What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-05 compared with 2020-08-07 · 116 added, 120 removed, 327 unchanged (42% of the section changed)

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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 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.

The financial results for the second and third quarters of 2020 have been significantly impacted by COVID-19 with census in our skilled nursing facilities dropping to 81.3% during the third quarter of 2020, 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.

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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. 

At this time, we are not able to quantify the impact that the COVID-19 pandemic will have on our future financial results, but we expect the developments related to COVID-19 to adversely affect our financial performance in 2020 and 2021. 

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. 

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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 new laws impact healthcare providers in a variety of ways, but the largest legislation from a monetary relief perspective is the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). 

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.

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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.

During the second and third quarters of 2020, we received four disbursements from the Provider Relief Fund which totaled $58,184,000.

These funds come 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 $58,184,000 of funds received, the Company recorded $12,132,000 and $36,780,000 of government stimulus income for the three and nine months ended September 30, 2020, respectively. 

As of September 30, 2020, amounts not recognized as income are $21,404,000 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 or lost revenues in the future;

therefore, at this time, we believe that we will fully utilize the remaining $21,404,000 of provider relief funds before the reporting requirement deadlines outlined by the U.S.

Department of Health and Human Services (“HHS”).  

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

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

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.

We received approximately $51,253,000 as part of this program.

On October 8, 2020 as part of the Continuing Appropriations Act, 2021 and Other Extensions Act, CMS amended the repayment terms for the accelerated and advance payments.

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

During the first eleven months after repayment begins, repayment will occur through an automatic recoupment of twenty-five percent of Medicare payments.

During the succeeding six months, repayment will occur through an automatic recoupment of fifty percent of Medicare payments.

Any remaining balance that was not paid through the recoupment process within twenty-nine months of receipt of the funds will be required to be paid on-demand, subject to an interest rate of four percent.

As of September 30, 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 $24 million, or $7 million to $8 million per quarter (2nd, 3rd, and 4th quarter impact).

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

As of September 30, 2020, we have deferred $14,854,000 of the Company’s share of the social security taxes. 

This deferral is included in other noncurrent liabilities within our interim condensed consolidated balance sheets. 

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 $14,000,000 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.

For the three months and nine months ended September 30, 2020, we have recorded $4,845,000 and $10,378,000, respectively, in net patient revenues in our interim condensed consolidated statements of operations for these supplemental Medicaid payments.

Provider Relief Funds Guidance

On September 19, 2020, HHS issued a six-page Post-Payment Notice of Reporting Requirements ("September 19, 2020 Notice") pertaining to the guidance and reporting process for recipients of Provider Relief Funds. 

This September 19, 2020 Notice was used to estimate the government stimulus income recorded in the interim condensed consolidated statements of operations for the three and nine months ended September 30, 2020. 

On October 22, 2020, HHS issued a subsequent Post-Payment Notice of Reporting Requirements ("October 22, 2020 Notice") document that materially revises the definition of lost revenues compared to the September 19, 2020 Notice. 

The definition of lost revenues has subsequently changed to refer to the negative year-over-year difference in 2019 and 2020 actual revenues from patient care related sources as opposed to the negative year-over-year change in net patient care operating income. 

As stated in Note 3, the Company's estimate for recording government stimulus income for the three and nine months ended September 30, 2020 has not been updated for the October 22, 2020 Notice. 

The Company's evaluation of the October 22, 2020 Notice is ongoing and its impact on our financial statements is not yet known. 

GAAP does not permit amounts recognized as of September 30, 2020 to be updated on the basis of new information in the October 22, 2020 Notice.    

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 six months ending June 30, 2020 was 87.9% compared to 90.4% for the same period a year ago.

The overall census in owned and leased skilled nursing facilities for the nine months ending September 30, 2020 was 85.7% compared to 90.3% 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. 

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.  

For the three months ended September 30, 2020, overall census in our owned and leased skilled nursing facilities was 81.3% compared to 90.1% in the third 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 June 30, 2020:

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

Industry Ratings

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Our accrued professional liability and workers’

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

compensation reserves totaled $105,953,000 at September 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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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.

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

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.  

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

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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. 

For the first nine months of 2020, our average Medicare per diem rate for skilled nursing facilities increased 11.1% as compared to the same period in 2019. 

Medicaid –

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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.

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.

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At this time, we expect our net patient revenues to increase by approximately $14,000,000 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.

For the first nine months of 2020, our average Medicaid per diem increased 5.8% compared to the same period in 2019.

We face challenges with respect to states’

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In November 2019, CMS released a final rule that sets forth the implementation of the PDGM and a 30-day unit of payment as mandated by the Bipartisan Budget Act of 2018 (“BBA”).

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.

CMS projected payments to home health agencies in fiscal year 2020 would increase in aggregate by 1.3%, or $250 million.

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.

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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 June 30, 2020

Three Months Ended September 30, 2020

Revenues and grant income:

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Non-operating income

Unrealized gains on marketable equity securities

Unrealized losses on marketable equity securities

Income before income taxes

Three Months Ended June 30, 2019

Three Months Ended September 30, 2019

Net patient revenues

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Non-operating income

Unrealized losses on marketable equity securities

Income before income taxes

Six Months Ended June 30, 2020

Unrealized gains on marketable equity securities

Income (loss) before income taxes

Nine Months Ended September 30, 2020

Revenues and grant income:

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Income (loss) before income taxes

Six Months Ended June 30, 2019

(As Adjusted)

Nine Months Ended September 30, 2019

Net patient revenues

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

For the nine months ended September 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

Six Months Ended

Nine Months Ended

Net income attributable to National Healthcare Corporation

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Unrealized (gains)/losses on marketable equity securities

Gain on acquisition of equity method investment

Gain on acquisitions of equity method investments

Operating results for newly opened facilities not at full capacity

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Unrealized (gains)/losses on marketable equity securities

Gain on acquisition of equity method investment

Gain on acquisitions of equity method investments

Operating results for newly opened facilities not at full capacity

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Results of Operations

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

Six Months Ended

Nine Months Ended

Net operating revenues and grant income:

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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%.

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

Results for the quarter ended September 30, 2020 compared to the third quarter of 2019 include a 1.4% increase in net operating revenues and grant income and a 6.9% increase in income from operations.

Excluding the grant income recorded during the third quarter of 2020, net operating revenues decreased 3.5% compared to the third 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 September 30, 2020 was $13,475,000 compared to $12,934,000 for the third quarter of 2019, which is an increase of 4.2%.

Net operating revenues and grant income

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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.

For the three months ended September 30, 2020, we have recorded $4,845,000 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 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.

For the three months ended September 30, 2020, this skilled nursing facility increased net patient revenues approximately $3,503,000 compared to the third quarter of 2019.

Other revenues decreased $866,000, or 7.2%, 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.

During the three months ended September 30, 2020, we recorded $12,132,000 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 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 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.  

Total costs and expenses for the three months ended September 30, 2020 compared to the same period of 2019 increased $3,105,000, or 1.3%, to $243,604,000 from $240,499,000.

Salaries, wages, and benefits decreased $611,000, or 0.4%, to $151,564,000 from $152,175,000.

Salaries, wages, and benefits as a percentage of net operating revenues and grant income was 60.5% compared to 61.6% for the three months ended September 30, 2020 and 2019, respectively.

The primary reason for salaries and wages decreasing was the implementation of expense controlling measures among our all of operations to mitigate the decrease in our occupancy among our skilled nursing and assisted living facilities, which also includes temporary pay reductions for our corporate office personnel.

The expense controlling measures were offset by the incentive compensation, or "combat pay", paid to our frontline partners in fighting the COVID-19 pandemic.

We incurred approximately $2,506,000 in incentive compensation related to COVID-19 for the three months ended September 30, 2020. For the three months ended September 30, 2020, we also incurred approximately $1,863,000 in salaries and wages from the skilled nursing facility that we acquired in February 2020, compared to the third quarter of 2019.  

Other operating expenses increased $4,157,000, or 6.2%, to $70,887,000 for the 2020 period compared to $66,730,000 for the 2019 period.

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.  

Other operating expenses as a percentage of net operating revenues and grant income was 28.3% and 27.0% for the three months ended September 30, 2020 and 2019, respectively.

During the third quarter of 2020, we incurred approximately $8,419,000 in COVID-19 related expenses in purchasing personal protective equipment, nursing supplies, and lab and testing supplies. 

The expense controlling efforts have helped mitigate the increase in other operating expenses due to COVID-19.  Excluding the COVID-19 related expenses, other operating expenses have decreased $4,262,000, or 6.4%, for the three months ended September 30, 2020 compared to the third quarter of 2019.

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.

At September 30, 2020, we have no long-term debt outstanding.

Non–operating income decreased by $185,000 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 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%.

The income tax provision for the three months ended September 30, 2020 is $391,000 (an effective income tax rate of 2.9%).

Excluding certain items, we expect our corporate (federal and state) income tax rate for 2020 to be approximately 26.0%. 

For the three months ended September 30, 2020, our income tax provision benefitted primarily from the statute of limitation expirations of our income tax contingency reserves of $2,234,000.

Noncontrolling interest

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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%.

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

Results for the nine months ended September 30, 2020 compared to the first nine months of 2019 include a 3.5% increase in net operating revenues and grant income and an 8.7% increase in income from operations.

Excluding the grant income recorded for the nine months ended September 30,2020, net operating revenues would have decreased 1.5% compared to the same nine-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 nine months ended September 30, 2020 was $44,721,000 compared to $42,794,000 for the same period of 2019, which is an increase of 4.5%.

Net operating revenues and grant income

Net patient revenues decreased $9,316,000, or 1.3%, 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 total census at owned and leased skilled nursing facilities for the first nine months of 2020 averaged 85.7% compared to an average of 90.3% 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.

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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.

For the nine months ended September 30, 2020, we have recorded $10,378,000 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.

For the nine months ended September 30, 2020, this skilled nursing facility increased net patient revenues approximately $7,896,000 compared to the same period in the prior year.

Our homecare operations had a decline in net patient revenues of approximately $4,134,000 in the first nine months of 2020 compared to the same period of 2019.

Our homecare net patient revenue decline was primarily due to volume declines in the first and second quarter due to COVID-19.

Other revenues decreased $1,575,000, or 4.4%, 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.  

During the nine months ended September 30, 2020, we recorded $36,780,000 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.

Total costs and expenses for the nine months ended September 30, 2020 compared to the same period of 2019 increased $23,054,000 or 3.2%, to $733,016,000 from $709,962,000.

Salaries, wages, and benefits increased $14,506,000, or 3.3%, to $455,947,000 from $441,441,000.

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.

Salaries, wages, and benefits as a percentage of net operating revenues and grant income was 59.3% compared to 59.5% for the nine months ended September 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.   

We incurred approximately $9,220,000 in incentive compensation related to COVID-19 for the nine months ended September 30, 2020. 

For the nine months ended September 30, 2020, we also incurred approximately $4,259,000 in salaries and wages from the skilled nursing facility that we acquired in February 2020, compared to the same period of 2019.

Due to COVID-19, we have implemented expense controlling measures within all of our operations that have mitigated the increase in salaries and wages, including temporary pay reductions for our corporate office personnel.

Other operating expenses increased $9,656,000, or 4.7%, to $213,416,000 for the 2020 period compared to $203,760,000 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.  

Other operating expenses as a percentage of net operating revenue was 27.8% and 27.4% for the nine months ended September 30, 2020 and 2019.

During the first nine months of 2020, we incurred $15,048,000 in COVID-19 related expenses in purchasing personal protective equipment, nursing supplies, and lab and testing supplies. The expense controlling efforts have helped mitigate the increase in other operating expenses due to COVID-19.  Excluding the COVID-19 related expenses, other operating expenses have decreased $5,392,000, or 2.6%, for the nine months ended September 30, 2020 compared to the same period in 2019.

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.

At September 30, 2020, we have no outstanding long-term debt.

Non–operating income decreased by $358,000 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%.

The income tax provision for the nine months ended September 30, 2020 is $800,000 (an effective income tax rate of 5.2%). Excluding certain items, we expect our corporate (federal and state) income tax rate for 2020 to be approximately 26.0%. 

For the nine months ended September 30, 2020, our income tax provision benefitted primarily from the statute of limitation expirations of our income tax contingency reserves of $2,234,000.

Noncontrolling interest

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

Six Months Ended

Six Month Change

Nine Months Ended

Nine 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 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 six months ended June 30, 2020 was $154,727,000 as compared to $39,172,000 in the same period last year.

Net cash provided by operating activities for the nine months ended September 30, 2020 was $183,900,000 as compared to $74,884,000 in the same period last year.

Cash provided by operating activities consisted of net income of $14,574,000 and adjustments for non–cash items of $53,358,000.

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. 

There was cash provided by working capital in the amount of $106,053,000 for the nine months ended September 30, 2020 compared to cash provided by working capital needs in the amount of $3,297,000 for the same period a year ago.

We also received cash distributions from our unconsolidated investments of $10,050,000 during the nine months ended September 30, 2020, compared to $3,884,000 for the same period a year ago.

Included in cash provided by working capital is $51,253,000 from the Medicare Accelerated Payment Program, $21,404,000 provided from the Provider Relief Fund that has not been recognized as income, and $14,854,000 from the deferral of the Company’s employer social security taxes. 

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

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Investing Activities

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.

Net cash used in investing activities totaled $15,273,000 for the nine months ended September 30, 2020 compared to $9,823,000 for the nine months ended September 30, 2019.

Cash used for property and equipment additions was $17,717,000 and $19,670,000 for the nine months ended September 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 nine months ended September 30, 2020.

The Company collected notes receivable of $1,572,000 and $1,010,000 for the nine months ended September 30, 2020 and 2019, respectively.

Sales of restricted marketable debt securities, net of purchases, resulted in positive cash flow of $8,250,000 and $30,085,000 for the nine months ended September 30, 2020 and 2019, respectively.

Financing Activities  

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.

Net cash used in financing activities totaled $33,519,000 and $51,899,000 for the nine months ending September 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 nine months ended September 30, 2020.

We made principal payments under our finance lease obligations in the amount of $3,101,000 and $2,920,000 for the nine months ended September 30, 2020 and 2019, respectively.

Cash used for dividend payments to common stockholders totaled $23,935,000 in the current year period compared to $23,240,000 for the same period a year ago.

In the current period, $949,000 was provided by the issuance of common stock compared to $1,383,000 in the prior year period.

Short–term liquidity

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

In addition to cash flows from operations, our current cash on hand of $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. 

In addition to cash flows from operations, our current cash on hand of $183,765,000 and our marketable equity securities of $111,873,000 are expected to be adequate to meet our contractual obligations, operating liquidity, and our growth and development plans in the next twelve months. 

Long–term liquidity

We expect to meet our long-term liquidity requirements primarily from our cash flows from operating activities, our current cash on hand of $149,471,000, marketable equity securities of $112,114,000 and our borrowing capacity on the credit facility.

We expect to meet our long-term liquidity requirements primarily from our cash flows from operating activities, our current cash on hand of $183,765,000 and our marketable equity securities of $111,873,000.

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

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.

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

Our future performance will be affected by business, economic, financial and other factors, including potential changes in state and federal government payment rates for healthcare, customer demand, success of our marketing efforts, pressures from competitors, and the state of the economy, including the state of financial and credit markets, as well as many unforeseen factors.

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

Divestiture of Skilled Nursing Facility

On August 21, 2020, the Company entered into a definitive agreement for the sale of the real estate and operations of a skilled nursing facility in Town and Country, Missouri. 

This transaction is expected to be completed in the fourth quarter of 2020.  

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