ADDUS HOMECARE CORPORATION
You should read the following discussion together with our unaudited condensed
consolidated financial statements and the related notes included elsewhere in
this quarterly report on Form 10-Q. This discussion contains forward-looking
statements about our business and operations. Statements that are predictive in
nature, that depend upon or refer to future events or conditions or that include
words like "believes," "belief," "expects," "plans," "anticipates," "intends,"
"projects," "estimates," "may," "might," "would," "should" and similar
expressions are intended to be forward-looking statements as defined by the
Private Securities Litigation Reform Act of 1995. These statements are based on
the beliefs and assumptions of our management based on information currently
available to management. Such forward-looking statements are subject to risks,
uncertainties and other important factors that could cause actual results and
the timing of certain events to differ materially from future results expressed
or implied by such forward-looking statements. These risks and uncertainties
include, but are not limited to, the anticipated impact to our business with
respect to developments related to the COVID-19 pandemic, including, without
limitation, those related to the length and severity of the pandemic, as well as
the timing, availability and acceptance of effective medical treatments,
vaccines and booster shots; the spread of potentially more contagious and/or
virulent forms of the virus; the pandemic's impact on our operations,
reimbursement and our consumer population; measures we are taking to respond to
the pandemic; the impact of government regulation, stimulus and relief measures,
including the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"),
Paycheck Protection Program and Health Care Enhancement Act ("PPPHCE Act"), the
Consolidated Appropriations Act, 2021 ("CAA"), the COVID-Related Tax Relief Act
of 2020, the American Rescue Plan of 2021 ("ARPA") and any other stimulus or
relief legislation, along with the related uncertainties regarding such measures
and any future measures related to COVID-19; negative economic conditions in the
United States , including inflationary conditions; higher interest rates,
increased expenses related to personal protective equipment ("PPE"), labor,
supply chain, or other expenditures, including as a result of inflationary
conditions; workforce disruptions, including shortages and increased labor
expenses, associated with competitive labor market conditions; the impact of
vaccine mandates on the workforce; and supply shortages and disruptions; changes
in operational and reimbursement processes and payment structures at the state
or federal levels; changes in Medicaid, Medicare, other government program and
managed care organizations policies and payment rates; changes in, or our
failure to comply with, existing, federal and state laws or regulations, or our
failure to comply with new government laws or regulations on a timely basis;
competition in the healthcare industry; the geographical concentration of our
operations; changes in the case mix of consumers and payment methodologies;
operational changes resulting from the assumption by managed care organizations
of responsibility for managing and paying for our services to consumers; the
nature and success of future financial and/or delivery system reforms; changes
in estimates and judgments associated with critical accounting policies; our
ability to maintain or establish new referral sources; our ability to renew
significant agreements or groups of agreements; our ability to attract and
retain qualified personnel; federal, state and city minimum wage pressure,
including any failure of any governmental entity to enact a minimum wage offset
and/or the timing of any such enactment; changes in payments and covered
services due to the overall economic conditions, and deficit spending by federal
and state governments; cost containment initiatives undertaken by federal, state
and other third-party payors; our ability to access financing through the
capital and credit markets; our ability to meet debt service requirements and
comply with covenants in debt agreements; business disruptions due to natural
disasters, acts of terrorism, pandemics, riots, civil insurrection or social
unrest, looting, protests, strikes or street demonstrations; our ability to
integrate and manage our information systems; our ability to prevent
cyber-attacks or security breaches to protect our information technology systems
and confidential consumer data; our expectations regarding the size and growth
of the market for our services; the acceptance of privatized social services;
our expectations regarding changes in reimbursement rates; eligibility standards
and limits on services imposed by state governmental agencies; the potential for
litigation; discretionary determinations by government officials; our ability to
successfully implement our business model to grow our business; our ability to
continue identifying, pursuing, consummating and integrating acquisition
opportunities and expand into new geographic markets; the impact of acquisitions
and dispositions on our business, including the potential inability to realize
the benefits of potential acquisitions; the effectiveness, quality and cost of
our services; our ability to successfully execute our growth strategy; changes
in tax rates; the impact of public health emergencies, including the COVID-19
pandemic; the impact of inclement weather or natural disasters; and various
other matters, many of which are beyond our control. In addition, these
forward-looking statements are subject to the risk factors set forth in Part I,
Item 1A of our Annual Report on Form 10-K for the period ended December 31,
2021 , filed with the SEC on February 25, 2022 . You should carefully review all
of these factors. Moreover, our business may be materially adversely affected by
factors that are not currently known to us, by factors that we currently
consider immaterial or by factors that are not specific to us, such as general
economic conditions. These forward-looking statements were based on information,
plans and estimates at the date of this report, and we assume no obligation to
update any forward-looking statements to reflect changes in underlying
assumptions or factors, new information, future events or other changes, except
as may be required by law.
Overview
We are a home care services provider operating three segments: personal care,
hospice and home health. Our services are principally provided in-home under
agreements with federal, state and local government agencies, managed care
organizations, commercial insurers and private individuals. Our consumers are
predominantly "dual eligible," meaning they are eligible to receive both
Medicare and Medicaid benefits. Managed care revenues accounted for 36.2% and
36.7% of our net service revenues during the three months ended September 30,
2022 and 2021, respectively, and 35.9% and 37.3% of our net service revenues
during the nine months ended September 30, 2022 and 2021, respectively.
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A summary of certain consolidated financial results is provided in the table below.
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Net service revenues by segment: (Amounts in Thousands) (Amounts in Thousands)
Personal care $ 179,180 $ 169,609 $ 523,142 $ 510,744
Hospice 51,359 39,095 151,160 112,098
Home health 9,956 7,958 29,768 17,015
Total net service revenues $ 240,495 $ 216,662 $ 704,070 $ 639,857
Net income $ 11,543 $ 11,577 $ 31,263 $ 32,068 As of
COVID-19 Pandemic Update
Althoughthe United States has experienced a moderation of infection and related hospitalization rates, there continues to be a significant number of COVID-19 cases and deaths inthe United States and throughout the world. The long-term trends of new cases and deaths inthe United States and the future impact of the pandemic continue to be unknown. CMS issued an interim rule inNovember 2021 requiring COVID-19 vaccinations for Medicare- and Medicaid-certified providers and suppliers, including hospices and home health agencies, which covers clinical staff, individuals providing services under arrangements, volunteers and staff who are not involved in direct patient care. Additionally, some states have implemented, or may implement in the future, vaccine mandates with respect to healthcare personnel. These rules have impacted, and we expect that they will continue to impact, our home health and hospice segments. For the three and nine months endedSeptember 30, 2022 , COVID-19-related expenses in our personal care segment were approximately$0.9 million and$3.7 million , respectively, and are included in cost of service revenues on the Consolidated Statements of Income. For the three and nine months endedSeptember 30, 2021 , COVID-19-related expenses in our personal care segment were approximately$1.3 million and$14.6 million , respectively, which were offset by$0.4 million and$11.7 million , respectively, related to the utilization of a portion of the funds received from theProvider Relief Fund inNovember 2020 and included in cost of service revenues on the Condensed Consolidated Statements of Income. Additionally, we recognized revenue of$1.3 million and$4.3 million attributable to temporary rate increases from certain payors in our personal care segment for the three and nine months endedSeptember 30, 2022 , respectively, and$1.3 million and$6.1 million for the three and nine months endedSeptember 30, 2021 , respectively. For the three and nine months endedSeptember 30, 2021 , COVID-19-related expenses in our hospice segment were approximately$1.9 million , which were offset by$1.9 million , related to the utilization of a portion of the funds received from theQueen City Hospice Provider Relief Fund and included in cost of service revenues on the Condensed Consolidated Statements of Income. As ofSeptember 30, 2022 , the Company deferred the recognition of$4.9 million of payments received from payors for COVID-19 reimbursement, included within accrued expenses, which will be recognized as we incur specific expenses related to the pandemic, such as expenses related to acquiring additional PPE and COVID-19 related paid time off, or will be returned to the extent COVID-19-related expenses are not incurred. We are not able to reasonably predict the total costs we will incur related to the COVID-19 pandemic, and such costs could be substantial. Federal and state agencies continue to issue regulations and guidance related to the COVID-19 pandemic, but have shifted to reducing or terminating certain temporary measures that were implemented to ease delivery of care earlier in the COVID-19 public health emergency. The public health situation continues to evolve, and, therefore, we cannot currently predict with certainty the extent to which our business, results of operations, financial condition or liquidity will ultimately be impacted by the pandemic. We will continue to assess the impact and consequences of the COVID-19 pandemic and government responses to the pandemic, including the implementation of the CARES Act, the PPPHCE Act, the CAA, the ARPA, other stimulus and relief legislation, the President's National COVID-19 Preparedness Plan, and existing and potential additional federal, state and local vaccine mandates, on our business, results of operations, financial condition and cash flows. Given the dynamic nature of these circumstances, the related financial effect cannot be reasonably estimated at this time but is not expected to materially adversely impact our business. See Part I, Item 1A-Risk Factors - "The COVID-19 pandemic could negatively affect our operations, business and financial condition, and our liquidity could also be negatively impacted, particularly if theU.S. economic and/or public health conditions deteriorate in connection with the pandemic" of our Annual Report on Form 10-K for the year endedDecember 31, 2021 , filed with theSEC onFebruary 25, 2022 . 23
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See "Liquidity and Capital Resources" below for additional information regarding funds received related to COVID-19 pandemic relief.
Recruiting
As the labor market has tightened and unemployment has declined in comparison to earlier levels, the competition for new caregivers, including skilled healthcare staff, and support staff has increased. In addition,the United States economy continues to experience significant inflationary pressures and a competitive labor market. To the extent that we continue to experience a shortage of caregivers, it may hinder our ability to fully meet the continuing demand for both our non-clinical and clinical services. The increased staffing challenges, including COVID-19 related quarantine requirements and inflationary pressures, resulted in increased labor costs to satisfy our staffing requirements during the three and nine months endedSeptember 30, 2022 compared to 2021 in our non-clinical and clinical operations.
Acquisitions
In addition to our organic growth, we have grown through acquisitions that have expanded our presence in current markets, with the goal of having all three levels of in-home care in our markets or facilitating our entry into new markets where in-home care has been moving to managed care organizations. OnAugust 1, 2021 , we completed the acquisition ofArmada Skilled Homecare of New Mexico LLC ,Armada Hospice of New Mexico LLC andArmada Hospice of Santa Fe LLC (collectively, "Armada") for approximately$29.8 million , including the amount of acquired excess cash held by Armada at the closing of the acquisition (approximately$0.7 million ), with funding provided by our revolving credit facility. With the purchase of Armada, we expanded our home health and hospice services in the state ofNew Mexico . OnOctober 1, 2021 , we completed the acquisition ofSummit Home Health, LLC ("Summit") for approximately$8.1 million , with funding provided by available cash. With the purchase of Summit, we added clinical services inIllinois to our home health segment. OnFebruary 1, 2022 , we completed the acquisition of the hospice and palliative operations ofJourneyCare, Inc. ("JourneyCare") for approximately$86.6 million , including the amount of acquired excess cash held byJourneyCare at the closing of the acquisition (approximately$0.5 million ) plus the finalization of net working capital payable to seller of$1.6 million , with funding provided through a combination of a$35.0 million draw under the revolving credit facility and available cash on hand. With theJourneyCare acquisition, we added hospice services inIllinois . 24
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Revenue by Payor and Significant States
Our payors are principally federal, state and local governmental agencies and managed care organizations. The federal, state and local programs under which the agencies operate are subject to legislative and budgetary changes and other risks that can influence reimbursement rates. We are experiencing a transition of business from government payors to managed care organizations, which we believe aligns with our emphasis on coordinated care and the reduction of the need for acute care.
Our revenue by payor and significant states by segment were as follows:
Personal Care Segment For the Three Months Ended September 30, For the Nine Months Ended September 30,
2022 2021 2022 2021
% of % of % of % of
Segment Segment Segment Segment
Amount Net Service Amount Net Service Amount Net Service Amount Net Service
(in Thousands) Revenues (in Thousands) Revenues (in Thousands) Revenues (in Thousands) Revenues
State, local and other
governmental programs $ 88,448 49.4 % $ 83,821 49.5 % $ 257,817 49.4 % $ 253,052 49.5 %
Managed care
organizations 83,199 46.4 76,890 45.3 241,164 46.1 231,211 45.3
Private pay 4,521 2.6 4,934 2.9 13,758 2.6 14,883 2.9
Commercial insurance 1,870 1.0 2,459 1.4 5,988 1.1 7,481 1.5
Other 1,142 0.6 1,505 0.9 4,415 0.8 4,117 0.8
Total personal care
segment net service
revenues $ 179,180 100.0 % $ 169,609 100.0 % $ 523,142 100.0 % $ 510,744 100.0 %
Illinois $ 92,804 51.8 % $ 81,959 48.3 % $ 266,284 50.9 % $ 240,131 47.1 %
New Mexico 26,912 15.0 24,214 14.3 78,825 15.1 73,291 14.3
New York (1) 20,997 11.7 24,127 14.2 63,510 12.1 77,237 15.1
All other states 38,467 21.5 39,309 23.2 114,523 21.9 120,085 23.5
Total personal care
segment net service
revenues $ 179,180 100.0 % $ 169,609 100.0 % $ 523,142 100.0 % $ 510,744 100.0 %
(1)The Company has suspended materially all of its new patient admissions under the New York CDPAP program as discussed below.
Hospice Segment For the Three Months Ended September 30, For the Nine Months Ended September 30,
2022 2021 2022 2021
% of % of % of % of
Segment Segment Segment Segment
Amount Net Service Amount Net Service Amount Net Service Amount Net Service
(in Thousands) Revenues (in Thousands) Revenues (in Thousands) Revenues (in Thousands) Revenues Medicare $ 46,537 90.6 % $ 36,280 92.8 %$ 137,174 90.8 % $ 104,715 93.4 % Commercial insurance 2,772 5.4 1,154 3.0 7,742 5.1 2,648 2.4 Managed care organizations 1,815 3.5 1,514 3.9 5,498 3.6 4,396 3.9 Other 235 0.5 147 0.4 746 0.5 339 0.3 Total hospice segment net service revenues $ 51,359 100.0 % $ 39,095 100.1 %$ 151,160 100.0 % $ 112,098 100.0 % Ohio $ 18,139 35.3 % $ 15,868 40.6 % $ 51,714 34.2 % $ 44,676 39.8 % Illinois (2) 12,188 23.7 - - 35,290 23.3 - - New Mexico 7,789 15.2 9,268 23.7 23,867 15.8 27,216 24.3 All other states 13,243 25.8 13,959 35.7 40,289 26.7 40,206 35.9 Total hospice segment net service revenues $ 51,359 100.0 % $ 39,095 100.0 %$ 151,160 100.0 % $ 112,098 100.0 % (2)
With the
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Home Health Segment For the Three Months Ended September 30, For the Nine Months Ended September 30,
2022 2021 2022 2021
% of % of % of % of
Segment Segment Segment Segment
Amount Net Service Amount Net Service Amount Net Service Amount Net Service
(in Thousands) Revenues (in Thousands) Revenues (in Thousands) Revenues (in Thousands) Revenues
Medicare $ 7,320 73.5 % $ 6,372 80.1 % $ 21,727 73.0 % $ 13,699 80.5 %
Managed care organizations 1,998 20.1 1,218 15.3 6,160 20.7 2,838 16.7
Other 638 6.4 368 4.6 1,881 6.3 478 2.8
Total home health segment net
service revenues $ 9,956 100.0 % $ 7,958 100.0 % $ 29,768 100.0 % $ 17,015 100.0 %
New Mexico $ 8,375 84.1 % $ 7,958 100.0 % $ 24,954 83.8 % $ 17,015 100.0 %
Illinois (3) 1,581 15.9 - - 4,814 16.2 - -
Total home health segment net
service revenues $ 9,956 100.0 % $ 7,958 100.0 % $ 29,768 100.0 % $ 17,015 100.0 %
(3)
With the acquisition of Summit, the Company expanded its home health services in
the state of
We derive a significant amount of our net service revenues inIllinois , which represented 44.3% and 37.8% of our net service revenues for the three months endedSeptember 30, 2022 and 2021, respectively, and accounted for 43.5% and 37.5% of our net service revenues for the nine months endedSeptember 30, 2022 and 2021, respectively. A significant amount of our net service revenues are derived from one payor, theIllinois Department on Aging , the largest payor program for ourIllinois personal care operations, which accounted for 21.0% and 21.3% of our net service revenues for the three months endedSeptember 30, 2022 and 2021, respectively, and accounted for 20.8% and 21.4% of the Company's net service revenues for the nine months endedSeptember 30, 2022 and 2021, respectively.
Changes in Reimbursement Rates
OnNovember 26, 2019 , theCity of Chicago voted to approve additional increases in theChicago minimum wage to$14 per hour beginningJuly 1, 2020 and to$15 per hour beginningJuly 1, 2021 . In subsequent years, minimum wage will be increased through a cost of living adjustment capped at 2.5%. EffectiveJanuary 1, 2021 , the state ofIllinois fiscal year 2021 budget increased hourly in-home care rates through the Community Care Program by 7.1%, to$23.40 from$21.84 . However, the rate increase was delayed and did not take effect untilApril 1, 2021 , as a result of the failure of theNovember 2020 referendum to revise theIllinois income tax code. The Company recognized$2.0 million related to the rate increase for the year endedDecember 31, 2021 , which was received during the three and nine months endedSeptember 30, 2022 . Originally, theIllinois fiscal year 2022 budget included a scheduled increase of hourly in-home care rates to$24.96 , to be effectiveJanuary 1, 2022 . OnJuly 12, 2021 , in connection with the temporary increase in federal funding for Medicaid HCBS authorized by the ARPA,Illinois submitted its Initial Spending Plan and Narrative to CMS for approval. This plan included the acceleration of the rate increase to$24.96 toNovember 1, 2021 fromJanuary 1, 2022 (i.e., two months earlier). CMS granted partial approval of theIllinois plan, including the acceleration of the rate increase toNovember 1, 2021 . However, CMS noted that the state will need to submit an amendment for certain Medicaid waiver programs with regard to any rate change methodology and has highlighted that pay increases for providers of HCBS funded through the temporary increase in federal matching funds available under the ARPA will require an updated rate methodology. We recognized revenue of$3.6 million related to the rate increase for the year endedDecember 31, 2021 , of which$3.2 million was received during the nine months endedSeptember 30, 2022 . The remainder is expected to be received during the fourth quarter of 2022.
The
Our business will benefit from the rate increases noted above as planned for 2023, but there is no assurance that there will be additional offsetting rate increases inIllinois for fiscal years beyond fiscal year 2023, and our financial performance will be adversely impacted for any periods in which an additional offsetting reimbursement rate increase is not in effect. 26
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Impact of Changes in Medicare and Medicaid Reimbursement
Home health services provided to Medicare beneficiaries are paid under the
Medicare Home Health Prospective Payment System ("HHPPS"), which uses national,
standardized 30-day period payment rates for periods of care that meet a certain
threshold of home health visits (periods of care that do not meet the visit
threshold are paid a per-visit payment rate for providing care). Although
payment is made for each 30-day period, the HHPPS permits continuous 60-day
certification periods through which beneficiaries are verified as eligible for
the home health benefit. The daily home health payment rate is adjusted for
case-mix and area wage levels. CMS uses the Patient-Driven Groupings Model
("PDGM") as the case-mix classification model to place periods of care into
payment categories, classifying patients based on clinical characteristics and
their resource needs. An outlier adjustment may be paid for periods of care
where costs exceed a specific threshold amount.
CMS updates the HHPPS payment rates each calendar year. For calendar year 2022,
CMS increased HHPPS rates by an estimated 3.2%, which reflects a 3.1% market
basket update and a productivity adjustment of negative 0.5 percentage points,
among other changes. Home health providers that do not comply with quality data
reporting requirements are subject to a 2-percentage point reduction to their
market basket update. In addition, beginning January 1, 2022 , Medicare requires
home health agencies to submit a one-time Notice of Admission ("NOA") for each
patient that establishes that the beneficiary is under a Medicare home health
period of care. Failure to submit the NOA within five calendar days from the
start of care will result in a reduction to the 30-day period payment amount for
each day from the start of care date until the date the NOA is submitted.
Effective January 1, 2022 , CMS began implementing a nationwide expansion of the
Home Health Value-Based Purchasing ("HHVBP") Model. Under the model, home health
agencies will receive increases or decreases to their Medicare fee-for-service
payments of up to 5%, based on performance against specific quality measures
relative to the performance of other home health providers. Data collected in
each performance year will impact Medicare payments two years later. Calendar
year 2023 is the first performance year under the expanded HHVBP Model, which
will affect payments in calendar year 2025.
In certain states, payment of claims may be impacted by the Review Choice
Demonstration for Home Health Services , a program intended to identify and
prevent fraud, reduce the number of Medicare appeals and improve provider
compliance with Medicare program requirements. The program applies to home
health agencies in Illinois , Ohio , North Carolina , Florida and Texas and may
expand, in the future, into additional states. Providers in states subject to
the Review Choice Demonstration may initially select from the following claims
review and approval processes: pre-claim review, post-payment review or a
minimal post-payment review with a 25% payment reduction. Home health agencies
that maintain high compliance levels will be eligible for additional options
that may be less burdensome. We are currently unable to predict what impact, if
any, this program may have on our result of operations or financial position.
Hospice
Hospice services provided to Medicare beneficiaries are paid under the Medicare Hospice Prospective Payment System, under which CMS sets a daily rate for each day a patient is enrolled in the hospice benefit. CMS updates these rates each federal fiscal year. EffectiveOctober 1, 2022 , CMS increased hospice payment rates by 3.8%. This reflects a 4.1% market basket increase and a negative 0.3 percentage point productivity adjustment. Hospices that do not satisfy quality reporting requirements are subject to a 2 percentage point reduction to the market basket update. Beginning in 2024, the reduction to the market basket update for failure to report quality data will increase to 4 percentage points. Overall payments made by Medicare to each hospice provider number are subject to an inpatient cap and an aggregate cap, which is set each federal fiscal year. The inpatient cap limits the number of days of inpatient care to no more than 20% of total patient care days. The aggregate cap, which limits the total Medicare reimbursement that a hospice may receive based on an annual per-beneficiary cap amount and the number of Medicare patients served, was updated to$32,486.92 for federal fiscal year 2023, which beganOctober 1, 2022 . If a hospice's Medicare payments exceed its inpatient or aggregate caps, it must repay Medicare the excess amount.
New York CDPAP
The New York Consumer Directed Personal Assistance Program ("CDPAP") is a self-directed care alternative program that allows eligible individuals who need help with activities of daily living or skilled nursing services to choose their caregivers. We provide support services as a CDPAP fiscal intermediary. In 2021, the Company was not selected to enter into contracts as a Lead Fiscal Intermediary and submitted a formal protest in response to the selection process, which was filed and accepted onMarch 19, 2021 . The Company has not received a response to the formal protest. 27
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TheNew York fiscal year 2023 state budget, passed inApril 2022 , amends the current Fiscal Intermediary Request For Offer ("RFO") process to authorize all fiscal intermediaries that submitted an RFO application and served at least 200 clients inNew York City or 50 clients in other counties betweenJanuary 1, 2020 andMarch 31, 2020 to contract with theNew York State Department of Health and continue to operate in all counties contained in their application if the fiscal intermediary submits an attestation and supporting information to theNew York State Department of Health no later thanNovember 29, 2022 . Under this provision, the Company is allowed to continue to contract with all of its current payors for CDPAP services as of the contract award date, which is anticipated to beJanuary 15, 2023 . The Company continues to assess the future of its participation in this program. Given the status of the program, the Company suspended materially all of its new patient admissions under the New York CDPAP.
Components of our Statements of Income
Net Service Revenues
We generate net service revenues by providing our services directly to consumers and primarily on an hourly basis in our personal care segment, on a daily basis in our hospice segment and on an episodic basis in our home health segment. We receive payment for providing such services from our private consumers and payors, including federal, state and local governmental agencies, managed care organizations and commercial insurers. In our personal care segment, net service revenues are principally provided based on authorized hours, determined by the relevant agency, at an hourly rate, which is either contractual or fixed by legislation, and are recognized at the time services are rendered. In our hospice segment, net service revenues are provided based on daily rates for each of the levels of care and are recognized as services are provided. In our home health segment, net service revenues are based on an episodic basis at a stated rate and recognized based on the number of days elapsed during a period of care within the reporting period. We also record estimated implicit price concessions (based primarily on historical collection experience) related to uninsured accounts to record revenues.
Cost of Service Revenues
We incur direct care wages, payroll taxes and benefit-related costs in connection with providing our services. We also provide workers' compensation and general liability coverage for our employees. Employees are also reimbursed for their travel time and related travel costs in certain instances.
General and Administrative Expenses
Our general and administrative expenses include our costs for operating our network of local agencies and our administrative offices. Our agency expenses consist of costs for supervisory personnel, our community care supervisors and office administrative costs. Personnel costs include wages, payroll taxes and employee benefits. Facility costs include rents, utilities, and postage, telephone and office expenses. Our corporate and support center expenses include costs for accounting, information systems, human resources, billing and collections, contracting, marketing and executive leadership. These expenses consist of compensation, including stock-based compensation, payroll taxes, employee benefits, legal, accounting and other professional fees, travel, general insurance, rents, provision for doubtful accounts and related facility costs. Expenses related to streamlining our operations such as costs related to terminated employees, termination of professional services relationships, other contract termination costs and asset write-offs are also included in general and administrative expenses.
Depreciation and Amortization Expenses
Depreciable assets consist principally of furniture and equipment, network administration and telephone equipment and operating system software. Depreciable and leasehold assets are depreciated or amortized on a straight-line method over their useful lives or, if less and if applicable, their lease terms. We amortize our intangible assets with finite lives, consisting of customer and referral relationships, trade names, trademarks and non-competition agreements, using straight line or accelerated methods based upon their estimated useful lives. Interest Expense
Interest expense is reported when incurred and principally consists of interest and unused credit line fees on the credit facility.
Income Tax Expense
All of our income is from domestic sources. We incur state and local taxes in states in which we operate. The effective income tax rate was 23.7% and 26.6% for the three months endedSeptember 30, 2022 and 2021, respectively. The effective income tax rates are 25.4% and 24.7% for the nine months endedSeptember 30, 2022 and 2021, respectively, compared to our federal statutory rate of 21%. The difference between our federal statutory and effective income tax rates was principally due to the inclusion of state taxes, non-deductible compensation, excess tax expense/benefit and the use of federal employment tax credits. 28
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