NATIONAL HEALTHCARE CORP 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.   Forward–Looking Statements   References throughout this document to the Company include National HealthCare Corporation and its wholly owned subsidiaries. In accordance with the Securities and Exchange Commissions “Plain English” guidelines, this Quarterly Report on Form 10–Q has been written in the first person. In this document, the words “we”, “our”, “ours” and “us” refer only to National HealthCare Corporation and its wholly–owned subsidiaries and not any other person.   This Quarterly Report on Form 10–Q and other information we provide from time to time, contains certain “forward–looking” statements as that term is defined by the Private Securities Litigation Reform Act of 1995. All statements regarding our expected future financial position, results of operations or cash flows, continued performance improvements, ability to service and refinance our debt obligations, ability to finance growth opportunities, ability to control our patient care liability costs, ability to respond to changes in government regulations, ability to execute our three–year strategic plan, and similar statements including, without limitations, those containing words such as “believes”, “anticipates”, “expects”, “intends”, “estimates”, “plans”, and other similar expressions are forward–looking statements.    Forward–looking statements involve known and unknown risks and uncertainties that may cause our actual results in future periods to differ materially from those projected or contemplated in the forward–looking statements as a result of, but not limited to, the following factors:     ● national and local economic conditions, including their effect on the availability and cost of labor, utilities and materials;         ● the effect of government regulations and changes in regulations governing the healthcare industry, including our compliance with such regulations;         ● changes in Medicare and Medicaid payment levels and methodologies and the application of such methodologies by the government and its fiscal intermediaries;         ● liabilities and other claims asserted against us, including patient care liabilities, as well as the resolution of current litigation (see Note 16: Contingencies and Commitments);         ● the uncertainty of the extent, duration and effects of the COVID-19 pandemic and the response of governments         ● the ability to attract and retain qualified personnel;         ● the availability and terms of capital to fund acquisitions and capital improvements;         ● the ability to refinance existing debt on favorable terms;         ● the competitive environment in which we operate;     26 Table of Contents     ● the ability to maintain and increase census levels; and         ● demographic changes.   See the notes to the quarterly financial statements, and “Item 1. Business” in our 2019 Annual Report on Form 10–K for a discussion of various governmental regulations and other operating factors relating to the healthcare industry and the risk factors inherent in them. This may be found on our web site at www.nhccare.com. You should carefully consider these risks before making any investment in the Company. These risks and uncertainties are not the only ones facing us. There may be additional risks that we do not presently know of or that we currently deem immaterial. If any of the risks occur, our business, financial condition or results of operations could be materially adversely affected. In that case, the trading price of our shares of stock could decline, and you may lose all or part of your investment. Given these risks and uncertainties, we can give no assurances that these forward–looking statements will, in fact, transpire and, therefore, caution investors not to place undue reliance on them.   Overview   National HealthCare Corporation (“NHC” or the “Company”) is a leading provider of senior health care services. We operate or manage, through certain affiliates, 76 skilled nursing facilities with a total of 9,633 licensed beds, 24 assisted living facilities, five independent living facilities, one behavioral health hospital and 35 homecare programs. We operate specialized care units within certain of our healthcare centers such as Alzheimer's disease care units and sub-acute nursing units. We also have a non-controlling ownership interest in a hospice care business that services NHC owned health care centers and others. In addition, we provide insurance services, management and accounting services, and we lease properties to operators of skilled nursing and assisted living facilities. We operate in 10 states and are located primarily in the southeastern United States.     Impact of COVID-19   In early March 2020, COVID-19, a disease caused by the novel strain of the coronavirus, was characterized as a pandemic by the World Health Organization. The COVID-19 virus has spread rapidly, with every state in the United States (“U.S.”) having confirmed cases. The rapid spread has resulted in authorities around the U.S. 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, 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: that is to protect the health and safety of our patients, residents, and partners (employees). 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 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. 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. 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 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.  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   The U.S. 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 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. 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.      27 Table of Contents   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 $51,253,000 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. 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.   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. 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). 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 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.  U.S. 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   Occupancy   A primary area of management focus continues to be the rates of occupancy within our skilled nursing facilities. The overall census in owned and leased skilled nursing facilities for 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 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. Management has undertaken a number of steps in order to best position our current and future health care facilities. This includes working internally to examine and improve systems to be most responsive to referral sources and payors. Additionally, NHC is in various stages of partnerships with hospital systems, payors, and other post–acute alliances to better position ourselves so we are an active participant in the delivery of post-acute healthcare services.   28 Table of Contents   Quality of Patient Care   CMS introduced the Five-Star Quality Rating System to help consumers, their families and caregivers compare skilled nursing facilities more easily. The Five-Star Quality Rating System gives each skilled nursing operation a rating ranging between one and five stars in various categories (five stars being the best). The Company has always strived for patient-centered care and quality outcomes as precursors to outstanding financial performance.    The tables below summarize NHC's overall performance in these Five-Star ratings versus the skilled nursing industry as of September 30, 2020:       NHC Ratings     Industry Ratings   Total number of skilled nursing facilities, end of period     76           Number of 4 and 5-star rated skilled nursing facilities     55           Percentage of 4 and 5-star rated skilled nursing facilities     72%       47%   Average rating for all skilled nursing facilities, end of period     4.00       3.22      Development and Growth   We are undertaking to expand our senior care operations while protecting our existing operations and markets. The following table lists our recent development activities.   Type of Operation   Description   Size   Location   Placed in Service Memory Care   New Facility   60 beds   Farragut, TN   January, 2019 Memory Care   Acquisition   60 beds   St. Peters, MO   June, 2019 Skilled Nursing   Acquisition   166 beds   Knoxville, TN   February, 2020 Assisted Living   Bed Addition   20 beds   Gallatin, TN   Under Construction Skilled Nursing   Bed Addition   30 beds   Kingsport, TN   Under Construction   Accrued Risk Reserves   Our accrued professional liability and workers’ 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’ compensation liabilities.   As to exposure for professional liability claims, we have developed performance certification criteria to measure and bring focus to the patient care issues most likely to produce professional liability exposure, including in–house acquired pressure ulcers, significant weight loss and numbers of falls. These programs for certification, which we regularly modify and improve, have produced measurable improvements in reducing these incidents. Our experience is that achieving goals in these patient care areas improves both patient and employee satisfaction.   Government Reimbursement Programs   Medicare – Skilled Nursing Facilities   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. 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 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.    29 Table of Contents   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 October 1, 2019 and for the fiscal year 2020, South Carolina implemented specific individual nursing facility rate changes. 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 $14,000,000 in 2020 due to 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.   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’ Medicaid payments, because many currently do not cover the total costs incurred in providing care to those patients. States will continue to control Medicaid expenditures and also look for adequate funding sources, including provider assessments. There are several pieces of legislation that include provisions designed to reduce Medicaid spending. These provisions include, among others, provisions strengthening the Medicaid asset transfer restrictions for persons seeking to qualify for Medicaid long-term care coverage, which could, due to the timing of the penalty period, increase facilities’ exposure to uncompensated care. Other provisions could increase state funding for home and community-based services, potentially having an impact on funding for nursing facilities.   Medicare – Homecare Programs   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 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.   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   The Company has two reportable operating segments: (1) inpatient services, which includes the operation of skilled nursing facilities, assisted and independent living facilities, and our behavioral health hospital; and (2) homecare services. These reportable operating segments are consistent with information used by the Company’s Chief Executive Officer, as chief operating decision maker (“CODM”), to assess performance and allocate resources.   The Company also reports an “all other” category that includes revenues from rental income, management and accounting services fees, insurance services, and costs of the corporate office. For additional information on these reportable segments see Note 2 – Summary of Significant Accounting Policies.      The Company’s CODM evaluates performance and allocates capital resources to each segment based on an operating model that is designed to improve the quality of patient care and profitability of the Company while enhancing long-term shareholder value. The CODM does not review assets by segment in his resource allocation and therefore, assets by segment are not disclosed below.   30 Table of Contents   The following table sets forth the Company’s unaudited interim condensed consolidated statements of operations by business segment (in thousands ):         Three Months Ended September 30, 2020       Inpatient Services     Homecare     All Other     Total   Revenues and grant income:                                 Net patient revenues   $ 214,211     $ 13,172     $ -     $ 227,383   Other revenues     84       -       11,027       11,111   Government stimulus income     12,132       -       -       12,132   Net operating revenues and grant income     226,427       13,172       11,027       250,626                                     Costs and expenses:                                 Salaries, wages, and benefits     132,245       8,210       11,109       151,564   Other operating     65,066       3,311       2,510       70,887   Rent     8,377       448       1,495       10,320   Depreciation and amortization     9,629       106       813       10,548   Interest     325       -       (40 )     285   Total costs and expenses     215,642       12,075       15,887       243,604                                     Income (loss) from operations     10,785       1,097       (4,860 )     7,022   Non-operating income     -       -       6,478       6,478   Unrealized losses on marketable equity securities     -       -       (241 )     (241 )                                   Income before income taxes   $ 10,785     $ 1,097     $ 1,377     $ 13,259           Three Months Ended September 30, 2019       Inpatient Services     Homecare     All Other     Total   Revenues:                                 Net patient revenues   $ 222,246     $ 12,844     $ -     $ 235,090   Other revenues     199       -       11,778       11,977   Net operating revenues     222,445       12,844       11,778       247,067                                     Costs and expenses:                                 Salaries, wages, and benefits     133,949       8,630       9,596       152,175   Other operating     60,800       4,267       1,663       66,730   Rent     8,234       450       1,483       10,167   Depreciation and amortization     9,666       61       936       10,663   Interest     312       -       452       764   Total costs and expenses     212,961       13,408       14,130       240,499                                     Income (loss) from operations     9,484       (564 )     (2,352 )     6,568   Non-operating income     -       -       6,663       6,663   Unrealized gains on marketable equity securities     -       -       9,312       9,312                                     Income (loss) before income taxes   $ 9,484     $ (564 )   $ 13,623     $ 22,543           Nine Months Ended September 30, 2020       Inpatient Services     Homecare     All Other     Total   Revenues and grant income:                                 Net patient revenues   $ 659,585     $ 37,564     $ -     $ 697,149   Other revenues     645       -       33,818       34,463   Government stimulus income     34,754       2,026       -       36,780   Net operating revenues and grant income     694,984       39,590       33,818       768,392                                     Costs and expenses:                                 Salaries, wages, and benefits     403,840       24,490       27,617       455,947   Other operating     194,170       11,471       7,775       213,416   Rent     25,134       1,351       4,487       30,972   Depreciation and amortization     28,826       266       2,439       31,531   Interest     1,073       -       77       1,150   Total costs and expenses     653,043       37,578       42,395       733,016                                     Income (loss) from operations     41,941       2,012       (8,577 )     35,376   Non-operating income     -       -       20,578       20,578   Unrealized losses on marketable equity securities     -       -       (40,580 )     (40,580 )                                   Income (loss) before income taxes   $ 41,941     $ 2,012     $ (28,579 )   $ 15,374     31 Table of Contents       Nine Months Ended September 30, 2019       Inpatient Services     Homecare     All Other     Total   Revenues:                                 Net patient revenues   $ 664,768     $ 41,697     $ -     $ 706,465   Other revenues     672       -       35,366       36,038   Net operating revenues     665,440       41,697       35,366       742,503                                     Costs and expenses:                                 Salaries, wages, and benefits     390,770       25,136       25,535       441,441   Other operating     183,602       13,193       6,965       203,760   Rent     24,754       1,400       4,448       30,602   Depreciation and amortization     28,790       183       2,542       31,515   Interest     979       -       1,665       2,644   Total costs and expenses     628,895       39,912       41,155       709,962                                     Income (loss) from operations     36,545       1,785       (5,789 )     32,541   Non-operating income     -       -       20,936       20,936   Unrealized gains on marketable equity securities     -       -       16,096       16,096                                     Income before income taxes   $ 36,545     $ 1,785     $ 31,243     $ 69,573         Non-GAAP Financial Presentation   The Company is providing certain non-GAAP financial measures as the Company believes that these figures are helpful in allowing investors to more accurately assess the ongoing nature of the Company’s operations and measure the Company’s performance more consistently across periods. Therefore, the Company believes this information is meaningful in addition to the information contained in the GAAP presentation of financial information. 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 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.   32 Table of Contents   The tables below provide reconciliations of GAAP to non-GAAP items (dollars in thousands, except per share data):       Three Months Ended September 30     Nine Months Ended September 30       2020     2019     2020     2019                                     Net income attributable to National Healthcare Corporation   $ 12,849     $ 19,461     $ 14,321     $ 54,441   Non-GAAP adjustments                                 Unrealized (gains)/losses on marketable equity securities     241       (9,312 )     40,580       (16,096 ) Gain on acquisitions of equity method investments     -       -       (1,707 )     (1,975 ) Operating results for newly opened facilities not at full capacity     87       152       401       884   Share-based compensation expense     518       340       1,807       1,448   Provision (benefit) of income taxes on non-GAAP adjustments     (220 )     2,293       (10,681 )     4,092   Non-GAAP Net income   $ 13,475     $ 12,934     $ 44,721     $ 42,794                                                                       GAAP diluted earnings per share   $ 0.84     $ 1.27     $ 0.93     $ 3.55   Non-GAAP adjustments                                 Unrealized (gains)/losses on marketable equity securities     0.01       (0.45 )     1.95       (0.78 ) Gain on acquisitions of equity method investments     -       -       (0.08 )     (0.09 ) Operating results for newly opened facilities not at full capacity     0.01       -       0.02       0.04   Share-based compensation expense     0.02       0.02       0.09       0.07   Non-GAAP diluted earnings per share   $ 0.88     $ 0.84     $ 2.91     $ 2.79       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 nine months ended September 30, 2020 and 2019.   Percentage of Net Operating Revenues and Grant Income       Three Months Ended September 30     Nine Months Ended September 30       2020     2019     2020     2019   Net operating revenues and grant income:     100.0 %     100.0 %     100 %     100 % Costs and expenses:                                 Salaries, wages, and benefits     60.5       61.6       59.3       59.5   Other operating     28.3       27.0       27.8       27.4   Facility rent     4.1       4.1       4.1       4.1   Depreciation and amortization     4.2       4.3       4.1       4.2   Interest     0.1       0.3       0.1       0.4   Total costs and expenses     97.2       97.3       95.4       95.6   Income from operations     2.8       2.7       4.6       4.4   Non–operating income     2.6       2.7       2.7       2.8   Unrealized gains/(losses) on marketable equity securities     (0.1 )     3.8       (5.3 )     2.2   Income before income taxes     5.3       9.2       2.0       9.4   Income tax provision     (0.2 )     (1.3 )     (0.1 )     (2.1 ) Net income     5.1       7.9       1.9       7.3   Net (income)/loss attributable to noncontrolling interest     0.0       0.0       0.0       0.0   Net income attributable to stockholders of NHC     5.1       7.9       1.9       7.3           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   Net patient revenues decreased $7,707,000, or 3.3%, compared to the same period last year.   33 Table of Contents   The total census at owned and leased skilled nursing facilities for the quarter averaged 81.3%, compared to an average of 90.1% 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 11.4% and managed care per diem rates increased 4.3% compared to the same quarter a year ago. Medicaid and private pay per diem rates increased 8.4% and 5.1%, 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 7.3% compared to the same quarter a year ago.   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 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 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 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 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 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 September 30, 2020, we have no long-term debt outstanding.   Other income   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.    Income taxes        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.   34 Table of Contents   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.     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 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. Our Medicare per diem rates increased 11.1% and managed care per diem rates increased 3.0% compared to the same period a year ago. Medicaid and private pay per diem rates increased 5.8% and 2.7%, 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 4.2% compared to the same period a year ago.   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. 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 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 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 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 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 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 $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.   35 Table of Contents   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 27.8% 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 September 30, 2020, we have no outstanding long-term debt.   Other income   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.    Income taxes        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   The noncontrolling interest in a subsidiary 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.     Liquidity, Capital Resources, and Financial Condition   Our primary sources of cash include revenues from the operations of our healthcare and senior living facilities, management and accounting services, rental income, and investment income. Our primary uses of cash include salaries, wages and other operating costs of our healthcare and senior living facilities, the cost of additions to and acquisitions of real property, facility rent expenses, and dividend distributions. These sources and uses of cash are reflected in our interim condensed consolidated statements of cash flows and are discussed in further detail below.   The following is a summary of our sources and uses of cash flows (dollars in thousands) :       Nine Months Ended September 30     Nine Month Change       2020     2019             %   Cash, cash equivalents, restricted cash, and restricted cash equivalents, at beginning of period   $ 61,010     $ 54,920     $ 6,090       11.1                                     Cash provided by operating activities     183,900       74,884       109,016       145.6                                     Cash used in investing activities     (15,273 )     (9,823 )     (5,450 )     (55.5 )                                   Cash used in financing activities     (33,519 )     (51,899 )     18,380       35.4                                     Cash, cash equivalents, restricted cash, and restricted cash equivalents, at end of period   $ 196,118     $ 68,082     $ 128,036       188.1     Operating Activities   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 $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.   36 Table of Contents   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.     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 $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 $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.   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 $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 $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.    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.     Commitment and Contingencies   Nutritional Support Services, L.P., Qui Tam Litigation   On June 19, 2018, a First Amended Complaint was filed naming Nutritional Support Services, L.P. (“NSS”), a wholly owned subsidiary of the Company, as a defendant in the action captioned U.S. ex rel. McClain v. Nutritional Support Services, L.P., No. 6:17-cv-2608-AMQ (D.S.C.), which was filed in the United States District Court for the District of South Carolina. The action alleges that NSS violated the False Claims Act by reporting a National Drug Code (“NDC”) number that did not correspond to the NDC for dispensed prescriptions. The plaintiffs are seeking unspecified damages. On April 16, 2018, the United States filed a Notice of Election to Decline Intervention with respect to the allegations asserted in this action. 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.    37 Table of Contents     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   Laws and regulations governing the Medicare, Medicaid and other federal healthcare programs are complex and subject to interpretation. Management believes that it is following all applicable laws and regulations in all material respects. However, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusions from the Medicare, Medicaid, and other federal healthcare programs. There have been several enacted and proposed federal and state relief measures as a result of COVID-19 which should provide support to us during this pandemic; however, the full benefit of any such programs would not be realized until these payments are fully implemented, government agencies issue applicable regulations, or guidance and such relief is provided.     New Accounting Pronouncements   See Note 2 to the interim condensed consolidated financial statements for the impact of new accounting standards.