What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-07 compared with 2020-05-07 · 220 added, 111 removed, 227 unchanged (59% of the section changed)

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implementing various measures to contain the virus, such as quarantines, shelter-in-place orders and business shutdowns.

The pandemic and these containment measures have had, and are expected to continue to have, a substantial negative impact on most businesses.

The pandemic and these containment measures have had, and are expected to continue to have, an adverse impact on the Company's results of operations.

As a provider of healthcare services, we are significantly exposed to the public health and economic effects of the COVID-19 pandemic. 

NHC’s primary objective has remained the same throughout the COVID-19 pandemic:

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We continue to follow all guidance from Centers for Medicare and Medicaid Services (“CMS”), the Centers for Disease Control and Prevention (“CDC”), and state and local health departments to prevent the spread of the disease within our operations.

The financial results for the three months ended March 31, 2020 were not significantly impacted by COVID-19, due to the virus not impacting the first two months of 2020.

Although our census was strong for most of the first quarter of 2020, during the second half of March, our census began to decline due to the lack of new admissions from our acute care providers and referral partners.

Our operating expenses also increased with incentive compensation being paid to our frontline partners, as well as increased costs of nursing supplies, personal protective equipment (“PPE”), sanitizers and cleaning supplies, and food and dietary products.

The financial results for the three months ended June 30, 2020 were significantly impacted by COVID-19 with census in our skilled nursing facilities dropping to 84.3%, while we also incurred significantly increased operating expenses.

Since the first week of March, our census has declined due to the lack of new admissions from our acute care providers and referral partners.

Our operating expenses have also increased with incentive compensation being paid to our frontline partners, as well as increased costs of personal protective equipment (“PPE”), sanitizers and cleaning supplies, COVID-19 testing of our patients and partners, and food and dietary products.

Besides the incentive compensation being paid to our tireless partners on the frontlines, we continue to take every possible action to support our partners with free meals on their shifts, a one-month health insurance premium holiday in April, as well as extended paid sick leave days.

All of the operational trends that impacted the second half of March have continued to impact operations in the months of April and the beginning of May.

Despite COVID-19 impacting operations, our capital and financial resources, including our overall liquidity, remain strong.

Despite COVID-19 disrupting operations, our capital and financial resources, including our overall liquidity, remain strong.

Our liquidity and low debt levels provide us with significant flexibility to maintain the strength of our balance sheet in periods of uncertainty or stress.

At this time, we are not able to quantify the impact that the COVID-19 pandemic will have on our financial results during 2020 and beyond, but we expect the developments related to COVID-19 to adversely affect our financial performance in 2020. 

The ultimate impact of the pandemic on our financial results will depend on, among other factors, the duration and severity of the pandemic, the volume of acute and post-acute healthcare patients cared for across the broader health care systems, the timing and availability of effective medical treatments and vaccines, and the impact of government actions and administrative regulations on our industry and broader economy, including future government stimulus efforts. 

We have received and may continue to receive payments and advances from the various federal and state initiatives. These legislative initiatives have been beneficial to partially mitigate the impact of the COVID-19 pandemic on our results of operations and financial position to date. 

The federal and state governments may consider additional stimulus and relief efforts, but we are unable to predict whether any of the additional stimulus measures will be enacted or their impact.   

Legislation and Government Stimulus Due to COVID-19

government has passed four new laws beginning in March 2020 designed to help the nation respond to the COVID-19 pandemic.

Although all four of the new laws impact healthcare providers in a variety of ways, the largest legislation from a monetary relief perspective is the CARES Act, which provided $2.2 trillion of economy-wide financial stimulus in the form of financial aid to individuals, businesses, nonprofits, states and municipalities.

Within the CARES Act, the legislation set aside under Title VIII in Division B the Public Health and Social Services Emergency Fund , which is referred to as the Provider Relief Fund.

This Provider Relief Fund set aside $100 billion to be administered through grants and other mechanisms to skilled nursing providers, home health providers, hospitals, and other Medicare and Medicaid enrolled providers to cover any unreimbursed health care related expenses or lost revenue attributable to the public health emergency resulting from COVID-19.

In April 2020, we received two disbursements from the Provider Relief Fund which totaled $19,468,000.

These funds come with terms and condition certifications in which all providers will be required to submit documents to ensure the funds were used for healthcare-related expenses or lost revenue attributable to COVID-19.

These funds are not reflected in our first quarter 2020 interim condensed consolidated financial statements.

government enacted several laws beginning in March 2020 designed to help the nation respond to the COVID-19 pandemic.

The new laws impact healthcare providers in a variety of ways, but the largest legislation from a monetary relief perspective is the CARES Act. 

The CARES Act provided $2.2 trillion of economy-wide financial stimulus in the form of financial aid to individuals, businesses, nonprofits, states and municipalities.

The CARES Act originally appropriated $100 billion to establish the Public Health and Social Services Emergency Fund , which is referred to as the Provider Relief Fund.

The Provider Relief Fund is administered through grants and other mechanisms to skilled nursing providers, home health providers, hospitals, and other Medicare and Medicaid enrolled providers to cover any unreimbursed health care related expenses or lost revenue attributable to the public health emergency resulting from COVID-19. 

On April 24, 2020, another $75 billion was added to the Provider Relief Fund by the Paycheck Protection Program and Health Care Enactment Act, bringing the total amount appropriated in the fund to $175 billion. 

During the second quarter of 2020, we received three disbursements from the Provider Relief Fund which totaled $43,942,000.

These funds came with terms and condition certifications in which all providers are required to submit documents to ensure the funds will be used for healthcare-related expenses or lost revenue attributable to COVID-19.

Of the $43,942,000 of funds received, the Company recorded $24,648,000 of income related to these funds during the three months ended June 30, 2020.

This $24,648,000 is reflected within government stimulus income in the interim condensed consolidated statements of operations. 

As of June 30, 2020, amounts not recognized as income are approximately $19,294,000 and are reflected in the current liability section of our interim condensed consolidated balance sheet (provider relief funds).

We anticipate incurring additional COVID-19 related expenses and lost revenues in the future;

therefore, at this time, we believe that we will fully utilize the remaining $19,294,000 million of provider relief funds before the end of the pandemic. 

As part of the CARES Act, the legislation included an expansion of the Medicare Accelerated and Advance Payment Program.

The expanded Medicare Accelerated and Advance Payment Program is a streamlined version of existing policy that allows the Medicare Administrative Contractors (“MAC’s”) to issue up to three months of advance Medicare payments to help increase cash flow and liquidity to Medicare Part A and Part B providers in certain circumstances that include national emergencies.

We received approximately $51 million as part of this program.

These funds will begin to be applied against claims for services provided to Medicare patients after approximately 120 days from the date we received the funds.

The payback period will be for approximately 90 days;

therefore, any remaining unapplied accelerated payment proceeds will be repaid within 210 days. 

Application to claims of the accelerated payments received by the Company is currently expected to begin in August 2020. 

As of June 30, 2020, the accelerated payments are reflected within contract liabilities in the interim condensed consolidated balance sheets as the related performance obligations have not been completed.

The CARES Act temporarily suspended Medicare sequestration beginning May 1, 2020 through December 31, 2020.

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Currently, we expect the deferral of these payroll taxes to improve our liquidity and cash available for operations during 2020 by approximately $21 million to $26 million, or $7 million to $8.5 million per quarter (2nd, 3rd, and 4th quarter impact).

In April 2020, the Company also submitted requests and received funding as part of the CMS COVID-19 Accelerated Payment Program.

The CMS COVID-19 Accelerated Payment Program is a streamlined version of existing policy that allows the Medicare Administrative Contractors (“MAC’s”) to issue up to three months of advance Medicare payments to help increase cash flow and liquidity to Medicare Part A and Part B providers in certain circumstances that include national emergencies.

We received $50,744,000 as part of this Medicare Accelerated Payment Program.

These funds will begin to be applied against claims for services provided to Medicare patients after approximately 120 days from the date we received the funds.

The payback period will be for approximately 90 days;

therefore, any remaining unapplied Accelerated Payment Program proceeds will be repaid within 210 days from the April 2020 receipt of the funds.

On April 24, 2020, the fourth and most recent Federal legislation ( Paycheck Protection Program and Health Care Enactment Act ) was passed that provided an additional $484 billion for COVID-19 relief, focusing primarily on health care and small businesses.

This legislation adds an additional $75 billion in funding to the Provider Relief Fund, adding to the original $100 billion from the CARES Act.

At this time, we do not have any insight into how these additional funds will be distributed from the Provider Relief Fund.

We have also received notification from many of the states in which we operate that a supplemental Medicaid payment is being provided to help mitigate the incremental costs resulting from the COVID-19 emergency.

At this time, we expect our net patient revenues to increase by approximately $7,000,000 in 2020 due to these supplemental Medicaid payments, of which $1,675,000 was recorded in our first quarter 2020 interim condensed consolidated statement of income.

At June 30, 2020, we have deferred $7.7 million of social security taxes.  

We have also received from many of the states in which we operate a supplemental Medicaid payment to help mitigate the incremental costs resulting from the COVID-19 public health emergency.

At this time, we expect our net patient revenues to increase by approximately $11,000,000 in 2020 due to these supplemental Medicaid payments. 

For the three months and six months ended June 30, 2020, we have recorded $3,859,000 and $5,532,000, respectively, in net patient revenues in our interim condensed consolidated statements of operations for these supplemental Medicaid payments.

Summary of Goals and Areas of Focus

A primary area of management focus continues to be the rates of occupancy within our skilled nursing facilities.

The overall census in owned and leased skilled nursing facilities for the three months ending March 31, 2020 was 91.4% compared to 90.2% for the same period a year ago.

Although our census was strong for most of the first quarter of 2020, during the second half of March, our census began to decline due to COVID-19 and the lack of new admissions from our acute care providers and referral partners.

The overall census in owned and leased skilled nursing facilities for the six months ending June 30, 2020 was 87.9% compared to 90.4% for the same period a year ago.

For the three months ended June 30, 2020, overall census in our owned and leased skilled nursing facilities was 84.3% compared to 90.5% in the second quarter of 2019.  

With the average length of stay decreasing for a skilled nursing patient, as well as the increased availability of assisted living facilities and home and community-based services, the challenge of maintaining desirable patient census levels has been amplified.

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The Company has always strived for patient-centered care and quality outcomes as precursors to outstanding financial performance.

 The tables below summarize NHC's overall performance in these Five-Star ratings versus the skilled nursing industry as of March 31, 2020:

 The tables below summarize NHC's overall performance in these Five-Star ratings versus the skilled nursing industry as of June 30, 2020:

Industry Ratings

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Under Construction

Skilled Nursing

Kingsport, TN

Under Construction

Accrued Risk Reserves

Our accrued professional liability and workers’

compensation reserves totaled $100,762,000 at March 31, 2020 and are a primary area of management focus.

compensation reserves totaled $105,008,000 at June 30, 2020 and are a primary area of management focus.

We have set aside restricted cash and cash equivalents and marketable securities to fund our estimated professional liability and workers’

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Our experience is that achieving goals in these patient care areas improves both patient and employee satisfaction.

Government Reimbursement Program s

Government Reimbursement Programs

Medicare –

Skilled Nursing Facilities

 In July 2019, CMS released its final rule outlining fiscal year 2020 Medicare payment rates and policy changes for skilled nursing facilities, which began October 1, 2019.

The fiscal year 2020 final rule provided for an approximate net 2.4% increase, or $851 million, compared to fiscal year 2019 levels.

This included a 2.8% market-basket update, offset by a statutorily required 0.4% productivity reduction. 

For the first three months of 2020, our average Medicare per diem rate for skilled nursing facilities increased 9.7% as compared to the same period in 2019.

On October 1, 2019, the new case-mix reimbursement model of Patient Driven Payment Model ("PDPM") became effective. Under PDPM, the payment to skilled nursing facilities is based heavily on the patient's condition rather than specific services provided by each skilled nursing facility. CMS' fiscal year 2020 final rule provided for an approximate net 2.4% increase, or $851 million, compared to the fiscal year 2019 levels.

The CARES Act temporarily suspended Medicare sequestration beginning May 1, 2020 through December 31, 2020.

The Medicare sequestration policy reduces fee-for-service Medicare payments by 2 percent.

The CARES Act extends the sequestration policy through 2030 in exchange for this temporary suspension.

We expect our net patient revenues to increase by approximately $2,600,000 in 2020 (2nd, 3rd, and 4th quarter impact) due to sequestration being temporarily suspended for the eight-month period.

For the first six months of 2020, our average Medicare per diem rate for skilled nursing facilities increased 10.9% as compared to the same period in 2019.

On July 31, 2020, CMS released its final rule outlining fiscal year 2021 Medicare payment rates and policy changes for skilled nursing facilities, which will begin October 1, 2020.

The fiscal year 2021 final rule provided for an approximate 2.2% increase, or $750 million, compared to fiscal year 2020 levels.

This included a 2.2% market-basket update, adjusted by a 0.0% productivity adjustment. 

The final rule continues to reflect the commitment to shifting Medicare payments from volume to value, with the continued implementation of PDPM and value-based purchasing to improve interoperability, operational quality, and safety.  

Medicaid –

Skilled Nursing Facilities

Effective July 1, 2020 and for the fiscal year 2021, the state of Tennessee implemented specific individual nursing facility increases.

We estimate the resulting increase in revenue for the 2021 fiscal year will be approximately $2,000,000, or $500,000 per quarter.

Effective July 1, 2019 and for the fiscal year 2020, the state of Tennessee implemented specific individual nursing facility rate increases.

We estimate the resulting increase in revenue for the 2020 fiscal year will be approximately $1,280,000 annually, or $320,000 per quarter.

The resulting increase in revenue for the 2020 fiscal year was approximately $1,280,000 annually, or $320,000 per quarter.

Effective October 1, 2019 and for the fiscal year 2020, South Carolina implemented specific individual nursing facility rate changes.

We estimate the resulting increase in revenue for the 2020 fiscal year will be approximately $2,012,000 annually, or $503,000 per quarter.

For the first three months of 2020, our average Medicaid per diem increased 2.7% compared to the same period in 2019.

The resulting increase in revenue for the 2020 fiscal year was approximately $2,012,000 annually, or $503,000 per quarter.

We have also received from many of the states in which we operate a supplemental Medicaid payment to help mitigate the incremental costs resulting from the COVID-19 public health emergency.

At this time, we expect our net patient revenues to increase by approximately $11,000,000 in 2020 due to these supplemental Medicaid payments. 

For the first six months of 2020, our average Medicaid per diem increased 4.6% compared to the same period in 2019.

We face challenges with respect to states’

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CMS projects payments to home health agencies in fiscal year 2020 will increase in aggregate by 1.3%, or $250 million, based on proposed policies.

The increase reflects the effects of the 1.5% home health payment update percentage as mandated by the BBA and a 0.2% decrease in aggregate payments due to reductions made by the new rural add-on policy, also mandated by the BBA.

The increase reflects the 1.5% home health payment update percentage as mandated by the BBA and a 0.2% decrease in aggregate payments due to reductions made by the new rural add-on policy, also mandated by the BBA.

In June 2020, CMS released its proposed rule outlining fiscal year 2021 Medicare payment rates.

CMS projects payments to home health agencies in fiscal year 2021 will increase in aggregate by 2.6%, or $540 million, based on proposed policies.

The increase reflects the effects of the 2.7% home health payment update percentage and a 0.1% decrease due to reductions made by the rural add-on policy.

This Rule also includes a provision to make permanent the regulatory changes related to telecommunication technologies in providing care under the Medicare home health benefit beyond the expiration of the COVID-19 public health emergency.

Segment Reporting

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

Three Months Ended March 31, 2020

Three Months Ended June 30, 2020

Revenues and grant income:

Net patient revenues

Other revenues

Government stimulus income

Net operating revenues and grant income

Costs and expenses:

Salaries, wages, and benefits

Other operating

Depreciation and amortization

Total costs and expenses

Income (loss) from operations

Non-operating income

Unrealized gains on marketable equity securities

Income before income taxes

Three Months Ended June 30, 2019

Net patient revenues

Other revenues

Net operating revenues

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Total costs and expenses

Income from operations

Income (loss) from operations

Non-operating income

Unrealized losses on marketable equity securities

Income before income taxes

Six Months Ended June 30, 2020

Revenues and grant income:

Net patient revenues

Other revenues

Government stimulus income

Net operating revenues and grant income

Costs and expenses:

Salaries, wages, and benefits

Other operating

Depreciation and amortization

Total costs and expenses

Income (loss) from operations

Non-operating income

Unrealized losses on marketable equity securities

Income (loss) before income taxes

Three Months Ended March 31, 2019

Six Months Ended June 30, 2019

(As Adjusted)

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Total costs and expenses

Income from operations

Income (loss) from operations

Non-operating income

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The presentation of this additional non-GAAP financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP.

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

The operating results for the newly constructed healthcare facilities not at full capacity for the three months ended March 31, 2020 include facilities that began operations from 2018 to 2020 (one memory care facility).

For the three months ended March 31, 2019, included are facilities that began operations from 2017 to 2019 (one skilled nursing facility, two assisted living facilities, and one memory care facility).

The operating results for the newly constructed healthcare facilities not at full capacity for the six months ended June 30, 2020 include facilities that began operations from 2018 to 2020, which is one memory care facility.

For the six months ended June 30, 2019, included are facilities that began operations from 2017 to 2019, which is one skilled nursing facility, two assisted living facilities, and one memory care facility.

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

Three Months Ended

Net income/(loss) attributable to National Healthcare Corporation

Six Months Ended

Net income attributable to National Healthcare Corporation

Non-GAAP adjustments

Unrealized (gains)/losses on marketable equity securities

Operating results for newly opened facilities not at full capacity

Gain on acquisition of equity method investment

Operating results for newly opened facilities not at full capacity

Share-based compensation expense

Income tax provision/(benefit) on non-GAAP adjustments

Provision (benefit) of income taxes on non-GAAP adjustments

Non-GAAP Net income

GAAP diluted earnings/(loss) per share

GAAP diluted earnings per share

Non-GAAP adjustments

Unrealized (gains)/losses on marketable equity securities

Operating results for newly opened facilities not at full capacity

Gain on acquisition of equity method investment

Operating results for newly opened facilities not at full capacity

Share-based compensation expense

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Results of Operations

The following table and discussion set forth items from the interim condensed consolidated statements of income as a percentage of net operating revenues for the three months ended March 31, 2020 and 2019.

Percentage of Net Operating Revenues

The following table and discussion set forth items from the interim condensed consolidated statements of operations as a percentage of net operating revenues and grant income for the three months and six months ended June 30, 2020 and 2019.

Percentage of Net Operating Revenues and Grant Income

Three Months Ended

Net operating revenues

Six Months Ended

Net operating revenues and grant income:

Costs and expenses:

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Unrealized gains/(losses) on marketable equity securities

Income/(loss) before income taxes

Income tax provision/(benefit)

Net income/(loss)

(Income)/loss attributable to noncontrolling interest

Net income/(loss) attributable to common stockholders of NHC

Three Months Ended March 31, 20 20 Compared to Three Months Ended March 31, 201 9

Results for the quarter ended March 31, 2020 compared to the first quarter of 2019 include a 3.2% increase in net operating revenues and a 0.1% increase in income from operations.

Excluding the unrealized losses in our marketable equity securities portfolio and the other non-GAAP adjustments, non-GAAP net income for the three months ended March 31, 2020 was $17,070,000 compared to $16,951,000 for the first quarter of 2019, which is an increase of 0.7%.

Net operating revenues

Net patient revenues increased $7,984,000, or 3.4%, compared to the same period last year.

Despite COVID-19 impacting the second half of March 2020, the total census at owned and leased skilled nursing facilities for the quarter averaged 91.4% compared to an average of 90.2% for the same quarter a year ago.

Medicare per diem rates increased 9.7%, and managed care per diem rates increased 1.8% compared to the same quarter a year ago.

Income before income taxes

Income tax provision

Net (income)/loss attributable to noncontrolling interest

Net income attributable to stockholders of NHC

Three Months Ended June 30 , 2020 Compared to Three Months Ended June 30 , 2019

Results for the quarter ended June 30, 2020 compared to the second quarter of 2019 include a 5.9% increase in net operating revenues and grant income and a 23.2% increase in income from operations.

Excluding the grant income recorded during the second quarter of 2020, net operating revenues decreased 4.1% compared to the second quarter of 2019. 

Excluding the unrealized gains in our marketable equity securities portfolio and the other non-GAAP adjustments, non-GAAP net income for the three months ended June 30, 2020 was $14,177,000 compared to $12,895,000 for the second quarter of 2019, which is an increase of 9.9%.

Net operating revenues and grant income

Net patient revenues decreased $9,593,000, or 4.1%, compared to the same period last year.

The total census at owned and leased skilled nursing facilities for the quarter averaged 84.3%, compared to an average of 90.5% for the same quarter a year ago.

The decline in census is due to COVID-19 and the lack of new admissions from our acute care providers and referral partners.

Our Medicare per diem rates increased 12.3% and managed care per diem rates increased 3.0% compared to the same quarter a year ago.

Medicaid and private pay per diem rates increased 6.6% and 0.8%, respectively, compared to the same quarter a year ago.

Overall, the composite skilled nursing facility per diem at our owned and leased skilled nursing facilities increased 3.1% compared to the same quarter a year ago.

The Company opened a memory care facility in 2019 that continues to stabilize and increased net patient revenues approximately $584,000 for the three months ended March 31, 2020 compared to the same quarter a year ago. 

Our homecare operations had a decline in net patient revenues of approximately $1,368,000 in the first quarter of 2020 compared to the third quarter of 2019.

Our homecare net patient revenue decline was primarily due to volume declines.

Our Medicare per diem rates have benefited from the new case-mix reimbursement model of PDPM, which was implemented on October 1, 2019. The CARES Act also temporarily suspended Medicare sequestration beginning May 1, 2020 through December 31, 2020.

The Medicare sequestration policy reduces fee-for-service Medicare payments by 2 percent.

Our Medicaid per diem rates have benefited from many of the states paying a supplemental Medicaid payment to help mitigate the incremental costs resulting from the COVID-19 public health emergency.

For the three months ended June 30, 2020, we have recorded $3,859,000 due to these supplemental Medicaid payments.

In February 2020, the Company acquired the remaining 75% ownership interest in a 166-bed skilled nursing facility in Knoxville, Tennessee.

For the three months ended March 31, 2020, this skilled nursing facility increased net patient revenues approximately $1,435,000 compared to the same quarter in the prior year.

For the three months ended June 30, 2020, this skilled nursing facility increased net patient revenues approximately $2,958,000 compared to the second quarter of 2019.

Our homecare operations had a decline in net patient revenues of approximately $3,093,000 in the second quarter of 2020 compared to the second quarter of 2019.

Our homecare net patient revenue decline was primarily due to volume declines related to COVID-19.

Other revenues decreased $564,000, or 4.7%, compared to the same quarter last year, as further detailed in Note 5 to our interim condensed consolidated financial statements.

During the three months ended June 30, 2020, we recorded $24.6 million in government stimulus income related to funds received from the CARES Act Provider Relief Fund.

See Note 3 - Coronavirus Pandemic for additional information.  

Total costs and expenses

Total costs and expenses for the first quarter of 2020 compared to the first quarter of 2019 increased $7,818,000 or 3.4%, to $240,319,000 from $232,501,000.

Total costs and expenses for the three months ended June 30, 2020 compared to the same period of 2019 increased $12,131,000, or 5.1%, to $249,093,000 from $236,962,000.

Salaries, wages, and benefits increased $9,036,000, or 6.1%, to $156,914,000 from $147,878,000.

Salaries, wages and benefits as a percentage of net operating revenues was 57.5% compared to 56.9% for the three months ended March 31, 2020 and 2019, respectively.

The primary reason for salaries, wages and benefits increasing as a percentage of net operating revenues is due to our existing skilled nursing facilities and the continued wage pressure in most of the markets in which we operate.

We also incurred $827,000 in incentive compensation during the month of March 2020 that was paid to our frontline partners in fighting the COVID-19 virus.

Besides the incentive compensation being paid to our tireless partners on the frontlines, we continue to take every possible action to support our partners with added employee benefits, such as a one-month health insurance premium holiday in April and extended paid sick leave days.

Salaries, wages, and benefits as a percentage of net operating revenues and grant income was 60.0% compared to 59.8% for the three months ended June 30, 2020 and 2019, respectively.

The primary reason for salaries and wages increasing is due to the incentive compensation, or "combat pay", paid to our frontline partners in fighting the COVID-19 pandemic.

We incurred approximately $5,895,000 in incentive compensation related to COVID-19 for the three months ended June 30, 2020 compared to the second quarter of 2019. For the three months ended June 30, 2020, we also incurred approximately $1,882,000 in salaries and wages from the skilled nursing facility that we acquired in February 2020, compared to the second quarter of 2019.  

Other operating expenses increased $3,263,000, or 4.8%, to $70,861,000 for the 2020 period compared to $67,598,000 for the 2019 period.

Other operating expenses as a percentage of net operating revenue was 28.0% for both the three months ended March 31, 2020 and 2019.

During the first quarter and specifically March 2020, we incurred $948,000 in COVID-19 related expenses in purchasing personal protective equipment, additional nursing supplies, food and dietary supplies.

The decrease in interest expense is due from our long-term debt being lower during the first quarter of 2020 than in the same quarter a year ago.

As a precautionary measure at the end of March 2020, we drew an additional $40,000,000 on our credit facility.

At March 31, 2020, we have $50 million outstanding on our credit facility.

Non–operating income increased by $2,145,000 compared to the same period last year, as further detailed in Note 5 to our interim condensed consolidated financial statements.

The increase in non-operating income is primarily due from the gain on the acquisition of an equity method investment.

In February 2020, a gain of $1,707,000 was recorded on the acquisition of the remaining 75% financial interest in a 166-bed skilled nursing facility in Knoxville, Tennessee.

We previously held a 25% noncontrolling ownership interest and equity method investment in this facility.

Upon acquiring the remaining 75% financial interest, we had to value the business and our previously held equity position based upon the facility’s fair value.

Other operating expenses as a percentage of net operating revenues and grant income was 27.1% and 27.4% for the three months ended June 30, 2020 and 2019, respectively.

During the second quarter of 2020, we incurred approximately $5,682,000 in COVID-19 related expenses in purchasing personal protective equipment, nursing supplies, lab and testing supplies, food, and dietary supplies. 

Due to the impact of COVID-19 and our census declining, we have implemented, and continue to implement, a plan to minimize and control expenses within every department of our operations. 

These expense controlling efforts have helped mitigate the increase in other operating expenses due to COVID-19.  

The decrease in interest expense is due from our long-term debt being paid off in the second quarter of 2020.

At June 30, 2020, we have no outstanding balance on our credit facility.

Non–operating income decreased by $2,318,000 compared to the same period last year, as further detailed in Note 6 to our interim condensed consolidated financial statements.

The decrease in non-operating income is primarily due from the gain on the acquisition of an equity method investment made in the second quarter of 2019.

In the prior year period, a gain of $1,975,000 was recorded on the acquisition of the remaining financial interest in a 60-bed memory care facility in St.

Peters, Missouri.

We previously held a 25% noncontrolling ownership interest and equity method investment in the facility.

Upon acquiring the remaining 75% financial interest, we fair valued the business and our previously held equity position based upon the facility’s fair value.

The income tax benefit for the three months ended March 31, 2020 is $9,625,000 (an effective income tax rate of 26.4%).

The income tax provision for the three months ended June 30, 2020 is $10,034,000 (an effective income tax rate of 26.0%).

Excluding nondeductible expenses, we expect our corporate income tax rate for 2020 to be approximately 26.0%.

Noncontrolling interest

The noncontrolling interest in subsidiaries is presented within total equity of the Company’s consolidated balance sheets.

The company presents the noncontrolling interest and the amount of consolidated net income attributable to NHC in its consolidated statements of operations.

The Company’s earnings per share is calculated based on net income attributable to NHC’s stockholders.

The carrying amount of the noncontrolling interest is adjusted based on an allocation of subsidiary earnings based on ownership interest.

Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

Results for the six months ended June 30, 2020 compared to the first six months of 2019 include a 4.5% increase in net operating revenues and grant income and a 9.2% increase in income from operations.

Excluding the grant income recorded for the six months ended June 30,2020, net operating revenues would have decreased 0.5% compared to the same six-month period in 2019.

Excluding the unrealized gains in our marketable equity securities portfolio and the other non-GAAP adjustments, non-GAAP net income for the six months ended June 30, 2020 was $31,245,000 compared to $29,845,000 for the same period of 2019, which is an increase of 5.2%.

Net operating revenues and grant income

Net patient revenues decreased $1,609,000, or 0.3%, compared to the same period last year.

The total census at owned and leased skilled nursing facilities for the first six months of 2020 averaged 87.9% compared to an average of 90.4% for the same period a year ago.

The decline in census is due to COVID-19 and the lack of new admissions from our acute care providers and referral partners.

Our Medicare per diem rates increased 10.9% and managed care per diem rates increased 2.4% compared to the same period a year ago.

Medicaid and private pay per diem rates increased 4.6% and 1.6%, respectively, compared to the same period a year ago.

Overall, the composite skilled nursing facility per diem at our owned and leased skilled nursing facilities increased 2.8% compared to the same period a year ago.

The Medicare sequestration policy reduces fee-for-service Medicare payments by 2 percent.

Since March 2020, our Medicaid per diem rates benefited from many of the states paying a supplemental Medicaid payment to help mitigate the incremental costs resulting from the COVID-19 public health emergency.

For the six months ended June 30, 2020, we have recorded $5,532,000 due to these supplemental Medicaid payments.

In February 2020, the Company acquired the remaining 75% ownership interest in a 166-bed skilled nursing facility in Knoxville, Tennessee.

For the six months ended June 30, 2020, this skilled nursing facility increased net patient revenues approximately $4,393,000 compared to the same period in the prior year.

Our homecare operations had a decline in net patient revenues of approximately $4,462,000 in the first six months of 2020 compared to the same period of 2019.

Our homecare net patient revenue decline was primarily due to volume declines due to COVID-19.

Other revenues decreased $709,000, or 2.9%, compared to the same period last year, as further detailed in Note 5 to our interim condensed consolidated financial statements.

During the six months ended June 30, 2020, we recorded $24.6 million in government stimulus income related to funds received from the Provider Relief Fund. See Note 3 - Coronavirus Pandemic for additional information.  

Total costs and expenses

Total costs and expenses for the six months ended June 30, 2020 compared to the same period of 2019 increased $19,949,000 or 4.2%, to $489,412,000 from $469,463,000.

Salaries, wages, and benefits increased $15,117,000, or 5.2%, to $304,383,000 from $289,266,000.

Salaries, wages, and benefits as a percentage of net operating revenues and grant income was 58.8% compared to 58.4% for the six months ended June 30, 2020 and 2019, respectively.

The primary reason for salaries and wages increasing is due to the incentive compensation, or "combat pay", paid to our frontline partners in fighting the COVID-19 pandemic.

We incurred approximately $6,714,000 in incentive compensation related to COVID-19 for the six months ended June 30, 2020 compared to the same period of 2019. 

For the six months ended June 30, 2020, we also incurred approximately $2,396,000 in salaries and wages from the skilled nursing facility that we acquired in February 2020, compared to the same period of 2019.   

Other operating expenses increased $5,499,000, or 4.0%, to $142,529,000 for the 2020 period compared to $137,030,000 for the 2019 period.

Other operating expenses as a percentage of net operating revenue was 27.5% and 27.7% for the six months ended June 30, 2020 and 2019.

During the first six months of 2020, we incurred $6,630,000 in COVID-19 related expenses in purchasing personal protective equipment, nursing supplies, lab and testing supplies, food, and dietary supplies. Due to the impact of COVID-19 and our census declining since March 2020, we have implemented, and continue to implement, a plan to minimize and control expenses within every department of our operations. 

These expense controlling efforts have helped mitigate the increase in other operating expenses due to COVID-19.  

The decrease in interest expense is due from our long-term debt being paid off in the second quarter of 2020.

At June 30, 2020, we have no outstanding balance on our credit facility.

Non–operating income decreased by $173,000 compared to the same period last year, as further detailed in Note 6 to our interim condensed consolidated financial statements.

The income tax provision for the six months ended June 30, 2020 is $409,000 (an effective income tax rate of 19.3%).

Excluding nondeductible expenses, we expect our corporate income tax rate for 2020 to be approximately 26.0%.

Noncontrolling interest

The noncontrolling interest in a subsidiary is presented within total equity of the Company’s consolidated balance sheets.

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The following is a summary of our sources and uses of cash flows (dollars in thousands) :

Three Months Ended

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Six Months Ended

Six Month Change

Cash, cash equivalents, restricted cash, and restricted cash equivalents, at beginning of period

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Cash used in investing activities

Cash provided by/(used in) financing activities

Cash used in financing activities

Cash, cash equivalents, restricted cash, and restricted cash equivalents, at end of period

Operating Activities

Net cash provided by operating activities for the three months ended March 31, 2020 was $7,754,000 as compared to $11,601,000 in the same period last year.

Cash provided by operating activities consisted of a net loss of $26,816,000 and adjustments for non–cash items of $51,768,000.

There was cash used for working capital needs in the amount of $19,547,000 for the three months ended March 31, 2020 compared to $13,046,000 for the same period a year ago.

We also received cash distributions from our unconsolidated investments of $2,349,000 during the three months ended March 31, 2020 compared to $31,000 for the same period a year ago.

Net cash provided by operating activities for the six months ended June 30, 2020 was $154,727,000 as compared to $39,172,000 in the same period last year.

Cash provided by operating activities consisted of net income of $1,706,000 and adjustments for non–cash items of $43,933,000.

There was cash provided by working capital in the amount of $102,187,000 for the six months ended June 30, 2020 compared to cash used for working capital needs in the amount of $8,044,000 for the same period a year ago.

We also received cash distributions from our unconsolidated investments of $6,901,000 during the six months ended June 30, 2020, compared to $2,609,000 for the same period a year ago.

Included in cash provided by working capital is $50,992,000 of receipts from the Medicare Accelerated Payment Program, $19,294,000 of receipts related to the Provider Relief Fund that have not been recognized as income, and $7,705,000 of deferred employer social security taxes. 

All three of these working capital cash flow items were initiated by the CARES Act legislation.  

Included in the adjustments for non-cash items are depreciation expense, equity in earnings of unconsolidated investments, unrealized gains/losses on our marketable equity securities, deferred taxes, stock compensation, and a gain on the acquisition of a 166-bed skilled nursing facility in Knoxville, Tennessee in which we previously held a noncontrolling ownership interest.

Investing Activities

Net cash used in investing activities totaled $16,225,000 for the three months ended March 31, 2020 compared to $2,947,000 for the three months ended March 31, 2019.

Cash used for property and equipment additions was $6,628,000 and $5,874,000 for the three months ended March 31, 2020 and 2019, respectively.

The acquisition of the 166-bed skilled nursing facility in Knoxville, Tennessee resulted in cash used of $6,648,000 for the three months ended March 31, 2020.

The Company collected notes receivable of $376,000 and $353,000 for the three months ended March 31, 2020 and 2019, respectively.

Purchases of restricted marketable debt securities, net of sales, resulted in cash used of $2,950,000 for the three months ended March 31, 2020.

Sales of restricted marketable debt securities, net of purchases, resulted in positive cash flow of $3,011,000 for the three months ended March 31, 2019.

Net cash used in investing activities totaled $18,567,000 for the six months ended June 30, 2020 compared to $11,370,000 for the six months ended June 30, 2019.

Cash used for property and equipment additions was $12,517,000 and $13,989,000 for the six months ended June 30, 2020 and 2019, respectively.

The acquisition of the 166-bed skilled nursing facility in Knoxville, Tennessee resulted in cash used of $6,648,000 for the six months ended June 30, 2020.

The Company collected notes receivable of $1,139,000 and $660,000 for the six months ended June 30, 2020 and 2019, respectively.

Sales of restricted marketable debt securities, net of purchases, resulted in positive cash flow of $69,000 and $23,216,000 for the six months ended June 30, 2020 and 2019, respectively.

Financing Activities  

Net cash provided by financing activities totaled $31,641,000 compared to net cash used of $8,875,000 for the three months ending March 31, 2020 and 2019, respectively.

Borrowings under our credit facility resulted in an increase of cash of $40,000,000 for the three months ended March 31, 2020.

We made principal payments under our finance lease obligations in the amount of $1,019,000 and $959,000 for the three months ended March 31, 2020 and 2019, respectively.

Net cash used in financing activities totaled $26,391,000 and $16,816,000 for the six months ending June 30, 2020 and 2019, respectively.

Cash used for repayments on the Company’s credit facility has been a net of $10,000,000 for the six months ended June 30, 2020.

We made repayments under our finance lease obligations in the amount of $2,052,000 and $1,932,000 for the six months ended June 30, 2020 and 2019, respectively.

Cash used for dividend payments to common stockholders totaled $15,948,000 in the current year period compared to $15,275,000 for the same period a year ago.

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We expect to meet our short-term liquidity requirements primarily from our cash flows from operating activities.

In addition to cash flows from operations, our current cash on hand of $69,492,000, marketable equity securities of $92,061,000, and as needed, our borrowing capacity on the credit facility, are expected to be adequate to meet our contractual obligations, operating liquidity, and our growth and development plans in the next twelve months.

In April 2020, the Company also submitted requests and received funding as part of the CMS COVID-19 Accelerated Payment Program.

The CMS COVID-19 Accelerated Payment Program is a streamlined version of existing policy that allows the MAC's to issue up to three months of advance Medicare payments to help increase cash flow and liquidity to Medicare Part A and Part B providers in certain circumstances that include national emergencies.

We received $50,744,000 as part of this Medicare Accelerated Payment Program.

These funds will begin to be applied against claims for services provided to Medicare patients after approximately 120 days from the date we received the funds.

The payback period will be for approximately 90 days;

therefore, any remaining unapplied Accelerated Payment Program proceeds will be repaid within 210 days from the April 2020 receipt of the funds. These funds are not reflected in our first quarter 2020 interim condensed consolidated financial statements.

The CARES Act also temporarily permits employers to defer the deposit and payment of the employer’s portion of the social security taxes (6.2% of employee wages) that otherwise would be due between March 27, 2020 and December 31, 2020.

The provision requires that the deferred taxes be paid over a two-year period with half the amount required to be paid by December 31, 2021, and the other half by December 31, 2022.

In addition to cash flows from operations, our current cash on hand of $149,471,000, marketable equity securities of $112,114,000, and as needed, our borrowing capacity on the credit facility, are expected to be adequate to meet our contractual obligations, operating liquidity, and our growth and development plans in the next twelve months. We are currently evaluating various options regarding the upcoming maturity date of our credit facility. 

At this time, we believe we have sufficient liquidity to meet our short-term liquidity needs with or without an extension of the credit facility. 

Long–term liquidity

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We also have substantial value in our unencumbered real estate assets which could potentially be used as collateral in future borrowing opportunities.

At March 31, 2020, the outstanding balance on the credit facility is $50,000,000;

At June 30, 2020, we do not have an outstanding balance on our credit facility;

therefore, leaving $60,000,000 available for future borrowings.

The maturity date on the credit facility is October 7, 2020.

The credit facility is available for general corporate purposes, including working capital and acquisitions.

We are currently evaluating various options regarding the upcoming maturity date of our credit facility.

Our ability to refinance the credit agreement, to meet our long–term contractual obligations, and to finance our operating requirements and growth plans will depend upon our future performance.

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On March 14, 2020, the Court entered an Order granting the Defendant’s Motion to Dismiss.

On May 6, 2020, the Court entered a Final Judgment dismissing the case.

Governmental Regulations

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis