NATIONAL HEALTHCARE CORP 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.   Forward – Looking Statements   References throughout this document to the Company include National HealthCare Corporation and its wholly owned subsidiaries. In accordance with the Securities and Exchange Commissions “Plain English” guidelines, this Quarterly Report on Form 10–Q has been written in the first person. In this document, the words “we”, “our”, “ours” and “us” refer only to National HealthCare Corporation and its wholly–owned subsidiaries and not any other person.   This Quarterly Report on Form 10–Q and other information we provide from time to time, contains certain “forward–looking” statements as that term is defined by the Private Securities Litigation Reform Act of 1995. All statements regarding our expected future financial position, results of operations or cash flows, continued performance improvements, ability to service and refinance our debt obligations, ability to finance growth opportunities, ability to control our patient care liability costs, ability to respond to changes in government regulations, ability to execute our three–year strategic plan, and similar statements including, without limitations, those containing words such as “believes”, “anticipates”, “expects”, “intends”, “estimates”, “plans”, and other similar expressions are forward–looking statements.   Forward–looking statements involve known and unknown risks and uncertainties that may cause our actual results in future periods to differ materially from those projected or contemplated in the forward–looking statements as a result of, but not limited to, the following factors:   ● national and local economic conditions, including their effect on the availability and cost of labor, utilities and materials;     ● the effect of government regulations and changes in regulations governing the healthcare industry, including our compliance with such regulations;     ● changes in Medicare and Medicaid payment levels and methodologies and the application of such methodologies by the government and its fiscal intermediaries;     ● liabilities and other claims asserted against us, including patient care liabilities, as well as the resolution of current litigation (see Note 17: Contingencies and Commitments);     ● the uncertainty of the extent, duration and effects of the COVID-19 pandemic and the response of governments     ● the ability to attract and retain qualified personnel;     ● the availability and terms of capital to fund acquisitions and capital improvements;     ● the ability to refinance existing debt on favorable terms;     ● the competitive environment in which we operate;     ● the ability to maintain and increase census levels; and     ● demographic changes.   See the notes to the quarterly financial statements, and “Item 1. Business” in our 2020 Annual Report on Form 10–K for a discussion of various governmental regulations and other operating factors relating to the healthcare industry and the risk factors inherent in them. This may be found on our web site at www.nhccare.com. You should carefully consider these risks before making any investment in the Company. These risks and uncertainties are not the only ones facing us. There may be additional risks that we do not presently know of or that we currently deem immaterial. If any of the risks occur, our business, financial condition or results of operations could be materially adversely affected. In that case, the trading price of our shares of stock could decline, and you may lose all or part of your investment. Given these risks and uncertainties, we can give no assurances that these forward–looking statements will, in fact, transpire and, therefore, caution investors not to place undue reliance on them.   28 Table of Contents   Overview   National HealthCare Corporation (“NHC” or the “Company”) is a leading provider of senior health care services. We operate or manage, through certain affiliates, 75 skilled nursing facilities with a total of 9,473 licensed beds, 24 assisted living facilities, five independent living facilities, one behavioral health hospital, 34 homecare agencies, and 28 hospice agencies. We operate specialized care units within certain of our healthcare centers such as Alzheimer's disease care units and sub-acute nursing units. In addition, we provide insurance services, management and accounting services, and we lease properties to operators of skilled nursing and assisted living facilities. We operate in 10 states and are located primarily in the southeastern United States.     Impact of COVID-19   In early March 2020, COVID-19, a disease caused by the novel strain of the coronavirus, was characterized as a pandemic by the World Health Organization. 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 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.    We began our first vaccination clinics in our skilled nursing facilities around the middle of December 2020. 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.  With the COVID-19 cases significantly declining during the first and second quarters of 2021, the census in our skilled nursing facilities began to increase. Although our census continued to increase in the third quarter of 2021, the trajectory of our census was slowed during the third quarter of 2021 due to the spike in delta variant cases during the period.  The delta variant spike during the third quarter of 2021 timeframe was the second highest number of positive COVID cases across the country since the beginning of the pandemic (December 2020/January 2021 peak was the highest).    Despite the COVID-19 cases decreasing in 2021, our operating expenses remain 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 the continued disruption of COVID-19 to our 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.   At this time, we are not able to quantify the impact that the COVID-19 pandemic will have on our future financial results, but the developments related to COVID-19 have adversely affected 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 impacted healthcare providers in a variety of ways, but the largest legislation from a monetary relief perspective is the CARES Act. Through the CARES Act, as well as the PPPCHE, the federal government 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.       The Provider Relief Fund grants 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. The Company recorded $10,429,000 and $12,132,000 of government stimulus income from the Provider Relief Funds for the three months ended September 30, 2021 and 2020, respectively. The Company recorded $48,304,000 and $36,780,000 of government stimulus income from the Provider Relief Funds for the nine months ended September 30, 2021 and 2020, respectively.  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 HHS.   29 Table of Contents   Additionally, as part of the CARES Act, the legislation included an expansion of the Medicare Accelerated and Advance Payment Program. We received approximately $51,253,000 as part of this program. These funds are applied against claims for services provided to Medicare patients after approximately one year from the date we received the funds. The recoupment of the accelerated payments began in the second quarter of 2021. At September 30, 2021, we have $27,013,000 of the accelerated payments remaining to be recouped and this balance is reflected within contract liabilities in the interim condensed consolidated balance sheet.   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. On December 27, 2020, the Consolidated Appropriations Act of 2021 further suspended the 2.0% payment adjustment through September 30, 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. At September 30, 2021, we deferred $21,153,000 of the Company’s share of the social security taxes.      Summary of Goals and Areas of Focus   Occupancy   A primary area of management focus continues to be the rates of occupancy within our skilled nursing facilities. For the three months ended September 30, 2021, overall census in our owned and leased skilled nursing facilities was 82.0% compared to 81.3% in the third quarter of 2020.  Our census for the third quarter of 2021 increased approximately 90 basis points when compared sequentially to the census in the second quarter of 2021.  Although our census continues to rebound, the trajectory of our census was slowed during the third quarter of 2021 due to the spike in delta variant cases during the period.  The overall census in owned and leased skilled nursing facilities for the nine months ending September 30, 2021 was 80.0% compared to 85.7% for the same period a year ago.    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. 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   CMS introduced the Five-Star Quality Rating System to help consumers, their families and caregivers compare skilled nursing facilities more easily. The Five-Star Quality Rating System gives each skilled nursing operation a rating ranging between one and five stars in various categories (five stars being the best). The Company has always strived for patient-centered care and quality outcomes as precursors to outstanding financial performance.   The tables below summarize NHC's overall performance in these Five-Star ratings versus the skilled nursing industry as of September 30, 2021:       NHC Ratings     Industry Ratings   Total number of skilled nursing facilities, end of period     75           Number of 4 and 5-star rated skilled nursing facilities     58           Percentage of 4 and 5-star rated skilled nursing facilities     77 %     47 % Average rating for all skilled nursing facilities, end of period     4.08       3.21     30 Table of Contents   Development and Growth   We are undertaking to expand our senior care operations while protecting our existing operations and markets. The following table lists our recent development activities.   Type of Operation     Description     Size     Location     Placed in Service   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   Hospice     Acquisition     28 agencies     Various     June 2021   Behavioral Health Hospital     New Facility     16 beds     St. Louis, MO     Under Construction   Behavioral Health Hospital     New Facility     64 beds     Knoxville, TN     Under Construction     Accrued Risk Reserves   Our accrued professional liability and workers’ compensation reserves totaled $103,824,000 at September 30, 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’ compensation liabilities.   As to exposure for professional liability claims, we have developed performance certification criteria to measure and bring focus to the patient care issues most likely to produce professional liability exposure, including in–house acquired pressure ulcers, significant weight loss and numbers of falls. These programs for certification, which we regularly modify and improve, have produced measurable improvements in reducing these incidents. Our experience is that achieving goals in these patient care areas improves both patient and employee satisfaction.     Government Reimbursement Programs   Medicare – Skilled Nursing Facilities   On July 31, 2020, CMS released its final rule outlining fiscal year 2021 Medicare payment rates and policy changes for skilled nursing facilities, which began October 1, 2020. The fiscal year 2021 final rule provided for an approximate 2.2% increase, or $750 million, compared to fiscal year 2020 levels. The final rule reflected the commitment to shifting Medicare payments from volume to value, with the continued implementation of the patient driven payment model (“PDPM”) and value-based purchasing to improve interoperability, operational quality, and safety.     The CARES Act temporarily suspended Medicare sequestration beginning May 1, 2020 through December 31, 2020. The Medicare sequestration policy reduces fee-for-service Medicare payments by 2 percent. The CARES Act extends the sequestration policy through 2030 in exchange for this temporary suspension. On December 27, 2020, the Consolidated Appropriations Act of 2021 further suspended the 2.0% payment adjustment through September 30, 2021. On April 14, 2021, Congress extended the Medicare sequestration suspension period to December 31, 2021.   On July 29, 2021, CMS released its final rule outlining fiscal year 2022 Medicare payment rates and policy changes for skilled nursing facilities, which began October 1, 2021. The fiscal year 2022 proposed rule provided for an approximate 1.2% increase, or $410 million, compared to 2021 levels. The net increase includes a 2.7% market-basket update that will be offset by a 0.7% productivity adjustment and a 0.8% market-basket forecast error adjustment for FY2022 since the difference between the projected and actual market basket for FY2020 exceeded its threshold.   For the first nine months of 2021, our average Medicare per diem rate for skilled nursing facilities increased 3.0% as compared to the same period in 2020.    Medicaid – Skilled Nursing Facilities   Effective July 1, 2021 and for the fiscal year 2022, the state of Tennessee implemented specific individual nursing facility increases. We estimate the resulting increase in revenue for the 2022 fiscal year will be approximately $3,500,000 annually, or $875,000 per quarter.   31 Table of Contents   Effective October 1, 2020 and for the fiscal year 2021, the state of South Carolina implemented specific individual nursing facility rate changes. The resulting increase in revenue for the 2021 fiscal year was approximately $3,600,000 annually, or $900,000 per quarter.   Effective July 1, 2021 and for the fiscal year 2022, the state of Missouri implemented specific individual nursing facility increases. We estimate the resulting increase in revenue for the 2022 fiscal year will be approximately $2,000,000 annually, or $500,000 per quarter.   We have also received from many of the states in which we operate supplemental Medicaid payments to help mitigate the incremental costs resulting from the COVID-19 public health emergency. We have recorded $5,053,000 and $4,845,000 in net patient revenues for these supplemental Medicaid payments for the three months ended September 30, 2021 and 2020, respectively. We have recorded $16,102,000 and $10,378,000 in net patient revenues for these supplemental Medicaid payments for the nine months ended September 30, 2021 and 2020, respectively.   For the first nine months of 2021, our average Medicaid per diem increased 7.8% compared to the same period in 2020.   We face challenges with respect to states’ Medicaid payments, because many currently do not cover the total costs incurred in providing care to those patients. States will continue to control Medicaid expenditures and also look for adequate funding sources, including provider assessments. There are several pieces of legislation that include provisions designed to reduce Medicaid spending. These provisions include, among others, provisions strengthening the Medicaid asset transfer restrictions for persons seeking to qualify for Medicaid long-term care coverage, which could, due to the timing of the penalty period, increase facilities’ exposure to uncompensated care. Other provisions could increase state funding for home and community-based services, potentially having an impact on funding for nursing facilities.   Medicare – Homecare Programs   In November 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.   In June 2021, CMS released its proposed rule outlining fiscal year 2022 Medicare payment rates. CMS projects payments to home health agencies in fiscal year 2022 will increase in aggregate by 1.7%, or $310 million, based on proposed policies. Additionally, CMS proposed plans to expand the Home Health Value-Based Purchasing (“HHVBP") model nationwide by the start of 2022. The CMS Innovation Center developed the HHVBP demonstration in an effort to create financial incentives for better quality of care.   Medicare – Hospice   In July 2020, CMS released its final rule outlining fiscal year 2021 Medicare payment rates. CMS issued a rate increase of 2.4%, or $540 million, effective October 1, 2020. The hospice cap amount for the 2021 cap year is equal to the FY 2020 cap amount updated by the FY 2021 hospice payment update percentage of 2.4 percent, or $30,683.93.   In July 2021, CMS released its final rule outlining fiscal year 2022 Medicare payment rates. CMS issued a rate increase of 2.0%, or $480 million, effective October 1, 2021. The increase is the result of a 2.7% market basket increase reduced by a 0.7% productivity adjustment. The FY2022 hospice payment updates also include an update to the statutory aggregate cap amount, which limits the overall payments per patient that are made annually. The cap amount for FY2022 is $31,297.61     Segment Reporting   The Company has two reportable operating segments: (1) inpatient services, which includes the operation of skilled nursing facilities, assisted and independent living facilities, and our behavioral health hospital; and (2) homecare and hospice services. These reportable operating segments are consistent with information used by the Company’s Chief Executive Officer, as chief operating decision maker (“CODM”), to assess performance and allocate resources.   The Company also reports an “all other” category that includes revenues from rental income, management and accounting services fees, insurance services, and costs of the corporate office. For additional information on these reportable segments see Note 2 – Summary of Significant Accounting Policies.       32 Table of Contents   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 table sets forth the Company’s unaudited interim condensed consolidated statements of operations by business segment (in thousands ):        Three Months Ended September 30, 2021       Inpatient Services     Homecare and Hospice     All Other     Total   Revenues:                                 Net patient revenues   $ 222,884     $ 31,933     $ -     $ 254,817   Other revenues     128       -       11,363       11,491   Government stimulus income     10,429       -       -       10,429   Net operating revenues and grant income     233,441       31,933       11,363       276,737                                     Costs and expenses:                                 Salaries, wages, and benefits     131,567       17,592       10,146       159,305   Other operating     74,506       6,797       2,736       84,039   Rent     8,169       594       1,441       10,204   Depreciation and amortization     9,300       118       811       10,229   Interest     198       -       -       198   Total costs and expenses     223,740       25,101       15,134       263,975                                     Income (loss) from operations     9,701       6,832       (3,771 )     12,762   Non-operating income     -       -       3,399       3,399   Unrealized losses on marketable equity securities     -       -       (23,797 )     (23,797 )                                   Income (loss) before income taxes   $ 9,701     $ 6,832     $ (24,169 )   $ (7,636 )         Three Months Ended September 30, 2020       Inpatient Services     Homecare     All Other     Total   Revenues and grant income:                                 Net patient revenues   $ 214,211     $ 13,172     $ -     $ 227,383   Other revenues     84       -       11,027       11,111   Government stimulus income     12,132       -       -       12,132   Net operating revenues and grant income     226,427       13,172       11,027       250,626                                     Costs and expenses:                                 Salaries, wages, and benefits     132,245       8,210       11,109       151,564   Other operating     65,066       3,311       2,510       70,887   Rent     8,377       448       1,495       10,320   Depreciation and amortization     9,629       106       813       10,548   Interest     325       -       (40 )     285   Total costs and expenses     215,642       12,075       15,887       243,604                                     Income (loss) from operations     10,785       1,097       (4,860 )     7,022   Non-operating income     -       -       6,478       6,478   Unrealized losses on marketable equity securities     -       -       (241 )     (241 )                                   Income before income taxes   $ 10,785     $ 1,097     $ 1,377     $ 13,259     33 Table of Contents       Nine Months Ended September 30, 2021       Inpatient Services     Homecare and Hospice     All Other     Total   Revenues and grant income:                                 Net patient revenues   $ 644,986     $ 63,662     $ -     $ 708,648   Other revenues     324       -       33,592       33,916   Government stimulus income     48,304       -       -       48,304   Net operating revenues and grant income     693,614       63,662       33,592       790,868                                     Costs and expenses:                                 Salaries, wages, and benefits     388,949       36,483       35,807       461,239   Other operating     204,445       13,730       8,060       226,235   Rent     24,641       1,478       4,318       30,437   Depreciation and amortization     27,790       299       2,432       30,521   Interest     657       -       -       657   Total costs and expenses     646,482       51,990       50,617       749,089                                     Income (loss) from operations     47,132       11,672       (17,025 )     41,779   Non-operating income     -       -       15,245       15,245   Gain on acquisition of equity method investment     -       -       95,202       95,202   Unrealized losses on marketable equity securities     -       -       (23,227 )     (23,227 )                                   Income before income taxes   $ 47,132     $ 11,672     $ 70,195     $ 128,999         Nine Months Ended September 30, 2020       Inpatient Services     Homecare     All Other     Total   Revenues and grant income:                                 Net patient revenues   $ 659,585     $ 37,564     $ -     $ 697,149   Other revenues     645       -       33,818       34,463   Government stimulus income     34,754       2,026       -       36,780   Net operating revenues and grant income     694,984       39,590       33,818       768,392                                     Costs and expenses:                                 Salaries, wages, and benefits     403,840       24,490       27,617       455,947   Other operating     194,170       11,471       7,775       213,416   Rent     25,134       1,351       4,487       30,972   Depreciation and amortization     28,826       266       2,439       31,531   Interest     1,073       -       77       1,150   Total costs and expenses     653,043       37,578       42,395       733,016                                     Income (loss) from operations     41,941       2,012       (8,577 )     35,376   Non-operating income     -       -       18,870       18,870   Gain on acquisition of equity method investment     -       -       1,708       1,708   Unrealized losses on marketable equity securities     -       -       (40,580 )     (40,580 )                                   Income (loss) before income taxes   $ 41,941     $ 2,012     $ (28,579 )   $ 15,374           34   Table of Contents   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, 2021 and 2020.   Percentage of Net Operating Revenues and Grant Income       Three Months Ended September 30     Nine Months Ended September 30       2021     2020     2021     2020   Net operating revenues and grant income     100.0 %     100.0 %     100 %     100 % Costs and expenses:                                 Salaries, wages, and benefits     57.6       60.5       58.3       59.3   Other operating     30.3       28.3       28.6       27.8   Facility rent     3.7       4.1       3.8       4.1   Depreciation and amortization     3.7       4.2       3.9       4.1   Interest     0.1       0.1       0.1       0.1   Total costs and expenses     95.4       97.2       94.7       95.4   Income from operations     4.6       2.8       5.3       4.6   Non–operating income     1.2       2.6       1.9       2.5   Gains on acquisitions of equity method investments     -       -       12.0       0.2   Unrealized losses on marketable equity securities     (8.6 )     (0.1 )     (2.9 )     (5.3 ) Income/(loss) before income taxes     (2.8 )     5.3       16.3       2.0   Income tax (provision)/benefit     1.5       (0.2 )     (0.7 )     (0.1 ) Net income/(loss)     (1.3 )     5.1       15.6       1.9   Net loss attributable to noncontrolling interest     0.1       0.0       0.0       0.0   Net income/(loss) attributable to stockholders of NHC     (1.2 )     5.1       15.6       1.9       Non-GAAP Financial Presentation   The Company is providing certain non-GAAP financial measures as the Company believes that these figures are helpful in allowing investors to more accurately assess the ongoing nature of the Company’s operations and measure the Company’s performance more consistently across periods. Therefore, the Company believes this information is meaningful in addition to the information contained in the GAAP presentation of financial information. The presentation of this additional non-GAAP financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP.   Specifically, the Company believes the presentation of non-GAAP financial information that excludes the unrealized gains or losses on our marketable equity securities, operating results for the newly constructed healthcare facilities not at full capacity, share-based compensation expense, and any gains on the acquisitions of equity method investments is helpful in allowing investors to more accurately access the Company’s operations.   The operating results for the newly constructed healthcare facilities not at full capacity for the three and nine months ended September 30, 2021 include facilities that began operations from 2019 to 2021. For the three and nine months ended September 30, 2020, included are facilities that began operations from 2018 to 2020. For all of the 2021 and 2020 periods presented, there is one memory care facility that is included in the reconciliation.   In June 2021, the gain on the acquisition of an equity method investment is from the acquisition of Caris HealthCare, L.P. See Note 4 for additional detail describing the Caris acquisition. In February 2020, the gain on the acquisition of an equity method investment is from the acquisition of a skilled nursing facility in Knoxville, Tennessee where we owned a prior 25% non-controlling ownership interest before acquiring the remaining 75% ownership interest.   35 Table of Contents   The tables below provide reconciliations of GAAP to non-GAAP items (dollars in thousands, except per share data):       Three Months Ended September 30     Nine Months Ended September 30       2021     2020     2021     2020                                     Net income/(loss) attributable to National Healthcare Corporation   $ (3,348 )   $ 12,849     $ 122,802     $ 14,321   Non-GAAP adjustments:                                 Unrealized losses on marketable equity securities     23,797       241       23,227       40,580   Gains on acquisitions of equity method investments     -       -       (95,202 )     (1,708 ) Operating results for newly opened facilities not at full capacity     115       87       480       402   Share-based compensation expense     726       518       1,905       1,807   Benefit of income taxes on non-GAAP adjustments     (6,406 )     (220 )     (6,369 )     (10,681 ) Non-GAAP Net income   $ 14,884     $ 13,475     $ 46,843     $ 44,721                                                                       GAAP diluted earnings/(loss) per share   $ (0.22 )   $ 0.84     $ 7.97     $ 0.93   Non-GAAP adjustments:                                 Unrealized losses on marketable equity securities     1.14       0.01       1.12       1.95   Gains on acquisitions of equity method investments     -       -       (6.16 )     (0.08 ) Operating results for newly opened facilities not at full capacity     0.01       0.01       0.02       0.02   Share-based compensation expense     0.03       0.02       0.09       0.09   Non-GAAP diluted earnings per share   $ 0.96     $ 0.88     $ 3.04     $ 2.91       Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020   Results for the quarter ended September 30, 2021 compared to the third quarter of 2020 include a 10.4% increase in net operating revenues and grant income and an 81.7% increase in income from operations. For the quarter ended September 30, 2021, GAAP net loss attributable to NHC was $3,348,000 compared to net income of $12,849,000 for the same period in 2020.   The decrease in our reported GAAP net income for the third quarter of 2021 is primarily due to the unrealized losses on our marketable equity securities. Excluding the unrealized losses on our marketable equity securities and the other non-GAAP adjustments, non-GAAP net income for the three months ended September 30, 2021 was $14,884,000 compared to $13,475,000 for the third quarter of 2020, which is an increase of 10.5%.   Net operating revenues and grant income   Net patient revenues increased $27,434,000, or 12.1%, compared to the same period last year.   The total census at owned and leased skilled nursing facilities for the quarter averaged 82.0%, compared to an average of 81.3% for the same quarter a year ago. Our census for the third quarter of 2021 increased approximately 90 basis points when compared sequentially to the census in the second quarter of 2021.  Although our census continues to rebound, the trajectory of our census was slowed during the third quarter of 2021 due to the spike in delta variant cases during the period.    Overall, the composite skilled nursing facility per diem increased 2.4% compared to the same quarter a year ago. Our Medicare per diem rates increased 0.5% and managed care per diem rates decreased 2.1% compared to the same quarter a year ago. Medicaid and private pay per diem rates increased 6.0% and 3.4%, respectively, compared to the same quarter a year ago. The Medicaid per diem rate increased due to the supplemental COVID-19 payments that we received from various states to help mitigate the incremental costs in fighting the pandemic. For the three months ending September 30, 2021 and 2020, respectively, $5,053,000 and $4,845,000 have been included in our net patient revenues for these supplemental COVID-19 Medicaid payments.   In June 2021, the Company acquired the remaining ownership interest in Caris, which resulted in net patient revenues increasing of $17,547,000 for the three months ended September 30, 2021 compared to the third quarter of 2020. Our homecare operations had an increase in net patient revenues of approximately $1,215,000 for the three months ended September 30, 2021 compared to the third quarter of 2020. In November 2020, the Company sold a skilled nursing facility located in Town & Country, Missouri. For the three months ended September 30, 2021, the sale of this facility decreased net patient revenue by $1,824,000 compared to the third quarter of 2020.   36 Table of Contents   Other revenues increased $380,000, or 3.4%, compared to the same quarter last year, as further detailed in Note 6 to our interim condensed consolidated financial statements.   During the three months ended September 30, 2021 and 2020, respectively, we recorded $10,429,000 and $12,132,000 in government stimulus income related to funds received from the CARES Act Provider Relief Fund. See Note 3 - Coronavirus Pandemic for additional information.     Total costs and expenses   Total costs and expenses for the three months ended September 30, 2021 compared to the same period of 2020 increased $20,371,000, or 8.4%, to $263,975,000 from $243,604,000.   Salaries, wages, and benefits increased $7,741,000, or 5.1%, to $159,305,000 from $151,564,000. Salaries, wages, and benefits as a percentage of net operating revenues and grant income was 57.6% compared to 60.5% for the three months ended September 30, 2021 and 2020, respectively. Our Caris acquisition increased salaries, wages, and benefits $8,946,000 in the third quarter of 2021 compared to the same quarter a year ago.  We continue to face tremendous workforce and labor shortages within all of our operations, which increases wage pressure and inflation in regards to retaining and attracting qualified healthcare partners (employees).  With the workforce environment being so challenging, the largest expense increase from a labor standpoint is in our agency nurse staffing.  But, since the agency nurse staffing personnel are not our employees (partners), this expense is categorized below in "other operating expenses".      Other operating expenses increased $13,152,000, or 18.6%, to $84,039,000 for the 2021 period compared to $70,887,000 for the 2020 period. Other operating expenses as a percentage of net operating revenues and grant income was 30.3% and 28.3% for the three months ended September 30, 2021 and 2020, respectively. Our Caris acquisition increased other operating expenses $3,698,000 in the third quarter of 2021 compared to the same quarter a year ago.  As mentioned in the previous paragraph, we continue to use additional agency nurse staffing due to the challenging workforce environment.  For the third quarter of 2021, our agency nurse staffing expenses increased $8,169,000 for the third quarter of 2021 compared to the same quarter a year ago.     Other income   Non–operating income decreased by $3,079,000 compared to the same period last year, as further detailed in Note 7 to our interim condensed consolidated financial statements.  The decrease is due to our June 2021 acquisition of Caris.  Therefore, from the respective acquisition date, we no longer record any equity in earnings from our Caris investment.  Caris' financial information (revenues and expenses) is now included in the Company's consolidated financial statements.     Income taxes   The income tax benefit for the three months ended September 30, 2021 is $4,090,000 (an effective income tax rate of 53.6%). Excluding certain items, we expect our corporate (federal and state) income tax rate for 2021 to be approximately 26.0%.    Noncontrolling interest   The noncontrolling interest in subsidiaries is presented within total equity of the Company’s consolidated balance sheets. The company presents the noncontrolling interest and the amount of consolidated net income attributable to NHC in its consolidated statements of operations. The Company’s earnings per share is calculated based on net income attributable to NHC’s stockholders. The carrying amount of the noncontrolling interest is adjusted based on an allocation of subsidiary earnings based on ownership interest.   Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020   Results for the nine months ended September 30, 2021 compared to the first nine months of 2020 include a 2.9% increase in net operating revenues and grant income and a 18.1% increase in income from operations. For the nine months ended September 30, 2021, GAAP net income attributable to NHC was $122,802,000 compared to $14,321,000 for the same period in 2020.   The large increase in our reported GAAP net income for the 2021 nine-month period compared to the same period in 2020 is primarily due to the gain recorded from the acquisition of Caris, a hospice provider. Excluding the gain on the Caris acquisition, as well as the unrealized losses in our marketable equity securities portfolio and the other non-GAAP adjustments, non-GAAP net income for the nine months ended September 30, 2021 was $46,843,000 compared to $44,721,000 for the first nine months of 2020, which is an increase of 4.7%.   Net operating revenues and grant income   Net patient revenues increased $11,499,000, or 1.6%, compared to the same period last year.    37 Table of Contents   The total census at owned and leased skilled nursing facilities for the nine months averaged 80.0%, compared to an average of 85.7% for the same period a year ago.  With the COVID-19 cases significantly declining during the first and second quarters of 2021, the census in our skilled nursing facilities began to increase. Although our census continued to increase in the third quarter of 2021, the trajectory of our census was slowed during the third quarter of 2021 due to the spike in delta variant cases during the period.  The delta variant spike during the third quarter of 2021 timeframe was the second highest number of positive COVID cases across the country since the beginning of the pandemic (December 2020/January 2021 peak was the highest).    Overall, the composite skilled nursing facility per diem at our owned and leased skilled nursing facilities increased 5.5% compared to the same period a year ago. Our Medicare per diem rates increased 3.0% and managed care per diem rates increased 0.2% compared to the same period a year ago. Medicaid and private pay per diem rates increased 7.8% and 1.9%, respectively, compared to the same period a year ago. The Medicaid per diem rate increased due to the supplemental COVID-19 payments that we received from various states to help mitigate the incremental costs in fighting the pandemic. For the nine months ending September 30, 2021 and 2020, respectively, $16,102,000 and $10,378,000 have been included in our net patient revenues for these supplemental COVID-19 Medicaid payments   In June 2021, the Company acquired the remaining ownership interest in Caris, which resulted in net patient revenues increasing $21,259,000 for the nine months ended September 30, 2021 compared to the same period a year ago. Our homecare operations had an increase in net patient revenues of approximately $4,839,000 for the nine months ended September 30, 2021, compared to the same period a year ago. In November 2020, the Company sold a skilled nursing facility located in Town & Country, Missouri. For the nine months ended September 30, 2021, the sale of this facility decreased net patient revenue by $6,228,000 compared to the same period a year ago.   Other revenues decreased $547,000, or 1.6%, compared to the same period last year, as further detailed in Note 6 to our interim condensed consolidated financial statements.   During the nine months ended September 30, 2021 and 2020, respectively, we recorded $48,304,000 and $36,780,000 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 nine months ended September 30, 2021 compared to the same period of 2020 increased $16,073,000, or 2.2%, to $749,089,000 from $733,016,000.   Salaries, wages, and benefits increased $5,292,000, or 1.2%, to $461,239,000 from $455,947,000. Salaries, wages, and benefits as a percentage of net operating revenues and grant income was 58.3% compared to 59.3% for the nine months ended September 30, 2021 and 2020, respectively. Our Caris acquisition in June 2021 increased salaries, wages, and benefits $10,851,000 for the nine month period ended September 30, 2021 compared to the nine-month period a year ago. With the COVID-19 cases declining during the first nine months of 2021, the COVID-related incentive pay (or combat pay) was significantly reduced for the nine-month period of 2021 compared to the same period a year ago ($5,527,000). We continue to face tremendous workforce and labor shortages within all of our operations, which increases wage pressure and inflation in regards to retaining and attracting qualified healthcare partners (employees).  With the workforce environment being so challenging, the largest expense increase from a labor standpoint is in our agency nurse staffing.  But, since the agency nurse staffing personnel are not our employees (partners), this expense is categorized below in "other operating expenses".      Other operating expenses increased $12,819,000, or 6.0%, to $226,235,000 for the 2021 period compared to $213,416,000 for the 2020 period. Other operating expenses as a percentage of net operating revenues and grant income was 28.6% and 27.8% for the nine months ended September 30, 2021 and 2020, respectively. Our Caris acquisition increased other operating expenses $4,469,000 in the nine-month period of 2021 compared to the same period a year ago.  As mentioned in the previous paragraph, we continue to use additional agency nurse staffing due to the challenging workforce environment.  For the nine months ending September 30, 2021, our agency nurse staffing expenses increased $13,127,000 for the nine-month period of 2021 compared to the same period a year ago.  With the COVID-19 cases declining during the first nine months of 2021, the expense for personal protective equipment, testing, and other COVID-related medical supplies has decreased $5,421,000 when compared to the same period a year ago.     Other income   Non–operating income decreased by $3,625,000 compared to the same period last year, as further detailed in Note 7 to our interim condensed consolidated financial statements.  The decrease is due to our June 2021 acquisition of Caris.  Therefore, from the respective acquisition date, we no longer record any equity in earnings from our Caris investment.  Caris' financial information (revenues and expenses) is now included in the Company's consolidated financial statements.     Gain on acquisition of equity method investments   In June 2021, a gain of $95,202,000 was recorded on the acquisition of the remaining ownership interest of Caris. We previously held a noncontrolling interest in the partnership. See Note 4 for additional detail describing the Caris acquisition.   In February 2020, a gain of $1,708,000 was recorded on the acquisition of the remaining ownership interest of a 166-bed 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.   38 Table of Contents   Income taxes   The income tax provision for the nine months ended September 30, 2021 is $5,907,000 (an effective income tax rate of 4.6%). The $95.2 million gain from the Caris acquisition is a mostly a non-taxable event and is the primary driver of our effective tax rate being lower than expected. Excluding certain items, we expect our corporate (federal and state) income tax rate for 2021 to be approximately 26.0%.    Noncontrolling interest   The noncontrolling interest in subsidiaries is presented within total equity of the Company’s consolidated balance sheets. The company presents the noncontrolling interest and the amount of consolidated net income attributable to NHC in its consolidated statements of operations. The Company’s earnings per share is calculated based on net income attributable to NHC’s stockholders. The carrying amount of the noncontrolling interest is adjusted based on an allocation of subsidiary earnings based on ownership interest.     Liquidity, Capital Resources, and Financial Condition   Our primary sources of cash include revenues from the operations of our healthcare and senior living facilities, management and accounting services, rental income, and investment income. Our primary uses of cash include salaries, wages and other operating costs of our healthcare and senior living facilities, the cost of additions to and acquisitions of real property, facility rent expenses, and dividend distributions. These sources and uses of cash are reflected in our interim condensed consolidated statements of cash flows and are discussed in further detail below.   The following is a summary of our sources and uses of cash flows (dollars in thousands) :       Nine Months Ended September 31     Nine Month Change       2021     2020     $     %   Cash, cash equivalents, restricted cash, and restricted cash equivalents, at beginning of period   $ 158,502     $ 61,010     $ 97,492       159.8                                     Cash provided by operating activities     46,871       183,900       (137,029 )     (74.5 )                                   Cash used in investing activities     (52,837 )     (15,273 )     (37,564 )     (246.0 )                                   Cash used in financing activities     (25,769 )     (33,519 )     7,750       23.1                                     Cash, cash equivalents, restricted cash, and restricted cash equivalents, at end of period   $ 126,767     $ 196,118     $ (69,351 )     (35.4 )   Operating Activities   Net cash provided by operating activities for the nine months ended September 30, 2021 was $46,871,000 as compared to $183,900,000 in the same period last year. Cash provided by operating activities consisted of net income of $123,092,000 and adjustments for non–cash items of $51,238,000. There was cash used for working capital needs in the amount of $31,297,000 for nine months ended September 30, 2021 compared to cash provided by working capital needs in the amount $106,053,000 for the same period a year ago.  The large swings in working capital between the 2021 and 2020 nine-month periods are primarily from the liquidity that we received from the CARES Act/Provider Relief Fund payments and the Medicare Accelerated Payment Program in 2020.  For the nine-month period in 2021, the government began recouping the Medicare Accelerated Payments in April 2021, as well as us receiving substantially less funding from the Provider Relief Fund in 2021.  We also received cash distributions from our unconsolidated investments of $6,314,000 during the nine months ended September 30, 2021, compared to $10,050,000 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 losses on our marketable equity securities, deferred taxes, stock compensation, and gains on the acquisitions of equity method investments.   Investing Activities   Net cash used in investing activities totaled $52,837,000 for the nine months ended September 30, 2021 compared to $15,273,000 for the nine months ended September 30, 2020. Cash used for property and equipment additions was $25,774,000 and $17,717,000 for the nine months ended September 30, 2021 and 2020, respectively. The acquisition of Caris resulted in cash used of $28,713,000 for the nine months ended September 30, 2021. The Company collected notes receivable of $8,620,000 and $1,572,000 for the nine months ended September 30, 2021 and 2020, respectively. Purchases of marketable securities, net of proceeds from sales, resulted in cash used of $6,620,000 for the nine months ended September 30, 2021 compared to proceeds from sales of marketable securities, net of purchases, resulting in positive cash flow of $8,250,000 for the nine months ended September 30, 2020.   39 Table of Contents   Financing Activities     Net cash used in financing activities totaled $25,769,000 for the nine months ended September 30, 2021 compared to net cash used in financing activities of $33,519,000 for the nine months ended September 30, 2020. We made principal payments under our finance lease obligations in the amount of $3,292,000 and $3,101,000 for the nine months ended September 30, 2021 and 2020, respectively. Cash used for dividend payments to common stockholders totaled $24,010,000 in the current year period compared to $23,935,000 for the same period a year ago.   Short – term liquidity   We expect to meet our short-term liquidity requirements primarily from our cash flows from operating activities. In addition to cash flows from operations, our current cash on hand of $112,462,000 and our marketable equity and debt securities of $142,483,000 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 $112,462,000 and our marketable equity and debt securities of $142,483,000. We also have substantial value in our unencumbered real estate assets which could potentially be used as collateral in future borrowing opportunities. At September 30, 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. Our future performance will be affected by business, economic, financial and other factors, including potential changes in state and federal government payment rates for healthcare, customer demand, success of our marketing efforts, pressures from competitors, and the state of the economy, including the state of financial and credit markets, as well as many unforeseen factors.     Commitment and Contingencies   Governmental Regulations   Laws and regulations governing the Medicare, Medicaid and other federal healthcare programs are complex and subject to interpretation. Management believes that it is following all applicable laws and regulations in all material respects. However, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusions from the Medicare, Medicaid, and other federal healthcare programs. There have been several enacted and proposed federal and state relief measures as a result of COVID-19 which should provide support to us during this pandemic; however, the full benefit of any such programs would not be realized until these payments are fully implemented, government agencies issue applicable regulations, or guidance and such relief is provided.   Qui Tam Litigation   United States of America, ex rel. Jennifer Cook and Sally Gaither v. Integrated Behavioral Health, Inc., NHC HealthCare/Moulton, LLC, et al. , Case No. 2:20-CV-00877-AMM (N.D. Ala.)   This is a qui tam case originally filed under seal on June 22, 2020. The United States declined intervention on March 1, 2021. Thereafter, the Plaintiff filed an amended Complaint and then a second amended complaint (the "Complaint") against Dr. Sanja Malhotra, Integrated Behavioral Health, Inc. and other entities Dr. Malhotra is alleged to own or in which he has a financial interest.  The Complaint also named multiple skilled nursing facilities as Defendants, including NHC Healthcare/Moulton, LLC, an affiliate of National HealthCare Corporation. The gravamen of the Complaint against the facilities is that Dr. Malhotra had nurse practitioners providing free services in the facilities in exchange for referrals to entities he owned or in which he had a financial interest in violation of the False Claims Act and Anti-Kickback Statute. NHC Healthcare/Moulton, LLC denies the allegations and is vigorously defending the claim.