What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-06 compared with 2020-11-05 · 103 added, 214 removed, 229 unchanged (58% of the section changed)

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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.

The COVID-19 virus spread rapidly, with every state in the United States (“U.S.”) having confirmed cases.

The rapid spread 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. 

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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. 

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

The financial results for the three months ending March 31, 2021 have been materially impacted by COVID-19 with census in our skilled nursing facilities averaging 76.8% during the first quarter of 2021 compared with 91.4% for the three months ending March 31, 2020. For the first time since the beginning of the COVID-19 pandemic, the census in our skilled nursing facilities increased approximately 3.5% from January 1, 2021 through March 31, 2021. We began our first vaccination clinics in our skilled nursing facilities around the middle of December 2020.

As of March 31, 2021, each of our 75 skilled nursing facilities have hosted at least three vaccination clinics onsite for our patients and partners (employees).

As the vaccination clinics progressed and as the vaccine became more accessible, we began to see a significant decline in COVID-19 cases among our operations.  Despite the COVID-19 cases significantly declining during the first quarter of 2021, our operating expenses remained elevated with incentive compensation being paid to our frontline partners, as well as increased costs of personal protective equipment (“PPE”), sanitizers and cleaning supplies, and COVID-19 testing of our patients and partners. Despite COVID-19 disrupting operations, our capital and financial resources, including our overall liquidity, remain strong.

Our liquidity provides us with significant flexibility to maintain the strength of our balance sheet in periods of uncertainty or stress.

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

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

The new laws impact healthcare providers in a variety of ways, but the largest legislation from a monetary relief perspective is the 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 new laws impacted 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"). Through the CARES Act, as well as the Paycheck Protection Program and Health Care Enhancement Act ("PPPCHE"), the federal government has allocated $178 billion to 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 and third quarters of 2020, we received four disbursements from the Provider Relief Fund which totaled $58,184,000.

During the three months ending March 31, 2021, we received additional disbursements from the Provider Relief Fund which totaled $30,191,000.

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).

The Company recorded $22,749,000 of government stimulus income from the Provider Relief Funds for the three months ended March 31, 2021. 

The grant income was determined on a systemic basis in line with the recognition of specific expenses and lost revenues for which the grants are intended to compensate.

The Company’s assessment of whether the terms and conditions for amounts received have been met for income recognition and the Company’s related income calculation considered all frequently asked questions and other interpretive guidance issued to date by the U.S.

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

As of March 31, 2021, amounts not recognized as income are $23,510,000 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”).  

therefore, at this time, we believe that we will fully utilize the remaining $23,510,000 of provider relief funds before the reporting requirement deadlines outlined by HHS.

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

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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.

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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.

Recoupment of the accelerated payments began in the second quarter of 2021.

As of March 31, 2021, the accelerated payments are reflected within contract liabilities in the interim condensed consolidated balance sheet 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 Medicare sequestration policy reduces fee-for-service Medicare payments by 2 percent. On December 27, 2020, the Consolidated Appropriations Act of 2021 further suspended the 2.0% payment adjustment through March 31, 2021.

On April 14, 2021, Congress extended the Medicare sequestration suspension period to December 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.

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. 

At March 31, 2021, we have deferred $21,153,000 of the Company’s share of the social security taxes. 

At March 31, 2021, 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.

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. 

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.    

For the three months ended March 31, 2021, we have recorded $3,955,000 in net patient revenues in our interim condensed consolidated statements of operations for these supplemental Medicaid payments.

Summary of Goals and Areas of Focus

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

The overall census in owned and leased skilled nursing facilities for the 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.

The overall census in owned and leased skilled nursing facilities for the three months ending March 31, 2021 was 76.8% compared to 91.4% for the same period a year ago. For the first time since the beginning of the COVID-19 pandemic, the census in our skilled nursing facilities increased approximately 3.5% from January 1, 2021 through March 31, 2021.  

Due to the pandemic, 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.

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

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

The tables below summarize NHC's overall performance in these Five-Star ratings versus the skilled nursing industry as of March 31, 2021:

Industry Ratings

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Placed in Service

January, 2019

Skilled Nursing

Knoxville, TN

February, 2020

February 2020

Assisted Living

Under Construction

September 2020

Skilled Nursing

Kingsport, TN

December 2020

Behavioral Health Hospital

Under Construction

Behavioral Health Hospital

Knoxville, 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.

compensation reserves totaled $101,481,000 at March 31, 2021 and are a primary area of management focus.

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

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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.

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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. 

On December 27, 2020, the Consolidated Appropriations Act of 2021 further suspended the 2.0% payment adjustment through March 31, 2021. On April 14, 2021, Congress extended the Medicare sequestration suspension period to December 31, 2021.

On April 8, 2021, CMS released a proposed rule outlining fiscal year 2022 Medicare payment rates and policy changes for skilled nursing facilities, which would begin October 1, 2021.

The fiscal year 2022 proposed rule provided for an approximate 1.3% increase, or $444 million, compared to 2021 levels.

For the first three months of 2021, our average Medicare per diem rate for skilled nursing facilities increased 6.3% as compared to the same period in 2020. 

Medicaid –

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We estimate the resulting increase in revenue for the 2021 fiscal year will be approximately $1,500,000, or $375,000 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.

Effective October 1, 2020 and for the fiscal year 2021, the state of South Carolina implemented specific individual nursing facility rate changes.

We estimate the resulting increase in revenue for the 2021 fiscal year will be approximately $3,600,000 annually, or $900,000 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 first nine months of 2020, our average Medicaid per diem increased 5.8% compared to the same period in 2019.

For the first three months of 2021, our average Medicaid per diem increased 8.5% compared to the same period in 2020.

We face challenges with respect to states’

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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.

In November 2020, CMS released its final rule outlining fiscal year 2021 Medicare payment rates.

CMS projects payments to home health agencies in fiscal year 2021 will increase in aggregate by 1.9%, or $390 million.

The increase reflects the effects of the 2.0% home health payment update percentage and a 0.1% decrease due to reductions made by the rural add-on policy.

The rule also updates the home health wage index, limiting any decrease in a geographic area’s wage index value to no more than 5% next year.

Segment Reporting

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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.

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

Three Months Ended September 30, 2020

Revenues and grant income:

Three Months Ended March 31, 2021

Net patient revenues

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Non-operating income

Unrealized losses on marketable equity securities

Unrealized gains on marketable equity securities

Income before income taxes

Three Months Ended September 30, 2019

Three Months Ended March 31, 2020

Net patient revenues

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Total costs and expenses

Income (loss) from operations

Non-operating income

Unrealized gains on marketable equity securities

Income (loss) before income taxes

Nine Months Ended September 30, 2020

Revenues and grant income:

Net patient revenues

Other revenues

Government stimulus income

Net operating revenues and grant income

Costs and expenses:

Salaries, wages, and benefits

Other operating

Depreciation and amortization

Total costs and expenses

Income (loss) from operations

Income from operations

Non-operating income

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Income/(loss) before income taxes

Nine Months Ended September 30, 2019

Net patient revenues

Other revenues

Net operating revenues

Costs and expenses:

Salaries, wages, and benefits

Other operating

Depreciation and amortization

Total costs and expenses

Income (loss) from operations

Non-operating income

Unrealized gains on marketable equity securities

Income before income taxes

Non-GAAP Financial Presentation

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

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

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

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

The operating results for the newly constructed healthcare facilities not at full capacity for the three months ended March 31, 2021 include facilities that began operations from 2019 to 2021, which is one memory care facility.

For the three months ended March 31, 2020, included are facilities that began operations from 2018 to 2020, which is one memory care facility.

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

Three Months Ended

Nine Months Ended

Net income attributable to National Healthcare Corporation

Net income/(loss) attributable to National Healthcare Corporation

Non-GAAP adjustments:

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Results of Operations

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

Percentage of Net Operating Revenues and Grant Income

Three Months Ended

Nine Months Ended

Net operating revenues and grant income

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Unrealized gains/(losses) on marketable equity securities

Income before income taxes

Income tax provision

Net (income)/loss attributable to noncontrolling interest

Net income attributable to stockholders of NHC

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%.

Income/(loss) before income taxes

Income tax (provision) benefit

Net income/(loss)

Net income attributable to noncontrolling interest

Net income/(loss) attributable to stockholders of NHC

Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

Results for the quarter ended March 31, 2021 compared to the first quarter of 2020 include a 2.0% decrease in net operating revenues and grant income and a 3.7% decrease in income from operations. 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 March 31, 2021 was $16,592,000 compared to $17,070,000 for the first quarter of 2020, which is a decrease of 2.8%.

Net operating revenues and grant income

Net patient revenues decreased $27,240,000, or 11.2%, compared to the same period last year.

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.

Included in net patient revenues for the three months ending March 31, 2021 and 2020 is $3,955,000 and $1,674,000, respectively, of COVID-19 supplemental Medicaid payments that were received to help mitigate the incremental costs in fighting the public health emergency.

The total census at owned and leased skilled nursing facilities for the quarter averaged 76.8%, compared to an average of 91.4% for the same quarter a year ago. For the first time since the beginning of the COVID-19 pandemic, the census in our skilled nursing facilities increased approximately 3.5% from January 1, 2021 through March 31, 2021.

Our Medicare per diem rates increased 6.3% and managed care per diem rates increased 3.1% 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.

Medicaid and private pay per diem rates increased 8.5% and decreased 1.6%, 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 6.9% 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.

For the three months ended March 31, 2021, this skilled nursing facility increased net patient revenues approximately $1,670,000 compared to the first quarter of 2020.

In November 2020, the Company sold a skilled nursing facility located in Town & Country, Missouri.

For the three months ended March 31, 2021, the sale of this facility decreased net patient revenue by $2,233,000 compared to the first quarter of 2020.

Other revenues decreased $660,000, or 5.5%, 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.

During the three months ended March 31, 2021, we recorded $22,749,000 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.

Total costs and expenses for the three months ended March 31, 2021 compared to the same period of 2020 decreased $4,568,000, or 1.9%, to $235,751,000 from $240,319,000.

Salaries, wages, and benefits decreased $2,339,000, or 1.6%, to $145,130,000 from $147,469,000.

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.

Salaries, wages, and benefits as a percentage of net operating revenues and grant income was 57.8% compared to 57.6% for the three months ended March 31, 2021 and 2020, respectively.

The primary reason for salaries and wages decreasing was the continued initiative of controlling expenses among our operations to mitigate our occupancy decline among our skilled nursing and assisted living facilities.

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.

We incurred approximately $3,348,000 and $827,000 in incentive compensation related to COVID-19 for the three months ended March 31, 2021 and 2020, respectively.

Excluding the COVID-19 related compensation, our salaries, wages, and benefits decreased 3.3% for the three months ended March 31, 2021 compared to the first quarter of 2020.  

Other operating expenses decreased $1,515,000, or 2.1%, to $70,153,000 for the 2021 period compared to $71,668,000 for the 2020 period.

Other operating expenses as a percentage of net operating revenues and grant income was 28.0% for the three months ended March 31, 2021 and 2020, respectively.

During the first quarter of 2021 and 2020, we incurred approximately $5,153,000 and $948,000, respectively, 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 decreased $5,720,000, or 8.1%, for the three months ended March 31, 2021 compared to the first quarter of 2020.

Non–operating income decreased by $1,886,000 compared to the same period last year, as further detailed in Note 6 to our interim condensed consolidated financial statements.

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

The income tax provision for the three months ended March 31, 2021 is $7,233,000 (an effective income tax rate of 25.3%).

Excluding certain items, we expect our corporate (federal and state) income tax rate for 2021 to be approximately 26.0%. 

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

Noncontrolling interest

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

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.

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.

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.

Non–operating income decreased by $358,000 compared to the same period last year, as further detailed in Note 6 to our interim condensed consolidated financial statements.

The income tax provision for the 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

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

Nine Months Ended

Nine Month Change

Three Months Ended

Three Month Change

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

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Cash used in investing activities

Cash used in financing activities

Cash used in/(provided by) financing activities

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

Operating Activities

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

Net cash provided by operating activities for the three months ended March 31, 2021 was $12,589,000 as compared to $7,754,000 in the same period last year.

Cash provided by operating activities consisted of net income of $21,308,000 and adjustments for non–cash items of $2,283,000.

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.

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.

There was cash used for working capital needs in the amount of $16,899,000 for three months ended March 31, 2021 compared to $19,547,000 for the same period a year ago.

We also received cash distributions from our unconsolidated investments of $5,897,000 during the three months ended March 31, 2021, compared to $2,349,000 for the same period a year ago.

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 during the first quarter of 2020 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.

Net cash used in investing activities totaled $5,852,000 for the three months ended March 31, 2021 compared to $16,225,000 for the three months ended March 31, 2020.

Cash used for property and equipment additions was $4,327,000 and $6,628,000 for the three months ended March 31, 2021 and 2020, respectively.

The Company collected notes receivable of $255,000 and $376,000 for the three months ended March 31, 2021 and 2020, respectively.

Purchases of marketable securities, net of sales, resulted in cash used of $1,780,000 and $2,950,000 for the three months ended March 31, 2021 and 2020.

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

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.

Net cash used in financing activities totaled $9,148,000 for the three months ended March 31, 2021 compared to net cash provided by financing activities of $31,641,000 for the three months ended March 31, 2020.

We made principal payments under our finance lease obligations in the amount of $1,081,000 and $1,019,000 for the three months ended March 31, 2021 and 2020, respectively.

Cash used for dividend payments to common stockholders totaled $7,987,000 in the current year period compared to $7,968,000 for the same period a year ago.

Short–term liquidity

We made borrowings under our credit facility of $40,000,000 during the three months ended March 31, 2020.

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.

In addition to cash flows from operations, our current cash on hand of $134,107,000 and our marketable securities of $184,738,000 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 $134,107,000 and our marketable securities of $184,738,000.

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

At March 31, 2021, we do not have any long-term debt.

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

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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.

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.

Divestiture of Skilled Nursing Facility

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

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

Governmental Regulations

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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.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis