NATIONAL HEALTHCARE CORP 10-K

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   Overview   National HealthCare Corporation, which we also refer to as NHC or the Company, is a leading provider of post–acute care and senior health care services. At December 31, 2020, we operate or manage 75 skilled nursing facilities with 9,463 1icensed beds, 24 assisted living facilities, five independent living facilities, one behavioral health hospital, and 35 homecare programs located in 10 states. These operations are provided by separately funded and maintained subsidiaries. We have a non–controlling ownership interest in a hospice care business that services NHC owned health care centers and others. In addition, we provide management services, accounting and financial services, and insurance services to third party operators of healthcare properties. We also own the real estate of 13 healthcare properties and lease these properties to third party operators.   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.”) being impacted. 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.    23 Table of Contents   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, third, and fourth quarters of 2020 have been significantly impacted by COVID-19 with census in our skilled nursing facilities dropping to 83.6% for the year, 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, and the COVID-19 testing of our patients and partners. 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 2020, 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 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 CARES Act.  The CARES Act provided $2.2 trillion of economy-wide financial stimulus in the form of financial aid to individuals, businesses, nonprofits, states and municipalities. The CARES Act originally appropriated $100 billion to establish the Public Health and Social Services Emergency Fund , which is referred to as the Provider Relief Fund. The Provider Relief Fund is administered through grants and other mechanisms to skilled nursing providers, home health providers, hospitals, and other Medicare and Medicaid enrolled providers to cover any unreimbursed health care related expenses or lost revenue attributable to the public health emergency resulting from COVID-19.  On April 24, 2020, another $75 billion was added to the Provider Relief Fund by the Paycheck Protection Program and Health Care Enactment Act, bringing the total amount appropriated in the fund to $175 billion.       During the second, third, and fourth quarters of 2020, we received disbursements from the Provider Relief Fund which totaled $63,573,000. 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 $63,573,000 of funds received, the Company recorded $47,505,000 of government stimulus income for the year ended December 31, 2020.  As of December 31, 2020, amounts not recognized as income are $16,068,000 and are reflected in the current liability section of our 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 we will fully utilize the remaining $16,068,000 of provider relief funds before the reporting requirement deadline that is required 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 December 31, 2020, the accelerated payments are reflected within contract liabilities in the 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. Our net patient revenues increased by approximately $2,900,000 in 2020 (2nd, 3rd, and 4th quarter impact) due to sequestration being temporarily suspended for the eight-month period.  On December 27, 2020, the Consolidated Appropriations Act of 2021 further suspended the 2.0% payment adjustment through March 31, 2021.     The CARES Act also temporarily permitted 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. At December 31, 2020, we have deferred $21,158,000 of the Company’s share of the social security taxes.  At December 31, 2020, half of the payroll tax deferral is included in accrued payroll in the current liabilities section of the consolidated balance sheet and the other half of the payroll tax deferral is included in other noncurrent liabilities within our consolidated balance sheet.    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. For the year ended December 31, 2020, we have recorded $26,179,000 in net patient revenues in our consolidated statements of operations for these supplemental Medicaid payments.   24 Table of Contents   Executive Summary   Earnings   To monitor our earnings, we have developed budgets and management reports to monitor labor, census, and the composition of revenues. Inflationary increases in our costs may cause net earnings from patient services to decline.   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 2020 was 83.6% compared to 90.3% in 2019 and 89.8% in 2018. Our census was strong for most of the first quarter of 2020, but 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.   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.   Quality of Patient Care   Centers for Medicare and Medicaid Services (“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 of 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 December 31, 2020:       NHC Ratings     Industry Ratings   Total number of skilled nursing facilities, end of period   75         Number of 4 and 5-star rated skilled nursing facilities   61         Percentage of 4 and 5-star rated skilled nursing facilities   81%     49%   Average rating for all skilled nursing facilities, end of period   4.19     3.28     Development and Growth    We are undertaking to expand our post–acute and senior health care operations while protecting our existing operations and markets. The following table lists our recent construction and purchase activities.   Type of Operation   Description   Size   Location   Placed in Service Skilled Nursing   Bed Addition   30 beds   Springfield, MO   April 2018 Behavioral Health Hospital   Acquisition   14 beds   Osage Beach, MO   August 2018 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   September 2020 Skilled Nursing   Bed Addition   30 beds   Kingsport, TN   December 2020 Behavioral Health Hospital   New Facility   16 beds   St Louis, MO   Under Construction Behavioral Health Hospital   New Facility   64 beds   Knoxville, TN   Under Construction   25 Table of Contents   Accrued Risk Reserves   Our accrued professional liability and workers’ compensation reserves totaled $99,537,000 and $96,011,000 at December 31, 2020 and 2019, respectively, and are a primary area of management focus. We have set aside restricted cash and restricted marketable securities to fund our professional liability and workers’ compensation reserves.   As to exposure for professional liability claims, we have developed performance measures to 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.   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 one 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 1 - “ 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.   The following tables set forth the Company’s consolidated statements of operations by business segment (in thousands ):       Year Ended December 31, 2020       Inpatient Services     Homecare     All Other     Total   Revenues:                                 Net patient revenues   $ 879,693     $ 52,102     $ –     $ 931,795   Other revenues     3,403       –       45,514       48,917   Government stimulus income     47,505       –       –       47,505   Net operating revenues and grant income     930,601       52,102       45,514       1,028,217                                     Costs and Expenses:                                 Salaries, wages and benefits     538,775       33,104       37,427       609,306   Other operating     261,643       14,689       10,513       286,845   Facility rent     33,090       1,802       5,602       40,494   Depreciation and amortization     38,217       377       3,424       42,018   Interest     1,374       –       25       1,399   Total costs and expenses     873,099       49,972       56,991       980,062                                     Income (loss) before non-operating income     57,502       2,130       (11,477 )     48,155   Non-operating income     –       –       28,234       28,234   Unrealized losses on marketable equity securities     –       –       (23,966 )     (23,966 )                                   Income (loss) before income taxes   $ 57,502     $ 2,130     $ (7,209 )   $ 52,423           Year Ended December 31, 2019       Inpatient Services     Homecare     All Other     Total   Revenues:                                 Net patient revenues   $ 893,201     $ 54,671     $ –     $ 947,872   Other revenues     910       –       47,601       48,511   Net operating revenues     894,111       54,671       47,601       996,383                                     Costs and Expenses:                                 Salaries, wages and benefits     526,430       33,037       33,364       592,831   Other operating     242,435       17,003       9,004       268,442   Facility rent     32,748       1,854       5,916       40,518   Depreciation and amortization     38,731       250       3,438       42,419   Interest     1,578       –       1,557       3,135   Total costs and expenses     841,922       52,144       53,279       947,345                                     Income (loss) before non-operating income     52,189       2,527       (5,678 )     49,038   Non-operating income     –       –       26,747       26,747   Unrealized gains on marketable equity securities     –       –       12,230       12,230                                     Income before income taxes   $ 52,189     $ 2,527     $ 33,299     $ 88,015     26 Table of Contents       Year Ended December 31, 2018       Inpatient Services     Homecare     All Other     Total   Revenues:                                 Net patient revenues   $ 872,912     $ 59,862     $ –     $ 932,774   Other revenues     2,494       -       45,081       47,575   Net operating revenues     875,406       59,862       45,081       980,349                                     Costs and Expenses:                                 Salaries, wages and benefits     513,647       33,339       35,735       582,721   Other operating     225,133       19,566       9,339       254,038   Facility rent     33,052       1,945       5,926       40,923   Depreciation and amortization     38,372       229       3,293       41,894   Interest     1,504       –       3,193       4,697   Total costs and expenses     811,708       55,079       57,486       924,273                                     Income (loss) before non-operating income     63,698       4,783       (12,405 )     56,076   Non-operating income     –       –       17,670       17,670   Unrealized gains on marketable securities     –       –       1,138       1,138                                     Income before income taxes   $ 63,698     $ 4,783     $ 6,403     $ 74,884       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 should exclude the following items: the unrealized gains or losses on our marketable equity securities, operating results for the newly constructed healthcare facilities not at full capacity, any gains on the acquisition of equity method investments, gains on the sale of healthcare facilities, stock-based compensation expense, legal costs and charges related to the settlement of a Qui Tam investigation within our Caris hospice partnership, and the tax adjustments with the passage of the 2017 U.S. Tax Cuts and Jobs Act.   The operating results for the newly constructed healthcare facilities not at full capacity include the following: for the year ended December 31, 2020, included are facilities that began operations from 2018 to 2020, which is one memory care facility. For the year ended December 31, 2019, included are facilities that began operations from 2017 to 2019 (one skilled nursing facility, two assisted living facilities, and one memory care facility). For the year ended December 31, 2018, included are facilities that began operations from 2016 to 2018 (two skilled nursing facilities and three assisted living facilities).   The table below provides reconciliations of GAAP to non-GAAP items ( dollars in thousands, except per share data ):       Year Ended December 31,       2020     2019     2018   Net income attributable to National HealthCare Corporation   $ 41,871     $ 68,211     $ 58,964   Non-GAAP adjustments:                         Unrealized (gains) losses on marketable equity securities     23,966       (12,230 )     (1,138 ) Gain on sale of real estate/healthcare facilities     (2,784 )     –       (1,668 ) Gain on acquisition of equity method investment     (1,707 )     (1,975 )     (2,050 ) Stock-based compensation expense     2,453       1,878       1,778   Operating results for newly opened facilities not at full capacity     602       712       3,562   Legal costs and charges related to Caris’ legal investigation     –       –       8,364   U.S. Tax Cuts and Jobs Act of 2017 adjustment     –       –       (1,434 ) Income tax (benefit) provision on non-GAAP adjustments     (5,858 )     3,020       (2,005 ) Non-GAAP Net Income   $ 58,543     $ 59,616     $ 64,373                             GAAP diluted earnings per share   $ 2.72     $ 4.44     $ 3.87   Non-GAAP adjustments:                         Unrealized (gains) losses on marketable equity securities     1.15       (0.59 )     (0.06 ) Gain on sale of real estate/healthcare facilities     (0.13 )     –       (0.08 ) Gain on acquisition of equity method investment     (0.08 )     (0.09 )     (0.13 ) Stock-based compensation expense     0.12       0.09       0.08   Operating results for newly opened facilities not at full capacity     0.03       0.03       0.17   Legal costs and charges related to Caris’ legal investigation     –       –       0.46   U.S. Tax Cuts and Jobs Act of 2017 adjustment     –       –       (0.09 ) Non-GAAP diluted earnings per share   $ 3.81     $ 3.88     $ 4.22     27 Table of Contents   Results of Operations   The following table and discussion set forth items from the consolidated statements of operations as a percentage of net operating revenues and grant income for the years ended December 31, 2020, 2019 and 2018.   Percentage of Net Operating Revenues       Year Ended December 31,       2020     2019     2018   Revenues:                         Net patient revenues     90.6 %     95.1 %     95.1 % Other revenues     4.8       4.9       4.9   Government stimulus income     4.6       0.0       0.0   Net operating revenues and grant income     100.0       100.0       100.0   Costs and Expenses:                         Salaries, wages and benefits     59.3       59.5       59.4   Other operating     27.9       26.9       25.9   Facility rent     3.9       4.1       4.2   Depreciation and amortization     4.1       4.3       4.3   Interest     0.1       0.3       0.5   Total costs and expenses     95.3       95.1       94.3   Income from operations     4.7       4.9       5.7   Non–operating income     2.7       2.7       1.8   Unrealized gains/(losses) on marketable equity securities     (2.3 )     1.2       0.1   Income before income taxes     5.1       8.8       7.6   Income tax provision     (1.0 )     (2.0 )     (1.6 ) Net income     4.1       6.8       6.0   Net loss attributable to noncontrolling interest     0.0       0.0       0.0   Net income attributable to common stockholders of NHC     4.1 %     6.8 %     6.0 %   The following table sets forth the increase or (decrease) in certain items from the consolidated statements of operations as compared to the prior period.   Period to Period Increase (Decrease)       2020 vs. 2019     2019 vs. 2018   (dollars in thousands)   Amount     Percent     Amount     Percent   Revenues:                                 Net patient revenues   $ (16,077 )     (1.7 )   $ 15,098       1.6   Other revenues     406       0.8       936       2.0   Government stimulus income     47,505       100.0       –       –   Net operating revenues and grant income     31,834       3.2       16,034       1.6   Costs and Expenses:                                 Salaries, wages and benefits     16,475       2.8       10,110       1.7   Other operating     18,403       6.9       14,404       5.7   Facility rent     (24 )     (0.1 )     (405 )     (1.0 ) Depreciation and amortization     (401 )     (0.9 )     525       1.3   Interest     (1,736 )     (55.4 )     (1,562 )     (33.3 ) Total costs and expenses     32,717       3.5       23,072       2.5   Income from operations     (883 )     (1.8 )     (7,038 )     (12.6 ) Non–operating income     1,487       5.6       9,077       51.4   Unrealized gains/(losses) on marketable equity securities     (36,196 )     (296.0 )     11,092       974.7   Income before income taxes     (35,592 )     (40.4 )     13,131       17.5   Income tax provision     9,606       (47.9 )     (3,854 )     23.8   Net income     (25,986 )     (38.2 )     9,277       15.8   Net income attributable to noncontrolling interest     (354 )     (150.6 )     (30 )     (11.3 ) Net income attributable to common stockholders of NHC   $ (26,340 )     (38.6 )   $ 9,247       15.7     28 Table of Contents   2020 Compared to 201 9   Results for the year ended December 31, 2020 compared to 2019 include a 3.2% increase in net operating revenues and grant income and a 38.6% decrease in net income attributable to NHC. In 2020, the decrease in net income attributable to NHC is primarily driven by the unrealized losses in our marketable equity securities portfolio.   Excluding the CARES Act grant income and other COVID-19 revenues recorded for the year ended December 31, 2020, net operating revenues would have decreased 4.2% compared to 2019. Excluding the unrealized losses in our marketable equity securities portfolio and the other non-GAAP adjustments, non-GAAP net income for the year ended December 31, 2020 was $58,543,000 compared to $59,616,000 for the 2019 year.   Net patient revenues totaled $931,795,000, a decrease of $16,077,000, or 1.7%, compared to the prior year. Included in net patient revenues for the year end December 31, 2020, is $26,179,000 of COVID-19 supplemental Medicaid payments that were received to help mitigate the incremental costs in fighting the public health emergency.   The overall average census in owned and leased skilled nursing facilities for 2020 was 83.6% compared to 90.3% in 2019. The decline in census is due to COVID-19 and the lack of new admissions from our acute care providers and referral partners. The composite skilled nursing facility per diem increased 7.0% in 2020 compared to 2019. Medicare per diem rates increased 10.1% in 2020 compared to 2019 and Managed Care per diem rates increased 3.2% in 2020 compared to 2019. Medicaid and private pay per diem rates increased 11.4% and 2.7%, respectively, in 2020 compared to 2019.   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.   In February 2020, the Company acquired the remaining 75% ownership interest in a 166-bed skilled nursing facility in Knoxville, Tennessee. For the year ended December 31, 2020, this skilled nursing facility increased net patient revenues approximately $11,299,000 compared to 2019.   Our homecare operations had a decline in net patient revenues of approximately $2,569,000 for the year ended December 31, 2020 as compared to 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 in 2020 were $48,917,000, an increase of $406,000, or 0.8%, as further detailed in Note 4 of the consolidated financial statements. Other revenues in 2020 include rental revenues of $22,768,000 ($22,641,000 in 2019), management and accounting service fees of $17,147,000 ($18,533,000 in 2019), and insurance services revenue of $5,447,000 ($6,209,000 in 2019). In November 2020, we sold a skilled nursing facility in Town & Country, Missouri, and recorded a gain on the sale of the transaction of $2,748,000.   For the year ended December 31, 2020, we recorded $47,505,000 in government stimulus income related to funds received from the Provider Relief Fund. At December 31, 2020, we have not recognized as income $16,068,000 of Provider Relief Funds that are reflected in the current liability section of our consolidated balance sheet (provider relief funds) and anticipate using these funds in 2021. See Note 2 for additional information.   Total costs and expenses for 2020 increased $32,717,000, or 3.5%, to $980,062,000 from $947,345,000 in 2019. In total, we incurred $47,897,000 of COVID-19 related expenses for the year ended December 31, 2020. The COVID-19 related expenses primarily consisted of: (1) personal protective equipment and sanitizers/infection control supplies; (2) incentive compensation paid to our frontline partners/employees; and (3) COVID-19 testing of our patients and partners/employees.   Salaries, wages and benefits, the largest operating costs of the company, increased $16,475,000, or 2.8%, to $609,306,000 from $592,831,000. Our salaries and wages were 59.3% and 59.5% of net operating revenues and grant income for 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. For the year ended December 31, 2020, we incurred approximately $15,224,000 in incentive compensation paid to our employees/partners related to COVID-19. For the year ended December 31, 2020, we also incurred approximately $6,094,000 in salaries and wages from the skilled nursing facility that we acquired in February 2020, compared to the same period of 2019.   Other operating expenses increased $18,403,000, or 6.9%, to $286,845,000 for 2020 compared to $268,442,000 in 2019. These costs were 27.9% and 26.9% of net operating revenues and grant income for 2020 and 2019, respectively. For the year ended December 31, 2020, we incurred $32,450,000 in COVID-19 related expenses in purchasing personal protective equipment, sanitizers and infection control supplies, and lab and testing supplies. Excluding the COVID-19 related expenses, other operating expenses have decreased $14,047,000, or 5.2%, for the year ended December 31, 2020 compared to 2019.    Facility rent expense decreased $24,000, or 0.1%, to $40,494,000. Depreciation and amortization decreased 0.9% to $42,018,000.   Interest expense decreased $1,736,000 to $1,399,000 in 2020 from $3,135,000 in 2019. The decrease in interest expense is due from our long-term debt being paid off in the second quarter of 2020. At December 31, 2020, we have no outstanding long-term debt.   Non–operating income in 2020 increased $1,487,000, or 5.6% to $28,234,000, as further detailed in Note 5 of the consolidated financial statements. The majority of the increase was the result of increased earnings from our investment in Caris HealthCare. In February 2020, a gain of $1,707,000 was recorded on the acquisition of the remaining ownership interest of a 166-skilled nursing facility in Knoxville, Tennessee. We previously held a noncontrolling interest in the facility. Upon acquiring the remaining ownership interest, we valued the business and our previously held equity position based upon the facility’s fair value.   We recorded unrealized losses in the amount of $23,966,000 for the decrease in fair value of our marketable equity securities portfolio for the year ended December 31, 2020. The marketable equity securities portfolio consists of publicly traded healthcare REIT’s, with NHI comprising approximately 85% of the market value of the portfolio at December 31, 2020.   The income tax provision for 2020 is $10,433,000 (an effective income tax rate of 19.9%). The income tax provision and effective tax rate for 2020 were also favorably impacted by statute of limitation expirations resulting in a benefit to the provision of $2,366,000 or 4.5% of income before taxes in 2020.   The income tax provision for 2019 is $20,039,000 (an effective income tax rate of 22.8%). The income tax provision and effective tax rate for 2019 were also favorably impacted by statute of limitation expirations resulting in a benefit to the provision of $2,064,000 or 2.3% of income before taxes in 2019.   29 Table of Contents   201 9 Compared to 201 8   Results for the year ended December 31, 2019 compared to 2018 include a 1.6% increase in net operating revenues and a 15.7% increase in net income attributable to NHC. Excluding the unrealized gains in our marketable equity securities portfolio and the other non-GAAP adjustments, non-GAAP net income for the year ended December 31, 2019 was $59,616,000 compared to $64,373,000 for the 2018 year.   The overall average census in owned and leased skilled nursing facilities for 2019 was 90.3% compared to 89.8% in 2018. Although our census increased and remained stable throughout 2019, we had a decline in Medicare patients (offset by Managed Care and Medicaid patients), which decreased our operating margins in our skilled nursing facilities. The composite skilled nursing facility per diem increased 0.3% in 2019 compared to 2018. Medicare per diem rates increased 1.8% in 2019 compared to 2018 and Managed Care per diem rates decreased 0.4% in 2019 compared to 2018. Medicaid and private pay per diem rates increased 3.0% and 1.9%, respectively, in 2019 compared to 2018.   Net patient revenues totaled $947,872,000, an increase of $15,098,000, or 1.6%, compared to the prior year. The largest driver of the net patient revenue increase in 2019 was the Company’s Institutional Special Needs Plan “(I-SNP”). Beginning January 1, 2019, the I-SNP began offering and providing insurance and healthcare services in the state of Tennessee. Our I-SNP, which is called NHC Advantage, is a managed care insurance company that enrolls Medicare Advantage eligible individuals who are patients in our skilled nursing facilities. We believe the I-SNP will benefit our patients by providing nurse practitioners and care-coordination teams that will continue to enhance the patient-centered experience and our quality of care. We also believe our progressive improvement to patient care will continue to drive positive financial results for the Company. For the year ended December 31, 2019, the I-SNP increased net patient revenues approximately $10,867,000 compared to 2018.   The Company opened one skilled nursing facility, two assisted living facilities, and a memory care facility from the years 2017 to 2019.  These facilities continue to stabilize and increased net patient revenues approximately $3,891,000 compared to the same period a year ago.  In August 2018, the Company acquired a controlling ownership interest in a 16-bed behavioral health hospital. For the 2019 year, the hospital increased net patient revenues by approximately $3,017,000 compared to 2018. The remaining increase in our net patient revenues is primarily due to the per diem increases in our existing skilled nursing facility and assisted living operations. Our homecare operations had a decline in net patient revenues of approximately $5,191,000 compared to the same period a year ago. Our homecare net patient revenue decline was primarily due to volume declines, as well as an unfavorable payor mix change with less Medicare patients and an increase of managed care patients. In October 2018, we sold a skilled nursing facility in Madisonville, Kentucky. The sale of this facility decreased net patient revenues $5,098,000 compared to the same period a year ago.   Other revenues in 2019 were $48,511,000, an increase of $936,000, or 2.0%, as further detailed in Note 3 of the consolidated financial statements. Other revenues in 2019 include rental revenues of $22,641,000 ($22,262,000 in 2018), management and accounting service fees of $18,533,000 ($15,175,000 in 2018), and insurance services revenue of $6,209,000 ($7,084,000 in 2018). In October 2018, we sold a skilled nursing facility in Madisonville, Kentucky and recorded a gain on the sale of the transaction of $1,668,000.   Total costs and expenses for 2019 increased $23,072,000, or 2.5%, to $947,345,000 from $924,273,000 in 2018.   Salaries, wages and benefits, the largest operating costs of the company, increased $10,110,000, or 1.7%, to $592,831,000 from $582,721,000. Our salaries and wages were 59.5% and 59.4% of net operating revenues for 2019 and 2018, respectively. The primary reason for salaries, wages and benefits increasing is due to our existing skilled nursing facilities and the continued wage pressure in most of the markets in which we operate. The newly opened operations (one skilled nursing facility, two assisted living facilities, and one memory care facility) that opened from the years 2017 to 2019 increased salaries, wages and benefits by approximately $2,129,000 compared to a year ago. The behavioral health hospital that we acquired in August 2018 resulted in increased salaries and wages expense of $1,695,000 in 2019 compared to the same period a year ago. These salaries and wage increases were offset by the October 2018 disposition of the Madisonville, Kentucky skilled nursing facility. The Madisonville, Kentucky skilled nursing facility decreased salaries, wages and benefits in the amount of $3,040,000 in 2019 compared to 2018.   Other operating expenses increased $14,404,000, or 5.7%, to $268,442,000 for 2019 compared to $254,038,000 in 2018. These costs were 26.9% and 25.9% of net operating revenues for 2019 and 2018, respectively. The majority of the increase in other operating expenses compared to a year ago is due to the January 1, 2019 start of our I-SNP insurance plan, NHC Advantage. For the year ending December 31, 2019, the I-SNP increased other operating expenses approximately $11,612,000 compared to the same period a year ago. The behavioral health hospital that we acquired in August 2018 increased other operating expenses $1,404,000 in 2019 compared to the same period a year ago. The October 2018 disposition of the Madisonville, Kentucky skilled nursing facility decreased other operating expenses in the amount of $2,974,000 in 2019 compared to 2018.    Facility rent expense decreased $405,000, or 1.0%, to $40,518,000. Depreciation and amortization increased 1.3% to $42,419,000.   Interest expense decreased $1,562,000 to $3,135,000 in 2019 from $4,697,000 in 2018. The decrease in interest expense is due from our long-term debt being paid down during 2019.   Non–operating income in 2019 increased $9,077,000, or 51.4% to $26,747,000, as further detailed in Note 4 of the consolidated financial statements. The increase in non-operating income is primarily due from our equity in earnings investment in our Caris hospice operations. During 2018, Caris recorded a charge to earnings of $8,500,000 for the settlement of a Qui Tam investigation, of which 75.1% is included in the Company's earnings. In total, with the $8.5 million settlement and legal expenses, Caris’ 2018 earnings negatively impacted NHC’s non-operating income by $8,364,000. There were no such charges or legal expenses in Caris for 2019.   30 Table of Contents   There were also gains on acquisitions of equity method investments in both the 2019 and 2018 years. In June 2019, a gain of $1,975,000 was recorded on the acquisition of the remaining ownership interest of a 60-bed memory care facility in St. Peters, Missouri. We previously held a noncontrolling interest in the facility. Upon acquiring the remaining ownership interest, we valued the business and our previously held equity position based upon the facility’s fair value. In July 2018, a gain of $2,050,000 was recorded on the acquisition of a controlling financial interest in a 16-bed behavioral health hospital in Osage Beach, Missouri. We previously held a non-controlling ownership interest. Upon acquiring the controlling ownership interest, we valued the business and our previously held equity position based upon the hospital’s fair value.   We recorded unrealized gains in the amount of $12,230,000 for the increase in fair value of our marketable equity securities portfolio for the year ended December 31, 2019. The marketable equity securities portfolio primarily consists of publicly traded healthcare REIT’s, with NHI comprising approximately 87% of the market value of the portfolio at December 31, 2019.   The income tax provision for 2019 is $20,039,000 (an effective income tax rate of 22.8%). The income tax provision and effective tax rate for 2019 were also favorably impacted by statute of limitation expirations resulting in a benefit to the provision of $2,064,000 or 2.3% of income before taxes in 2019.   The income tax provision for 2018 is $16,185,000 (an effective income tax rate of 21.6%). The income tax provision and effective tax rate for 2018 were also favorably impacted by statute of limitation expirations resulting in a benefit to the provision of $2,222,000 or 3.0% of income before taxes in 2018.      Liquidity and Capital Resources   Sources and Uses of Funds   Our primary sources of cash include revenues from the healthcare and senior living facilities we operate, homecare services, rental income, management and accounting services and insurance services. Our primary uses of cash include salaries, wages and benefits, operating costs of the healthcare facilities, the cost of additions and improvements to our real property, rent expenses, and dividend distributions. These sources and uses of cash are reflected in our 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) :       Year Ended     One Year Change     Year Ended     One Year Change       12/31/20     12/31/19     $     %     12/31/19     12/31/18     $     %   Cash, cash equivalents, restricted cash, and restricted cash equivalents at beginning of period   $ 61,010     $ 54,920     $ 6,090       11.1     $ 54,920     $ 67,421     $ (12,501 )     (18.5 )                                                                   Cash provided by operating activities     203,259       100,103       103,156       103.1       100,103       98,435       1,668       1.7                                                                     Cash used in investing activities     (63,878 )     (14,265 )     (49,613 )     (347.8 )     (14,265 )     (33,662 )     19,397       57.6                                                                     Cash used in financing activities     (41,889 )     (79,748 )     37,859       47.5       (79,748 )     (77,274 )     (2,474 )     (3.2 )                                                                   Cash, cash equivalents, restricted cash, and restricted cash equivalents at end of period   $ 158,502     $ 61,010     $ 97,492       159.8     $ 61,010     $ 54,920     $ 6,090       11.1     Operating Activities   Net cash provided by operating activities for the year ended December 31, 2020 was $203,259,000 as compared to $100,103,000 and $98,435,000 for the years ended December 31, 2019 and 2018, respectively. Cash provided by operating activities consisted of net income of $41,990,000 and adjustments for non–cash items of $40,816,000. There was cash provided by working capital in the amount of $110,403,000 for the year ended December 31, 2020 compared to cash used for working capital needs of $3,952,000 in 2019. We also received cash distributions from our unconsolidated investments of $10,050,000 for the year ended December 31, 2020 compared to $3,902,000 for 2019.   Included in cash provided by working capital is $51,253,000 from the Medicare Accelerated Payment Program, $16,068,000 provided from the Provider Relief Fund that has not been recognized as income, and $21,158,000 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 losses on our marketable equity securities, deferred taxes, stock compensation, gain on the sale of a skilled nursing facility, and the gain on the acquisition of a noncontrolling ownership interest.   31 Table of Contents   Investing Activities   Cash used in investing activities totaled $63,878,000 for the year ended December 31, 2020, as compared to $14,265,000 and $33,662,000 for the years ended December 31, 2019 and 2018, respectively. Cash used for property and equipment additions was $21,873,000, $26,400,000, and $29,772,000 for the years ended December 31, 2020, 2019 and 2018, respectively. Purchases of marketable securities, net of sales, resulted in a net use of cash of $43,860,000 in 2020; compared to net sales of marketable securities, resulted in positive cash flow of $32,029,000 in 2019. In 2020, the acquisition of the 166-bed skilled nursing facility in Knoxville, Tennessee resulted in cash used of $6,648,000 and proceeds from the sale of a skilled nursing facility resulted in cash proceeds of $6,750,000.   Financing Activities   Net cash used in financing activities totaled $41,889,000, $79,748,000 and $77,274,000 for the years ended December 31, 2020, 2019, and 2018, respectively. Cash used for repayments on the Company’s credit facility was a net $10,000,000 for the year ended December 31, 2020. During 2019 and 2018, $45,000,000 of cash was used for principal payments on long-term debt. Dividends paid to common stockholders was $31,921,000, $31,208,000, and $29,827,000 for the years ended December 31, 2020, 2019 and 2018, respectively. Proceeds from the issuance of common stock totaled $1,756,000 in 2020 compared to $2,346,000 and $2,865,000 for 2019 and 2018, respectively.   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 $147,093,000 and marketable securities of $176,352,000 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 $147,093,000, and marketable securities of $176,352,000. We also have substantial value in our unencumbered real estate assets which could potentially be used as collateral in future borrowing opportunities. At December 31, 2020, we do not have any long-term debt.    Our ability to obtain long-term debt to meet our long–term contractual obligations and to finance our operating requirements, growth and development plans will depend upon our future performance, which will be affected by business, economic, financial and other factors, including potential changes in state and federal government payment rates for health care, customer demand, success of our marketing efforts, pressures from competitors, and the state of the economy, including the state of financial and credit markets.   Given the uncertainty in the rapidly changing market and economic conditions related to COVID-19, we will continue to evaluate the nature and extent of the impact to our business and financial position.     Contingencies   See Note 17 to the consolidated financial statements for additional information on pending litigation and other contingencies.   Guarantees   At December 31, 2020, we have no agreements to guarantee the debt obligations of other parties.   We have no outstanding letters of credit. We may or may not in the future elect to use financial derivative instruments to hedge interest rate exposure in the future. At December 31, 2020, we did not participate in any such financial investments.     New Accounting Pronouncements   See Note 1 to the consolidated financial statements for the impact of new accounting standards.    32 Table of Contents   Application of Critical Accounting Policies   The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and cause our reported net income to vary significantly from period to period.   Our critical accounting policies that are both important to the portrayal of our financial condition and results and require our most difficult, subjective or complex judgments are as follows:   Net Patient Revenues and Accounts Receivable   Net patient revenues are derived from services rendered to patients for skilled and intermediate nursing, rehabilitation therapy, assisted living and independent living, and home health care services. Net patient revenue is reported at the amount that reflects the consideration to which the Company expects to be entitled in exchange for providing patient services. These amounts are due from patients, governmental programs, and other third-party payors, and include variable consideration for retroactive revenue adjustments due to settlement of audits, reviews, and investigations.   The Company recognizes revenue as its performance obligations are completed. Routine services are treated as a single performance obligation satisfied over time as services are rendered. These routine services represent a bundle of services that are not capable of being distinct. The performance obligations are satisfied over time as the patient simultaneously receives and consumes the benefits of the healthcare services provided. Additionally, there may be ancillary services which are not included in the daily rates for routine services, but instead are treated as separate performance obligations satisfied at a point in time when those services are rendered.   The Company determines the transaction price based on established billing rates reduced by contractual adjustments provided to third party payors.  Contractual adjustments are based on contractual agreements and historical experience.  The Company considers the patient's ability and intent to pay the amount of consideration upon admission.  Subsequent changes resulting from a patient’s ability to pay are recorded as bad debt expense, which is included as a component of other operating expenses in the consolidated statements of operations.    Revenue Recognition – Third Party Payors   Medicare and Medicaid program revenues, as well as certain Managed Care program revenues, are subject to audit and retroactive adjustment by government representatives or their agents. The Medicare PPS methodology requires that patients be assigned based on the acuity level of the patient to determine the amount that is paid to us for patient services. The assignment of patients to the various categories is subject to post–payment review by Medicare and Managed Care intermediaries or their agents. Settlements with third-party payors for retroactive adjustments due to audits, reviews or investigations are considered variable consideration and are included in the determination of the estimated transaction price for providing patient care. These settlements are estimated based on the terms of the payment agreement with the payor, correspondence from the payor and the Company’s historical settlement activity, including an assessment to ensure that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the retroactive adjustment is subsequently resolved.   In our opinion, adequate provision has been made for any adjustments that may result from these reviews. Any differences between our original estimates of reimbursements and subsequent revisions are reflected in operations in the period in which the revisions are made often due to final determination or the period of payment no longer being subject to audit or review.   Accrued Risk Reserves   We are self–insured for risks related to health insurance and have wholly owned limited purpose insurance companies that insure risks related to workers’ compensation and general and professional liability insurance claims. The accrued risk reserves include a liability for reported claims and estimates for incurred but unreported claims. Our policy is to engage an external, independent actuary to assist in estimating our exposure for claims obligations (for both asserted and unasserted claims). We reassess our accrued risk reserves on a quarterly basis.   Professional liability remains an area of particular concern to us. The long-term care industry has seen an increase in personal injury/wrongful death claims based on alleged negligence by skilled nursing facilities and their employees in providing care to residents. It remains possible that those pending matters plus potential unasserted claims could exceed our reserves, which could have a material adverse effect on our consolidated financial position, results of operations and cash flows. It is also possible that future events could cause us to make significant adjustments or revisions to these reserve estimates and cause our reported net income to vary significantly from period to period.   We are principally self–insured for incidents occurring in all centers owned or leased by us. The coverages include both primary policies and excess policies. In all years, settlements, if any, in excess of available insurance policy limits and our own reserves would be expensed by us.   33 Table of Contents