solutions from 2003 to 2005. From 1996 until 2001, Mr. Turner was employed by Corrections Corporation of America, a private prison operator, serving as Treasurer from 1998 to 2001. Mr. Turner also currently serves on the Board of Directors of Surgery Partners, Inc. (NASDAQ: SRGY) and previously served on the Board of Trustees for the National Association for Behavioral Health and served as its Chairman in 2018 and 2009.
We believe that Mr. Turner's extensive experience as a healthcare executive provides a significant addition to our Board of Directors and company.
EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the Company’s executive officers:
Name Position(s) Age Executive
Officer Since
Keith G. Myers Director, Chairman,
Chief Executive Officer 64 1994
Joshua L. Proffitt President,
Chief Operating Officer 45 2012
Dale G. Mackel Executive Vice President,
Chief Financial Officer and Treasurer 59 2020
Bruce Greenstein Executive Vice President,
Chief Strategy and Innovation Officer 55 2018
Nicholas Gachassin, III Executive Vice President,
General Counsel 56 2019
The following information describes the business experience for each of the Company’s executive officers:
Keith G. Myers has served as our Chief Executive Officer (or similar position in our predecessors) since 1994. Please refer to the biography of Mr. Myers provided under the heading “Information Regarding Continuing Directors” above.
Joshua L. Proffitt has served as our President since 2020. In addition to providing executive, operational, and financial leadership, Mr. Proffitt oversees the company's corporate development growth efforts through acquisitions and new strategic partnership initiatives with hospitals and health systems. Mr. Proffitt joined the company in 2008, and during his tenure with the company has served as Vice President, Assistant General Counsel, and Director of Mergers and Acquisitions from 2008 to 2009, and then Senior Vice President and Chief Compliance Officer from 2009 to 2012, Executive Vice President, Corporate Development, and General Counsel from 2012 to 2016, and Chief Financial Officer and Treasurer from 2016 to 2020. Prior to joining us, Mr. Proffitt was a member of the corporate healthcare practice group with the law firm of Alston & Bird, LLP in Atlanta, where he focused on corporate governance, mergers and acquisitions, joint ventures, healthcare law, securities law, and general corporate matters for both public and private entities with an emphasis on the healthcare industry. Mr. Proffitt is a member of the Health Care Compliance Association, is certified in healthcare compliance, and is admitted to practice law in the State of Georgia. He received a bachelor’s degree in accounting, summa cum laude, from the University of Kentucky and graduated as a member of the Order of the Coif from the University of Kentucky College of Law.
Dale G. Mackel joined the company in November 2020 as our Executive Vice President, Chief Financial Officer and Treasurer. Prior to Mr. Mackel joining the company, he served as Executive Vice President, Finance and Administration and Chief Financial Officer for BlueCross BlueShield of Nebraska from 2016 to 2020. Prior to BlueCross BlueShield of Nebraska, Mr. Mackel was the market president for Nebraska, Iowa, North Dakota and South Dakota for Aetna from 2013 to 2016 where he was accountable for all strategic, operational and financial aspects, and Chief Operating Officer and Chief Financial Officer of managed care company Coventry Health Care of Nebraska, Iowa, and South Dakota from 2008 to 2013. Prior to his managed care career, he spent 22 years with Motorola. Mr. Mackel has an MBA from the University of Iowa, a bachelor's degree in finance from the University of Nebraska at Kearney and is a Certified Healthcare Financial Professional.
Bruce D. Greenstein joined the company in June 2018. As Executive Vice President and Chief Strategy and Innovation Officer, he leads the company's value-based contracting, ACO management company, and alternative payment and delivery model strategies. Mr. Greenstein previously served as Chief Technology Officer (CTO) for the U.S. Department of Health and Human Services (HHS) in Washington, D.C. from 2017 to 2018. He has an extensive healthcare industry background in both government and the private sector, having served as President-West for New York-based Quartet Health from 2016 to 2017, CEO of Blend Health Insights from 2013 to 2016, and as managing director of Worldwide Health for Microsoft from 2006 to 2010. Mr. Greenstein was a cabinet member in Louisiana, serving as secretary of the Department of Health and Hospitals from 2010 to 2013. He also previously ran Medicaid-managed care and waivers and demonstrations at the Centers for Medicare & Medicaid Services (CMS) from 2003 to 2005.
Nicholas Gachassin, III joined LHC Group in January 2019 as Executive Vice President and General Counsel. Prior to joining the company, Mr. Gachassin served as the managing partner of Gachassin Law Firm from 2004 to 2019, an established Louisiana firm dedicated to representing healthcare providers and healthcare businesses. As general counsel, he is responsible for managing the company's in-house legal department, overseeing the work of outside counsel, and providing timely and effective legal advice on day-to-day operations, company strategy, and corporate development. Mr. Gachassin is licensed to practice in Louisiana and Mississippi and is a member of several healthcare organizations, including the American
Health Lawyers Association, the American College of Healthcare Executives, and the Louisiana Association of Hospital Attorneys. Mr. Gachassin is a graduate of St. Stanislaus College, Tulane University, Loyola University New Orleans College of Law (JD, with Honors), and Loyola University Chicago School of Law (LL.M - Health Care).
Code of Conduct and Ethics
We have adopted a code of ethics that applies to all of our directors, officers and employees. This code is publicly available in the investor relations area of our website at www.lhcgroup.com. Any substantive amendments to this code, or any waivers granted for any directors or executive officers, including our principal executive officer, principal financial officer, principal accounting officer or controller, will be disclosed on our website and remain available there for at least 12 months. This code of ethics is not incorporated in this report by reference. Copies of our code of ethics will also be provided, without charge, upon written request to Investor Relations at LHC Group, Inc., 901 Hugh Wallis Road South, Lafayette, Louisiana, 70508.
CORPORATE GOVERNANCE
Board Leadership Structure; Succession Planning
Our Board of Directors currently combines the role of Chairman of the Board with the role of Chief Executive Officer. We have also established a Lead Director position held by an independent director to further strengthen our governance structure. We believe this structure provides an efficient and effective leadership model for the company. Combining the Chairman of the Board and Chief Executive Officer roles fosters clear accountability, effective decision-making, and alignment on corporate strategy, while appointing a Lead Director ensures that an independent director serves in a board leadership position, allowing our independent directors to effectively oversee company management and key issues related to strategy, risk, and integrity. To further assure effective independent oversight, we have adopted a number of governance practices, including:
• executive sessions of our independent directors after every board meeting, and
• annual performance evaluations of the Chairman of the Board and Chief Executive Officer by our independent directors.
Mr. Clifford S. Holtz, who joined the board in 2018 is the Company's Lead Director. The Lead Director’s duties include preparing and reviewing agendas and minutes of committee meetings and pertinent board issues and presiding at regularly scheduled executive sessions and other meetings of our independent directors.
We recognize that no single leadership model is right for all companies and that, depending on the circumstances, other leadership models, such as one providing for a separate independent Chairman of the Board, might be appropriate. Accordingly, our Board of Directors periodically reviews our leadership structure. Based on that review, our Board of Directors believes that our leadership model best serves the company and its stockholders.
A key responsibility of the Chief Executive Officer and our Board of Directors is ensuring that an effective process is in place to provide continuity of leadership over the long term at all levels in the company. Each year, succession-planning reviews are held at every significant organizational level of the company. During this review, the Chief Executive Officer and the members of the Nominating and Corporate Governance Committee discuss future candidates for senior leadership positions, succession timing for those positions, and development plans for the highest-potential candidates. This process ensures continuity of leadership over the long term, and it forms the basis on which the company makes ongoing leadership assignments. It is a key success factor in managing the long-term planning and investment lead times of our business.
In addition, the Chief Executive Officer maintains in place at all times, and reviews with the Nominating and Corporate Governance Committee periodically, a confidential plan for the timely and efficient transfer of his responsibilities in the event of an emergency or his sudden incapacitation or departure.
Risk Oversight
Our enterprise risk management is an overarching ongoing governance process for identifying, ranking, and managing the risks of our business. Top risks that have been identified through this process are managed by the executive team and assigned to the senior managers responsible for coordinating the monitoring, reporting, and risk mitigation activities associated with such risks, which may be financial, operational, or strategic in nature. Senior managers periodically provide detailed reports to our Board of Directors or its committees. Accountability to a committee of our Board of Directors is based on the nature of the risk and the applicable responsibilities of the committee. For all other risks not applicable to a committee, accountability is with our Board of Directors. For example, financial related risks are reviewed by the Audit Committee, governance related risks are reviewed by our Nominating and Corporate Governance Committee, and strategic risks are reviewed by our full Board of Directors.
Our Board of Directors has delegated to the Compensation Committee the responsibility of assessing the risks associated with our compensation practices and policies for employees, including a consideration of the counterbalance of risk-taking incentives and risk-mitigating factors in our practices and policies. Based on the results of the Compensation Committee’s risk assessment, management has concluded that our current compensation policies and practices do not create risks that are reasonably likely to have a material adverse effect on the company. Our management also believes that our incentive compensation arrangements do not encourage risk-taking beyond our organization’s ability to effectively identify and manage significant risks, are compatible with effective internal controls and our risk management practices, and are supported by the oversight and administration of the Compensation Committee with regard to executive compensation programs.
Information security is a significant operational risk that may lead not only to financial loss and regulatory penalty, but may also negatively affect the reputation of and confidence in the company. We continue to enhance our information security programs and capabilities to identify and mitigate threats to the confidentiality, availability, and integrity of our information systems. Our Board of Directors has delegated to the Audit Committee the responsibility of assessing the risks associated with our information systems. Our Audit Committee is actively engaged in the oversight of the company’s information security risk management and cybersecurity programs. The Audit Committee receives regular updates from the company’s Chief Information Officer concerning our information security and cyber risk strategy, cyber defense initiatives, cyber event preparedness, and cybersecurity risk assessments. The Audit Committee also oversees the company’s consultation with outside parties with an expertise in cybersecurity that we engage and retain to review and assess our information security program, and to perform periodic penetration tests against our information networks. Further, the company employs a risk management framework to identify, assess, monitor, and test cyber risk and controls, and performs comprehensive due diligence and ongoing oversight of third-party relationships, including vendors. Our information security program employs a wide variety of technologies that are intended to secure our operations and proprietary information. This in-depth defense strategy focuses on protecting our networks, systems, data, and facilities from attacks or unauthorized access. We have made and will continue to make ongoing investments in developing and enhancing our security processes and controls and in maintaining our technology infrastructure, including the maintenance of a business continuity and disaster recovery program, which is tested on a regular basis. We also provide regular education and training to our employees and contractors on cybersecurity and the protection of our information systems in order to mitigate risk associated with protection against threats to the confidentiality, availability, and integrity of our information systems.
We have established five committees of our Board of Directors: an Audit Committee, Compensation Committee, Nominating and Corporate Governance Committee, Clinical Quality Committee, and Corporate Development Committee, each of which is briefly described below. The table below shows the current composition of our Board committees.
Name
Audit
Compensation
Nominating
and
Corporate
Governance
Clinical
Quality
Corporate
Development
Monica F. Azare
X X*
Teri G. Fontenot
X* X X
Jonathan Goldberg
X* X X
Clifford S. Holtz
X X X
John L. Indest
X* X
Keith G. Myers
Ronald T. Nixon
X X
W. Earl Reed, III
X X X
Brent Turner
X X*
* Committee Chair.
Audit Committee
The members of the Audit Committee are Ms. Fontenot and Messrs. Holtz, Reed, and Turner, and Ms. Fontenot serves as the chair of the Audit Committee. We have determined that each member of the Audit Committee is “independent” as defined in Rule 10A-3 of the Securities Exchange Act of 1934 (the “Exchange Act”) and the listing standards of NASDAQ, including rules specifically governing audit committee members. Both Mr. Turner and Ms. Fontenot have been designated by the Board as the Audit Committee financial experts.
The Audit Committee was established in accordance with Section 3(a)(58)(A) of the Exchange Act. The charter of the Audit Committee is available on our website at www.lhcgroup.com under Investors - Corporate Governance. The Audit Committee performs the following functions, among others:
• selects our independent registered public accounting firm (whose duty it is to audit the financial statements of the company and its subsidiaries for the fiscal year in which it is appointed) and has the sole authority and responsibility to approve all audit and engagement fees and terms, as well as all permitted non-audit services by our independent auditors;
• meets with the independent auditors and management of the company to review and discuss the scope of the audit and all significant matters related to the audit;
• reviews the adequacy and effectiveness of our internal controls regarding accounting and financial matters;
• reviews the company’s financial statements and discusses them with management and the independent auditors;
• reviews and discusses with management our earnings reports and press releases, as well as financial information and earnings guidance provided to analysts and rating agencies;
• reviews and discusses with management our quarterly reports on Form 10-Q and annual reports on Form 10-K;
• reviews and approves any proposed transaction with any affiliate, in accordance with our written policy with respect to related person transactions;
• reviews the effectiveness of our compliance program with management;
• annually reviews and implements the Audit Committee charter and reports to our Board of Directors regarding activities of the Audit Committee; and
• performs an annual performance evaluation of the Audit Committee.
Additional information regarding the Audit Committee and its processes and procedures for the consideration and approval of related party transactions can be found in the section titled “Certain Relationships and Related Transactions.”
Compensation Committee
The members of the Compensation Committee are Ms. Azare and Messrs. Goldberg, Holtz, and Reed, and Mr. Goldberg serves as the chair of the Compensation Committee. We have determined that each of the members of the Compensation Committee is an “independent director” as defined under the listing standards of NASDAQ, including rules specifically governing compensation committee members, and is a “non-employee director” as defined in Rule 16b-3 under the Exchange Act.
The charter of the Compensation Committee is available on our website at www.lhcgroup.com under Investors - Corporate Governance. The Compensation Committee performs the following functions, among others:
• annually reviews and approves our goals and objectives relevant to the compensation of our Chief Executive Officer and evaluates the performance of our Chief Executive Officer in light of these goals and objectives;
• annually determines and approves the compensation of our Chief Executive Officer based on such evaluation;
• annually reviews, evaluates and approves the compensation of our other executive officers;
• makes recommendations to our Board of Directors regarding our equity-based and incentive compensation plans;
• annually reviews and implements the Compensation Committee charter and reports to our Board of Directors regarding activities of the Compensation Committee; and
• performs an annual performance evaluation of the Compensation Committee.
The Compensation Committee has the authority to delegate any of its responsibilities to subcommittees as it deems appropriate. The Compensation Committee has delegated authority to the Compensation Committee Chair and our Chief Executive Officer to approve incentive awards under our long-term incentive plans to participants who are not subject to Section 16 of the Exchange Act, provided such awards are consistent with the previously approved methodology for determining awards. Additional information regarding the Compensation Committee and its processes and procedures for the consideration and determination of executive compensation can be found in the section titled “Compensation Discussion and Analysis.”
Nominating and Corporate Governance Committee
The members of the Nominating and Corporate Governance Committee are Ms. Azare and Messrs. Goldberg and Holtz, and Ms. Azare serves as the chair of the Nominating and Corporate Governance Committee. We have determined that each of the members of the Nominating and Corporate Governance Committee are independent directors under the listing standards of NASDAQ.
The charter of the Nominating and Corporate Governance Committee is available on our website at www.lhcgroup.com under Investors - Corporate Governance. The Nominating and Corporate Governance Committee performs the following functions, among others:
• recommends to our Board of Directors for its approval proposed nominees for board membership after evaluating each proposed nominee and making a determination as to such proposed nominee’s qualifications to be a board member;
• evaluates the performance of each existing director before recommending to our Board of Directors his or her nomination for an additional term as a director;
• annually reviews and implements the Nominating and Corporate Governance Committee charter and reports to our Board of Directors regarding activities of the Nominating and Corporate Governance Committee; and
• performs an annual performance evaluation of the Nominating and Corporate Governance Committee.
Clinical Quality Committee
The members of the Clinical Quality Committee are Ms. Fontenot, and Messrs. Goldberg, Indest, and Nixon, and Mr. Indest serves as the chair of the Clinical Quality Committee.
The charter of the Clinical Quality Committee is available on our website at www.lhcgroup.com under Investors - Corporate Governance. The Clinical Quality Committee performs the following functions, among others:
• advises our clinical leadership of leading edge strategies, including clinical practices to be evaluated for company adoption;
• monitors our performance on established internal and external benchmarking regarding clinical performance and outcomes;
• oversees and evaluates the effectiveness of our performance improvement and quality plans;
• facilitates the development of industry best-practices based on internal and external data comparisons;
• fosters enhanced awareness of our clinical performance by our Board of Directors and appropriate external sources;
• establishes a long-term, strategic clinical vision for the company;
• makes recommendations to our Board of Directors with respect to our overall quality, safety, and performance improvement initiatives;
• makes regular reports to the Board of Directors concerning the activities of the Clinical Quality Committee;
• annually reports to our Board of Directors certain company statistical information as required by The Joint Commission, a healthcare accreditation organization;
• annually reviews and implements the Clinical Quality Committee charter and reports to our Board of Directors regarding activities of the Clinical Quality Committee; and
• performs an annual performance evaluation of the Clinical Quality Committee.
Corporate Development Committee
The members of the Corporate Development Committee are Ms. Fontenot and Messrs. Indest, Nixon, Reed, and Turner, and Mr. Turner serves as the chair of the Corporate Development Committee.
The charter of the Corporate Development Committee is available on our website at www.lhcgroup.com under Investors - Corporate Governance. The Corporate Development Committee performs the following functions, among others:
• develops long-term corporate development strategies;
• works with management to develop acquisition strategies;
• reviews progress on corporate development strategies;
• reports evaluations and recommendations relating to corporate development strategies to our Board of Directors;
• annually reviews and implements the Corporate Development Committee charter and reports to our Board of Directors regarding activities of the Corporate Development Committee; and
• performs an annual performance evaluation of the Corporate Development Committee.
Director Nominee Evaluation Process
The Nominating and Corporate Governance Committee is responsible for seeking individuals qualified to become board members, conducting appropriate inquiries into the backgrounds and qualifications of possible board nominees, and
proposing nominees for board membership to our Board of Directors for its approval. The Nominating and Corporate Governance Committee will consider candidates for board membership suggested by its members and other board members, as well as by management and stockholders.
The Nominating and Corporate Governance Committee seeks to ensure that the composition of our Board of Directors at all times reflects a variety of complementary experiences and backgrounds sufficient to provide sound and prudent guidance with respect to the operations and interests of the company. The Nominating and Corporate Governance Committee will evaluate prospective nominees considering certain factors, including:
• the commitment of the prospective nominee to represent the long-term interests of our stockholders;
• the prospective nominee’s standards of character and integrity;
• the prospective nominee’s financial literacy;
• the prospective nominee’s ability to dedicate sufficient time, energy, and attention to the diligent performance of his or her duties, including the prospective nominee’s service on other public company boards;
• the prospective nominee’s independence and absence of any conflicts of interest that would interfere with his or her performance as a director;
• the extent to which the prospective nominee contributes to the range of talent, skill, and expertise appropriate for our Board of Directors; and
•the prospective nominee's background, gender, and ethnicity.
The Nominating and Corporate Governance Committee strives to ensure that at least one member of our Audit Committee qualifies as an “audit committee financial expert,” as defined by Item 407(d)(5) of Regulation S-K, and that a majority of the members of our Board of Directors meet the definition of “independent director” under the listing standards of NASDAQ. The Nominating and Corporate Governance Committee also believes it is appropriate for certain members of management to participate as members of our Board of Directors. Other than the foregoing, there are no stated minimum criteria for director nominees, although the Nominating and Corporate Governance Committee may also consider such other factors as it deems are in the best interests of the company and our stockholders, such as the current composition of our Board of Directors, the balance of management and independent directors, and the need for specialized expertise.
Annually, the Nominating and Corporate Governance Committee reviews with our full Board of Directors the appropriate experience, skills, and characteristics expected of board members in the context of the current make-up of our Board of Directors. In accordance with our Corporate Governance Guidelines, the Nominating and Corporate Governance Committee’s annual review includes assessing the diversity of our Board of Directors and whether board members possess certain skills, such as an understanding of financial statements and financial reporting systems, an understanding of the healthcare industry, experience in operations, experience in governmental matters, and experience in acquisitions. We view and define diversity in its broadest sense, which includes gender, ethnicity, education, experience, and leadership qualities. If, as a result of such assessment, the Nominating and Corporate Governance Committee determines that adding or replacing a director is advisable, the Nominating and Corporate Governance Committee initiates a search for a suitable candidate to fulfill the board’s needs from a diverse pool of candidates.
The Nominating and Corporate Governance Committee identifies nominees by first evaluating the willingness of the current members of our Board of Directors to continue in service. Current members of our Board of Directors with skills and experience that are relevant to our business and who are willing to continue in service are considered for re-nomination, and the Nominating and Corporate Governance Committee balances the value of continuity of service by existing members of our Board of Directors with that of the need for additional skills or experience from new board members. If any member of our Board of Directors does not wish to continue in service, or if the Nominating and Corporate Governance Committee or our full Board of Directors decides not to re-nominate a current board member for re-election, the Nominating and Corporate Governance Committee identifies the desired skills and experience for a new nominee in light of the criteria for board members described above. The Nominating and Corporate Governance Committee considers new candidates for our Board of Directors recommended by current members of our board or members of management. In addition, the Nominating and Corporate Governance Committee may, to the extent it deems appropriate, retain a professional search firm and other advisors to identify potential director nominees. The Nominating and Corporate Governance Committee also considers director candidates recommended by eligible stockholders. The criteria employed by the Nominating and Corporate Governance Committee in evaluating potential nominees do not differ based on whether the candidate is recommended by a stockholder of the company.
Compensation Committee Interlocks and Insider Participation
None of the members of the Compensation Committee was, during 2022 or formerly, an officer or employee of the company or had any relationships during 2022 requiring disclosure in this proxy statement under “Certain Relationships and Related
Transactions.” During 2021, none of our executive officers served as a member of a Board of Directors or compensation committee (or other board committee performing equivalent functions) of any entity that has one or more executive officers serving as a member of our Board of Directors or the Compensation Committee.
Code of Business Conduct and Ethics; Corporate Governance Guidelines
In compliance with requirements of both the SEC and the listing standards of NASDAQ, we have adopted a Code of Conduct and Ethics applicable to all of our directors, officers, and employees. Our Code of Conduct and Ethics and our Corporate Governance Guidelines can be found on our website at www.lhcgroup.com under Investors - Corporate Governance. Both are available in print upon request.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation.
EXECUTIVE OFFICER COMPENSATION
COMPENSATION COMMITTEE REPORT
The Compensation Committee has reviewed and discussed the “Compensation Discussion and Analysis” section with management. Based on this review and discussion, the Compensation Committee recommended to our Board of Directors that the Compensation Discussion and Analysis be included in the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
Submitted by the Compensation Committee of the Board of Directors.
Monica F. Azare
Jonathan Goldberg - Chair
Clifford Holtz
W. Earl Reed, III
COMPENSATION DISCUSSION AND ANALYSIS
In this section, we provide an overview and analysis of our executive compensation program and policies, the material compensation decisions we have made under those programs and policies with respect to our named executive officers, and the material factors that the Compensation Committee considered in making those decisions. Immediately following this section, you will find a series of tables containing specific information about the compensation earned or paid in 2022 to the following individuals, whom we refer to, collectively, as our named executive officers for 2022:
• Keith G. Myers, our Chief Executive Officer;
• Joshua L. Proffitt, our President and Chief Operating Officer;
• Dale G. Mackel, our Executive Vice President, Chief Financial Officer and Treasurer;
• Bruce Greenstein, our Executive Vice President, Chief Strategy and Innovation Officer; and
• Nicholas Gachassin, III, our Executive Vice President, and Chief General Counsel.
Executive Summary
We provide post-acute health care services to patients through our home health agencies, hospice agencies, home and community-based agencies, facility-based (primarily long-term acute hospitals), and healthcare innovations services ("HCI"). As of December 31, 2022, we operated 920 locations in 37 states within the continental United States and the District of Columbia. The majority of our consolidated net service revenue comes from Medicare, and our objective is to become the leading provider of in-home healthcare services in the United States, while also providing a complementary suite of other post-acute healthcare service offerings through our facility-based and HCI segments. For more information about our business, please see “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form 10-K.
The compensation program for our named executive officers is structured to support the achievement of our business objectives, and by design, overall executive compensation will rise or fall in tandem with our performance. We believe that each executive officer has the potential to affect both the short-term and long-term profitability of the company. Therefore, we place considerable importance on creating and implementing our executive compensation program to properly compensate and incentivize our named executive officers. Our executive compensation program emphasizes the creation of stockholder value by focusing on our overall performance and recognizing and rewarding each executive officer’s contributions to our success. Highlights of our program include:
• High percentage of executive compensation is at-risk or performance-based. At least half or more of the total direct compensation earned by each named executive officer in 2022 (base salary, annual cash incentive award,
and time-vesting restricted stock award) was at-risk or performance-based, meaning that it must have been earned on the basis of corporate and individual performance goals (in the case of annual incentive awards) or its future value was contingent upon the future performance of our common stock (in the case of restricted stock). For Mr. Myers, our Chief Executive Officer, approximately 82% of his 2022 total direct compensation was at-risk or performance-based.
•2022 long-term equity incentive awards are based on successful achievement of key performance metrics. The grants of long-term equity incentives to the named executive officers in 2022 were based on the company meeting or exceeding performance expectations relating to key financial and qualitative performance metrics in 2021.
•Compensation clawback policy. We have adopted a compensation clawback policy that allows us to recoup certain compensation paid to our executive officers in the event of a restatement of our financial results.
•Stock ownership guidelines. We have adopted stock ownership guidelines and retention requirements for our executive officers and directors.
•Anti-hedging and anti-pledging policies. Our Insider Trading Policy prohibits hedging and pledging transactions by our executive officers and directors.
•Double-trigger change in control provisions. Following a change in control, each named executive officer would only be entitled to severance benefits and accelerated vesting of equity awards if the executive officer experiences an involuntary termination of employment.
•No excise tax gross-ups. We do not provide excise tax gross-ups in change of control arrangements.
Our Compensation Philosophy
Our compensation philosophy is to integrate our compensation program with corporate performance by linking a portion of executive officer compensation to the achievement of financial goals that are critical to the success of the company. Our objective is to have a compensation program that will allow us to attract, motivate, and retain qualified executives, reward entrepreneurial thinking, and align the interests of our named executive officers with the interests of our stockholders. In order to further this objective, our compensation program is structured to incorporate certain key principles, which are reflected in various elements of our compensation program, as summarized below:
Compensation Principle
Element of Compensation Program that Reflects Principle
• Our executives should be provided with total compensation opportunities at levels that are competitive for comparable positions at companies with whom we compete for talent.
• Based on review of peer group market data, our executive compensation program is competitive relative to our peer group, with opportunities for our executives to earn compensation that is at or above median levels based on meeting or exceeding key company and individual performance measures.
• A significant portion of executive compensation should be linked to the company’s achievement of performance goals and increased stock value in a way that proportionally rewards higher performance levels.
• Annual bonus awards and long-term equity awards are earned based on company performance, and the value of restricted stock awards is based on our stock value.
• Each of our executive’s interests should be closely aligned with those of our stockholders by making stock-based incentives a core element of our compensation program.
• We grant annual equity awards to our executives in the form of restricted stock based on company and individual executive performance.
How We Determine and Assess Executive Compensation
We believe that the total compensation package available to our executives is fair and competitive, provides enhanced levels of financial reward based on higher levels of performance, and is designed to recognize and reward both short- and long-term performance. As described below, the Compensation Committee determines appropriate elements and levels of compensation for our named executive officers based upon input from our Chief Executive Officer regarding each executive officer other than himself, market data provided by its compensation consultant, analysis of market data and trends, and an analysis of internal pay equity.
Role of Independent Compensation Consultants
To assist in evaluating our compensation practices, the Compensation Committee from time to time retains an independent compensation consultant to provide advice and ongoing recommendations regarding executive compensation practices that are consistent with our business goals and pay philosophy. We believe that this input and advice produces more informed decision-making and assures that an objective perspective is considered in this important governance process. The Compensation Committee has retained Pearl Meyer & Partners (“PM&P”) as its the executive compensation consultant since 2010. For their analysis conducted in late 2020, which was used in connection with the executive compensation decisions for 2022, the Compensation Committee instructed PM&P to (i) review the total compensation package (base salary, annual cash incentives, and long-term equity incentives) we pay to our named executive officers, (ii) assess the competitiveness and reasonableness of our compensation program as compared to a peer group of companies within the health care industry with similar revenue levels and market capitalization, and (iii) provide conclusions and recommendations for the current and future total compensation packages for our named executive officers. When establishing compensation levels for our executive officers for 2022, we referred to the results of this study, met with representatives from PM&P, and also internally reviewed current industry and market practices within our peer group. The Compensation Committee has assessed the independence of PM&P and concluded that PM&P’s work did not raise any conflicts of interest. PM&P has no other relationship with our company.
Market Data and Peer Group
The Compensation Committee reviews and analyzes market data to ensure that our executive officer compensation is competitive with the marketplace. We consider the compensation levels, programs, and practices of other companies within our industry and of comparable size in terms of revenue and market capitalization to assist us in setting executive compensation so that it is market competitive. The Compensation Committee used the reported market data, along with the PM&P report, to understand competitive compensation, industry trends and best practices regarding executive compensation. In reviewing compensation levels for 2022, we used the following peer group: Amedisys, Inc.; AMN Healthcare Services, Inc.; Brookdale Senior Living, Inc.; Chemed Corporation; Encompass Health Corporation; LifePoint Health, Inc.; MEDNAX, Inc.; The Ensign Group, Inc.; Quorum Health Corporation; RadNet, Inc.; Acadia Healthcare Company, Inc.; Select Medical Holdings Corporation; Surgery Partners, Inc.; The Providence Service Corporation; Option Care Health; Premier, Inc. and Civitas Solutions, Inc.
Role of Chief Executive Officer in Executive Compensation Decisions
Our Chief Executive Officer recommends to the Compensation Committee base salary, target bonus levels, and long-term incentive awards for our executive officers, excluding himself. Our Chief Executive Officer bases these recommendations on data and analysis regarding our peer group, information provided by our compensation consultant, and qualitative judgments regarding individual performance. Our Chief Executive Officer is not present when the Compensation Committee discusses or determines any aspect of his compensation.
Consideration of Say-on-Pay Vote Results
At our 2011 Annual Meeting, we held our first non-binding stockholder advisory vote on executive compensation (“say-on-pay”). Our stockholders have consistently and overwhelmingly approved our executive compensation program, with greater than 95% of voting stockholders casting their vote in favor of the say-on-pay resolution in each of the annual say-on-pay votes held, including our most recent say-on-pay vote at our 2021 Annual Meeting of Stockholders. The Compensation Committee considered the results of the 2021 say-on-pay vote along with other factors when making executive compensation decisions for 2022. In making such decisions, the Compensation Committee’s main considerations included our stockholders’ continuous, strong support for our executive compensation program, and the Compensation Committee’s satisfaction with the 2021 pay structure, as well as compensation research report prepared for the company by PM&P in 2020 and other publicly available information.
Elements of Our Compensation Program
Our executive compensation program consists of the following three primary components: base salary, annual cash incentive awards and long-term equity incentive awards in the form of restricted stock grants. We consider a combination of objective and subjective factors in determining the appropriate aggregate compensation for our named executive officers. Objective factors include compensation paid by companies in our peer group to officers in similar positions, and factors relating to the performance of the company, including net income, earnings per share, return on equity, quality of patient care measures and Star Ratings, and organic and acquisitive growth. Subjective factors relate to the performance of the individual executive officer, and include the following:
• the executive officer’s responsibilities;
• the scope of the position;
• experience and length of service with the company;
• individual efforts and performance within the company, the industry and the community;
• team building skills consistent with the company’s best interests; and
• observance of our ethics and compliance program.
While these subjective factors are integrated with the objective factors mentioned above, the overall assessment is primarily a subjective one, intended to reflect the level of responsibility and individual performance of the particular executive officer.
In addition, we provide certain other benefits, such as limited perquisites, retirement benefits, which are available to all eligible employees, and severance benefits. The percentage mix of total compensation for 2022 for each named executive officer (as reported in the “2022 Summary Compensation Table” in the section “Executive Compensation Tables” below) is as follows:
FIXED
AT RISK/PERFORMANCE BASED
Name
2022 Total
Compensation
(as Reported in the
Summary
Compensation
Table)
% Attributable
to Salary and
All Other
Compensation
% Attributable
to
Annual Cash Incentive Award
% Attributable
to
Restricted Stock
Grants
Keith G. Myers
$ 5,453,394 18% -% 82%
Joshua L. Proffitt
4,273,517 16 - 84
Dale G. Mackel
3,083,484 26 - 74
Bruce Greenstein
1,830,979 30 - 70
Nicholas Gachassin, III
999,280 42 - 58
Base Salary
We provide base salaries to our named executive officers as compensation for day-to-day responsibilities and sustained performance. Base salary provides our named executive officers with an element of compensation that is not “at-risk.”
Mr. Myers conducts an annual merit review of each of our named executive officers, and based on this review, recommends base salaries to the Compensation Committee with respect to each named executive officer other than himself. The Compensation Committee determines the appropriate base salary for Mr. Myers after an annual performance review based on the same factors used to evaluate the other named executive officers.
Annual Cash Incentive Awards
The Compensation Committee believes that a significant portion of the total cash compensation for named executive officers should be based on our achievement of specific performance criteria, and that a significant part of the cash compensation package should be “at-risk.” The Compensation Committee established short-term incentive ("STI") target amounts for Messrs. Myers, Proffitt, Mackel, Greenstein, and Gachassin at 100%, 100%, 75%, 78%, and 60%, respectively, of their base salaries. The Compensation Committee approved a cash incentive bonus program for 2022 under which Messrs. Myers, Proffitt, Mackel, Greenstein, and Gachassin had the opportunity to earn a cash incentive bonus (the "EPS Target Bonus") based on our level of achievement in 2022 of annual earnings per share target goals in accordance with the calculations set forth in the STI plan approved by the Compensation Committee (the "Annual EPS Goals for 2022"), as follows:
Annual EPS Goals for 2022 Amount of STI Earned
$5.55 50% of STI Target
$5.66 80% of STI Target
$5.77 100% of STI Target
$5.88 100% of STI Target, plus 10% of base salary
$6.00 100% of STI Target, plus 20% of base salary
The company’s adjusted 2022 earnings per share was below the amount required to earn the EPS Target Bonus, and accordingly, no annual incentives were paid to the named executive officers for 2022.
Long-Term Equity Incentive Awards
The purpose of long-term equity incentives is to align our named executive officers’ performance incentives more closely with the interests of our stockholders. Since our initial public offering in 2005, we have provided annual long-term equity incentive awards to our named executive officers in the form of restricted stock awards. We believe that these restricted stock awards have been and remain an excellent vehicle for providing financial incentives for management because they align the executives’ interests with those of our stockholders and provide strong incentive for the creation of stockholder value. Time-vesting restricted stock also provides a strong retention component to our compensation program.
For the 2022 grants, the Committee established target award opportunities under the long-term incentive plan ("LTIP") expressed as a percentage of base salary that are driven by the individual's role/level within the company. The actual grant value is based on the achievement of the certain company financial and quality goals as determined by the Compensation Committee. For the 2022 grants, the committee considered the following 2021 performance measures:
•Earnings Per Share;
•Return on Equity; and
•Quality Outcomes.
The grant values are ultimately at the Committee's discretion. The Committee may increase or decrease the award to reflect what the Committee determines to be an appropriate result. The Committee primarily considers company performance versus budget. In addition, the Committee considers individual performance, performance versus peers, and external economic factors including governmental reimbursements.
During 2022, Messrs. Myers, Proffitt, Mackel, Greenstein and Gachassin received restricted stock awards with target grant date values equal to 447%, 546%, 456%, 237%, and 141%, respectively, of their 2021 base salaries. The Committee considered company and individual performance and determined that the target grant values were appropriate.
Timing of Equity Grants
Equity awards are made by the Compensation Committee only on dates the Committee meets. Equity awards for 2022 were approved at a regularly scheduled meeting of our Compensation Committee after review and consideration of the company’s performance during the prior fiscal year. We do not have any program, practice, or policy of timing equity awards in connection with the release of material non-public information. The Compensation Committee may make an award with an effective date in the future contingent on commencement of employment, execution of a new employment agreement, or some other subsequent event.
Limited Executive Perquisites and No Retirement Benefits
Retirement benefits fulfill an important role within our overall executive compensation objective by providing a financial security component which promotes retention. However, our executives do not receive any retirement benefits that are not generally available to our other full-time employees. We maintain a 401(k) plan, a tax-qualified defined contribution retirement plan in which our named executive officers are eligible to participate and we provide a discretionary match of up to 2% of employee eligible compensation. We do not maintain any excess benefit plans, defined benefit or pension plans, or any deferred compensation plans.
Severance and Change in Control Arrangements
We maintain employment agreements with each of our named executive officers that provide, among other things, that the executive will be entitled to receive certain severance benefits in the event of a termination of employment, and the executive will be entitled to increased benefits in the event that a termination of employment follows a change in control of the company. We believe these employment agreements are an important element of our named executive officers’ overall compensation package because they serve to ensure the continued focus and dedication of our named executive officers notwithstanding any personal concerns they may have regarding their own continued employment, either prior to or following a change in control. The increased benefits that are payable in the event of a termination following a change in control are designed to attract and retain qualified executives who might not otherwise join or remain with the company without financial protection in the event that they are forced out of the company following a change in control. These provisions are also intended to provide for continuity of management in the event of a change in control of the company. We believe that our severance and change in control arrangements are comparable to those provided by the companies in our peer group and competitive within our industry.
None of our named executive officers are entitled to a tax gross-up in connection with a change of control payment.
Compensation Clawback Policy
The Board of Directors has adopted an executive compensation recovery, or "clawback" policy that applies to all executive officers in the event the company is required to restate its financial statements. The Compensation Committee will seek
recovery of any performance-based incentive payments or grants granted to executive officers during the three years preceding such restatement where (1) the payment or award grant was calculated based on achievement of the misstated financial results; (2) the Board of Directors determines the executive engaged in intentional misconduct that materially contributed to the need for the restatement; and (3) a lower payment or award grant would have been made to the executive based upon the restated financial results, unless the Committee determines that recovery of the excess compensation would be unreasonable or contrary to the interests of the company.
Executive Stock Ownership and Retention Guidelines
The Board of Directors has adopted stock ownership guidelines pursuant to which the following executives are expected to own shares of company stock equal in value to a multiple of the executive officer's base salary, as follows:
Chief Executive Officer 5x annual base salary
President and Chief Operating Officer 3x annual base salary
Chief Financial Officer 2x annual base salary
Until an above-described executive has satisfied the stock ownership guidelines, he is required to retain 75% of the after-tax shares received upon the exercise or vesting of equity incentive awards. Furthermore, any sales of company stock by an above-described executive will be permitted only to the extent that the executive will continue to meet the guidelines immediately following such sale.
Tax and Accounting Considerations
The accounting and tax treatment of compensation generally has not been a material factor in determining the amounts of compensation for our named executive officers. However, the Compensation Committee and management have considered the accounting and tax impact of various program designs to balance the potential cost to us with the benefit/value to the named executive officers.
EXECUTIVE COMPENSATION TABLES
The tables below summarize the total compensation paid to or earned by, as applicable, our named executive officers during 2022. See the section titled “Compensation Discussion and Analysis” above for a more detailed discussion of our executive compensation program.
2022 Summary Compensation Table
The following table sets forth the cash and other compensation paid to or earned by, as applicable, our named executive officers for their services in all capacities during 2022, 2021, and 2020:
Name and Principal Position
Year
Salary
($)(1)
Bonus
($)(2)
Stock
Awards
($)(3)
Non-Equity
Incentive Plan
Compensation
($)(4)
All Other
Compensation
($)(5)
Total
($)
Keith G. Myers 2022 996,000 - 4,451,294 - 6,100 5,453,394
Chief Executive Officer 2021 996,000 - 3,305,950 - 5,539 4,307,489
2020 996,000 - 2,334,461 - 5,539 3,336,000
Joshua L. Proffitt 2022 663,000 - 3,610,517 - - 4,273,517
President and Chief Operating Officer 2021 663,000 - 2,415,175 - - 3,078,175
2020 663,000 - 1,767,243 - 50,000 2,480,243
Dale G. Mackel 2022 500,000 300,000 2,277,715 - 5,769 3,083,484
Executive Vice President,
Chief Financial Officer and Treasurer
2021 500,000 - 122,100 - 5,240 627,340
2020 83,333 - 250,115 31,250 30,000 394,698
Bruce Greenstein 2022 541,000 - 1,283,879 - 6,100 1,830,979
Executive Vice President,
Chief Strategy and Innovation Officer 2021 541,000 - 1,577,381 - 5,800 2,124,181
2020 540,750 - 934,027 210,000 5,700 1,690,477
Nicholas Gachassin, III 2022 415,000 - 584,280 - - 999,280
Executive Vice President, Chief General Counsel 2021 415,000 3,461 468,975 - - 887,436
2020 400,000 - 359,522 120,000 - 879,522
(1)The amounts reported in this column reflect the annual base salary earned by each of our named executive officers.
(2)The amounts reported in this column reflect discretionary bonuses paid to the named executive officer.
(3)The amounts reported in this column reflect the grant date fair value of the restricted stock awards, as determined pursuant to Accounting Standards Codification 718, and are based on the closing sales price per share of our common stock on the date of grant. See the "2022 Grants of Plan-Based Awards" table for additional information for awards granted in 2022.
(4)The amounts reported in this column reflect the annual cash incentive awards earned by each of our named executive officers based on company and individual performance. For more information regarding our annual cash incentive program, see the discussion in the section titled "Compensation Discussion and Analysis."
(5)The amounts reported in this column for 2022 for each named executive officer reflect our 2% matching contribution under the 401(k) plan and payments pursuant to employment agreements.
CEO PAY RATIO
SEC regulations require that we provide a comparison of the annual total compensation of Keith G. Myers, our Chief Executive Officer in 2022, to the annual total compensation of our median employee. For purposes of providing the comparison in accordance with SEC regulations, we identified a “median employee” and compared Mr. Myers’ annual total compensation to that of the median employee. For 2022, our last completed fiscal year:
• Mr. Myers’ annual total compensation was $5,453,394.
• Our median employee’s annual total compensation was $41,397.
• The ratio of Mr. Myers’ annual total compensation to our median employee’s annual total compensation was 131:1.
The methodology that we used to identify the median employee is described below. Annual total compensation is calculated in the same manner as the amount set forth in the "Total" column in the 2022 Summary Compensation Table. We believe the pay ratio information set forth above constitutes a reasonable estimate, calculated in a manner consistent with the applicable SEC regulations.
Because other companies may use different methodologies to identify their median employees, the pay ratio set forth above may not be comparable to the pay ratios used by other companies.
Methodology
Date used to determine employee population - For purposes of identifying the median employee, we selected December 31, 2022 to be the date of which we should determine our employee population.
Composition of employee population - The analysis consisted of 27,728 employees.
Pay data used - To identify the median employee, we derived compensation information from our payroll records for fiscal 2022. We annualized compensation for full-time employees hired during 2022.
2022 Grants of Plan-Based Awards
The following table sets forth the individual grants of plan-based awards made to each of our named executive officers during 2022:
Estimated Future Payouts Under
Non-Equity Incentive Plan Awards (1)
All Other
Stock
Awards:
Number of
Shares of
Stock or
Units
(#)(2)
Grant Date
Fair Value
of Stock
Awards
($)(3)
Name
Grant Date
Threshold ($) Target ($) Maximum ($)
Keith G. Myers
EPS Target Bonus
498,000 996,000 1,195,200
Stretch Target Bonus
99,600
Restricted Stock
3/1/2022
31,845 4,451,294
Joshua L. Proffitt
EPS Target Bonus
331,500 663,000 795,600
Stretch Target Bonus
66,300
Restricted Stock
3/1/2022
25,830 3,610,517
Dale G. Mackel
EPS Target Bonus
187,500 375,000 475,000
Stretch Target Bonus
37,500
Restricted Stock
3/1/2022
16,295 2,277,715
Bruce Greenstein
EPS Target Bonus
210,000 420,000 528,200
Stretch Target Bonus
42,000
Restricted Stock
3/1/2022
9,185 1,283,879
Nicholas Gachassin, III
EPS Target Bonus
125,000 250,000 333,000
Stretch Target Bonus
25,000
Restricted Stock
3/1/2022
4,180 584,280
(1) Amounts reflect threshold, target and maximum payout levels for the EPS Target Bonus and target payout level for the Stretch Target Bonus (assuming each of the five performance goals are met) for 2022 performance under our annual cash incentive program. The actual amount earned by each named executive officer for 2022 is reported under the "Non-Equity Incentive Plan Compensation" column in the "2022 Summary Compensation Table". For more information regarding our annual cash incentive program, see the discussion in the section titled “Compensation Discussion and Analysis.”
(2) Amounts reflect awards of time-vesting restricted stock granted under our long-term incentive plans. The restricted stock awards vest in five equal annual installments beginning on the first anniversary of the date of grant.
(3) Amounts reflect the grant date fair value of the restricted stock awards, determined pursuant to the Accounting Standards Codification 718, based on the closing sales price per share of our common stock on the grant date.
Outstanding Equity Awards at December 31, 2022
The following table provides information concerning stock awards that are outstanding as of December 31, 2022 for each of our named executive officers. Our named executive officers do not hold any stock option awards.
Stock Awards
Name
Number of
Shares or Units
of Stock That
Have Not Vested
(#)(1)
Market Value of Shares or
Units of Stock That Have
Not Vested
($)(2)
Keith G. Myers
83,641 13,523,913
Joshua L. Proffitt
60,301 9,750,069
Dale G. Mackel
14,257 2,305,214
Bruce Greenstein
23,677 3,828,334
Nicholas Gachassin, III
9,378 1,516,329
(1) The restricted shares vest in five equal annual installments beginning on the first anniversary of the date of grant provided that the executive is then still employed by the company, or earlier upon the occurrence of the executive’s death, disability or retirement, or termination by the company without cause or resignation for good reason within two years following a change of control of the company. The restricted stock will vest as follows:
Name
Shares of
Restricted Stock
Vesting Schedule
Mr. Myers
12,244 100% on March 1, 2023
13,724 50% on March 1, 2023 and on the next anniversary thereof
11,532 33% on March 1, 2023 and on each of the two subsequent anniversaries thereof
14,296 25% on March 1, 2023 and on each of the three subsequent anniversaries thereof
31,845 20% on March 1, 2023 and on each of the four subsequent anniversaries thereof
Mr. Proffitt
3,480 100% on March 1, 2023
2,275 100% on May 1, 2023
4,110 50% on March 1, 2023 and on the next anniversary thereof
5,432 50% on October 1, 2023 and on the next anniversary thereof
8,730 33% on March 1, 2023 and on each of the two subsequent anniversaries thereof
10,444 25% on March 1, 2023 and on each of the three subsequent anniversaries thereof
25,830 20% on March 1, 2023 and on each of the four subsequent anniversaries thereof
Mr. Mackel
693 33% on November 1, 2023 and on each of the two subsequent anniversaries thereof
528 25% on March 1, 2023 and on each of the three subsequent anniversaries thereof
13,036 25% on March 1, 2024 and on each of the three subsequent anniversaries thereof
Mr. Greenstein
1,394 100% on August 1, 2023
1,828 50% on March 1, 2023 and on the next anniversary thereof
4,614 33% on March 1, 2023 and on each of the two subsequent anniversaries thereof
5,088 25% on March 1, 2023 and on each of the three subsequent anniversaries thereof
1,568 25% on July 1, 2023 and on each of the three subsequent anniversaries thereof
9,185 20% on March 1, 2023 and on each of the four subsequent anniversaries thereof
Mr. Gachassin 1,394 50% on January 1, 2023 and on the subsequent anniversary thereof
1,776 33% on March 1, 2023 and on each of the two subsequent anniversaries thereof
2,028 25% on March 1, 2023 and on each of the three subsequent anniversaries thereof
4,180 20% on March 1, 2023 and on each of the four subsequent anniversaries thereof
(2) Reflects the value as calculated using the closing market price of our common stock as of December 30, 2022, which was $161.69.
2022 Stock Vested
The following table provides information concerning stock awards that vested in 2022 for each of our named executive officers. Our named executive officers do not hold any stock option awards.
Stock Awards
Name
Number of
Shares
Acquired on
Vesting
(#)
Value Realized on
Vesting
($)(1)
Keith G. Myers
34,789 4,862,806
Joshua L. Proffitt
18,630 2,725,335
Dale G. Mackel
3,622 583,389
Bruce Greenstein
5,510 807,957
Nicholas Gachassin, III
1,796 249,268
(1) The value realized is based on the closing market price of our common stock on the applicable date of vesting of the restricted stock awards, or if there were no reported sales on such date, on the last preceding date on which any reported sale occurred.
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL
Employment Agreements
We have employment agreements with each of our continuing named executive officers, (collectively, the “Employment Agreements”), with effective dates as detailed in the table below:
Name
Effective Date of Current
Employment Agreement
Expiration Date of
Current Employment Agreement
Keith G. Myers
April 1, 2017 March 31, 2023
Joshua L. Proffitt
October 7, 2019 September 30, 2023
Dale G. Mackel
November 2, 2020 October 31, 2023
Bruce Greenstein
July 1, 2021 June 30, 2024
Nicholas Gachassin, III
January 2, 2020 January 2, 2024
Each of the Employment Agreements will automatically renew for additional one-year periods unless either party gives notice to the other of its intent not to renew the agreement. The Employment Agreements provide that each executive is entitled to a minimum annual base salary (subject to annual review and increases for merit performance) and is entitled to participate in all incentive, savings, retirement, and welfare benefit plans generally made available to our senior executive officers. Each of these executives will have an opportunity to earn an annual cash bonus based upon achievement of performance goals to be established by the Compensation Committee. In addition, each of the executives is entitled to fringe benefits generally made available to our senior executive officers, and will be eligible for equity grants under our long-term incentive plans.
The Employment Agreements may be terminated by us at any time with or without “cause” (as defined therein), or by the executive with or without “good reason” (as defined therein). The Employment Agreements also terminate automatically upon the death or retirement of the executive and may be terminated by us if the executive becomes disabled. Depending on
the reason for the termination and when it occurs, the executive will be entitled to certain severance benefits, as described below.
Termination for Cause; Resignation without Good Reason or due to Retirement
If an executive is terminated for cause, resigns without good reason (as such terms are defined in the agreements), or retires, the executive receives only the salary and vested benefits that have accrued through the date of termination or retirement. No other severance benefits are payable.
Termination Due to Disability or Death
If an executive is terminated due to disability or death, the executive (or his estate) receives salary and vested benefits accrued through the date of termination. The executive’s outstanding equity awards will vest and become immediately exercisable pursuant to the terms of our long-term incentive plans and applicable award agreements.
Termination without Cause or Disability; Resignation for Good Reason
Under the current terms of the Employment Agreements, if the executive is terminated without cause or disability, or resigns for good reason, then the executive will be entitled to accrued salary, vested benefits, and a pro-rata portion of the annual bonus earned through the date of termination, as well as the continuation of health and welfare benefits for the COBRA-eligible period. In addition, each of the named executive officers will be entitled to:
• if the termination occurs prior to, or more than two years following, a change of control of the company: (A) a severance payment equal to the product of 1.5 times the sum of (1) the base salary in effect as of the date of termination, plus (2) the greater of the average of the annual bonuses earned for the two fiscal years in which annual bonuses were paid immediately preceding the termination, or the target bonus for the year in which the date of termination occurs; and (B) continued vesting of outstanding equity awards, assuming compliance with the restrictive covenants discussed below.
• if the termination occurs within two years following a change of control of the company: (A) a severance payment equal to the product of 2.5 times the sum of (1) the base salary in effect as of the date of termination, plus (2) the greater of the average of the annual bonuses earned for the two fiscal years in which annual bonuses were paid immediately preceding the termination, or the target bonus for the year in which the date of termination occurs; and (B) the immediate and full vesting of all outstanding equity awards.
Restrictive Covenants
Each of the Employment Agreements contains confidentiality, non-compete, and non-solicitation covenants that apply during the executive’s employment with the company and for a two year period, after the executive’s termination of employment (or for a six month period if the executive’s termination occurs within two years after a change in control).
Summary of Termination Payments and Benefits
The following table summarizes the value of the termination payments and benefits that our continuing named executive officers would have received under their Employment Agreements if their employment was terminated on December 31, 2022 under each of the circumstances shown. The amounts shown in the table exclude distributions under our 401(k) retirement plan and any additional benefits that are generally available to all of our salaried employees.
Myers
Proffitt
Mackel Greenstein
Gachassin
Reason for Termination:
By Company Without Cause; by Executive for Good Reason
Cash Severance(1)
$ 2,988,000 $ 1,989,000 $ 1,612,475 $ 1,460,721 $ 996,004
Health and Welfare Continuation(2)
19,932 25,304 12,769 15,265 -
Total Estimated Value of Payments and Benefits
3,007,932 2,014,304 1,625,244 1,475,986 996,004
Termination Without Cause or by Executive for Good Reason Within 24 Months Following a Change of Control
Cash Severance(1)
4,980,000 3,315,000 2,487,458 2,434,535 1,660,006
Health and Welfare Continuation(2)
19,932 25,304 12,769 15,265 -
Value of Accelerated Equity Awards(3)
13,523,913 9,750,069 2,305,214 3,828,334 1,516,329
Total Estimated Value of Payments and Benefits
18,523,845 13,090,373 4,805,441 6,278,134 3,176,335
Death or Disability
Value of Accelerated Equity Awards(3)
13,523,913 9,750,069 2,305,214 3,828,334 1,516,329
Total Estimated Value of Payments and Benefits
$ 13,523,913 $ 9,750,069 $ 2,305,214 $ 3,828,334 $ 1,516,329
(1) Reflects a severance payment equal to the product of 1.5 times, or 2.5 times in the event of a change in control, the sum of (a) the executive’s base salary in effect as of the date of termination and (b) the greater of the average of the annual bonuses earned by the executive for the two immediately preceding fiscal years, or the executive's target bonus for the year in which the date of termination occurs.
(2) Reflects the cost of providing continued health and welfare benefits to the executive after the termination date of employment. The company will pay the excess of the COBRA cost of such coverage over the amount that the executive would have had to pay for such coverage if the executive had remained employed and paid the active employee rate. Our obligations to provide health and welfare benefits cease in the event the executive participates in another employer sponsored plan or when the COBRA benefit expires (18 months from qualifying event).
(3) Represents the fair market value of shares of restricted stock that would immediately vest upon termination each based on closing market price of our common stock as of December 31, 2022, which was $161.69.
2022 DIRECTOR COMPENSATION
The following table sets forth the cash and equity compensation that was earned by or paid to our non-employee directors during 2022:
Name
Fees Earned
or Paid in
Cash($)(1)
Stock
Awards
($)(2)
Total
($)
Monica F. Azare
104,500 177,859 282,359
Teri G. Fontenot
121,000 177,859 298,859
Jonathan Goldberg
112,000 177,859 289,859
Clifford S. Holtz (3)
134,000 366,551 500,551
John L. Indest (4)
101,527 177,859 279,386
Ronald T. Nixon
97,000 177,859 274,859
W. Earl Reed, III
109,000 177,859 286,859
Brent Turner
106,000 177,859 283,859
(1) Amounts reflect the total cash compensation earned by or paid to each director in fiscal year 2022 in connection with retainers and meeting fees of our Board of Directors and its committees.
(2) Reflects the aggregate grant date fair value of the restricted stock awards on the grant date. The grant date fair value of the awards is determined pursuant to Accounting Standards Codification 718 and is based on the closing sales price per share of our common stock on the date of grant. The aggregate number of shares of restricted stock held by each director as of December 31, 2022, was as follows:
Director Shares of Restricted Stock
Monica F. Azare 1,100
Teri G. Fontenot 1,100
Jonathan Goldberg 1,100
Clifford S. Holtz 2,267
John L. Indest 1,100
Ronald T. Nixon 1,100
W. Earl Reed, III 1,100
Brent Turner 1,100
(3) Mr. Holtz received a grant of 3,500 shares of restricted stock in connection with his appointment as Lead Director. The grant of restricted stock vest one-third on the date of grant and one-third on each of the first two anniversaries of the grant date.
(4) Mr. Indest retired as an employee on August 31, 2011. In connection with his retirement, Mr. Indest entered into a consulting agreement with the company, under which Mr. Indest agreed to provide consulting services to the company on an as requested basis. Under the consulting agreement, Mr. Indest is paid $200 per hour for his services and remains eligible, along with his spouse, to participate in our medical insurance plan. In 2022, Mr. Indest did not perform consulting services; therefore, no compensation under his consulting agreement was reported.
Director Compensation Plan
Our Second Amended and Restated 2005 Non-Employee Directors Compensation Plan, as amended, which we refer to as the “Director Compensation Plan,” provides for both cash and equity compensation for our non-employee directors. Our employees do not receive any compensation for serving on our Board of Directors.
Cash Compensation
Our non-employee directors received the following fees, as applicable, pro-rated for their service on our Board of Directors and its committees from January 1, 2022 through December 31, 2022:
• $70,000 annual cash retainer, payable on a monthly basis, for service on our Board of Directors;
• $25,000 annual cash retainer, payable on a monthly basis, for service as the Lead Director;
• $24,000 annual cash retainer, payable on a monthly basis, for service as the Chair of the Audit Committee;
• $15,000 annual cash retainer, payable on a monthly basis, for service as the Chair of the Compensation Committee, or Chair of the Nominating and Corporate Governance Committee;
• $12,000 annual cash retainer, payable on a monthly basis, for service as the Chair of the Corporate Development Committee, or Chair of the Clinical Quality Committee;
• $12,000 annual cash retainer, payable on a monthly basis, for service as a member (other than Chair) of the Audit Committee;
•$7,500 annual cash retainer, payable on a monthly basis, for service as a member (other than Chair) on a committee of our Board of Directors, excluding the Audit Committee; and
• $3,000 meeting fee, payable for each board meeting.
Equity Compensation
The Director Compensation Plan provides for annual awards of restricted stock to non-employee directors. On March 1, 2022, each non-employee director received an award of restricted stock having an aggregate value equal to approximately $130,000. The number of shares of restricted stock awarded to each non-employee director was determined by dividing $130,000 by the fair market value per share as of the date of grant (rounded up to the nearest hundred shares). These annual restricted stock awards vest on the first anniversary of the grant date.
In addition, the Director Compensation Plan provides that new directors, other than the Lead Director, receive an initial grant of 3,500 shares of restricted stock in connection with their election or appointment to our Board of Directors. The Lead Director receives an initial grant of 7,000 shares of restricted stock in connection with his or her appointment as Lead Director. These initial grants of restricted stock vest one-third on the date of grant and one-third on each of the first two anniversaries of the grant date.
Benefits
We reimburse each non-employee director for expenses associated with attending board and committee meetings and other board-related activities. Our non-employee directors do not receive other benefits from the company with the exception of Mr. Indest who, along with his spouse, participates in our medical insurance plan pursuant to Mr. Indest’s consulting agreement with the company.
Role of Independent Compensation Consultants
To assist in evaluating our compensation practices, the Compensation Committee from time to time retains an independent compensation consultant to provide advice and ongoing recommendations regarding board member compensation practices that are consistent with our business goals and compensation philosophy. We believe that this input and advice produces more informed decision-making and assures that an objective perspective is considered in this important governance process. Since 2010, the Compensation Committee has periodically retained PM&P to review our non-employee director compensation program. Specifically, the Compensation Committee engaged PM&P in 2020 with instructions to (i) review the total compensation package we provide to our board members, (ii) assess the competitiveness and reasonableness of our compensation program as compared to a peer group of companies within the health care industry with similar revenue levels and market capitalization, and (iii) provide assessments and recommendations for the current and future total compensation packages for our board members. We referred to the results of these studies, and also internally reviewed current industry and market practices within our peer group, when we established compensation levels for our board members for 2022. PM&P has no other relationship with our company. The Compensation Committee has assessed the independence of PM&P and concluded that PM&P’s work did not raise any conflicts of interest.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS
The following table sets forth the number of shares of our common stock held beneficially, directly or indirectly, as of the record date by (a) each person known by the company to be the beneficial owner of more than 5% of the common stock, (b) each continuing director and director nominee of the company, (c) each named executive officer of the company, and (d) all continuing directors, director nominees and executive officers of the company as a group, together with the percentage of the outstanding shares of common stock that such ownership represents. The percentage of beneficial ownership is based on 31,032,560 shares of our common stock outstanding as of December 31, 2022.
Except as noted in the footnotes below, we believe, based on information provided to us that the persons named in the table below have sole voting and investment power with respect to all shares of our common stock beneficially owned by them.
Beneficial
Ownership
Name (1)
Number
Percent
Director Nominees, Continuing Directors and Named Executive Officers
Keith G. Myers (2)
948,933 3.1%
Monica F. Azare (3)
30,521 *
Teri G. Fontenot (3)
7,700 *
Jonathan Goldberg (4)
57,472 *
Clifford S. Holtz (5)
12,023 *
John L. Indest (6)
34,948 *
Ronald T. Nixon (3)
27,100 *
W. Earl Reed, III (7)
138,797 *
Brent Turner (3)
14,200 *
Joshua L. Proffitt (8)
106,238 *
Dale G. Mackel (9)
18,039
Bruce Greenstein (10)
34,126 *
Nicholas Gachassin, III (11)
13,040 *
All continuing directors, director nominees, and executive officers of the company as a group (13 persons)
1,443,137 4.7%
Certain Beneficial Owners
BlackRock, Inc. (12)
55 East 52nd Street
New York, NY 10055
4,625,583 14.9%
The Vanguard Group (13)100 Vanguard Blvd.
Malvern, PA 19355
2,919,047 9.4%
* Less than 1%.
(1) Unless otherwise noted, the address of each beneficial owner listed in the table above is c/o LHC Group, Inc., 901 Hugh Wallis Road South, Lafayette, Louisiana 70508.
(2) Includes 604,013 shares held by K&G Family, LLC, of which Mr. Myers is a Manager. Includes 83,641 unvested restricted shares held by the named executive officer, which have various vesting dates.
(3) Includes 1,100 unvested restricted shares held by the director, which will vest on March 1, 2023.
(4) Includes 5,032 shares held by self-directed 401(k) plan. Includes 1,830 shares held by spouse's self-directed 401(k) plan. Includes 16 shares held as custodian for his children. Includes 16 shares held for a minor. Includes 1,100 unvested restricted shares held by the director, will vest on March 1, 2023.
(5) Includes 2,267 unvested restricted shares held by the direction, of which 1,100 will vest on March 1, 2023, and 1,167 will vest on July 12, 2023.
(6) Includes 30,576 shares held by Duperier Avenue Investors, LLC, of which Mr. Indest is a Manager. Includes 1,100 unvested restricted shares held by the director, which will vest on March 1, 2023.
(7) Includes 27,848 shares held by a trust where Mr. Reed is the sole trustee. Includes 1,100 unvested restricted shares held by the director, which will vest on March 1, 2023.
(8) Includes 60,301 unvested restricted shares held by the named executive officer, which have various vesting dates.
(9) Includes 14,257 unvested restricted shares held by the named executive officer, which have various vesting dates.
(10) Includes 23,677 unvested restricted shares held by the named executive officer, which have various vesting dates.
(11) Includes 9,378 unvested restricted shares held by the named executive officer, which have various vesting dates.
(12) Based on the Schedule 13GA filed with the SEC on February 10, 2023. According to the Schedule 13GA, BlackRock, Inc. has sole voting power with respect to 4,563,775 of these shares and sole dispositive power with respect to 4,625,583 of these shares.
(13) Based on the Schedule 13GA filed with the SEC on February 9, 2023. According to the Schedule 13GA, The Vanguard Group has shared power to vote with respect to 50,206 of these shares, sole dispositive power with respect to 2,839,381of these shares and shared dispositive power with respect to 79,666 shares.
Equity Compensation Plan Information
The following table provides information as of December 31, 2022, regarding shares of common stock that may be issued under the Company's existing equity compensation plans:
(a) (b) (c)
Plan Category Number of Shares to be
Issued Upon Exercise of
Outstanding Options,
Warrants, and Rights Weighted-Average
Exercise Price of
Outstanding Price of
Outstanding Rights Number of Shares Remaining
Available for Future Issuance
Under Equity Compensation
Plans (Excluding Securities
Reflected in Column (a) (1)
Equity compensation plans approved by Stockholders: - $ - 1,632,806
Equity compensation plans not approved by Stockholders: - - -
Total - $ - 1,632,806
(1) Includes 1,544,734 shares remaining available for issuance under the LHC Group, Inc. 2018 Long-Term Incentive Plan (all of which are available for issuance pursuant to grants of full-value stock awards) and 88,072 shares remaining available for issuance under the Amended and Restated LHC Group, Inc.'s 2006 Employee Stock Purchase Plan.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Company Policy and Certain Relationships
We believe that business decisions and actions taken by our officers, directors, and employees should be based on the best interests of the company, and must not be motivated by personal considerations or relationships. We attempt to analyze any transactions in which the company participates and in which a related person (as defined below) may have a direct or indirect material interest, both due to the potential for a conflict of interest and to determine whether disclosure of the transaction is required under applicable SEC rules and regulations.
As a result, our Board of Directors has adopted a policy for reviewing and approving transactions between the company and related persons, including directors, nominees, executive officers, and any person known to be the beneficial owner of more than 5% of the company’s voting securities or any immediate family member of an executive officer, director, nominee, or greater than 5% beneficial holder. The policy also covers any firm, corporation, or other entity which is owned or controlled by any such person, or in which such person has a substantial ownership interest. Prior to entering into a transaction with a related person, notice must be given to our legal counsel containing (i) the related person’s relationship to the company and interest in the transaction, (ii) the material facts of the transaction, (iii) the benefits to the company of the transaction, (iv) the availability of any other sources of comparable products or services, and (v) an assessment of whether the transaction is on terms comparable to those available to an unrelated third party. If our legal counsel determines that it is a related party transaction, the proposed transaction is submitted to the Audit Committee for its approval. The policy also provides for the annual review by the Audit Committee of ongoing related person transactions.
During 2022, the company continued to engage Gachassin Law Firm for certain legal transactions, of which Mr. Gachassin continues to serve as the managing partner. The company paid $354,024 for services provided by Gachassin Law Firm during the fiscal year 2022.
The company employs Zachary J. Indest, son of John L. Indest, a member of our Board of Directors. Zachary Indest serves as the company's Vice President of Clinical Services, and for 2022 was paid an annual salary of $198,877, a cash bonus of $3,749, and was granted 645 shares of time-vesting restricted stock of the company.
The company employs Brach J. Myers and Elliot Myers, sons of Keith G. Myers, our Chief Executive Officer. Brach Myers serves as the company's Senior Vice President Strategic Partnerships and Growth Initiatives, and for 2022 was paid an annual salary of $295,006, cash bonus of $11,063, and was granted 1,445 shares of time-vesting restricted stock of the company. Elliot Myers serves as the Company's Clinical Administrator, and for 2022 was paid an annual salary of $130,000.
Independence of Directors
Our Board of Directors has reviewed the independence of each of our directors in light of the definition of “independent director” in the applicable listing standards of NASDAQ. As a result of this review, we affirmatively determined that all of our directors are independent, with the exception of Keith G. Myers, our Chief Executive Officer.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accountant Fees and Services.
Our independent registered public accounting firm is KPMG LLP, Baton Rouge, Louisiana, Auditor Firm ID: 185.
The independent accounting firm of KPMG LLP (“KPMG”) has served as our independent registered public accounting firm since August 20, 2008. KPMG has no financial interest, direct or indirect, in the company and does not have any connection with the company except in its professional capacity as an independent auditor.
Principal Accounting Fees and Services
The following table shows the fees related to the audit and other services provided by KPMG for the fiscal years ended December 31, 2022 and 2021:
Fee Category
2022 2021
Audit Fees (1)
$ 2,986,129 $ 2,310,000
Audit-Related Fees (2)
- -
Tax Fees (3)
- -
All Other Fees (4)
105,000 204,150
Total
$ 3,091,129 $ 2,514,150
(1)Audit Fees includes the aggregate fees billed for professional services rendered for the audit of our annual financial statements for 2022 and 2021 and internal control over financial reporting, review of our Form 10-Qs for the same periods, quarterly reviews, and review of other SEC filings.
(2) Audit-Related Fees includes fees for professional services rendered for assistance with review of financial statements not included in (1) above.
(3)Tax Fees includes fees for professional services rendered for tax compliance, tax advice, and tax planning.
(4)All Other Fees includes Real Time System Assessment fees related to the implementation of the Enterprise Resource Planning software system.
Audit Committee Pre-Approval Policy
Our Audit Committee approves all fees to be paid for audit and audit-related services and all other fees of our independent auditor prior to engagement for those services.
The Audit Committee is responsible for the appointment, compensation, and oversight of the work performed by our independent registered public accounting firm. The Audit Committee has adopted a pre-approval policy requiring it to pre-approve all audit and audit-related services and permitted non-audit services provided by our independent registered public accounting firm in order to assure that the provision of such services does not impair their independence.
The Audit Committee pre-approval policy sets forth specified audit, audit-related, tax, and other permissible non-audit services, if any, for which pre-approval is provided, without further approval by the Audit Committee, up to a maximum fee amount set annually by the Audit Committee. Pre-approval is generally provided for up to one year, and any proposed services exceeding these fee levels or any services not specifically identified in the policy must be specifically pre-approved by the Audit Committee. Our independent registered public accounting firm and management periodically report to the Audit Committee regarding the extent of services provided by the independent registered public accounting firm in accordance with this pre-approval policy. The Audit Committee may also pre-approve particular services on a case-by-case basis and may delegate specific pre-approval authority to one or more members pursuant to a resolution adopted by the unanimous approval of the Audit Committee, provided that the member reports any pre-approved services at the next regularly scheduled Audit Committee meeting.
The Audit Committee pre-approved all services provided by KPMG in 202 and 2022. The Audit Committee has pre-approved all services anticipated to be provided by KPMG during 2023.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits, Financial Statement Schedules.
(a) Documents to be filed with Form 10-K:
(1) Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2022 and 2021
For each of the years in the three-year period ended December 31, 2022
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
(2) Financial Statement Schedules
There are no financial statement schedules included in this report.
(3) Exhibits
The Exhibits are listed in the Index of Exhibits required by Item 601 of Regulation S-K included herewith, which is incorporated by reference.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
LHC Group, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of LHC Group, Inc. and subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2022 and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022, 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, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 22, 2023 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements 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 consolidated 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 consolidated 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 consolidated 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 consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Evaluation of implicit price concessions for the Home Health segment
As discussed in Note 2 to the consolidated financial statements, net service revenue from contracts with customers is recognized in the period the performance obligations are satisfied under the contracts by transferring the requested services to patients in amounts that reflect the consideration which is expected to be received in exchange for providing patient care. Implicit price concessions include discounts provided to self-pay, uninsured patients or other payors, adjustments resulting from regulatory reviews, audits, billing reviews and other matters. The Company estimates implicit price concessions based on historical collection experience by major payor class. Estimates of implicit price concessions are periodically reviewed to ensure they are reflective of current business and economic conditions and trends and indicative of the Company's historical collections. The Company's net service revenue for the year ended December 31, 2022, was $1,531 million, which is net of implicit price concessions.
We identified the evaluation of implicit price concessions for the home health segment as a critical audit matter. A high degree of subjective auditor judgment was required to evaluate the implicit price concessions as they were based on estimated collection rates by major payor class. Specifically, evaluating the estimated transaction prices required knowledge of the payor mix and current business and economic conditions and trends.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company's home health revenue process, including controls over the data used to support the estimated transaction prices. We assessed the outcome of the estimation of the implicit price concessions for the home health segment in prior period financial statements by comparing a sample of current year collections to prior period accounts receivable to identify any circumstances or conditions that are relevant to the determination of the current year estimate. This assessment included testing a sample of accounts receivable that were written off in the current year. In addition, we evaluated the completeness and accuracy of the Company's collections on home health revenue recorded by major payor class by testing a sample of collections to assess the relevance and reliability of the current year estimated transaction prices.
Valuation of goodwill in the Home and Community-Based Services reporting unit
As discussed in Note 4 to the consolidated financial statements, the goodwill balance as of December 31, 2022, was $1,766 million, of which $166 million related to the home and community-based services reporting unit. As discussed in Note 2, the Company performs goodwill impairment testing on an annual basis as of November 30, and whenever events or changes in circumstances indicate that the carrying value of a reporting unit likely exceeds its fair value. This involves estimating the fair value of the reporting units using discounted cash flow models.
We identified the evaluation of the goodwill impairment analysis for the home and community-based services reporting unit as a critical audit matter. The estimated fair value of the reporting unit approximated its carrying value, indicating a higher risk that goodwill may be impaired and, therefore, a high degree of subjective auditor judgement was required to evaluate the fair value. Specifically, the revenue growth rate and discount rate assumptions used to estimate the fair value of the reporting unit were challenging to test as they represented subjective determinations of future market and economic conditions that were sensitive to variation. Minor changes to those assumptions could have had a significant effect on the Company's assessment of the fair value of the reporting unit.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the goodwill impairment process. This included controls related to management's determination of the revenue growth rate and the discount rate. We evaluated the reasonableness of the Company's projected revenue growth rate by comparing it to historical actual results and contracted payor rates. We involved valuation professionals with specialized skills and knowledge, who assisted in evaluating the Company's discount rate used by comparing it against a discount rate range that was independently developed using publicly available market data for comparable entities.
/s/ KPMG LLP
KPMG LLP
We have served as the Company's auditor since 2008.
Baton Rouge, Louisiana
February 22, 2023
LHC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
As of December 31,
2022 2021
ASSETS
Current assets:
Cash $ 17,911 $ 9,809
Receivables:
Patient accounts receivable 313,163 348,820
Other receivables 13,506 13,780
Total receivables 326,669 362,600
Prepaid income taxes 17,120 7,531
Prepaid expenses 26,536 28,401
Other current assets 19,943 24,801
Total current assets 408,179 433,142
Property, building and equipment, net of accumulated depreciation of $114,427 and $98,394, respectively
154,283 153,959
Goodwill 1,765,778 1,748,426
Intangible assets, net of accumulated amortization of $23,726 and $19,152, respectively
395,328 400,002
Operating lease right of use asset 107,993 113,399
Other assets 65,396 46,693
Total assets $ 2,896,957 $ 2,895,621
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and other accrued liabilities $ 114,986 $ 98,118
Salaries, wages and benefits payable 97,968 100,532
Self insurance reserves 37,348 33,784
Contract liabilities - deferred revenue - 106,489
Current operating lease payable 36,445 37,630
Amounts due to governmental entities 3,707 5,447
Current liabilities - deferred employer payroll tax - 26,790
Total current liabilities 290,454 408,790
Deferred income taxes 86,330 70,026
Income taxes payable 7,219 7,320
Revolving credit facility 733,000 661,197
Operating lease payable 74,520 78,688
Total liabilities 1,191,523 1,226,021
Noncontrolling interest-redeemable 25,075 17,501
Commitments and contingencies
Stockholders’ equity:
LHC Group, Inc. stockholders’ equity:
Preferred stock - $0.01 par value: 5,000,000 shares authorized; none issued or outstanding
- -
Common stock - $0.01 par value: 60,000,000 shares authorized; 36,744,210 and 36,549,524 shares issued, and 30,595,381 and 30,634,414 shares outstanding, respectively
367 365
Treasury stock - 6,148,829 and 5,915,110 shares at cost, respectively
(195,906) (164,790)
Additional paid-in capital 1,000,036 979,642
Retained earnings 790,896 751,025
Total LHC Group, Inc. stockholders’ equity 1,595,393 1,566,242
Noncontrolling interest - non-redeemable 84,966 85,857
Total stockholders’ equity 1,680,359 1,652,099
Total liabilities and stockholders’ equity $ 2,896,957 $ 2,895,621
See accompanying Notes to the Consolidated Financial Statements
LHC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except share and per share data)
For the year ended December 31,
2022 2021 2020
Net service revenue $ 2,282,771 $ 2,219,622 $ 2,063,204
Cost of service revenue (excluding depreciation and amortization) 1,399,158 1,336,609 1,250,403
Gross margin 883,613 883,013 812,801
General and administrative expenses 764,239 696,435 632,847
Impairment of intangibles and other 10,854 937 1,849
Operating income 108,520 185,641 178,105
Interest expense (31,311) (4,338) (4,129)
Income before income taxes and noncontrolling interests 77,209 181,303 173,976
Income tax expense 16,961 37,687 36,043
Net income 60,248 143,616 137,933
Less net income attributable to noncontrolling interests 20,377 27,888 26,337
Net income attributable to LHC Group, Inc.’s common stockholders $ 39,871 $ 115,728 $ 111,596
Earnings per share - basic:
Net income attributable to LHC Group, Inc.’s common stockholders $ 1.31 $ 3.71 $ 3.59
Earnings per share - diluted:
Net income attributable to LHC Group, Inc.’s common stockholders $ 1.30 $ 3.69 $ 3.56
Weighted average shares outstanding:
Basic 30,539,343 31,195,305 31,092,417
Diluted 30,659,727 31,396,658 31,365,765
See accompanying Notes to the Consolidated Financial Statements
LHC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands, except share data)
LHC Group, Inc. Noncontrolling
interest non-
redeemable Total
equity Non
controlling
interest
redeemable Net income
Common Stock Additional
paid-in
capital Retained
earnings
Issued Treasury
Amount Shares Amount Shares
Balances at December 31, 2019 $ 361 36,129,280 $ (60,060) 5,136,890 $ 949,321 $ 523,701 $ 93,928 $ 1,507,251 $ 15,151
Net income - - - - - 111,596 12,150 123,746 14,187 137,933
Acquired noncontrolling interest - - - - - - 5,854 5,854 3,508
Purchase of additional controlling interest - - - - (1,709) - (22,204) (23,913) (382)
Sale of noncontrolling interest - - - - (860) - 6,150 5,290 -
Noncontrolling interest distributions - - - - - - (11,294) (11,294) (13,543)
Nonvested stock compensation - - - - 14,347 - - 14,347 -
Issuance of vested stock 3 195,618 - - - - - 3 -
Treasury shares redeemed to pay income tax - - (9,202) 71,439 - - - (9,202) -
Exercise of stock options - 16,286 251 7,328 (1,156) - - (905) -
Issuance of common stock under Employee Stock Purchase Plan - 14,313 - - 2,177 - - 2,177 -
Balances at December 31, 2020 $ 364 36,355,497 $ (69,011) 5,215,657 $ 962,120 $ 635,297 $ 84,584 $ 1,613,354 $ 18,921
Net income - - - - - 115,728 15,945 131,673 11,943 143,616
Acquired noncontrolling interest - - - - - - - - 113
Purchase of additional controlling interest - - - - (951) - (789) (1,740) (373)
Sale of noncontrolling interest - - - - (83) - 1,871 1,788 -
Noncontrolling interest distributions - - - - - - (15,754) (15,754) (13,103)
Nonvested stock compensation - - - - 15,868 - - 15,868 -
Issuance of vested stock 1 180,235 - - - - - 1 -
Treasury shares redeemed to pay income tax - - (12,043) 64,584 216 - - (11,827) -
Repurchase of common stock - - (83,736) 634,869 - - - (83,736) -
Issuance of common stock under Employee Stock Purchase Plan - 13,792 - - 2,472 - - 2,472 -
Balances at December 31, 2021 $ 365 36,549,524 $ (164,790) 5,915,110 $ 979,642 $ 751,025 $ 85,857 $ 1,652,099 $ 17,501
Net income - - - - - 39,871 10,771 50,642 9,606 60,248
Acquired noncontrolling interest - - - - - - 707 707 1,080
Purchase of additional controlling interest - - - - (1,539) - (317) (1,856) -
Sale of noncontrolling interest - - - - (1,164) - - (1,164) 6,367
Noncontrolling interest distributions - - - - - - (12,052) (12,052) (9,479)
Nonvested stock compensation - - - - 20,017 - - 20,017 -
Issuance of vested stock 2 164,428 - - - - - 2 -
Treasury shares redeemed to pay income tax - - (5,446) 36,848 1,068 - - (4,378) -
Exercise of stock options - 13,986 (198) 6,249 (368) - - (566)
Repurchase of common stock - - (25,472) 190,622 - - - (25,472) -
Issuance of common stock under Employee Stock Purchase Plan - 16,272 - - 2,380 - - 2,380 -
Balances at December 31, 2022 $ 367 36,744,210 $ (195,906) 6,148,829 $ 1,000,036 $ 790,896 $ 84,966 $ 1,680,359 $ 25,075
See accompanying Notes to the Consolidated Financial Statements
LHC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
For the year ended December 31,
2022 2021 2020
Operating activities:
Net income
$ 60,248 $ 143,616 $ 137,933
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense 23,143 20,917 21,249
Amortization and impairment of operating lease right of use asset 41,042 37,506 34,546
Stock-based compensation expense 20,017 15,868 14,347
Deferred income taxes 16,304 22,789 (13,261)
Loss (gain) on disposal of assets 742 (1,134) 412
Impairment of intangibles and other 10,854 937 1,849
Changes in operating assets and liabilities, net of acquisitions:
Receivables 34,389 (35,361) (16,561)
Prepaid expenses 1,865 (5,902) (754)
Other assets 1,404 (11,015) (3,169)
Prepaid income taxes (9,589) (7,531) 9,652
Accounts payable and accrued expenses 21,846 12,345 (22,506)
Salaries, wages, and benefits payable and self-insurance reserves 504 3,004 6,482
Other liabilities (26,790) (26,758) 51,856
Contract liabilities - deferred revenue (106,489) (211,473) 317,962
Operating lease payable (40,846) (37,360) (34,226)
Income tax payable (101) (20,347) 23,800
Net amounts due to/from governmental entities 1,431 (433) (364)
Net cash provided by (used in) operating activities 49,974 (100,332) 529,247
Investing activities:
Cash paid for acquisitions, net of cash acquired
(23,552) (569,583) (24,545)
Minority interest investments (15,250) (10,100) -
Proceeds from sale of assets 52 3,350 7,920
Proceeds from sale of an entity - 1,531 -
Purchases of property, building and equipment
(19,510) (32,976) (65,875)
Purchase of intangible assets (100) - -
Net cash used in investing activities (58,360) (607,778) (82,500)
Financing activities:
Proceeds from line of credit 1,043,276 1,025,559 296,229
Payments on line of credit (971,473) (384,362) (529,229)
Government stimulus advance - (93,257) 93,257
Proceeds from employee stock purchase plan 2,380 2,472 2,177
Payments on deferred financing fees - (3,556) -
Payments on repurchasing common stock (34,565) (74,643) -
Noncontrolling interest distributions (21,531) (28,857) (24,837)
Purchase of additional controlling interest (1,858) (2,113) (24,295)
Sale of noncontrolling interest 5,203 1,934 4,856
Withholding taxes paid on stock-based compensation (4,944) (11,827) (10,008)
Net cash provided by (used in) financing activities 16,488 431,350 (191,850)
Change in cash 8,102 (276,760) 254,897
Cash at beginning of period 9,809 286,569 31,672
Cash at end of period $ 17,911 $ 9,809 $ 286,569
Supplemental disclosures of cash flow information
Interest paid $ 29,275 $ 4,168 $ 5,011
Income taxes paid $ 10,457 $ 43,728 $ 16,830
Non-Cash Operating activity:
Operating right of use assets in exchange for lease obligations 35,620 41,364 43,047
Non-Cash Investing activity:
Accrued capital expenditures 176 417 2,922
Net working capital adjustment 1,440 890 -
Non-Cash Financing activity:
Contribution of noncontrolling interest - - 230
See accompanying Notes to the Consolidated Financial Statements
LHC GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
LHC Group, Inc. (the “Company”) is a health care provider specializing in the post-acute continuum of care. The Company provides services through five segments: home health, hospice, home and community-based services, facility-based services, the latter primarily through long-term acute care hospitals ("LTACHs"), and healthcare innovations ("HCI").
As of December 31, 2022, the Company, through its wholly and majority-owned subsidiaries, equity joint ventures, controlled affiliates, and management agreements, operated 920 service providers in 37 states within the continental United States and the District of Columbia.
LHC Group, Inc. and UnitedHealth Group Incorporated Merger
On March 28, 2022, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with UnitedHealth Group Incorporated ("Parent") and Lightning Merger Sub Inc., a wholly owned subsidiary of Parent ("Merger Sub"), pursuant to which Merger Sub will be merged with and into the Company (the "Merger"), with the Company surviving the Merger as a wholly owned subsidiary of Parent. At a Special Meeting of Stockholders held on June 21, 2022, the stockholders of the Company approved the Merger. On December 6, 2022, the Company delivered written notice to UnitedHealth Group extending the Outside Date, as defined in the Merger Agreement, to March 28, 2023. The parties to the Merger continue to work toward the expected consummation of the Merger prior to the end of the first quarter of 2023.
COVID-19 Update
SARS-CoV-2 ("COVID-19") continues to cause disruption in the economy, in terms of increased costs and disruptions in the labor market. The impact of COVID-19 is lessened as vaccines have become available in the United States; however, we continue to see periodic increases in the number of cases due to the spread of COVID-19 variants. The effects of COVID-19 continue to materially impact our business. As a result, operating results for the twelve months ended December 31, 2022 may not be directly comparable to operating results for the twelve months ended December 31, 2021.
CARES Act
In response to COVID-19, the U.S. Government enacted the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") on March 27, 2020. The CARES Act also provided financial hardship relief to Medicare providers impacted by the COVID-19 pandemic in order to provide necessary funds when there is a disruption in Medicare claims submission and/or Medicare claims processing by distributing funds through the Accelerated and Advanced Payments Program ("CAAP").
In addition, the CARES Act suspended the 2% sequestration payment adjustments on Medicare patient claims with dates of service from May 1 through December 31, 2020, suspended the application of site-neutral payment for LTACH admissions that were admitted during the Public Health Emergency ("PHE"), and delayed payment of the employer portion of social security tax. On April 14, 2021, Congress passed legislation to continue the suspension of the 2% sequestration payment adjustments on Medicare patient claims with dates of service through December 31, 2021. On December 10, 2021, the Protecting Medicare and American Farmers from Sequester Cuts Act legislation passed, which continued the suspension of the sequestration payment adjustments for Medicare patient claims with dates of service through March 31, 2022. Medicare patient claims with dates of service between April 1 through June 30, 2022 had a 1% sequestration adjustment and Medicare patient claims with dates of service beginning July 1, 2022 had a 2% sequestration adjustment. On February 9, 2023, the U.S. Department of Health and Human Services extended the PHE until May 11, 2023.
CAAP
During the twelve months ended December 31, 2021, the Company had $106.5 million of accelerated payments under the CAAP, which was recorded in contract liabilities - deferred revenue in our consolidated balance sheets in accordance with Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers ("Topic 606"). On October 1, 2020, the repayment and recoupment terms for CAAP funds were amended by the Continuing Appropriations Act, 2021 and Other Extensions Act, which provides that recoupment will begin one year from the date the CAAP funds were received. The repayment terms began one year starting from the date the CAAP funds were issued and continued for 11 months, as CMS recouped the initial 25% of Medicare payments otherwise owed to the Company. If any amount of CAAP funds that we received from CMS remained unpaid after the initial 11 month period, CMS recouped 50% of Medicare payments otherwise owed to the Company during the following six months. Interest began accruing on any amount of the CAAP funds that we received from CMS that remained unpaid following those recoupment periods. CMS issued a repayment letter to the
Company for any such outstanding amounts, which must be paid in full within 30 days from the date of the letter. As of December 31, 2022, the Company repaid $106.5 million before any interest was accrued.
Other
The Company recognized the following amounts of net service revenue due to the suspension of the 2% sequestration payment adjustment and the suspension of LTACH site-neutral payments (amounts in thousands):
Year Ended December 31,
2022 2021 2020
Suspension of 2% sequestration payment adjustment $ 9,952 $ 26,768 $ 18,137
Suspension of LTACH site-neutral payment 20,311 25,744 19,205
As of December 31, 2021, the Company deferred $26.8 million of employer social security taxes, which was recorded in current liabilities - deferred employer payroll tax on our consolidated balance sheets. The Company paid $26.8 million back to the government during the twelve months ended December 31, 2022.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("US GAAP") requires management to make estimates and assumptions that affect the reported amounts of the Company's accompanying consolidated financial statements and notes to the consolidated financial statements. Actual results could differ from those estimates.
A description of the significant accounting policies and a discussion of the significant estimates and judgments associated with such policies are described below.
Principles of Consolidation
The consolidated financial statements include all subsidiaries and entities controlled by the Company through direct ownership of majority interest or controlling member ownership of such entities. Third party equity interests in the consolidated joint ventures are reflected as noncontrolling interests in the Company’s consolidated financial statements.
All significant intercompany accounts and transactions have been eliminated in consolidation. All business combinations accounted for under the acquisition method have been included in the consolidated financial statements from the respective dates of acquisition.
The Company consolidates equity joint venture entities as the Company has controlling interests, has voting control over these entities, or has ability to exercise significant influence in these entities. The members of the Company's equity joint ventures participate in profits and losses in proportion to their equity interests.
The Company, through wholly owned subsidiaries, leases home health licenses necessary to operate certain of its home nursing and hospice agencies. As with wholly owned subsidiaries, the Company owns 100% of the equity of these entities and consolidates them based on such ownership.
Revenue Recognition
Basis of Presentation
Net service revenue from contracts with customers is recognized in the period the performance obligations are satisfied under the Company's contracts by transferring the requested services to patients in amounts that reflect the consideration to which is expected to be received in exchange for providing patient care, which is the transaction price allocated to the services provided in accordance with Topic 606 and ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (collectively, "ASC 606").
Net service revenue is recognized as performance obligations are satisfied, which can vary depending on the type of services provided. The performance obligation is the delivery of patient care in accordance with the requested services outlined in physicians' orders, which are based on specific goals for each patient.
The performance obligations are associated with contracts in duration of less than one year; therefore, the optional exemption provided by ASC 606 was elected resulting in the Company not being required to disclose the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied or partially unsatisfied as of the end of the reporting period. The Company's unsatisfied or partially unsatisfied performance obligations are primarily completed when the patients are discharged and typically occur within days or weeks of the end of the period.
The Company determines the transaction price based on gross charges for services provided, reduced by explicit price concessions and estimates for implicit price concessions. Explicit price concessions include contractual adjustments provided to patients and third-party payors. Implicit price concessions include discounts provided to self-pay, uninsured patients or other payors, adjustments resulting from regulatory reviews, audits, billing reviews and other matters. Subsequent changes to the estimate of the transaction price are recorded as adjustments to net service revenue in the period of change. Subsequent changes that are determined to be the result of an adverse change in the patient's ability to pay (i.e. change in credit risk) are recorded as a provision for doubtful accounts within general and administrative expenses.
Explicit price concessions are recorded for the difference between our standard rates and the contracted rates to be realized from patients, third party payors and others for services provided.
Implicit price concessions are recorded for self-pay, uninsured patients and other payors by major payor class based on historical collection experience, and current business and economic conditions, representing the difference between amounts billed and amounts expected to be collected. The Company assesses the ability to collect for the healthcare services provided at the time of patient admission based on the verification of the patient's insurance coverage under Medicare, Medicaid, and other commercial or managed care insurance programs.
Amounts due from third-party payors, primarily commercial health insurers and government programs (Medicare and Medicaid), include variable consideration for retroactive revenue adjustments due to settlements of audits and reviews. The Company has determined estimates for price concessions related to regulatory reviews based on historical experience and success rates in the claim appeals and adjudication process. Revenue is recorded at amounts estimated to be realizable for services provided.
The following table sets forth the percentage of net service revenue earned by category of payor for each segment for the years ending December 31:
2022 2021 2020
Home Health:
Medicare 59.4 % 62.1 % 66.8 %
Managed Care, Commercial, and Other 40.6 37.9 33.2
100.0 % 100.0 % 100.0 %
Hospice:
Medicare 93.1 % 94.2 % 93.1 %
Managed Care, Commercial, and Other 6.9 5.8 6.9
100.0 % 100.0 % 100.0 %
Home and Community-Based:
Medicaid 36.6 % 31.5 % 21.4 %
Managed Care, Commercial, and Other 63.4 68.5 78.6
100.0 % 100.0 % 100.0 %
Facility-Based:
Medicare 54.3 % 49.9 % 55.0 %
Managed Care, Commercial, and Other 45.7 50.1 45.0
100.0 % 100.0 % 100.0 %
Healthcare Innovations:
Medicare 6.0 % 12.4 % 19.2 %
Managed Care, Commercial, and Other 94.0 87.6 80.8
100.0 % 100.0 % 100.0 %
Medicare
The following describes the payment models in effect during the twelve months ended December 31, 2022. Such payment models have been subject to temporary adjustments made by CMS in response to COVID-19 pandemic as described elsewhere in this Annual Report on Form 10-K. The 2% sequestration reduction adjustment was suspended for patient claims with dates of service that began May 1, 2020 through March 31, 2022. Medicare patient claims with dates of services between April 1 through June 30, 2022 had a 1% sequestration payment adjustment. Medicare patient claims with dates of service beginning July 1, 2022 had the full 2% sequestration payment adjustment.
Home Health Services
The Company records revenue as services are provided under the Patient Driven Groupings Model ("PDGM"). For each 30-day period, the patient is classified into one of 432 home health resource groups prior to receiving services. Each 30-day period is placed into a subgroup falling under the following categories: (i) timing being early or late, (ii) admission source being community or institutional, (iii) one of 12 clinical groupings based on the patient's principal diagnosis, (iv) functional impairment level of low, medium, or high, and (v) a co-morbidity adjustment of none, low, or high based on the patient's secondary diagnoses.
Each 30-day period payment from Medicare reflects base payment adjustments for case-mix and geographic wage differences. In addition, payments may reflect one of three retroactive adjustments to the total reimbursement: (a) an outlier payment if the patient’s care was unusually costly; (b) a low utilization adjustment whereby the number of visits is dependent on the clinical grouping; and/or (c) a partial payment if the patient transferred to another provider or from another provider before completing the episode. The retroactive adjustments outlined above are recognized in net service revenue when the event causing the adjustment occurs and during the period in which the services are provided to the patient. The Company reviews these adjustments to ensure that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the retroactive adjustments is subsequently resolved. Net service revenue and related patient accounts receivable are recorded at amounts estimated to be realized from Medicare for services rendered.
Hospice Services
The Company records revenue based upon the date of service at amounts equal to the estimated payment rates. The Company receives one of four predetermined daily rates based upon the level of care provided by the Company, which can be routine care, general inpatient care, continuous home care, and respite care. There are two separate payment rates for routine care: payment for the first 60-days of care and care beyond 60-days. In addition to the two routine rates, the Company may also receive a service intensity add-on ("SIA"). The SIA is based on visits made in the last seven days of life by a registered nurse or medical social worker for patients in a routine level of care.
The performance obligation is the delivery of hospice services to the patient, as determined by a physician, each day the patient is on hospice care.
Adjustments to Medicare revenue are made from regulatory reviews, audits, billing reviews and other matters. The Company estimates the impact of these adjustments based on our historical experience.
Hospice payments are subject to variable consideration through an inpatient cap and an overall Medicare payment cap. The inpatient cap relates to individual programs receiving more than 20% of its total Medicare reimbursement from inpatient care services and the overall Medicare payment cap relates to individual programs receiving reimbursements in excess of a “cap amount,” determined by Medicare to be payment equal to 12 months of hospice care for the aggregate base of hospice patients, indexed for inflation. The determination for each cap is made annually based on the 12-month period ending on September 30 of each year. The Company monitors its limits on a provider-by-provider basis and records an estimate of its liability for reimbursements received in excess of the cap amount, if any, in the reporting period.
Facility-Based Services
Gross revenue is recorded as services are provided under the LTACH prospective payment system. Each patient is assigned a long-term care diagnosis-related group. The Company is paid a predetermined fixed amount intended to reflect the average cost of treating a Medicare LTACH patient classified in that particular long-term care diagnosis-related group. For selected LTACH patients, the amount may be further adjusted based on length-of-stay and facility-specific costs, as well as in instances where a patient is discharged and subsequently re-admitted, among other factors. The Company calculates the adjustment based on a historical average of these types of adjustments for LTACH claims paid. Similar to other Medicare prospective payment systems, the rate is also adjusted for geographic wage differences. Net service revenue adjustments resulting from reviews and audits of Medicare cost report settlements are considered implicit price concessions for LTACHs and are measured at expected value.
Non-Medicare Revenue
Other sources of net service revenue for all segments fall into Medicaid, managed care or other payors of the Company's services. Medicaid reimbursement is based on a predetermined fee schedule applied to each service provided. Therefore, revenue is recognized for Medicaid services as services are provided based on this fee schedule. The Company's managed care and other payors reimburse the Company based upon a predetermined fee schedule or an episodic basis, depending on the terms of the applicable contract. Accordingly, the Company recognizes revenue from managed care and other payors as services are provided, such costs are incurred, and estimates of expected payments are known for each different payer, thus the Company's revenue is recorded at the estimated transaction price.
Contingent Service Revenues
The HCI segment provides strategic health management services to Affordable Care Organizations ("ACOs") that have been approved to participate in the Medicare Shared Savings Program ("MSSP"). The HCI segment has service agreements with ACOs that provide for sharing of MSSP payments received by the ACO, if any. ACOs are legal entities that contract with CMS to provide services to the Medicare fee-for-service population for a specified annual period with the goal of providing better care for the individual, improving health for populations and lowering costs. ACOs share savings with CMS to the extent that the actual costs of serving assigned beneficiaries are below certain trended benchmarks of such beneficiaries and certain quality performance measures are achieved. The generation of shared savings is the performance obligation of each ACO, which only become certain upon the final issuance of unembargoed calculations by CMS, generally in the third quarter of each year. During the years ended December 31, 2022, 2021, and 2020, the HCI segment recorded net service revenue of $15.6 million, $12.1 million, and $9.6 million, respectively, related to the 2021, 2020 and 2019 ACO respective service periods, as certain ACOs served by the HCI segment received a MSSP payment from CMS confirming the performance obligation has been met.
Patient Accounts Receivable
The Company reports patient accounts receivable from services rendered at their estimated transaction price, which includes price concessions based on the amounts expected to be due from payors. The Company's patient accounts receivable is uncollateralized and primarily consist of amounts due from Medicare, Medicaid, other third-party payors, and to a lesser degree patients. The credit risk from other payors is limited due to the significance of Medicare as the primary payor. The Company believes the credit risk associated with its Medicare accounts is limited due to (i) the historical collection rate from Medicare and (ii) the fact that Medicare is a U.S. government payor. The Company does not believe that there are any other significant concentrations from any particular payor that would subject it to any significant credit risk in the collection of patient accounts receivable.
The following table sets forth the percentage of patient accounts receivable by payor for the years ended December 31:
2022 2021
Medicare 65.6 % 60.3 %
Medicaid 5.2 7.5
Managed Care, Commercial, and Other 29.2 32.2
Total patient accounts receivable 100.0 % 100.0 %
Business Combinations
The Company accounts for its acquisitions in accordance with ASC 805, "Business Combinations" ("ASC 805") using the acquisition method of accounting. Assets typically acquired consist primarily of Medicare licenses, trade names, certificates of need, and/or non-compete agreements. The assets acquired and liabilities assumed, if any, are measured at fair value on the acquisition date using the appropriate valuation method. The noncontrolling interest associated with joint venture acquisitions is also measured and recorded at fair value as of the acquisition date. Goodwill represents the excess of the cost of an acquired entity over the net amounts assigned to assets acquired and liabilities assumed. The operations of the acquisitions are included in the consolidated financial statements from their respective dates of acquisition. Acquisition transactions that occurred in 2022 and 2021 are further described in Note 3 and Note 4 to the Consolidated Financial Statements included in this Annual Report on Form 10-K.
Insurance Programs
The Company bears significant risk under its large-deductible workers’ compensation insurance program and its self-insured employee health program. Under the workers’ compensation insurance program, the Company bears risk up to $1.0 million per incident, after which stop-loss coverage is maintained. The Company purchases stop-loss insurance for the employee health plan and bear risk up to $0.5 million per incident.
Malpractice and general patient liability claims for incidents which may give rise to litigation have been asserted against the Company by various claimants. The claims are in various stages of processing and some may ultimately be brought to trial. The Company currently carries professional liability insurance coverage on a claims made basis and general liability insurance coverage on an occurrence basis for this exposure with a $0.3 million deductible. The Company also carries Directors and Officers coverage (also on a claims made basis) for potential claims against the Company’s directors and officers, including securities actions, with a deductible of $2.5 million.
The Company records estimated liabilities for its insurance programs based on information provided by the third-party plan administrators, historical claims experience, the life cycle of claims, expected costs of claims incurred but not paid, and expected costs to settle unpaid claims. The Company monitors its estimated insurance-related liabilities and recoveries, if any, on a monthly basis and records amounts due under insurance policies in other current assets, while recording the estimated carrier liability in self-insurance reserves. As facts change, it may become necessary to make adjustments that could be material to the Company’s results of operations and financial condition.
Goodwill and Intangible Assets
Goodwill
Goodwill represents the excess of amounts paid for acquisitions over the fair value of net identifiable assets acquired less liabilities assumed. The Company assigns assets acquired, including goodwill, and liabilities assumed to one or more reporting units as of the date of the acquisition. The Company's reporting units are home health, hospice, home and community-based, LTACH, and HCI. The LTACHs are incorporated in the Company's facility-based operating segment. The other locations within the facility-based segment do not share in the economic benefits of the LTACH reporting unit, and as such, are excluded from the annual impairment testing.
Goodwill and purchased intangible assets with indefinite useful lives are not amortized. ASC 350, "Intangibles - Goodwill and Other" ("ASC 350") requires that all indefinite-lived intangible assets, such as goodwill, be tested for impairment at least annually or sooner whenever events or changes in circumstances indicate that the asset is impaired. An entity may perform a qualitative assessment to determine whether it is necessary to perform the quantitative impairment test. In assessing whether the asset is impaired, the Company assess all relevant events and circumstances for each of the Company's reporting units.
The Company performs its goodwill impairment testing on an annual basis as of November 30, and whenever events or changes in circumstances indicate that the carrying value of a reporting unit likely exceeds its fair value. This involves estimating the fair value of the reporting units using discounted cash flow models. For 2022, the Company performed its annual impairment review of goodwill at November 30. The Company assessed and reviewed factors such as: labor cost; financial performance, such as cash flows and planned revenue; regulatory factors; market considerations, such as market-dependent multiples; and access of capital. For 2022, the Company performed a qualitative assessment of goodwill for each of its reporting units. When performing its quantitative assessment, the Company determined the existence of events and circumstances that would lead to a determination that is more likely than not that the fair value of the reporting units for hospice, home and community-based, and LTACHs could be less than its carrying value. The Company was required to perform a quantitative assessment on these reporting units.
The Company's quantitative assessment for the determination of impairment was made by comparing the carrying amount of the hospice, home and community-based, and LTACH reporting units with its fair value, calculated by a combination of market and discounted cash flow approaches. Minor changes to assumptions used in these approaches could have had a significant effect on the assessment of the fair value of these reporting units. The Company's home and community-based and LTACH reporting units fair value exceeded its respective carrying value by 5% and 1%, respectively. Both reporting units are at risk of failing step one of the impairment test in future quarters if financial performance continues to decrease and the cost of debt continues to increase. The Company has not recognized any goodwill impairment charges in 2022, 2021 or 2020 related to the annual impairment testing.
Components of the Company's reporting units are collections of markets of similar service offerings that operate collaboratively under a house of brands, i.e. multiple brands are used across markets, states, and segments. The Company recognized an impairment of $5.3 million, $0.02 million and $0.5 million, respectively, for the twelve months ended December 31, 2022, 2021, and 2020 related to goodwill associated with the closure of underperforming locations. The impairments were determined using prices of comparable businesses in respective markets.
Intangible assets: Indefinite-lived assets
The Company also has indefinite-lived assets that are not subject to amortization expense such as trade names, certificates of need, and Medicare licenses to conduct specific operations within geographic markets. The Company has concluded that trade names, certificates of need, and licenses have indefinite lives, because there are no legal, regulatory, contractual, economic or other factors that would limit the useful lives of these intangible assets and the Company intends to renew and
operate the certificates of need and licenses and use the trade names indefinitely. In some cases, the value of licenses and certificates of need is increased by moratoriums in effect. These indefinite-lived intangible assets are reviewed annually for impairment or more frequently if circumstances indicate impairment may have occurred. The Company performed a qualitative assessment and determined that it is not more likely than not that the fair values of these assets are less than the carrying amounts. During the twelve months ended December 31, 2022, 2021, and 2020, the Company did not record an impairment charge related to indefinite-lived intangible assets in the annual impairment testing.
During the twelve months ended December 31, 2022, 2021, and 2020, the Company closed underperforming locations and impaired certificates of need or Medicare licenses for these providers. The Company recognized an impairment of $5.6 million, $0.9 million, $0.7 million, respectively. The amounts of impairment of the certificate of needs or Medicare licenses was its carrying value at the time of closure.
Intangible assets: Definite-lived assets
Included in intangible assets are definite-lived assets subject to amortization such as non-compete agreements, customer relationships, and defensive assets, which are defined as trade names that are not actively used. Amortization of definite-lived intangible assets is calculated on a straight-line basis over the estimated useful lives of the related assets, ranging from three to 16 years. Amortization expense for the Company's definite-lived intangible assets for the years ended December 31, 2022, 2021, and 2020, was $4.6 million, $1.5 million, and $1.2 million, respectively. Amortization expense was recorded in general and administrative expenses.
Due to/from Governmental Entities
The Company’s LTACHs are reimbursed for certain activities based on tentative rates. The amounts recorded in due to/from governmental entities on the Company’s consolidated balance sheets relate to settled and open cost reports that are subject to the completion of audits and the issuance of final assessments. Final reimbursement is determined based on submission of annual cost reports and audits by the fiscal intermediary. Adjustments are accrued on an estimated basis in the period the related services were rendered and further adjusted as final settlements are determined. These adjustments are accounted for as changes in estimates. Additionally, reimbursements received in excess of hospice cap amounts are recorded in this account, if any.
Property, Building and Equipment
Property, building and equipment are recorded at cost. Property, building and equipment acquired in connection with business combinations are recorded at estimated fair value in accordance with the acquisition method of accounting in accordance with ASC 805. Expenditures that increase capacities or extend useful lives are capitalized to the appropriate property, building and equipment accounts. Costs and related accumulated depreciation associated with assets that are sold or retired are written off and any gain or loss are recorded in operating income. Routine repairs and maintenance costs are expensed as incurred.
Depreciation is computed using the straight-line method over the estimated useful life of the individual assets. The estimated useful life of buildings is 39 years, while the estimated useful life of transportation equipment, fixed equipment, office furniture, and computer equipment range from three to 15 years. The useful life for leasehold improvements is the shorter of the lease term or the expected life of the leasehold improvement.
In accordance with ASC 360, "Property, Plant, and Equipment", the Company evaluates its long-lived assets for possible impairment whenever events or changes in circumstances occur that indicate that the carrying amount of the asset may not be recoverable. There were no impairment charges recognized during the periods ended December 31, 2022, 2021, and 2020.
The following table describes the Company’s components of property, building and equipment for the years ended December 31, 2022 and 2021 (amounts in thousands):
2022 2021
Land $ 7,339 $ 7,339
Building and leasehold improvements 111,858 105,444
Transportation equipment 20,442 19,898
Office furniture and medical equipment 129,071 117,084
Construction in progress - 2,588
268,710 252,353
Less accumulated depreciation 114,427 98,394
Property, building and equipment, net $ 154,283 $ 153,959
Building and leasehold improvements and office furniture and medical equipment were reclassified as of December 31, 2021 due to the reclassification of fixed equipment associated with the Company's implementation of a new enterprise resource planning software.
Depreciation expense for the years ended December 31, 2022, 2021 and 2020 was $18.6 million, $19.4 million, and $20.0 million, respectively, which was recorded in general and administrative expenses. In addition, during the years ended December 31, 2021 and 2020, the Company capitalized $1.0 million and $1.1 million, respectively, in interest costs related to the construction of its home office expansion project. Construction of its home office expansion projection was completed during the twelve months ended December 31, 2021.
Noncontrolling Interest
The Company classifies noncontrolling interests of its joint ventures based upon a review of the legal provisions governing the redemption of such interests. In each of the Company’s joint ventures, those provisions are embodied within the joint venture’s operating agreement. For joint ventures with operating agreement provisions that establish an obligation for the Company to purchase the third party partners’ noncontrolling interests other than as a result of events that lead to a liquidation of the joint venture, such noncontrolling interests are classified as redeemable noncontrolling interests in temporary equity. For joint ventures with operating agreement provisions that establish an obligation that the Company purchase the third party partners’ noncontrolling interests, but which obligation is triggered by events that lead to a liquidation of the joint venture, such noncontrolling interests are classified as nonredeemable noncontrolling interests in permanent equity. Additionally, for joint ventures with operating agreement provisions that do not establish an obligation for the Company to purchase the third party partners’ noncontrolling interests (e.g., where the Company has the option, but not the obligation, to purchase the third party partners’ noncontrolling interests), such noncontrolling interests are classified as nonredeemable noncontrolling interests in permanent equity.
The Company’s equity joint ventures that are classified as redeemable noncontrolling interests are subject to operating agreement provisions that require the Company to purchase the noncontrolling partner’s interest upon the occurrence of certain triggering events, which are defined as the bankruptcy of the partner or the partner’s exclusion from the Medicare or Medicaid programs. These triggering events and the related repurchase provisions are specific to each redeemable equity joint venture, since the triggering of a repurchase obligation for any one redeemable noncontrolling interest in an equity joint venture does not necessarily impact any of the other redeemable noncontrolling interests in other equity joint ventures. Upon the occurrence of a triggering event requiring the purchase of a redeemable noncontrolling interest, the Company would be required to purchase the noncontrolling partner’s interest based upon a valuation methodology set forth in the applicable joint venture agreement.
Redeemable noncontrolling interests and nonredeemable noncontrolling interests are initially recorded at their fair value as of the closing date of the transaction establishing the joint venture. Such fair values are determined using various accepted valuation methods, including the income approach, the market approach, the cost approach, and a combination of one or more of these approaches. A number of facts and circumstances concerning the operation of the joint venture are evaluated for each transaction, including (but not limited to) the ability to choose management, control over acquiring or liquidating assets, and control over the joint venture’s strategy and direction, in order to determine the fair value of the noncontrolling interest.
Subsequent to the closing date of the transaction establishing the joint venture, recorded values for both redeemable and nonredeemable noncontrolling interests are adjusted at the end of each reporting period for (a) comprehensive income (loss) that is attributed to the noncontrolling interest, which is calculated by multiplying the noncontrolling interest percentage by the comprehensive income (loss) of the joint venture’s operations during the reporting period, (b) dividends paid to the noncontrolling interest partner during the reporting period, and (c) any other transactions that increase or decrease the Company’s ownership interest in the joint venture, as a result of which the Company retains its controlling interest. If the Company determines based upon its analysis as of the end of each reporting period in accordance with authoritative accounting guidance, that it is not probable that an event would occur to otherwise require the redemption of a redeemable noncontrolling interest (i.e., the date for such event is not set or such event is not certain to occur), then the Company does not adjust the recorded amount of such redeemable noncontrolling interest.
The carrying amount of each redeemable equity instrument presented in temporary equity as of December 31, 2022 is not less than the initial amount reported for each instrument. The activity of noncontrolling interest-redeemable for the twelve months ended December 31, 2022, 2021, and 2020 is summarized in the Company’s statements of stockholders' equity.
Based upon the Company’s evaluation of the redemption provisions concerning redeemable noncontrolling interests as of December 31, 2022, the Company determined in accordance with authoritative accounting guidance that it was not probable that an event otherwise requiring redemption of any redeemable noncontrolling interest would occur (i.e., the date for such event was not set or such event is not certain to occur). Therefore, none of the redeemable noncontrolling interests were
identified as mandatorily redeemable interests at such times, and the Company did not record any values in respect of any mandatorily redeemable interests.
Stock-Based Compensation
The Company accounts for its stock-based awards in accordance with provisions of ASC 718, "Compensation - Stock Compensation" ("ASC 718"). The Company grants restricted stock or restricted stock units to employees and members of its Board of Directors as a form of compensation. In accordance with ASC 718, the expense for such awards is based on the grant date fair value of the award and is recognized on a straight-line basis over the requisite service period. See Note 7 to the Consolidated Financial Statements included in this Annual Report on Form 10-K for additional information.
Earnings Per Share
The following table sets forth shares used in the computation of basic and diluted per share information for the years ended December 31, 2022, 2021, and 2020:
2022 2021 2020
Weighted average number of shares outstanding for basic per share calculation 30,539,343 31,195,305 31,092,417
Effect of dilutive potential shares:
Nonvested restricted stock 120,384 201,353 273,348
Adjusted weighted average shares for diluted per share calculation 30,659,727 31,396,658 31,365,765
Antidilutive shares 87,333 117,238 1,155
Investments
During the twelve months ended December 31, 2022, the Company invested $15.0 million and became a minority owner in a post-acute management services company, invested $0.1 million in Jumpstart Nova Fund, LP, and invested $0.2 million in LHCC Aging Innovations Fund I, LP. During the twelve months ended December 31, 2021, the Company invested $10.0 million and became a minority owner in a healthcare analytics company and invested $0.1 million in an investment fund focused on minority-owned businesses. These investments are recorded in other assets in our consolidated balance sheets. These investments were accounted for under the cost method of accounting as the Company does not have the ability to exercise significant influence in connection with its minority ownership positions.
3. Acquisitions, Divestitures, and Joint Venture Activities
2022 Acquisitions
On September 1, 2021, the Company purchased Heart of Hospice. During the twelve months ended December 31, 2022, the Company recorded a decrease in patient accounts receivable of $1.5 million due to information obtained that relates to facts and circumstances that existed at the time of acquisition; therefore, it was an adjustment to the provisional amounts previously recognized.
On November 1, 2021, the Company purchased Brookdale Health Care Services' agencies from the recently formed home
health, hospice, and outpatient therapy venture between HCA Healthcare and Brookdale Senior Living. The Company's net
working capital adjustment was finalized during the twelve months ended December 31, 2022 for $3.1 million and recorded in accordance with ASC Topic 805, Business Combinations, as an increase to the consideration transferred. In addition, amounts due to government entities was reduced by $3.2 million to reflect payments made for prior years' hospice cap liability.
On May 1, 2022, the Company purchased the majority ownership of a home health agency from Archbold Medical Center,
which included two locations in Georgia for a total consideration for the acquisition of $3.7 million. On October 1, 2022, the Company purchased eight home health providers located in Georgia from Three Rivers Home Health Services, Inc. for a total consideration for the acquisition of $18.5 million. On November 1, 2022, the Company purchased the majority ownership of two home health agencies and one home and community-based agency located in Maryland from the University of Maryland Shore Regional Health, Inc. for a total consideration for the acquisition of $4.8 million. The purchase prices were determined based on the Company's analysis of comparable acquisitions and the target market's potential future cash flows.
Goodwill generated from the acquisitions was recognized based on the expected contributions of each acquisition to the overall corporate strategy. The Company expects its portion of goodwill to be fully tax deductible. The acquisitions were
accounted for under the acquisition method of accounting. Accordingly, the accompanying financial information includes the results of operations of the acquired entities from the date of acquisition.
Transaction costs associated with acquisitions are expensed as incurred. During the twelve months ended December 31, 2022, the Company incurred $0.2 million in acquisition-related transaction costs, which was recorded in the consolidated statements of income as general and administrative expenses.
The following table summarizes the amounts of the assets acquired and liabilities assumed at the acquisition dates, as well as their fair value at the acquisition dates and the noncontrolling interest acquired during the twelve months ended December 31, 2022 (amounts in thousands):
Consideration
Cash $ 23,552
Fair value of total consideration transferred
Recognized amounts of identifiable assets acquired and liabilities assumed
Trade names $ 2,881
Certificates of need/licenses 2,148
Non-compete agreements 254
Operating lease right of use asset 17
Accounts payable and other accrued liabilities (630)
Salaries, wages, and benefits payable (496)
Current operating lease payable (17)
Total identifiable assets and liabilities $ 4,157
Noncontrolling interest 1,788
Goodwill, including noncontrolling interest of $1,266
$ 21,183
Trade names, certificates of need and licenses are indefinite-lived assets and, therefore, not subject to amortization. Acquired trade names that are not being used actively are amortized over the estimated useful life on the straight line basis. Trade names are valued using the relief from royalty method, a form of the income approach. Certificates of need are valued using the replacement cost approach based on registration fees and opportunity costs. Licenses are valued based on the estimated direct costs associated with recreating the asset, including opportunity costs based on an income approach. In the case of states with a moratorium in place, the licenses are valued using the multi-period excess earnings method. Noncontrolling interest is recorded at fair value.
2022 Joint Venture Activities
During the twelve months ended December 31, 2022, the Company purchased additional controlling membership interests in four of our equity joint venture partnerships, whereby the agencies became wholly-owned subsidiaries of the Company. The total consideration for these additional controlling interest purchases was $1.9 million. The transactions were accounted for as equity transactions.
During the twelve months ended December 31, 2022, the Company sold noncontrolling membership interests in five home health agencies. The total consideration of the sales of noncontrolling membership interest was $5.2 million. The transactions were accounted for as equity transactions.
2021 Acquisitions
On July 1, 2021, the Company purchased Heart n' Home Hospice for $50.1 million, which included seven wholly-owned hospice locations in Idaho and two wholly-owned hospice locations in Oregon. In addition, the Company purchased Casa de la Luz on July 1, 2021 for $48.0 million, which included two wholly-owned hospice and palliative care locations in Arizona.
On September 1, 2021, the Company purchased Heart of Hospice for $278.0 million, which included 24 wholly-owned hospice locations in Arkansas, Louisiana, Mississippi, Oklahoma, and South Carolina.
On November 1, 2021, the Company purchased Brookdale Health Care Services' agencies from the recently formed home health, hospice, and outpatient therapy venture between HCA Healthcare and Brookdale Senior Living, Inc. The wholly-owned purchased agencies included 23 home health locations, 11 hospice locations, and 13 main therapy agencies across 22
states. Total consideration for this acquisition was $197.0 million, of which $178.8 million was paid in cash, net of working capital adjustments.
In separate acquisitions, the Company acquired the majority-ownership of four home health agencies, three hospice agencies, and one home and community-based agency during the twelve months ended December 31, 2021 for an aggregate purchase price $17.8 million. The purchase prices were determined based on the Company's analysis of comparable acquisitions and the target market's potential future cash flows.
Transaction costs associated with acquisitions are expensed as incurred. During the twelve months ended December 31, 2021, the Company incurred $9.1 million in acquisition-related transaction costs, which was recorded in the consolidated statements of income as general and administrative expenses.
2021 Divestitures
During the twelve months ended December 31, 2021, the Company sold its controlling membership interests in a home health agency previously operated as an equity joint venture and sold its pharmacy location, which was wholly-owned. The total consideration for these controlling interest sales was $1.5 million and resulted in a loss of $0.1 million, which was accounted for as a loss on the sale of entities and recorded in general and administrative expenses.
2021 Joint Venture Activities
During the twelve months ended December 31, 2021, the Company purchased additional controlling membership interests in four of our equity joint venture partnerships, whereby the agencies became wholly-owned subsidiaries of the Company. The total consideration for these additional controlling interest purchases was $2.1 million. The transactions were accounted for as equity transactions.
During the twelve months ended December 31, 2021, the Company sold noncontrolling membership interests in two home health agencies. The total consideration of the sales of noncontrolling membership interest was $1.9 million. The transactions were accounted for as equity transactions.
4. Goodwill and Other Intangibles, Net
The following table summarizes changes in goodwill and other intangibles assets by segment during the twelve months ended December 31, 2022 and 2021 (amounts in thousands):
Home Health
Hospice
Home and community-
based
Facility-based
HCI
Total
Goodwill
Balance as of December 31, 2020 $ 884,000 $ 151,742 $ 166,773 $ 15,770 $ 40,862 $ 1,259,147
Acquisitions 84,377 404,590 254 - - 489,221
Noncontrolling interest 78 - - - - 78
Adjustments and disposals (20) - - - - (20)
Balance as of December 31, 2021 $ 968,435 $ 556,332 $ 167,027 $ 15,770 $ 40,862 $ 1,748,426
Acquisitions 19,917 - - - - 19,917
Noncontrolling interest 1,266 - - - - 1,266
Adjustments and disposals (2,491) (20) (1,320) - - (3,831)
Balance as of December 31, 2022 $ 987,127 $ 556,312 $ 165,707 $ 15,770 $ 40,862 $ 1,765,778
Intangibles Assets
Balance as of December 31, 2020 $ 226,004 $ 44,732 $ 24,208 $ 5,311 $ 15,100 $ 315,355
Acquisitions 13,734 73,026 46 614 - 87,420
Amortization (480) (418) (9) (6) (581) (1,494)
Adjustments and disposals (1,279) - - - - (1,279)
Balance as of December 31, 2021 $ 237,979 $ 117,340 $ 24,245 $ 5,919 $ 14,519 $ 400,002
Acquisitions 5,483 - - - - 5,483
Amortization (1,937) (1,679) (9) (368) (581) (4,574)
Adjustments and disposals (3,805) (1,267) (511) - - (5,583)
Balance as of December 31, 2022 $ 237,720 $ 114,394 $ 23,725 $ 5,551 $ 13,938 $ 395,328
The Company determined that there was no impairment for the goodwill of any reporting unit as of December 31, 2022, 2021, and 2020 based on the Company's annual impairment testing.
During 2022, 2021, and 2020, the Company closed underperforming locations. Due to these closures, the Company recorded $5.3 million, $0.02 million, and $0.5 million of impairment of goodwill during the years ended December 31, 2022, 2021, and 2020. The amount of disposal of goodwill was determined using prices of comparable businesses in the market. This was recorded in impairment of intangibles and other on the Company's consolidated statements of income and disclosed in the changes in goodwill table in adjustments and disposals.
The Company performed an impairment analysis on its indefinite-lived intangible assets related to the Company's trade names, certificates of needs, and licenses and determined that it is not more likely than not that the fair values of the indefinite-lived intangible assets are less than its carrying amount as of November 30, 2022; however, the Company did record $5.6 million, $0.9 million, and $0.7 million, during the years ended December 31, 2022, 2021, and 2020. These impairments related to closures of underperforming locations. The amounts of disposal of the indefinite-lived intangible assets were the carrying values at the time of closure. This was recorded in impairment of intangibles and other on the Company's consolidated statements of income and disclosed in the changes in intangible assets table in adjustments and disposals.
During the twelve months ended December 31, 2021, the Company divested a certificate of need of $0.4 million, which was accounted for as a loss on the sale of an entity and recorded on the Company's consolidated statements of income in general and administrative expenses.
The following tables summarize the changes in intangible assets during the twelve months ended December 31, 2022 and 2021 (amounts in thousands):
2022 2021
Indefinite-lived intangible assets:
Trade names $ 210,373 $ 207,780
Certificates of need/licenses 170,808 173,955
Net total $ 381,181 $ 381,735
Definite-lived intangible assets:
Trade names
Gross carrying amount $ 11,273 $ 11,073
Accumulated amortization (10,615) (9,606)
Net total $ 658 $ 1,467
Non-compete agreements
Gross carrying amount $ 14,778 $ 14,524
Accumulated amortization (10,155) (7,172)
Net total $ 4,623 $ 7,352
Customer relationships
Gross carrying amount $ 11,822 $ 11,822
Accumulated amortization (2,956) (2,374)
Net total $ 8,866 $ 9,448
Total definite-lived intangible assets
Gross carrying amount $ 37,873 $ 37,419
Accumulated amortization (23,726) (19,152)
Net total $ 14,147 $ 18,267
Total intangible assets:
Gross carrying amount $ 419,054 $ 419,154
Accumulated amortization (23,726) (19,152)
Net total $ 395,328 $ 400,002
Remaining useful lives of trade names, customer relationships, and non-compete agreements were 6.7, 15.3 and 3.8 years, respectively at December 31, 2022. Similar amounts at December 31, 2021 were 7.8, 16.3 and 4.9 years, respectively.
Amortization expense for the Company's intangible assets was $4.6 million, $1.5 million, and $1.2 million for the years ended December 31, 2022, 2021 and 2020, which was recorded on the Company's consolidated statements of income in general and administrative expenses.
The estimated intangible asset amortization expense for each of the five years subsequent to December 31, 2022 is as follows (amounts in thousands):
Year Amortization amount
2023 $ 2,708
2024 2,224
2025 1,860
2026 1,579
2027 656
Total $ 9,027
5. Income Taxes
The Company accounts for income taxes using the asset and liability method. Under the asset and liability method, deferred taxes are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax laws that will be in effect when the differences are expected to reverse.
Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2022 and 2021 were as follows (amounts in thousands):
2022 2021
Deferred tax assets:
Allowance for uncollectible accounts $ 6,400 $ 8,394
Accrued employee benefits 7,372 7,533
Stock compensation 2,828 2,735
Accrued self-insurance 7,810 6,626
Acquisition costs 4,244 2,631
Net operating loss carry forward 31,097 5,245
Intangible asset impairment 6 6
Interest Expense 7,820 -
Lease payable 22,591 23,220
Government stimulus advance - 21,591
Payroll tax - 5,895
Other 1,630 312
Gross deferred tax assets 91,798 84,188
Less: valuation allowance (3,590) (3,121)
Net deferred tax assets $ 88,208 $ 81,067
Deferred tax liabilities:
Amortization of intangible assets (120,303) (100,339)
Tax depreciation in excess of book depreciation (17,386) (17,584)
Prepaid expenses (2,063) (1,733)
Non-accrual experience accounting method (666) (829)
Right of use asset (22,105) (22,781)
Other (12,015) (7,827)
Deferred tax liabilities (174,538) (151,093)
Net deferred tax liability $ (86,330) $ (70,026)
Based on the Company’s historical pattern of taxable income, the Company believes it will produce sufficient income in the future to realize its deferred income tax assets. Management provides a valuation allowance for any net deferred tax assets when it is more likely than not that a portion of such net deferred tax assets will not be recovered.
The components of the Company’s income tax expense from continuing operations, less noncontrolling interest, for the twelve months ended December 31, were as follows (amounts in thousands):
2022 2021 2020
Current:
Federal $ (883) $ 10,746 $ 37,253
State 1,931 4,220 12,232
1,048 14,966 49,485
Deferred:
Federal 14,677 17,699 (10,800)
State 1,236 5,022 (2,642)
15,913 22,721 (13,442)
Total income tax expense $ 16,961 $ 37,687 $ 36,043
A reconciliation of the difference between the federal statutory tax rate and the Company's effective tax rate for income taxes for each of the twelve months ended December 31, were as follows:
2022 2021 2020
Federal statutory tax rate 21.0 % 21.0 % 21.0 %
State income taxes, net of federal benefit 8.1 4.8 5.2
Nondeductible expenses 5.4 1.4 1.9
Uncertain tax position (0.1) 0.1 1.5
Cares Act Enactment - - (2.9)
Excess tax benefit (1.8) (1.5) (1.7)
Credits and other (2.7) (1.2) (0.6)
Effective tax rate 29.9 % 24.6 % 24.4 %
The Company is subject to both federal tax and state income tax for jurisdictions within which it operates. Within these jurisdictions, the Company is open to examination for tax years ended after December 31, 2012.
As of December 31, 2022, the Company has gross U.S. operating loss carry forwards of $102.5 million that are available to reduce future taxable income. If not used to offset taxable income, a portion of these losses will expire between 2032 and 2034. Losses generated in years ending after December 31, 2017 have an unlimited carryforward under the Tax Cut and Jobs Act ("2017 Tax Act"). Due to U.S. limitations on acquired operating losses, a valuation allowance has been established on $1.6 million of these losses.
Gross state operating loss carryforwards totaling $189.4 million at December 31, 2022 are being carried forward in jurisdictions where the Company is permitted to use tax losses from prior periods to reduce future taxable income. If not used to offset future taxable income, these losses will expire between 2023 and 2042. Due to uncertainty regarding the Company's ability to use some of the carryforwards, a valuation allowance has been established on $56.2 million of state net operating loss carryforwards. Based on the Company's historical record of producing taxable income and expectations for the
future, the Company has concluded that future operating income will be sufficient to give rise to taxable income sufficient to utilize the remaining state net operating loss carryforwards.
The effective tax rate for the twelve months ended December 31, 2022 benefited from $1.0 million of excess tax benefits associated with stock-based compensation arrangements. For the twelve months ended December 31, 2021, the effective tax rate benefited from $2.4 million of excess tax benefits associated with stock-based compensation arrangements.
In response to the COVID-19 pandemic, the CARES Act was signed into law in March 2020. The CARES Act lifts certain deduction limitations originally imposed by the 2017 Tax Act. Corporate taxpayers may carryback net operating losses ("NOLs") originating during 2018 through 2020 for up to five years, which was not previously allowed under the 2017 Tax Act. The CARES Act also eliminates the 80% of taxable income limitations by allowing corporate entities to fully utilize NOL carryforwards to offset taxable income in 2018, 2019, or 2020. Taxpayers may generally deduct interest up to the sum of 50% of adjusted taxable income plus business interest income (30% limit under the 2017 Tax Act) for tax years beginning January 1, 2019 and 2020. The CARES Act allows taxpayers with alternative minimum tax credits to claim a refund in 2020 for the entire amount of the credits instead of recovering the credits through refunds over a period of years, as originally enacted by the 2017 Tax Act. In addition, the CARES Act raises the corporate charitable deduction limit to 25% of taxable income and makes qualified improvement property generally eligible for 15-year cost-recovery and 100% bonus depreciation. The effective tax rate for the twelve months ended December 31, 2020 benefited from a $4.3 million impact from the enactment of the CARES Act. The benefit was primarily driven by NOL carryback provisions and rate differential between the affected years. There was no material impact to our net deferred tax assets as of December 31, 2020.
US GAAP prescribes a recognition threshold and measurement attribute for the accounting and financial statement disclosure of tax positions taken or expected to be taken in a tax return. The evaluation of a tax position is a two-step process. The first step requires the Company to determine whether it is more likely than not that a tax position will be sustained upon examination based on the technical merits of the position. The second step requires the Company to recognize in the financial statements each tax position that meets the more likely than not criteria, measured at the amount of benefit that has a greater than 50% likelihood of being realized. The Company's unrecognized tax benefits would affect the tax rate, if recognized. The Company includes the full amount of unrecognized tax benefits in noncurrent income taxes payable in the consolidated balance sheets. The Company anticipates it is reasonably possible an increase or decrease in the amount of unrecognized tax benefits could be made in the next twelve months; however, the Company does not presently anticipate that any increase or decrease in unrecognized tax benefits will be material to the consolidated financial statements. The impact of the CARES Act increased unrecognized tax benefits by $2.1 million, which also had an impact on the Company's effective tax rate for the twelve months ended December 31, 2020. The impact was primarily driven by the NOL carryback mentioned above to previously closed years. As of December 31, 2022 and 2021, the Company recognized $7.2 million and $7.3 million, respectively, in unrecognized tax benefits.
A reconciliation of the total amounts of unrecognized tax benefits follows:
Unrecognized tax benefits
As of January 1, 2021 $ 6,203
Acquired unrecognized tax position -
Increased (decreased) in unrecognized tax benefits as a result of:
Tax positions taken in the current year 1,244
Lapse of statute of limitations (127)
As of December 31, 2021 $ 7,320
Increased (decreased) in unrecognized tax benefits as a result of:
Tax positions taken in the current year 304
Lapse of statute of limitations (405)
As of December 31, 2022 $ 7,219
6. Debt
Credit Facility
On August 3, 2021, the Company entered into an Amended and Restated Senior Credit Facility (the "2021 Amended Credit Agreement"), which provided a senior, secured revolving line of credit commitment with a maximum principal borrowing limit of $800.0 million, which included an additional $500.0 million accordion expansion, and a letter of credit sub-limit
equal to $75.0 million. On December 31, 2021, the aggregate commitment was increased to a maximum borrowing limit of $1.0 billion, with an additional $300.0 million accordion expansion. The expiration date of the 2021 Amended Credit Agreement is August 3, 2026.
The Company's obligations under the 2021 Amended Credit Agreement are secured by substantially all of the assets of the Company and its wholly-owned subsidiaries (subject to customary exclusions), which assets include the Company's equity ownership of its wholly-owned subsidiaries and its equity ownership in joint venture entities. The Company's wholly-owned subsidiaries also guarantee the obligations of the Company under the 2021 Amended Credit Agreement.
Revolving loans under the 2021 Amended Credit Agreement bear interest at, as selected by the Company, either a (i) the prevailing London Interbank Offered Rate ("LIBOR") (with interest periods of one, three, or six months at the Company's option) plus a spread of 1.25% to 2.00% based on the Company's quarterly consolidated Leverage Ratio or (ii) the prevailing prime or base rate plus a spread of 0.25% to 1.00% based on the Company's quarterly consolidated Leverage Ratio. Swing line loans bear interest at the Base Rate. The Company is limited to 15 Eurodollar borrowings outstanding at any time. The Company is required to pay a commitment fee for the unused commitments at rates ranging from 0.15% to 0.30% per annum depending upon the Company's quarterly consolidated Leverage Ratio. The Base Rate at December 31, 2022 was 8.50% and the Eurodollar Rate was 6.44%. As of December 31, 2022, the effective interest rate on outstanding borrowings under the 2021 Amended Credit Agreement was 6.39%.
On March 5, 2021, the ICE Benchmark Administration, the administrator of LIBOR, announced its intention to cease the publication of LIBOR settings for 1-month, 3-month, 6-month, and 12-month LIBOR borrowings immediately on June 30, 2023. JPMorgan Chase Bank, N.A will transition our 2021 Amended Credit Agreement to an alternate rate to CME Term SOFR Reference Rate ("SOFR"), which is administered by CME Group Benchmark Administration Ltd ("CME"). Due to the differences observed between LIBOR rates and SOFR published rates, JPMorgan Chase Bank, N.A. will use a credit spread adjustment ("CSA") in order to minimize value transfer and leave the existing margin applicable to our 2021 Amended Credit Agreement. The CSA used by JPMorgan Chase Bank, N.A. is based on the average of the differences between LIBOR and SOFR over a 12-month period and will be added to SOFR.
As of December 31, 2022 the Company had $733.0 million drawn and letters of credit in the amount of $24.1 million outstanding under the credit facility. At December 31, 2021, the Company had $661.2 million drawn and letters of credit in the amount of $24.3 million outstanding under the credit facility.
Under the terms of the 2021 Amended Credit Agreement, the Company is required to maintain certain financial ratios and comply with certain financial covenants. The 2021 Amended Credit Agreement permits the Company to make certain restricted payments, such as purchasing shares of its stock, within certain parameters, provided the Company maintains compliance with those financial ratios and covenants after giving effect to such restricted payments. The Company was in compliance with its debt covenants under the 2021 Amended Credit Agreement at December 31, 2022.
The scheduled principal payments on long-term debt for each of the five years subsequent to December 31, 2022 is as follows (amounts in thousands):
Year Principal payment amount
2023 $ -
2024 -
2025 -
2026 733,000
2027 -
Total $ 733,000
7. Stockholders’ Equity
Equity Based Awards
The 2018 Incentive Plan is administered by the Compensation Committee of the Company’s Board of Directors. The total number of shares of the Company's common stock originally reserved were 2,210,544 shares of our common stock and a total of 1,544,734 shares are currently available for issuance. A variety of discretionary awards for employees, officers, directors, and consultants are authorized under the 2018 Incentive Plan, including incentive or non-qualified stock options and restricted stock, restricted stock units and performance-based awards. All awards must be evidenced by a written award
certificate which will include the provisions specified by the Compensation Committee of the Board of Directors. The Compensation Committee determines the exercise price for stock options, which cannot be less than the fair market value of the Company’s common stock as of the date of grant.
Share Based Compensation
Nonvested Stock
The Company issues stock-based compensation to employees in the form of nonvested stock, which is an award of common stock subject to certain restrictions. The awards, which the Company calls nonvested shares, generally vest over five years, conditioned on continued employment for the full incentive period. Compensation expense for the nonvested stock is recognized for the awards that are expected to vest. The expense is based on the fair value of the awards on the grant date recognized on a straight-line basis over the requisite service period, which generally relates to the vesting period. The Company estimates forfeitures at the time of grant and revises the estimate in subsequent periods if actual forfeitures differ to ensure that total compensation expense recognized is at least equal to the value of vested awards. The Company applies the same guidance to nonemployee share-based awards.
During 2022, 2021, and 2020, respectively, the Company granted 182,310, 109,985, and 114,680 nonvested shares of stock to employees. During 2022, 2021, and 2020, respectively, the Company granted 10,935, 5,735, and 10,890 nonvested shares of stock to a consultant. All shares granted were granted pursuant to the 2018 Incentive Plan. The shares will vest over a period of five years, conditioned on continued employment and in accordance with the consulting agreement.
During 2022, 2021, and 2020, respectively, the Company granted 8,800, 7,200 and 9,900 nonvested shares of stock to the independent directors. The shares vest 100% on the one year anniversary date. During 2021, the Company granted 3,500 nonvested shares of common stock to the Company's Lead Director, which shares vest one-third at the date of grant and one-third on each of the first two anniversaries of the grant date. During 2020, one retired director was granted 775 nonvested shares of common stock, which vest 100% at the grant date. Shares granted to directors were pursuant to the Second Amended and Restated 2005 Non-Employee Directors Compensation Plan.
The fair value of nonvested shares is determined based on the closing trading price of the Company’s shares on the grant date. The weighted average grant date fair values of nonvested shares granted during the years ended December 31, 2022, 2021 and 2020 were $139.64, $186.08 and $123.89, respectively.
The following table represents the share grants stock activity for the year ended December 31, 2022:
Nonvested stock Options
Number of
Shares Weighted average
grant date fair value Number of
Shares Weighted average
grant date fair value
Share grants outstanding at December 31, 2021 415,816 $ 122.40 74,235 $ 42.07
Granted 202,045 139.64 - -
Vested or exercised (164,428) 108.87 (13,986) 31.27
Share grants outstanding at December 31, 2022 453,433 $ 134.64 60,249 $ 43.05
As of December 31 2022, there was $44.9 million of total unrecognized compensation cost related to nonvested shares granted. That cost is expected to be recognized over the weighted average period of 3.11 years. The total fair value of shares vested in the year ended 2022, 2021, and 2020 were $17.9 million, $14.1 million, and $12.2 million, respectively. The Company recorded $20.0 million, $15.9 million and $14.3 million in compensation expense related to non-vested stock grants in the years ended December 31, 2022, 2021 and 2020, respectively.
Aggregate intrinsic value for options represents the estimated value of the Company's common stock at the end of the period in excess of the weighted average exercise price multiplied by the number of options exercisable. The aggregate intrinsic value of options outstanding at December 31, 2022 was $7.1 million. The following table summarizes information about stock options outstanding and exercisable at December 31, 2022:
Range of Exercise Price Shares Wtd. Avg. Remaining Contractual Life Wtd. Avg. Exercise Price
$0.00 - $30.00
5,764 1.21 $ 26.54
$30.01 - $40.00
20,174 3.18 $ 39.38
Over $40.00
34,311 4.01 $ 47.99
60,249 4.01 $ 43.05
Employee Stock Purchase Plan
In 2006, the Company adopted the Employee Stock Purchase Plan allowing eligible employees to purchase the Company’s common stock at 95% of the market price on the last day of each calendar quarter. There were 250,000 shares reserved for the plan.
On June 20, 2013, the Amended and Restated Employee Stock Purchase Plan was approved by the Company’s stockholders. As a result of the amendment, the Employee Stock Purchase Plan was modified as follows:
•An additional 250,000 shares of common stock were authorized for issuance over the term of the Employee Stock Purchase Plan.
•The term of the Employee Stock Purchase Plan was extended from January 1, 2016 to January 1, 2023.
The Board of Directors approved the cessation of any new offering periods granted to employees in 2023 and approved for the termination of the participation of all employees in the Employee Stock Purchase Plan. Any payroll withholdings with respect to unpurchased shares were refunded to the participants.
The following table represents the shares issued during 2022, 2021, and 2020, under the Employee Stock Purchase Plan:
Number of
Shares Weighted Average
Per Share Price
Shares issued in 2020 14,313 $ 152.10
Shares issued in 2021 13,792 $ 186.20
Shares issued in 2022 16,272 $ 146.28
Treasury Stock
In conjunction with the vesting of the nonvested shares of stock or exercise of options, recipients incur personal income tax obligations. The Company allows the recipients to turn in shares of common stock to satisfy those personal tax obligations. The Company redeemed 43,097, 64,584 and 78,767 shares of common stock related to these tax obligations during the years ended December 31, 2022, 2021, and 2020, respectively. Such shares are held in treasury stock and are available for reissuance by the Company.
Stock Repurchase
On December 6, 2021, the Company's Board of Directors approved a share repurchase program authorizing repurchases up to $250.0 million of the Company's common stock. The Company may purchase common stock in open market transactions, block or privately negotiated transactions, and may from time to time purchase shares pursuant to a trading plan in accordance with Rule 10b5-1 and Rule 10b-18 under the Exchange Act or by any combination of such methods, in each case subject to compliance with all SEC rules and other legal requirements. The number of shares to be purchased and the timing of the purchases are based on a variety of factors, including, but not limited to, the level of cash balances, credit availability, debt covenant restrictions, general business conditions, the market price of our stock and the availability of alternative investment opportunities. No time limit was set for completion of repurchases under the new authorization, and the program may be suspended or discontinued at any time.
The Company uses the cost method to account for the repurchase of common stock. During the twelve months ended December 31, 2022, the Company repurchased 190,622 shares from the open market under its Stock Repurchase plan at an aggregate cost of $25.5 million. During the twelve months ended December 31, 2021, the Company repurchased 634,869 shares from the open market at an aggregate cost of $83.7 million. The remaining dollar value of shares authorized to be purchased under the Stock Repurchase plan was $140.8 million at December 31, 2022.
8. Leases
The Company determines if a contract contains a lease at inception date. The Company's leases are operating leases, primarily for office and office equipment, that expire at various dates over the next five years. The facility based leases have renewal options for periods ranging from one to nine years. As it is not reasonably certain these renewal options will be
exercised, the options were not considered in the lease term, and payments associated with the option years are excluded from lease payments.
Payments due under operating leases include fixed and variable payments. These variable payments for the Company's office leases can include operating expenses, utilities, property taxes, insurance, common area maintenance, and other facility-related expense. Additionally, any leases with terms less than one year were not recognized as operating lease right of use assets or payables for short term leases in accordance with the election of ‘package of practical expedient’ under ASU 2016-02.
The Company recognizes operating lease right of use assets and operating lease payable based on the present value of the future minimum lease payments at the lease commencement date. The Company's leases do not provide implicit rates. Therefore, the Company used an incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future payments. As of December 31, 2022, the weighted-average remaining lease term was 3.60 years and weighted-average discount rate was 4.36%. As of December 31, 2021, the weighted-average remaining lease term was 3.85 years and weighted-average discount rate was 4.22%.
The following table summarizes the operating lease right of use assets and related lease payables in the consolidated balance sheets at December 31, 2022 and 2021 (amounts in thousands):
December 31, 2022 December 31, 2021
Operating lease right of use asset $ 107,993 $ 113,399
Current operating lease payable $ 36,445 $ 37,630
Long-term operating lease payable $ 74,520 $ 78,688
The components of lease costs for operating leases for the years ended December 31, 2022, 2021, and 2020 were as follows: (amounts in thousands):
2022 2021 2020
Operating lease cost $ 58,182 $ 51,080 $ 47,288
Short-term lease cost 3,128 3,480 4,273
Variable lease cost 4,569 4,013 4,187
Total lease costs $ 65,879 $ 58,573 $ 55,748
Maturities of operating lease payables as of December 31, 2022 were as follows (amounts in thousands):
Year Total
2023 $ 40,077
2024 31,845
2025 23,424
2026 14,510
Thereafter 9,275
Total future minimum lease payments 119,131
Less: Imputed interest (8,166)
Total $ 110,965
9. Employee Benefit Plan
Defined Contribution Plan
The Company sponsors a 401(k) plan for all eligible employees. The plan allows participants to contribute up to the IRS 402(g) limits each year, both on a pretax and after tax basis, which was $20,500 in 2022. The plan also allows discretionary Company contributions as determined by the Company’s Board of Directors. Effective January 1, 2006, the Company implemented a discretionary match of up to two percent of participating employee contributions. The employer contribution will vest 25% in an employee's account for each year of service with the Company and 25% each additional year until it is
fully vested in year four. Contribution expense to the Company was $12.0 million, $12.6 million and $11.9 million in the years ended December 31, 2022, 2021, and 2020, respectively.
10. Commitments and Contingencies
Contingencies
The Company provides services in a highly regulated industry and is a party to various proceedings and regulatory and other governmental and internal audits and investigations in the ordinary course of business (including audits by Zone Program Integrity Contractors ("ZPICs") and Recovery Audit Contractors ("RACs") and investigations resulting from the Company's obligation to self-report suspected violations of law). Management cannot predict the ultimate outcome of any regulatory, other governmental, and internal audits and investigations. While such audits and investigations are the subject of administrative appeals, the appeals process, even if successful, may take several years to resolve. The Department of Justice, CMS, or other federal and state enforcement and regulatory agencies may conduct additional investigations related to the Company's businesses. These audits and investigations have caused and could potentially continue to cause delays in collections and, recoupments from governmental payors. As of December 31, 2022 and 2021, respectively, the Company recorded $12.0 million and $16.9 million in other assets, which are from government payors related to the disputed finding of pending ZPIC audits. Additionally, these audits may subject the Company to sanctions, damages, extrapolation of damage findings, additional recoupments, fines, and other penalties (some of which may not be covered by insurance), which may, either individually or in the aggregate, have a material adverse effect on the Company's business and financial condition.
We are involved in various legal proceedings arising in the ordinary course of business. Although the results of litigation cannot be predicted with certainty, we believe the outcome of pending litigation will not have a material adverse effect, after considering the effect of our insurance coverage, on our consolidated financial information.
Legal fees related to all legal matters are expensed as incurred.
Joint Venture Buy/Sell Provisions
Most of the Company’s joint ventures include a buy/sell option that grants to the Company and its joint venture partners the right to require the other joint venture party to either purchase all of the exercising member’s membership interests or sell to the exercising member all of the non-exercising member’s membership interest, at the non-exercising member’s option, within 30 days of the receipt of notice of the exercise of the buy/sell option. In some instances, the purchase price is based on a multiple of the historical or future earnings before income taxes and depreciation and amortization of the equity joint venture at the time the buy/sell option is exercised. In other instances, the buy/sell purchase price will be negotiated by the partners and subject to a fair market valuation process. The Company has not received notice from any joint venture partners of their intent to exercise the terms of the buy/sell agreement nor has the Company notified any joint venture partners of its intent to exercise the terms of the buy/sell agreement.
Compliance
The laws and regulations governing the Company’s operations, along with the terms of participation in various government programs, regulate how the Company does business, the services offered and its interactions with patients and the public. These laws and regulations, and their interpretations, are subject to frequent change. Changes in existing laws or regulations, or their interpretations, or the enactment of new laws or regulations could materially and adversely affect the Company’s operations and financial condition.
The Company is subject to various routine and non-routine governmental reviews, audits and investigations. In recent years, federal and state civil and criminal enforcement agencies have heightened and coordinated their oversight efforts related to the health care industry, including referral practices, cost reporting, billing practices, joint ventures and other financial relationships among health care providers. Violation of the laws governing the Company’s operations, or changes in the interpretation of those laws, could result in the imposition of fines, civil or criminal penalties, and/or termination of the Company’s rights to participate in federal and state-sponsored programs and suspension or revocation of the Company’s licenses. The Company believes that it is in material compliance with all applicable laws and regulations.
11. Segment Information
The Company's reporting segments include (1) home health services, (2) hospice services, (3) home and community-based services, (4) facility-based services and (5) healthcare innovations (“HCI”). The accounting policies of the segments are the same as those described in the summary of significant accounting policies, as described in Note 2 to the Consolidated Financial Statements included in this Annual Report on Form 10-K.
Reportable segments have been identified based upon how management has organized the business by services provided to customers and how the chief operating decision maker manages the business and allocates resources, consistent with the criteria in ASC 280, Segment Reporting.
The following tables summarize the Company’s segment information for the twelve months ended December 31, 2022, 2021 and 2020 (amounts in thousands):
Year Ended December 31, 2022
Home Health Hospice Home and Community-Based Facility-Based HCI Total
Net service revenue $ 1,531,491 $ 407,489 $ 180,587 $ 127,916 $ 35,288 $ 2,282,771
Cost of service revenue (excluding depreciation and amortization) 894,002 270,177 130,142 93,336 11,501 1,399,158
General and administrative expenses 521,184 129,237 48,230 48,073 17,515 764,239
Impairment of intangibles and other 6,295 2,727 1,832 - - 10,854
Operating income (loss) 110,010 5,348 383 (13,493) 6,272 108,520
Interest expense (21,979) (4,553) (2,832) (1,327) (620) (31,311)
Income (loss) before income taxes and noncontrolling interests 88,031 795 (2,449) (14,820) 5,652 77,209
Income tax expense (benefit) 21,144 (1,049) (694) (4,087) 1,647 16,961
Net income (loss) 66,887 1,844 (1,755) (10,733) 4,005 60,248
Less net income (loss) attributable to noncontrolling interests 17,330 4,199 (130) (1,172) 150 20,377
Net income (loss) attributable to LHC Group, Inc.’s common stockholders $ 49,557 $ (2,355) $ (1,625) $ (9,561) $ 3,855 $ 39,871
Total assets $ 1,721,288 $ 797,019 $ 235,036 $ 79,571 $ 64,043 $ 2,896,957
Year Ended December 31, 2021
Home Health Hospice Home and Community-Based Facility-Based HCI Total
Net service revenue $ 1,551,542 $ 311,218 $ 189,561 $ 132,098 $ 35,203 $ 2,219,622
Cost of service revenue (excluding depreciation and amortization) 901,685 194,895 137,852 89,270 12,907 1,336,609
General and administrative expenses 501,132 89,693 46,724 45,304 13,582 696,435
Impairment of intangibles and other 937 - - - - 937
Operating income (loss) 147,788 26,630 4,985 (2,476) 8,714 185,641
Interest expense (3,103) (529) (413) (208) (85) (4,338)
Income (loss) before income taxes and noncontrolling interests 144,685 26,101 4,572 (2,684) 8,629 181,303
Income tax expense (benefit) 30,089 5,344 1,069 (919) 2,104 37,687
Net income (loss) 114,596 20,757 3,503 (1,765) 6,525 143,616
Less net income (loss) attributable to noncontrolling interests 22,060 4,297 467 1,105 (41) 27,888
Net income (loss) attributable to LHC Group, Inc.’s common stockholders $ 92,536 $ 16,460 $ 3,036 $ (2,870) $ 6,566 $ 115,728
Total assets $ 1,719,403 $ 786,671 $ 239,314 $ 85,005 $ 65,228 $ 2,895,621
Year Ended December 31, 2020
Home Health Hospice Home and Community-Based Facility-Based HCI Total
Net service revenue $ 1,463,779 $ 243,806 $ 194,584 $ 128,578 $ 32,457 $ 2,063,204
Cost of service revenue (excluding depreciation and amortization) 848,663 150,675 150,378 85,827 14,860 1,250,403
General and administrative expenses 464,568 66,454 45,443 43,435 12,947 632,847
Impairment of intangibles and other 1,249 600 - - - 1,849
Operating income (loss) 149,299 26,077 (1,237) (684) 4,650 178,105
Interest expense (2,856) (469) (390) (297) (117) (4,129)
Income (loss) before income taxes and noncontrolling interests 146,443 25,608 (1,627) (981) 4,533 173,976
Income tax expense (benefit) 30,435 4,925 (357) (185) 1,225 36,043
Net income (loss) 116,008 20,683 (1,270) (796) 3,308 137,933
Less net income (loss) attributable to noncontrolling interests 20,525 4,822 (171) 1,193 (32) 26,337
Net income (loss) attributable to LHC Group, Inc.’s common stockholders $ 95,483 $ 15,861 $ (1,099) $ (1,989) $ 3,340 $ 111,596
Total assets $ 1,741,044 $ 301,475 $ 263,708 $ 103,401 $ 73,726 $ 2,483,354
12. Fair Value of Financial Instruments
The carrying amounts of the Company’s cash, receivables, accounts payable, accrued liabilities, and operating lease right of use assets and liabilities approximate their fair values because of their short maturity. The estimated fair value of intangible assets acquired was calculated using level 3 inputs based on the present value of anticipated future benefits. For the year ended December 31, 2022, the carrying value of the Company’s long-term debt approximates fair value as the interest rates approximates current rates.
EXHIBIT INDEX
Exhibit
Number Description of Exhibits
2.1 Agreement and Plan of Merger, dated as of November 15, 2017, by and among LHC Group, Inc., Hammer Merger Sub, Inc., and Almost Family, Inc. (incorporated by reference to Exhibit 2.1 to LHC Group's Form 8-K filed on November 16, 2017).
3.1 Amended and Restated Certificate of Incorporation of LHC Group, Inc. (previously filed as Exhibit 3.3 to LHC Group's Form S-4/A (File No. 333-222209) filed on February 5, 2018).
3.2 Bylaws of LHC Group, Inc., as amended on December 3, 2007 (previously filed as Exhibit 3.2 to LHC Group’s Form 10-Q for the quarterly period ended March 31, 2008, filed on May 9, 2008).
4.1 Specimen Stock Certificate of LHC Group’s Common Stock, par value $0.01 per share (previously filed as Exhibit 4.1 to LHC Group’s Form S-1/A (File No. 333-120792) filed on February 14, 2005).
4.2 Description of Securities Registered Pursuant to Section 12 of the Exchange Act.
10.1+ LHC 2003 Key Employee Equity Participation Plan (previously filed as Exhibit 10.3 to LHC Group’s Form S-1 (File No. 333-120792) filed on November 26, 2004).
10.2+ LHC Group, Inc. Second Amended and Restated 2005 Non-Employee Directors Compensation Plan (previously filed as Exhibit 10.4 to LHC Group's Form 10-K for the year ended December 31, 2014, filed on March 11, 2015).
10.3+ Amendment to LHC Group, Inc. Second Amended and Restated 2005 Non-Employee Directors Compensation Plan, effective January 20, 2015. (previously filed as Exhibit 10.1 to LHC Group's Form 10-Q filed on May 7, 2015).
10.4+ LHC Group, Inc. 2005 Long-Term Incentive Plan (previously filed as Exhibit 10.4 to LHC Group's Form S-1/A (File No. 333-120792) filed on February 14, 2005).
10.5+ LHC Group, Inc. 2010 Long-Term Incentive Plan (previously filed as Exhibit 10.1 to LHC Group’s Form 10-Q for the quarterly period ended June 30, 2010, filed on August 6, 2010).
10.6+ LHC Group, Inc. 2018 Incentive Plan (previously filed as Appendix A of the Company's Definitive Proxy Statement on Schedule 14A filed on April 27, 2018).
10.7+ Form of Indemnity Agreement between LHC Group and directors and certain officers (previously filed as Exhibit 10.10 to LHC Group's the Form S-1/A (File No. 333-120792) filed on February 14, 2005).
10.8+ LHC Group, Inc. 2006 Employee Stock Purchase Plan (previously filed as Exhibit 99.2 to LHC Group’s Form 8-K filed on June 16, 2006).
10.9+ Amended and Restated Senior Secured Credit Facility, dated August 3, 2021, among LHC Group, Inc., the Lenders Party Thereto, and JPMorgan Chase Bank, N.A. as Administrative Agent (previously filed as Exhibit 10.1 to LHC Group's Form 8-K filed on August 3, 2021).
10.10+ Amended and Restated Employment Agreement between Keith G. Myers and LHC Group, Inc. dated April 1, 2017 (previously filed as Exhibit 10.1 to LHC Group's Form 8-K filed April 5, 2017).
10.11+ Amended and Restated Employment Agreement between Joshua L. Proffitt and LHC Group, Inc. dated October 7, 2019 (previously filed as Exhibit 10.1 to LHC Group's Form 10-Q filed November 7, 2019).
10.12+ Amended and Restated Employment Agreement between Bruce D. Greenstein and LHC Group, Inc. dated July 1, 2021 (previously filed as Exhibit 10.1 to LHC Group's Form 10-Q filed August 5, 2021).
10.13+ Employment Agreement between Nicholas Gachassin, III and LHC Group, Inc. dated January 2, 2019 (previously filed as Exhibit 10.12 to LHC Group's Form 10-K filed February 28, 2019).
10.14+ Employment Agreement between Dale Mackel and LHC Group, Inc. dated November 2, 2020 (previously filed as Exhibit 10.12 to LHC Group's Form 10-K filed February 26, 2021).
21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG LLP.
24.1 Power of Attorney (included as part of signature page)
31.1 Certification of Keith G. Myers, Chief Executive Officer pursuant to Rule 13a- 14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Dale Mackel, Chief Financial Officer pursuant to Rule 13a- 14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1* Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS XBRL Instance Document
101.SCH XBRL Schema Document
101.CAL XBRL Calculation Linkbase Document
101.DEF XBRL Definition Linkbase Document
101.LAB XBRL Label Linkbase Document
101.PRE XBRL Presentation Linkbase Document
104 Cover Page Interactive Data File
Attached as Exhibit 101 to this report are documents formatted in XBRL (Extensible Business Reporting Language). Users of this data are advised pursuant to Rule 406T of Regulation S-T that the interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of section 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise not subject to liability under these sections. The financial information contained in the XBRL-related documents is “unaudited” or “unreviewed.”
+ Indicates a management contract or compensatory plan.
* This exhibit is furnished to the SEC as an accompanying document and is not deemed to be "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section, and the document will not be deemed incorporated by reference into any filing under the Securities Act of 1933.