What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-18 compared with 2021-02-19 · 155 added, 160 removed, 291 unchanged (52% of the section changed)

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National HealthCare Corporation, which we also refer to as NHC or the Company, is a leading provider of post–acute care and senior health care services.

At December 31, 2020, we operate or manage 75 skilled nursing facilities with 9,463 1icensed beds, 24 assisted living facilities, five independent living facilities, one behavioral health hospital, and 35 homecare programs located in 10 states.

At December 31, 2021, we operate or manage 75 skilled nursing facilities with 9,473 1icensed beds, 24 assisted living facilities, five independent living facilities, one behavioral health hospital, 34 homecare agencies, and 28 hospice agencies located in 10 states.

These operations are provided by separately funded and maintained subsidiaries.

We have a non–controlling ownership interest in a hospice care business that services NHC owned health care centers and others.

In addition, we provide management services, accounting and financial services, and insurance services to third party operators of healthcare properties.

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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.”) being impacted.

The rapid spread has resulted in authorities around the U.S.

implementing various measures to contain the virus, such as quarantines, shelter-in-place orders and business shutdowns.

The pandemic and these containment measures have had, and are expected to continue to have, an adverse impact on the Company's results of operations.

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, third, and fourth quarters of 2020 have been significantly impacted by COVID-19 with census in our skilled nursing facilities dropping to 83.6% for the year, while we also incurred significantly increased operating expenses.

Since the first week of March, our census has declined due to the lack of new admissions from our acute care providers and referral partners.

Our operating expenses have also increased with incentive compensation being paid to our frontline partners, as well as increased costs of personal protective equipment (“PPE”), sanitizers and cleaning supplies, and the COVID-19 testing of our patients and partners.

Besides the incentive compensation being paid to our tireless partners on the frontlines, we continue to take every possible action to support our partners with free meals on their shifts, a one-month health insurance premium holiday in April 2020, as well as extended paid sick leave days.

Despite COVID-19 disrupting operations, our capital and financial resources, including our overall liquidity, remain strong.

Our liquidity and low debt levels provide us with significant flexibility to maintain the strength of our balance sheet in periods of uncertainty or stress.

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

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

We have received and may continue to receive payments and advances from the various federal and state initiatives. These legislative initiatives have been beneficial to partially mitigate the impact of the COVID-19 pandemic on our results of operations and financial position to date. 

The federal and state governments may consider additional stimulus and relief efforts, but we are unable to predict whether any of the additional stimulus measures will be enacted or their impact.   

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 and fourth quarters of 2021, the trajectory of our census was slowed due to the spike in the Delta and Omicron variants during the second half of 2021.

The pandemic continues to have a material impact on the Company's loss of revenues, operating expenses, and the labor and workforce environment.

 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

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

The new laws impact healthcare providers in a variety of ways, but the largest legislation from a monetary relief perspective is the CARES Act. 

The CARES Act provided $2.2 trillion of economy-wide financial stimulus in the form of financial aid to individuals, businesses, nonprofits, states and municipalities.

The CARES Act originally appropriated $100 billion to establish the Public Health and Social Services Emergency Fund , which is referred to as the Provider Relief Fund.

The 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. 

On April 24, 2020, another $75 billion was added to the Provider Relief Fund by the Paycheck Protection Program and Health Care Enactment Act, bringing the total amount appropriated in the fund to $175 billion. 

During the second, third, and fourth quarters of 2020, we received disbursements from the Provider Relief Fund which totaled $63,573,000.

These funds come with terms and condition certifications in which all providers are required to submit documents to ensure the funds will be used for healthcare-related expenses or lost revenue attributable to COVID-19.

Of the $63,573,000 of funds received, the Company recorded $47,505,000 of government stimulus income for the year ended December 31, 2020. 

As of December 31, 2020, amounts not recognized as income are $16,068,000 and are reflected in the current liability section of our consolidated balance sheet (provider relief funds).

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 $63,360,000 and $47,505,000 of government stimulus income from the Provider Relief Funds for the years ended December 31, 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.

As of December 31, 2021 and 2020, amounts not recognized as income are $9,443,000 and $16,068,000, respectively, and are reflected in the current liability section of our consolidated balance sheet (provider relief funds).

We anticipate incurring additional COVID-19 related expenses or lost revenues in the future;

therefore, at this time, we believe we will fully utilize the remaining $16,068,000 of provider relief funds before the reporting requirement deadline that is required by the U.S.

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

therefore, at this time, we believe we will fully utilize the remaining $9,443,000 of provider relief funds before the reporting requirement deadline that is required by the U.S.

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

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

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

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

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

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

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

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

As of December 31, 2020, the accelerated payments are reflected within contract liabilities in the consolidated balance sheets as the related performance obligations have not been completed.

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

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

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

As of December 31, 2021, $15,022,000 of the accelerated payments remain and is reflected within contract liabilities in the consolidated balance sheet.

The CARES Act and subsequent related legislation temporarily suspended Medicare sequestration beginning May 1, 2020 through March 31, 2022.

The Medicare sequestration policy reduces fee-for-service Medicare payments by 2 percent.

The CARES Act extends the sequestration policy through 2030 in exchange for this temporary suspension.

Our net patient revenues increased by approximately $2,900,000 in 2020 (2nd, 3rd, and 4th quarter impact) due to sequestration being temporarily suspended for the eight-month period. 

On December 27, 2020, the Consolidated Appropriations Act of 2021 further suspended the 2.0% payment adjustment through March 31, 2021.  

The CARES Act also temporarily permitted employers to defer the deposit and payment of the employer’s portion of the social security taxes (6.2% of employee wages) that otherwise would be due between March 27, 2020 and December 31, 2020.

Beginning April 1, 2022, the sequestration reductions will then be 1% from April 1, 2022 through June 30, 2022. 

The full 2% reduction is scheduled to go back into effect July 1, 2022.  The CARES Act extends the sequestration policy through 2030 in exchange for this temporary suspension, which the sequestration reduction for 2030 has been increased up to 3%. 

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 have been due between March 27, 2020 and December 31, 2020.

The provision requires that the deferred taxes be paid over a two-year period with half the amount required to be paid by December 31, 2021, and the other half by December 31, 2022.

At December 31, 2021, we have deferred $10,545,000 of the Company’s share of the social security taxes. 

At December 31, 2020, half of the payroll tax deferral is included in accrued payroll in the current liabilities section of the consolidated balance sheet and the other half of the payroll tax deferral is included in other noncurrent liabilities within our consolidated balance sheet. 

We have also received from many of the states in which we operate a supplemental Medicaid payment to help mitigate the incremental costs resulting from the COVID-19 public health emergency.

For the year ended December 31, 2020, we have recorded $26,179,000 in net patient revenues in our consolidated statements of operations for these supplemental Medicaid payments.

For the years ended December 31, 2021 and 2020, we have recorded $20,482,000 and $26,179,000, respectively, in net patient revenues in our consolidated statements of operations for these supplemental Medicaid payments.

Executive Summary

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The overall census in owned and leased skilled nursing facilities for 2021 was 80.6% compared to 83.6% in 2020 and 90.3% in 2019.

Our census was strong for most of the first quarter of 2020, but during the second half of March, our census began to decline due to COVID-19 and the lack of new admissions from our acute care providers and referral partners.

With the average length of stay decreasing for a skilled nursing patient, as well as the increased availability of assisted living facilities and home and community-based services, the challenge of maintaining desirable patient census levels has been amplified.

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Quality of Patient Care

Centers for Medicare and Medicaid Services (“CMS”) introduced the Five-Star Quality Rating System to help consumers, their families and caregivers compare skilled nursing facilities more easily.

CMS introduced the Five-Star Quality Rating System to help consumers, their families and caregivers compare skilled nursing facilities more easily.

The Five-Star Quality Rating System gives each skilled nursing operation a rating of between one and five stars in various categories (five stars being the best).

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Average rating for all skilled nursing facilities, end of period

Development and Growth 

We are undertaking to expand our post–acute and senior health care operations while protecting our existing operations and markets.

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Skilled Nursing

Springfield, MO

Behavioral Health Hospital

Osage Beach, MO

Skilled Nursing

Knoxville, TN

February, 2020

February 2020

Assisted Living

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Under Construction

Behavioral Health Hospital

Behavior Health Hospital

Knoxville, TN

Under Construction

For the two behavioral health hospitals under construction, the two facilities are expected to begin operations late in the first quarter of 2022 or the beginning of the second quarter of 2022.

Accrued Risk Reserves

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The Company has two reportable operating segments:

(1) inpatient services, which includes the operation of skilled nursing facilities, assisted and independent living facilities, and one behavioral health hospital, and (2) homecare services.

(1) inpatient services, which includes the operation of skilled nursing facilities, assisted and independent living facilities, and one 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.

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Depreciation and amortization

Impairment of assets

Total costs and expenses

1 unchanged sentence

Non-operating income

Gain on acquisition of equity method investment

Unrealized losses on marketable equity securities

Income (loss) before income taxes

Income before income taxes

Year Ended December 31, 2020

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Other revenues

Net operating revenues

Government stimulus income

Net operating revenues and grant income

Costs and Expenses:

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Non-operating income

Unrealized gains on marketable equity securities

Income before income taxes

Gain on acquisition of equity method investment

Unrealized losses on marketable equity securities

Income (loss) before income taxes

Year Ended December 31, 2019

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Non-operating income

Unrealized gains on marketable securities

Gain on acquisition of equity method investment

Unrealized gains on marketable equity securities

Income before income taxes

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.

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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 should exclude the following items: the unrealized gains or losses on our marketable equity securities, operating results for the newly constructed healthcare facilities not at full capacity, any gains on the acquisition of equity method investments, gains on the sale of healthcare facilities, stock-based compensation expense, legal costs and charges related to the settlement of a Qui Tam investigation within our Caris hospice partnership, and the tax adjustments with the passage of the 2017 U.S.

Tax Cuts and Jobs Act.

The operating results for the newly constructed healthcare facilities not at full capacity include the following:

for the year ended December 31, 2020, included are facilities that began operations from 2018 to 2020, which is one memory care facility.

For the year ended December 31, 2019, included are facilities that began operations from 2017 to 2019 (one skilled nursing facility, two assisted living facilities, and one memory care facility).

For the year ended December 31, 2018, included are facilities that began operations from 2016 to 2018 (two skilled nursing facilities and three assisted living facilities).

Specifically, the Company believes the presentation of non-GAAP financial information should exclude the following items: the unrealized gains or losses on our marketable equity securities, operating results for the newly constructed healthcare facilities not at full capacity, any gains on the acquisition of equity method investments, gains on the sale of healthcare facilities, stock-based compensation expense, and impairments of long-lived assets and notes receivable.

The operating results for the newly constructed healthcare facilities not at full capacity for the year ended December 31, 2021 include facilities that began operations from 2019 to 2021 (one memory care facility and two behavioral health hospitals that have incurred expenses and expected to open during 2022).

The operating results for the newly constructed healthcare facilities not at full capacity for the year ended December 31, 2020 include facilities that began operations from 2018 to 2020 (one memory care facility).

The operating results for the newly constructed healthcare facilities not at full capacity for the year ended December 31, 2019 include facilities that began operations from 2017 to 2019 (one skilled nursing facility, two assisted living facilities, and one memory care facility).

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

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Non-GAAP adjustments:

Unrealized (gains) losses on marketable equity securities

Unrealized losses (gains) on marketable equity securities

Gain on sale of real estate/healthcare facilities

Gain on acquisition of equity method investment

Gain on acquisitions of equity method investments

Stock-based compensation expense

Operating results for newly opened facilities not at full capacity

Legal costs and charges related to Caris’

legal investigation

Tax Cuts and Jobs Act of 2017 adjustment

Impairment of assets

Income tax (benefit) provision on non-GAAP adjustments

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Non-GAAP adjustments:

Unrealized (gains) losses on marketable equity securities

Unrealized losses (gains) on marketable equity securities

Gain on sale of real estate/healthcare facilities

Gain on acquisition of equity method investment

Gain on acquisitions of equity method investments

Stock-based compensation expense

Operating results for newly opened facilities not at full capacity

Legal costs and charges related to Caris’

legal investigation

Tax Cuts and Jobs Act of 2017 adjustment

Impairment of assets

Non-GAAP diluted earnings per share

Results of Operations

The following table and discussion set forth items from the consolidated statements of operations as a percentage of net operating revenues and grant income for the years ended December 31, 2020, 2019 and 2018.

Percentage of Net Operating Revenues

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Depreciation and amortization

Impairment of assets

Total costs and expenses

1 unchanged sentence

Non–operating income

Gain on acquisitions of equity method investments

Unrealized gains (losses) on marketable equity securities

1 unchanged sentence

Income tax provision

Net loss attributable to noncontrolling interest

Net (income) loss attributable to noncontrolling interest

Net income attributable to common stockholders of NHC

The following table sets forth the increase or (decrease) in certain items from the consolidated statements of operations as compared to the prior period.

The following table sets forth the increase or (decrease) in certain items from the consolidated statements of operations as compared to the prior period (dollars in thousands) .

Period to Period Increase (Decrease)

(dollars in thousands)

Net patient revenues

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Depreciation and amortization

Impairment of assets

Total costs and expenses

1 unchanged sentence

Non–operating income

Gain on acquisitions of equity method investments

Unrealized gains/losses on marketable equity securities

4 unchanged sentences

2021 Compared to 2020

Results for the year ended December 31, 2021 compared to 2020 include a 4.5% increase in net operating revenues and grant income, a 0.1% increase in income from operations, and a 231.0% increase in net income attributable to NHC.

In 2021, if you exclude the $8,225,000 impairment of assets, income from operations would have increased 22.8% compared to 2020. 

The large increase in our reported GAAP net income attributable to NHC compared to 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 year ended December 31, 2021 was $62,645,000 compared to $58,543,000 for the year ended December 31, 2020, which is an increase of 7.0%.

Net operating revenues and grant income

Net patient revenues totaled $965,542,000, an increase of $33,747,000, or 3.6%, compared to the prior year.

Included in net patient revenues for the year end December 31, 2021 and 2020, respectively, is $20,482,000 and $26,179,000 of COVID-19 supplemental Medicaid payments that were received to help mitigate the incremental costs in fighting the public health emergency.

The overall average census in owned and leased skilled nursing facilities for 2021 was 80.6% compared to 83.6% in 2020.

The decline in census is due to COVID-19 and the lack of new admissions from our acute care providers and referral partners, and the difficult workforce and labor environment that has limited our admissions during phases of 2021.

The composite skilled nursing facility per diem increased 2.4% in 2021 compared to 2020.

Medicare and managed care per diem rates increased 2.0% and 1.3%, respectively, in 2021 compared to 2020.

Medicaid and private pay per diem rates increased 2.2% and 2.4%, respectively, in 2021 compared to 2020.

In June 2021, the Company acquired the remaining ownership interest in Caris, which resulted in net patient revenues increasing $39,746,000 for the year ended December 31, 2021 compared to 2020.

Our homecare operations had an increase in net patient revenues of approximately $5,007,000 for the year ended December 31, 2021 compared to 2020.

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

For the year ended December 31, 2021, the sale of this facility decreased net patient revenue by $7,323,000 compared to 2020.

Other revenues in 2021 were $45,400,000, a decrease of $3,517,000, or 7.2%, as further detailed in Note 5 of the consolidated financial statements.

Other revenues in 2021 include rental revenues of $22,717,000 ($22,768,000 in 2020), management and accounting service fees of $17,139,000 ($17,147,000 in 2020), and insurance services revenue of $5,019,000 ($5,447,000 in 2020).

In November 2020, we sold a skilled nursing facility in Town & Country, Missouri, and recorded a gain on the sale of the transaction of $2,748,000.

For the years ended December 31, 2021 and 2020, respectively, we recorded $63,360,000 and $47,505,000 in government stimulus income related to funds received from the Provider Relief Fund.

At December 31, 2021, we have not recognized as income $9,443,000 of Provider Relief Funds that are reflected in the current liability section of our consolidated balance sheet (provider relief funds) and anticipate using these funds in 2022. See Note 2 for additional information.

Total costs and expenses

Total costs and expenses for 2021 increased $43,315,000, or 4.4%, to $1,023,377,000 from $980,062,000 in 2020.

In total, we incurred $21,555,000 and $47,674,000 of COVID-19 related expenses for the years ended December 31, 2021 and 2020, respectively.

The COVID-19 related expenses primarily consisted of:

(1) personal protective equipment and sanitizers/infection control supplies;

(2) incentive compensation paid to our frontline partners/employees;

and (3) COVID-19 testing of our patients and partners/employees. 

In 2021, we also incurred asset impairment expenses of $8,225,000 for the impairment and write-down of long-lived assets (leasehold improvements) and a credit impairment on a note receivable. 

Both of these impairment of assets items are due to the operating environment caused by COVID-19.    

Salaries, wages and benefits, the largest operating costs of the company, increased $20,366,000, or 3.3%, to $629,672,000 from $609,306,000.

Our salaries and wages were 58.6% and 59.3% of net operating revenues and grant income for 2021 and 2020, respectively.

Our Caris acquisition in June 2021 increased salaries, wages, and benefits $20,754,000 for the year ended December 31, 2021 compared to 2020.

We incurred COVID-related incentive pay (or combat pay) in the amount of $11,010,000 for the year ended December 31, 2021 compared to $15,224,000 for 2020.

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 $16,300,000, or 5.7%, to $303,145,000 for 2021 compared to $286,845,000 in 2020.

These costs were 28.2% and 27.9% of net operating revenues and grant income for 2021 and 2020, respectively.

For the years ended December 31, 2021 and 2020, respectively, we incurred $10,545,000 and $32,450,000 in COVID-19 related expenses in purchasing personal protective equipment, sanitizers and infection control supplies, and lab and testing supplies.

As mentioned in the previous paragraph, we continue to use additional agency nurse staffing due to the challenging workforce environment.

For the year ended December 31, 2021, our agency nurse staffing expenses were $35,533,000 compared to $11,479,000 for the 2020 year. Our Caris acquisition increased other operating expenses $8,368,000 for the year ended December 31, 2021 compared to 2020.

Facility rent expense decreased $324,000, or 0.8%, to $40,818,000.

Depreciation and amortization decreased 3.2% to $40,672,000.

Interest expense decreased $554,000 to $845,000 in 2021 from $1,399,000 in 2020.

At December 31, 2021, we have no outstanding long-term debt.

Non–operating income in 2021 decreased $8,753,000, or 33.0% to $17,744,000, as further detailed in Note 6 of the consolidated financial statements.

The decrease is due to our June 2021 acquisition of Caris.

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.

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.

Upon acquiring the remaining ownership interest in Caris, we valued the business and our previously held equity position (75.1%) based upon Caris' fair value at the acquisition date. 

In February 2020, a gain of $1,707,000 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 (25%) in the facility.

Upon acquiring the remaining ownership interest, we valued our previously held equity position based upon the facility’s fair value.

We recorded unrealized losses in the amount of $13,863,000 for the decrease in fair value of our marketable equity securities portfolio for the year ended December 31, 2021.

The marketable equity securities portfolio consists of publicly traded healthcare REIT’s, with NHI comprising approximately 67% of the market value of the portfolio at December 31, 2021.

The income tax provision for 2021 is $10,951,000 (an effective income tax rate of 7.3%).

The income tax provision and effective tax rate for 2021 were favorably impacted by the nontaxable revaluation gain related to the Caris acquisition resulting in a benefit to the provision of $19,758,000 or 12.5% of income before income taxes.

The income tax provision and effective tax rate for 2021 were also favorably impacted by the statute of limitation expirations resulting in a benefit to the provision of $1,901,000 or 1.3% of income before taxes in 2021.

The income tax provision for 2020 is $10,433,000 (an effective income tax rate of 19.9%).

The income tax provision and effective tax rate for 2020 were also favorably impacted by statute of limitation expirations resulting in a benefit to the provision of $2,366,000 or 4.5% of income before taxes in 2020.

2020 Compared to 2019

Results for the year ended December 31, 2020 compared to 2019 include a 3.2% increase in net operating revenues and grant income and a 38.6% decrease in net income attributable to NHC.

In 2020, the decrease in net income attributable to NHC is primarily driven by the unrealized losses in our marketable equity securities portfolio.

Excluding the CARES Act grant income and other COVID-19 revenues recorded for the year ended December 31, 2020, net operating revenues would have decreased 4.2% compared to 2019.

Excluding the unrealized losses in our marketable equity securities portfolio and the other non-GAAP adjustments, non-GAAP net income for the year ended December 31, 2020 was $58,543,000 compared to $59,616,000 for the 2019 year.

Net operating revenues and grant income

Net patient revenues totaled $931,795,000, a decrease of $16,077,000, or 1.7%, compared to the prior year.

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For the year ended December 31, 2020, we recorded $47,505,000 in government stimulus income related to funds received from the Provider Relief Fund.

At December 31, 2020, we have not recognized as income $16,068,000 of Provider Relief Funds that are reflected in the current liability section of our consolidated balance sheet (provider relief funds) and anticipate using these funds in 2021.

See Note 2 for additional information.

At December 31, 2020, we had not recognized as income $16,068,000 of Provider Relief Funds that are reflected in the current liability section of our consolidated balance sheet (provider relief funds).

Total costs and expenses

Total costs and expenses for 2020 increased $32,717,000, or 3.5%, to $980,062,000 from $947,345,000 in 2019.

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We previously held a noncontrolling interest (25%) 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.

Upon acquiring the remaining ownership interest, we valued our previously held equity position based upon the facility’s fair value.

We recorded unrealized losses in the amount of $23,966,000 for the decrease in fair value of our marketable equity securities portfolio for the year ended December 31, 2020.

4 unchanged sentences

The income tax provision and effective tax rate for 2019 were also favorably impacted by statute of limitation expirations resulting in a benefit to the provision of $2,064,000 or 2.3% of income before taxes in 2019.

201 9 Compared to 201 8

Results for the year ended December 31, 2019 compared to 2018 include a 1.6% increase in net operating revenues and a 15.7% increase in net income attributable to NHC.

Excluding the unrealized gains in our marketable equity securities portfolio and the other non-GAAP adjustments, non-GAAP net income for the year ended December 31, 2019 was $59,616,000 compared to $64,373,000 for the 2018 year.

The overall average census in owned and leased skilled nursing facilities for 2019 was 90.3% compared to 89.8% in 2018.

Although our census increased and remained stable throughout 2019, we had a decline in Medicare patients (offset by Managed Care and Medicaid patients), which decreased our operating margins in our skilled nursing facilities.

The composite skilled nursing facility per diem increased 0.3% in 2019 compared to 2018.

Medicare per diem rates increased 1.8% in 2019 compared to 2018 and Managed Care per diem rates decreased 0.4% in 2019 compared to 2018.

Medicaid and private pay per diem rates increased 3.0% and 1.9%, respectively, in 2019 compared to 2018.

Net patient revenues totaled $947,872,000, an increase of $15,098,000, or 1.6%, compared to the prior year.

The largest driver of the net patient revenue increase in 2019 was the Company’s Institutional Special Needs Plan “(I-SNP”).

Beginning January 1, 2019, the I-SNP began offering and providing insurance and healthcare services in the state of Tennessee.

Our I-SNP, which is called NHC Advantage, is a managed care insurance company that enrolls Medicare Advantage eligible individuals who are patients in our skilled nursing facilities.

We believe the I-SNP will benefit our patients by providing nurse practitioners and care-coordination teams that will continue to enhance the patient-centered experience and our quality of care.

We also believe our progressive improvement to patient care will continue to drive positive financial results for the Company.

For the year ended December 31, 2019, the I-SNP increased net patient revenues approximately $10,867,000 compared to 2018.

The Company opened one skilled nursing facility, two assisted living facilities, and a memory care facility from the years 2017 to 2019. 

These facilities continue to stabilize and increased net patient revenues approximately $3,891,000 compared to the same period a year ago. 

In August 2018, the Company acquired a controlling ownership interest in a 16-bed behavioral health hospital.

For the 2019 year, the hospital increased net patient revenues by approximately $3,017,000 compared to 2018.

The remaining increase in our net patient revenues is primarily due to the per diem increases in our existing skilled nursing facility and assisted living operations.

Our homecare operations had a decline in net patient revenues of approximately $5,191,000 compared to the same period a year ago.

Our homecare net patient revenue decline was primarily due to volume declines, as well as an unfavorable payor mix change with less Medicare patients and an increase of managed care patients.

In October 2018, we sold a skilled nursing facility in Madisonville, Kentucky.

The sale of this facility decreased net patient revenues $5,098,000 compared to the same period a year ago.

Other revenues in 2019 were $48,511,000, an increase of $936,000, or 2.0%, as further detailed in Note 3 of the consolidated financial statements.

Other revenues in 2019 include rental revenues of $22,641,000 ($22,262,000 in 2018), management and accounting service fees of $18,533,000 ($15,175,000 in 2018), and insurance services revenue of $6,209,000 ($7,084,000 in 2018).

In October 2018, we sold a skilled nursing facility in Madisonville, Kentucky and recorded a gain on the sale of the transaction of $1,668,000.

Total costs and expenses for 2019 increased $23,072,000, or 2.5%, to $947,345,000 from $924,273,000 in 2018.

Salaries, wages and benefits, the largest operating costs of the company, increased $10,110,000, or 1.7%, to $592,831,000 from $582,721,000.

Our salaries and wages were 59.5% and 59.4% of net operating revenues for 2019 and 2018, respectively.

The primary reason for salaries, wages and benefits increasing is due to our existing skilled nursing facilities and the continued wage pressure in most of the markets in which we operate.

The newly opened operations (one skilled nursing facility, two assisted living facilities, and one memory care facility) that opened from the years 2017 to 2019 increased salaries, wages and benefits by approximately $2,129,000 compared to a year ago.

The behavioral health hospital that we acquired in August 2018 resulted in increased salaries and wages expense of $1,695,000 in 2019 compared to the same period a year ago.

These salaries and wage increases were offset by the October 2018 disposition of the Madisonville, Kentucky skilled nursing facility.

The Madisonville, Kentucky skilled nursing facility decreased salaries, wages and benefits in the amount of $3,040,000 in 2019 compared to 2018.

Other operating expenses increased $14,404,000, or 5.7%, to $268,442,000 for 2019 compared to $254,038,000 in 2018.

These costs were 26.9% and 25.9% of net operating revenues for 2019 and 2018, respectively.

The majority of the increase in other operating expenses compared to a year ago is due to the January 1, 2019 start of our I-SNP insurance plan, NHC Advantage.

For the year ending December 31, 2019, the I-SNP increased other operating expenses approximately $11,612,000 compared to the same period a year ago.

The behavioral health hospital that we acquired in August 2018 increased other operating expenses $1,404,000 in 2019 compared to the same period a year ago.

The October 2018 disposition of the Madisonville, Kentucky skilled nursing facility decreased other operating expenses in the amount of $2,974,000 in 2019 compared to 2018.

Facility rent expense decreased $405,000, or 1.0%, to $40,518,000.

Depreciation and amortization increased 1.3% to $42,419,000.

Interest expense decreased $1,562,000 to $3,135,000 in 2019 from $4,697,000 in 2018.

The decrease in interest expense is due from our long-term debt being paid down during 2019.

Non–operating income in 2019 increased $9,077,000, or 51.4% to $26,747,000, as further detailed in Note 4 of the consolidated financial statements.

The increase in non-operating income is primarily due from our equity in earnings investment in our Caris hospice operations.

During 2018, Caris recorded a charge to earnings of $8,500,000 for the settlement of a Qui Tam investigation, of which 75.1% is included in the Company's earnings.

In total, with the $8.5 million settlement and legal expenses, Caris’

2018 earnings negatively impacted NHC’s non-operating income by $8,364,000.

There were no such charges or legal expenses in Caris for 2019.

There were also gains on acquisitions of equity method investments in both the 2019 and 2018 years.

In June 2019, a gain of $1,975,000 was recorded on the acquisition of the remaining ownership interest of a 60-bed memory care facility in St.

Peters, Missouri.

We previously held a noncontrolling interest in the facility.

Upon acquiring the remaining ownership interest, we valued the business and our previously held equity position based upon the facility’s fair value.

In July 2018, a gain of $2,050,000 was recorded on the acquisition of a controlling financial interest in a 16-bed behavioral health hospital in Osage Beach, Missouri.

We previously held a non-controlling ownership interest.

Upon acquiring the controlling ownership interest, we valued the business and our previously held equity position based upon the hospital’s fair value.

We recorded unrealized gains in the amount of $12,230,000 for the increase in fair value of our marketable equity securities portfolio for the year ended December 31, 2019.

The marketable equity securities portfolio primarily consists of publicly traded healthcare REIT’s, with NHI comprising approximately 87% of the market value of the portfolio at December 31, 2019.

The income tax provision for 2019 is $20,039,000 (an effective income tax rate of 22.8%).

The income tax provision for 2018 is $16,185,000 (an effective income tax rate of 21.6%).

The income tax provision and effective tax rate for 2018 were also favorably impacted by statute of limitation expirations resulting in a benefit to the provision of $2,222,000 or 3.0% of income before taxes in 2018.

Liquidity and Capital Resources

Liquidity, Capital Resources and Financial Condition

Sources and Uses of Funds

Our primary sources of cash include revenues from the healthcare and senior living facilities we operate, homecare services, rental income, management and accounting services and insurance services.

Our primary sources of cash include revenues from the healthcare and senior living facilities we operate, homecare and hospice services, rental income, management and accounting services and insurance services.

Our primary uses of cash include salaries, wages and benefits, operating costs of the healthcare facilities, the cost of additions and improvements to our real property, rent expenses, and dividend distributions.

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Cash provided by operating activities consisted of net income of $139,087,000 and adjustments for non–cash items of $42,269,000.

There was cash provided by working capital in the amount of $110,403,000 for the year ended December 31, 2020 compared to cash used for working capital needs of $3,952,000 in 2019.

We also received cash distributions from our unconsolidated investments of $10,050,000 for the year ended December 31, 2020 compared to $3,902,000 for 2019.

Included in cash provided by working capital is $51,253,000 from the Medicare Accelerated Payment Program, $16,068,000 provided from the Provider Relief Fund that has not been recognized as income, and $21,158,000 from the deferral of the Company’s employer social security taxes.

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

Included in the adjustments for non-cash items are depreciation expense, equity in earnings of unconsolidated investments, unrealized losses on our marketable equity securities, deferred taxes, stock compensation, gain on the sale of a skilled nursing facility, and the gain on the acquisition of a noncontrolling ownership interest.

There was cash used for working capital in the amount of $40,738,000 for the year ended December 31, 2021 compared to cash provided by working capital needs of $110,403,000 in 2020.

The large swings in working capital between 2021 and 2020 are primarily from the liquidity that we received from the CARES Act/Provider Relief Fund payments and the Medicare Accelerated Payment Program in 2020.

In April 2021, the government began recouping the Medicare Accelerated Payments and we repaid $36,231,000 during 2021.

We also received less cash funding from the Provider Relief Fund in 2021.

We received cash distributions from our unconsolidated investments of $6,314,000 for the year ended December 31, 2021 compared to $10,050,000 for 2020.

Included in the adjustments for non-cash items are depreciation expense, equity in earnings of unconsolidated investments, unrealized losses on our marketable equity securities, deferred taxes, stock compensation, gain on the sale of a skilled nursing facility, gains on the acquisition of equity method investments, and impairments of long-lived assets and notes receivable.

Investing Activities

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Cash used for property and equipment additions was $39,399,000, $21,873,000, and $26,400,000 for the years ended December 31, 2021, 2020 and 2019, respectively.

Purchases of marketable securities, net of sales, resulted in a net use of cash of $43,860,000 in 2020;

compared to net sales of marketable securities, resulted in positive cash flow of $32,029,000 in 2019.

Purchases of marketable securities, net of sales, resulted in a net use of cash of $6,267,000 and $43,860,000 in 2021 and 2020, respectively.

The acquisition of Caris resulted in cash used of $28,713,000 in 2021.

In 2020, the acquisition of the 166-bed skilled nursing facility in Knoxville, Tennessee resulted in cash used of $6,648,000 and proceeds from the sale of a skilled nursing facility resulted in cash proceeds of $6,750,000.

The company collected notes receivable of $8,840,000 and $2,483,000 for the years ended December 31, 2021 and 2020, respectively.

Financing Activities

Net cash used in financing activities totaled $35,264,000, $41,889,000, and $79,748,000 for the years ended December 31, 2021, 2020, and 2019, respectively.

Cash used for repayments on the Company’s credit facility was a net $10,000,000 for the year ended December 31, 2020.

During 2019 and 2018, $45,000,000 of cash was used for principal payments on long-term debt.

Principal payments made under finance lease obligations was $4,423,000 and $4,166,000 for the years ended December 31, 2021 and 2020, respectively.

Dividends paid to common stockholders was $32,030,000, $31,921,000, and $31,208,000 for the years ended December 31, 2021, 2020 and 2019, respectively.

Proceeds from the issuance of common stock totaled $3,440,000 in 2021 compared to $1,756,000 and $2,346,000 for 2020 and 2019, respectively.

Short–term liquidity

Cash used for repayments on the Company’s credit facility was a net $10,000,000 for the year ended December 31, 2020.

During 2019, $45,000,000 of cash was used for principal payments on long-term debt.

Contractual Obligations

The Company has certain contractual obligations, primarily operating leases, finance leases, and construction obligations.

See Note 8 - Long Term Leases for details regarding our operating and finance leases. 

See Note 12 - Property and Equipment for details regarding our construction obligations.

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 $107,607,000 and marketable securities of $148,418,000 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

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 $107,607,000, and marketable securities of $148,418,000.

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Net Patient Revenues and Accounts Receivable

Net patient revenues are derived from services rendered to patients for skilled and intermediate nursing, rehabilitation therapy, assisted living and independent living, and home health care services.

Net patient revenues are derived from services rendered to patients for skilled and intermediate nursing, rehabilitation therapy, assisted living and independent living, home health care services and hospice services.

Net patient revenue is reported at the amount that reflects the consideration to which the Company expects to be entitled in exchange for providing patient services.

31 unchanged sentences

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-K

Item 7. Management’s Discussion and Analysis