What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-05 compared with 2021-11-04 · 96 added, 250 removed, 209 unchanged (62% of the section changed)

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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;

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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 or manage, through certain affiliates, 75 skilled nursing facilities with a total of 9,456 licensed beds, 24 assisted living facilities, five independent living facilities, one behavioral health hospital, 35 homecare agencies, and 29 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.

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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.

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 in 2021.  

Despite the COVID-19 cases significantly declining during 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. 

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 2022. 

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

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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 is administered through grants and other mechanisms to skilled nursing providers, home health providers, hospitals, and other Medicare and Medicaid enrolled providers to cover 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 Company recorded $10,620,000 and $22,749,000 of government stimulus income from the Provider Relief Funds for the three months ended March 31, 2022 and 2021, 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.

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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.

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

As of March 31, 2022, $5,003,000 of the accelerated payments remain and is reflected within contract liabilities in the interim condensed 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.

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 September 30, 2021, we deferred $21,153,000 of the Company’s share of the social security taxes. 

At March 31, 2022, we have deferred $10,545,000 of the Company’s share of the social security taxes included in the current liabilities section of the consolidated balance sheet. 

Summary of Goals and Areas of Focus

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

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. 

The overall census in owned and leased skilled nursing facilities for the three months ending March 31, 2022 was 82.7% compared to 76.8% 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.

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

The tables below summarize NHC's overall performance in these Five-Star ratings versus the skilled nursing industry as of September 30, 2021:

The tables below summarize NHC's overall performance in these Five-Star ratings versus the skilled nursing industry as of March 31, 2022:

Industry Ratings

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Placed in Service

Skilled Nursing

Knoxville, TN

February 2020

Assisted Living

September 2020

Skilled Nursing

Kingsport, TN

December 2020

Behavioral Health Hospital

Under Construction

Behavioral Health Hospital

Knoxville, TN

Under Construction

Behavioral Health Hospital

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.

compensation reserves totaled $101,413,000 at March 31, 2022 and are a primary area of management focus.

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

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Skilled Nursing Facilities

On 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. 

The fiscal year 2022 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 is offset by a 0.7% productivity adjustment and a 0.8% market-basket forecast error adjustment since the difference between the projected and actual market basket for FY2020 exceeded its threshold.

In April 2022, CMS released its proposed rule outlining fiscal year 2023 Medicare payment rates and policy changes for skilled nursing facilities, which will begin on October 1, 2022.

The fiscal year 2023 proposed rule equates to a net decrease of 0.7%, or approximately $320 million, in Medicare Part A payments to SNFs in fiscal year 2023 compared to 2022 levels. 

The proposed rule includes a 2.8% market basket rate increase, a 1.5% increase for forecast error adjustment, and a 0.4% decrease for multifactor productivity adjustment for a net update of 3.9%.

But, CMS also proposes to offset the 3.9% increase with a downward adjustment to payment rates by 4.6%, or $1.7 billion, to achieve budget neutrality from the aggregate fiscal year 2020 Medicare payments under the new Patient Driven Payment Model.

For the first three months of 2022, our average Medicare per diem rate for skilled nursing facilities increased 1.2% as compared to the same period in 2021. 

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.

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.

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.

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 have recorded $5,538,000 and $3,955,000 in net patient revenues for these supplemental Medicaid payments for the three months ended March 31, 2022 and 2021, respectively.

For the first three months of 2022, our average Medicaid per diem increased 4.8% compared to the same period in 2021.

We face challenges with respect to states’

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CMS projects payments to home health agencies in fiscal year 2022 will increase in aggregate by 3.2%, or $570 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.

The increase reflects the effects of the home health payment update percentage of 2.6%, an estimated 0.7% increase that reflects the effects of the updated fixed-dollar loss ratio, and an estimated 0.1% decrease in payments due to the changes in the rural add-on percentages for 2022.

Medicare –

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CMS issued a rate increase of 2.0%, or $480 million, effective October 1, 2021.

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.

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

Three Months Ended September 30, 2021

Net patient revenues

Other revenues

Government stimulus income

Net operating revenues and grant income

Costs and expenses:

Salaries, wages, and benefits

Other operating

Depreciation and amortization

Total costs and expenses

Income (loss) from operations

Non-operating income

Unrealized losses on marketable equity securities

Income (loss) before income taxes

Three Months Ended September 30, 2020

Revenues and grant income:

Three Months Ended March 31, 2022

Net patient revenues

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Non-operating income

Unrealized losses on marketable equity securities

Unrealized gains on marketable equity securities

Income before income taxes

Nine Months Ended September 30, 2021

Revenues and grant income:

Three Months Ended March 31, 2021

Net patient revenues

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Non-operating income

Gain on acquisition of equity method investment

Unrealized losses on marketable equity securities

Unrealized gains on marketable equity securities

Income before income taxes

Nine Months Ended September 30, 2020

Revenues and grant income:

Net patient revenues

Other revenues

Government stimulus income

Net operating revenues and grant income

Costs and expenses:

Salaries, wages, and benefits

Other operating

Depreciation and amortization

Total costs and expenses

Income (loss) from operations

Non-operating income

Gain on acquisition of equity method investment

Unrealized losses on marketable equity securities

Income (loss) before income taxes

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

Nine Months Ended

Net operating revenues and grant income

Costs and expenses:

Salaries, wages, and benefits

Other operating

Facility rent

Depreciation and amortization

Total costs and expenses

Income from operations

Non–operating income

Gains on acquisitions of equity method investments

Unrealized losses on marketable equity securities

Income/(loss) before income taxes

Income tax (provision)/benefit

Net income/(loss)

Net loss attributable to noncontrolling interest

Net income/(loss) attributable to stockholders of NHC

Non-GAAP Financial Presentation

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

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

The operating results for the newly constructed healthcare facilities not at full capacity for the 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.

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, and share-based compensation expense is helpful in allowing investors to assess the Company’s operations more accurately.

The operating results for the newly constructed healthcare facilities not at full capacity for the three months ended March 31, 2022 include facilities that began operations from 2020 to 2022, which is two behavioral health hospitals that will be licensed and operating during the second quarter of 2022.

For the three months ended March 31, 2021, included are facilities that began operations from 2019 to 2021, which is one memory care facility.

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

Three Months Ended

Nine Months Ended

Net income/(loss) attributable to National Healthcare Corporation

Net income attributable to National Healthcare Corporation

Non-GAAP adjustments:

Unrealized losses on marketable equity securities

Gains on acquisitions of equity method investments

Unrealized gains on marketable equity securities

Operating results for newly opened facilities not at full capacity

Share-based compensation expense

Benefit of income taxes on non-GAAP adjustments

Provision of income taxes on non-GAAP adjustments

Non-GAAP Net income

GAAP diluted earnings/(loss) per share

GAAP diluted earnings per share

Non-GAAP adjustments:

Unrealized losses on marketable equity securities

Gains on acquisitions of equity method investments

Unrealized gains on marketable equity securities

Operating results for newly opened facilities not at full capacity

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Non-GAAP diluted earnings per share

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%.

Results of Operations

Percentage of Net Operating Revenues and Grant Income

Three Months Ended

Net operating revenues and grant income

Costs and expenses:

Salaries, wages, and benefits

Other operating

Facility rent

Depreciation and amortization

Total costs and expenses

Income from operations

Non–operating income

Unrealized gains on marketable equity securities

Income before income taxes

Income tax provision

Net income attributable to noncontrolling interest

Net income attributable to stockholders of NHC

Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021

Results for the quarter ended March 31, 2022 compared to the first quarter of 2021 include an 11.2% increase in net operating revenues and grant income and a 6.6% decrease in income from operations. For the quarter ended March 31, 2022, GAAP net income attributable to NHC was $15,318,000 compared to net income of $21,267,000 for the same period in 2021.

Excluding the unrealized gains in our marketable equity securities portfolio and other non-GAAP adjustments, adjusted net income for the quarter ended March 31, 2022 was $14,081,000 compared to $16,592,000 for the same period in 2021. 

The decrease in adjusted net income for the first quarter of 2022 compared to the first quarter of 2021 was primarily due to less government stimulus income recorded during the current quarter, as well as higher inflationary pressures on labor costs.  

Net operating revenues and grant income

Net patient revenues increased $39,482,000, or 18.2%, compared to the same period last year.

The total census at owned and leased skilled nursing facilities for the quarter averaged 82.7%, compared to an average of 76.8% 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 2.9% 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.

Our Medicare per diem rates increased 1.2% and managed care per diem rates increased 6.9% compared to the same quarter a year ago.

Medicaid and private pay per diem rates increased 4.8% and 9.2%, 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.

For the three months ended March 31, 2022 and 2021, respectively, $5,538,000 and $3,955,000 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 $17,785,000 for the three months ended March 31, 2022 compared to the first quarter of 2021.

Other revenues increased $657,000, or 5.8%, compared to the same quarter last year, as further detailed in Note 5 to our interim condensed consolidated financial statements.

During the three months ended September 30, 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.  

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.  

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. 

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.

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.

During the three months ended March 31, 2022 and 2021, respectively, we recorded $10,620,000 and $22,749,000 in government stimulus income related to funds received from the CARES Act Provider Relief Fund.

See Note 3 - Coronavirus Pandemic for additional information.  

Total costs and expenses

Total costs and expenses for the 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).

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".   

Total costs and expenses for the three months ended March 31, 2022 compared to the same period of 2021 increased $29,015,000, or 12.3% to $264,766,000 from $235,751,000.

Salaries, wages, and benefits increased $21,535,000, or 14.4%, to $170,694,000 from $149,159,000.

Salaries, wages, and benefits as a percentage of net operating revenues and grant income was 61.2% compared to 59.4% for the three months ended March 31, 2022 and 2021, respectively.

Our Caris acquisition increased salaries, wages, and benefits $10,224,000 in the first quarter of 2022 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 regard 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. 

Our agency nurse staffing expense increased $12,435,000 for the first quarter of 2022 compared to the same quarter a year ago.

Other operating expenses increased $7,961,000, or 12.0%, to $74,085,000 for the 2022 period compared to $66,124,000 for the 2021 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.  

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.

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.

Other operating expenses as a percentage of net operating revenues and grant income was 26.6% and 26.3% for the three months ended March 31, 2022 and 2021, respectively.

Our Caris acquisition increased other operating expenses $5,104,000 in the first quarter of 2022 compared to the same quarter a year ago.

We continue to face inflationary pressures in certain categories within other operating expenses as well, such as food/dietary supplies and drugs/pharmaceutical supplies.  

Non–operating income decreased by $3,061,000 compared to the same period last year, as further detailed in Note 6 to our interim condensed consolidated financial statements.

The income tax provision for the three months ended March 31, 2022 is $5,193,000 (an effective income tax rate of 25.3%).

Excluding certain items, we expect our corporate (federal and state) income tax rate for 2022 to be approximately 26.0%. 

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

Nine Months Ended

Nine Month Change

Three Months Ended

Three Month Change

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

Cash provided by operating activities

Cash (used in)/provided by operating activities

Cash used in investing activities

2 unchanged sentences

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.

Net cash used in operating activities for the three months ended March 31, 2022 was $27,457,000 as compared to cash provided by operating activities of $12,589,000 in the same period last year.

Cash used in operating activities consisted of net income of $15,349,000 and adjustments for non–cash items of $9,444,000.

There was cash used for working capital needs in the amount of $52,250,000 for the three months ended March 31, 2022 compared to $16,899,000 for the same period a year ago. 

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.

Net cash used in investing activities totaled $5,920,000 for the three months ended March 31, 2022, compared to $5,852,000 for the three months ended March 31, 2021.

Cash used for property and equipment additions was $8,962,000 and $4,327,000 for the three months ended March 31, 2022, and 2021, respectively.

The two behavioral health hospitals that are opening during the second quarter of 2022 were $4,430,000 of the property additions for the first quarter of 2022. Proceeds from the sale of marketable securities, net of purchases, resulted in cash provided by investing activity of $2,818,000 for the three months ended March 31, 2022. 

For the three months ended March 31, 2021, proceeds from the sale of marketable securities, net of purchases, resulting in cash used in investing activities of $1,780,000.

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.

Net cash used in financing activities totaled $10,450,000 for the three months ended March 31, 2022 compared to $9,148,000 for the three months ended March 31, 2021.

We made principal payments under our finance lease obligations in the amount of $1,147,000 and $1,081,000 for the three months ended March 31, 2022 and 2021, respectively.

Cash used for dividend payments to common stockholders totaled $8,493,000 in the current year period compared to $7,988,000 for the same period a year ago.

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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.

At March 31, 2022, we do not have any long-term debt.

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

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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.

2:20-CV-00877-AMM (N.D.

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. 

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis