NATIONAL HEALTHCARE CORP 10-K

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   Overview   National HealthCare Corporation, which we also refer to as NHC or the Company, is a leading provider of post–acute care and senior health care services. At December 31, 2022, we operate or manage 68 skilled nursing facilities with 8,726 1icensed beds, 23 assisted living facilities with 1,181 units, five independent living facilities, three behavioral health hospitals, 35 homecare agencies, and 29 hospice agencies located in 8 states. In addition, we provide management services, accounting and financial services, and insurance services to third party operators of healthcare properties. We also own the real estate of 13 healthcare properties and lease these properties to third party operators.   Impact of COVID-19   In early March 2020, COVID-19, a disease caused by the novel strain of the coronavirus, was characterized as a pandemic by the World Health Organization. As a provider of healthcare services, we are significantly exposed to the public health and economic effects of the COVID-19 pandemic. NHC’s primary objective has remained the same throughout the COVID-19 pandemic: that is to protect the health and safety of our patients, residents, and partners (employees). We continue to follow all guidance from the Centers for Medicare and Medicaid Services (“CMS”), the Centers for Disease Control and Prevention (“CDC”), and state and local health departments to prevent the spread of the disease within our operations.   We began our first vaccination clinics in our skilled nursing facilities in 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, as well as a significant decrease in the adverse health events related to COVID. Despite the COVID-19 cases and adverse health events from COVID declining, our operating expenses have remained elevated with incentive compensation being paid to attract and retain 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. 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.    Legislation and Government Stimulus Due to COVID-19   The U.S. government enacted several laws beginning in March 2020 designed to help the nation respond to the COVID-19 pandemic. The new laws impacted healthcare providers in a variety of ways, but the largest legislation from a monetary relief perspective is the CARES Act. Through the CARES Act, as well as the PPPCHE, the federal government allocated $178 billion to the Public Health and Social Services Emergency Fund, which is referred to as the Provider Relief Fund. The Provider Relief Fund is administered through grants and other mechanisms to skilled nursing providers, home health providers, hospitals, and other Medicare and Medicaid enrolled providers to cover 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 are used for healthcare-related expenses or lost revenue attributable to COVID-19. The Company recorded $11,457,000, $63,360,000 and $47,505,000 of government stimulus income from the Provider Relief Funds for the years ended December 31, 2022, 2021 and 2020, respectively.  The grant income was determined on a systemic basis in line with the recognition of specific expenses and lost revenues for which the grants are intended to compensate. The Company’s assessment of whether the terms and conditions for amounts received have been met for income recognition and the Company’s related income calculation considered all frequently asked questions and other interpretive guidance issued to date by HHS.   29 Table of Contents   Additionally, as part of the CARES Act, the legislation included an expansion of the Medicare Accelerated and Advance Payment Program. In the second quarter of 2020, we received approximately $51,253,000 as part of this program. These funds began to be applied against claims for services provided to Medicare patients after approximately one year from the date we received the funds. The Company repaid $36,231,000 of the funds in 2021 and the remaining $15,022,000 of the funds in 2022.   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 were 1% from April 1, 2022 through June 30, 2022. The full 2% reduction went 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. The Company paid $10,613,000 during the year ended December 31, 2021 and the remaining $10,545,000 during the year ended December 31, 2022.   Executive Summary   Earnings   To monitor our earnings, we have developed budgets and management reports to monitor labor, census, and the composition of revenues. Inflationary increases in our costs may cause net earnings from patient services to decline.   Occupancy   A primary area of management focus continues to be the rates of occupancy within our skilled nursing facilities. The overall census in owned and leased skilled nursing facilities for 2022 was 83.8% compared to 80.6% in 2021 and 83.6% in 2020.   Due to the pandemic, as well as the increased strain the pandemic has caused on America's healthcare labor shortage, the challenge of maintaining desirable patient census levels has been amplified. Management has undertaken a number of steps in order to best position our current and future operations. This includes working internally to examine and improve systems to be most responsive to referral sources and payors, as well as find creative initiatives to retain and attract qualified healthcare professionals. Additionally, NHC is in various stages of partnerships with hospital systems, payors, and other post–acute alliances to better position ourselves so we are an active participant in the delivery of post-acute healthcare services.   Quality of Patient Care   CMS introduced the Five-Star Quality Rating System to help consumers, their families and caregivers compare skilled nursing facilities more easily. The Five-Star Quality Rating System gives each skilled nursing operation a rating ranging between one and five stars in various categories (five stars being the best). The Company has always strived for patient-centered care and quality outcomes as precursors to outstanding financial performance.   In July 2022, CMS launched its enhanced Five-Star Quality Rating System which integrated weekend staffing rates for nurses and information on annual turnover among nurses and administrators. The tables below summarize NHC's overall performance in these Five-Star ratings versus the skilled nursing industry as of December 31, 2022:       NHC Ratings     Industry Ratings   Total number of skilled nursing facilities, end of period     68           Number of 4 and 5-star rated skilled nursing facilities     42           Percentage of 4 and 5-star rated skilled nursing facilities     62%       37%   Average rating for all skilled nursing facilities, end of period     3.8       2.9     30 Table of Contents   Development and Growth   We are undertaking to expand our post–acute and senior health care operations while protecting our existing operations and markets. The following table lists our recent construction and purchase activities.   Type of Operation   Description   Size   Location   Placed in Service Skilled Nursing   Acquisition   166 beds   Knoxville, TN   February 2020 Assisted Living   Bed Addition   20 beds   Gallatin, TN   September 2020 Skilled Nursing   Bed Addition   30 beds   Kingsport, TN   December 2020 Hospice   Acquisition   28 agencies   Various   June 2021 Homecare   New Agency   1 agency   Anderson, SC   January 2022 Hospice   New Agency   1 agency   Tullahoma, TN   March 2022 Behavioral Health Hospital   New Facility   64 beds   Knoxville, TN   April 2022 Behavioral Health Hospital   New Facility   16 beds   St. Louis, MO   June 2022   Accrued Risk Reserves   Our accrued professional liability and workers’ compensation reserves totaled $102,469,000 and $98,048,000 at December 31, 2022 and 2021, respectively, and are a primary area of management focus. We have set aside restricted cash and restricted marketable securities to fund our professional liability and workers’ compensation reserves.   As to exposure for professional liability claims, we have developed performance measures to bring focus to the patient care issues most likely to produce professional liability exposure, including in–house acquired pressure ulcers, significant weight loss and numbers of falls. These programs for certification, which we regularly modify and improve, have produced measurable improvements in reducing these incidents. Our experience is that achieving goals in these patient care areas improves both patient and employee satisfaction.   Segment Reporting   The Company has two reportable operating segments: (1) inpatient services, which includes the operation of skilled nursing facilities, assisted and independent living facilities, and behavioral health hospitals; and (2) homecare and hospice services. These reportable operating segments are consistent with information used by the Company’s Chief Executive Officer, as chief operating decision maker (“CODM”), to assess performance and allocate resources. The Company also reports an “all other” category that includes revenues from rental income, management and accounting services fees, insurance services, and costs of the corporate office.   The Company’s CODM evaluates performance and allocates capital resources to each segment based on an operating model that is designed to improve the quality of patient care and profitability of the Company while enhancing long-term shareholder value. The CODM does not review assets by segment in his resource allocation and therefore, assets by segment are not disclosed below.    31 Table of Contents   The following tables set forth the Company’s consolidated statements of operations by business segment (in thousands ):       Year Ended December 31, 2022       Inpatient Services     Homecare and Hospice     All Other     Total   Revenues:                                 Net patient revenues   $ 900,231     $ 128,854     $ –     $ 1,029,085   Other revenues     136       –       45,060       45,196   Government stimulus income     11,457       –       –       11,457   Net operating revenues and grant income     911,824       128,854       45,060       1,085,738                                     Costs and Expenses:                                 Salaries, wages and benefits     580,707       77,688       27,774       686,169   Other operating     251,355       26,319       11,698       289,372   Facility rent     32,956       2,327       5,694       40,977   Depreciation and amortization     36,522       691       3,276       40,489   Interest     563       –       –       563   Recovery of assets     –       –       (3,728 )     (3,728 ) Total costs and expenses     902,103       107,025       44,714       1,053,842                                     Income before non-operating income     9,721       21,829       346       31,896   Non-operating income     –       –       11,141       11,141   Unrealized losses on marketable equity securities     –       –       (15,806 )     (15,806 )                                   Income (loss) before income taxes   $ 9,721     $ 21,829     $ (4,319 )   $ 27,231           Year Ended December 31, 2021       Inpatient Services     Homecare and Hospice     All Other     Total   Revenues:                                 Net patient revenues   $ 868,687     $ 96,855     $ –     $ 965,542   Other revenues     386       –       45,014       45,400   Government stimulus income     63,360       –       –       63,360   Net operating revenues and grant income     932,433       96,855       45,014       1,074,302                                     Costs and Expenses:                                 Salaries, wages and benefits     557,604       59,226       49,233       666,063   Other operating     238,354       16,053       12,347       266,754   Facility rent     32,819       2,064       5,935       40,818   Depreciation and amortization     36,890       443       3,339       40,672   Interest     845       –       –       845   Impairment of assets     4,497       –       3,728       8,225   Total costs and expenses     871,009       77,786       74,582       1,023,377                                     Income (loss) before non-operating income     61,424       19,069       (29,568 )     50,925   Non-operating income     –       –       17,774       17,774   Gain on acquisition of equity method investment     –       –       95,202       95,202   Unrealized losses on marketable equity securities     –       –       (13,863 )     (13,863 )                                   Income before income taxes   $ 61,424     $ 19,069     $ 69,545     $ 150,038     32 Table of Contents       Year Ended December 31, 2020       Inpatient Services     Homecare and Hospice     All Other     Total   Revenues:                                 Net patient revenues   $ 879,693     $ 52,102     $ –     $ 931,795   Other revenues     3,403       –       45,514       48,917   Government stimulus income     47,505       –       –       47,505   Net operating revenues and grant income     930,601       52,102       45,514       1,028,217                                     Costs and Expenses:                                 Salaries, wages and benefits     546,188       37,377       37,427       620,992   Other operating     254,230       10,416       10,513       275,159   Facility rent     33,090       1,802       5,602       40,494   Depreciation and amortization     38,217       377       3,424       42,018   Interest     1,374       –       25       1,399   Total costs and expenses     873,099       49,972       56,991       980,062                                     Income (loss) before non-operating income     57,502       2,130       (11,477 )     48,155   Non-operating income     –       –       26,527       26,527   Gain on acquisition of equity method investment     –       –       1,707       1,707   Unrealized losses on marketable equity securities     –       –       (23,966 )     (23,966 )                                   Income (loss) before income taxes   $ 57,502     $ 2,130     $ (7,209 )   $ 52,423     Non-GAAP Financial Presentation   The Company is providing certain non-GAAP financial measures as the Company believes that these figures are helpful in allowing investors to more accurately assess the ongoing nature of the Company’s operations and measure the Company’s performance more consistently across periods. Therefore, the Company believes this information is meaningful in addition to the information contained in the GAAP presentation of financial information. The presentation of this additional non-GAAP financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP.   Specifically, the Company believes the presentation of non-GAAP financial information should exclude the following items: the unrealized gains or losses on our marketable equity securities, operating results for the newly constructed healthcare facilities not at full capacity, any gains on the acquisition of equity method investments, gains on the sale of healthcare facilities, stock-based compensation expense, and impairments or recoveries of long-lived assets and notes receivable.   The operating results for the start-up operations not at full capacity include the following: for the year ended December 31, 2022, included are operations that began from 2020 to 2022, which is two behavioral health hospitals, one hospice agency, and one homecare agency. For the year ended December 31, 2021, included are facilities that began operations from 2019 to 2021, which is one memory care facility and two behavioral health hospitals. For the year ended December 31, 2020, included are facilities that began operations from 2018 to 2020, which is one memory care facility.   33 Table of Contents   The table below provides reconciliations of GAAP to non-GAAP items ( dollars in thousands, except per share data ):       Year Ended December 31,       2022     2021     2020   Net income attributable to National HealthCare Corporation   $ 22,445     $ 138,590     $ 41,871   Non-GAAP adjustments:                         Unrealized losses on marketable equity securities     15,806       13,863       23,966   Gain on sale of real estate/healthcare facilities     –       –       (2,784 ) Gain on acquisition of equity method investment     –       (95,202 )     (1,707 ) Stock-based compensation expense     2,612       2,620       2,453   Operating results for newly-opened operations not at full capacity     5,416       922       602   Impairment (recovery) of assets     (3,728 )     8,225       –   Income tax benefit on non-GAAP adjustments     (5,228 )     (6,373 )     (5,858 ) Non-GAAP Net Income   $ 37,323     $ 62,645     $ 58,543                             GAAP diluted earnings per share   $ 1.45     $ 8.99     $ 2.72   Non-GAAP adjustments:                         Unrealized losses on marketable equity securities     0.76       0.67       1.15   Gain on sale of real estate/healthcare facilities     –       –       (0.13 ) Gain on acquisition of equity method investment     –       (6.16 )     (0.08 ) Stock-based compensation expense     0.13       0.13       0.12   Operating results for newly-opened operations not at full capacity     0.26       0.04       0.03   Impairment (recovery) of assets     (0.18 )     0.39       –   Non-GAAP diluted earnings per share   $ 2.42     $ 4.06     $ 3.81     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, 2022, 2021 and 2020.   Percentage of Net Operating Revenues       Year Ended December 31,       2022     2021     2020   Revenues:                         Net patient revenues     94.8 %     89.9 %     90.6 % Other revenues     4.2       4.2       4.8   Government stimulus income     1.0       5.9       4.6   Net operating revenues and grant income     100.0       100.0       100.0   Costs and Expenses:                         Salaries, wages and benefits     63.2       62.0       60.4   Other operating     26.6       24.8       26.8   Facility rent     3.8       3.8       3.9   Depreciation and amortization     3.7       3.8       4.1   Interest     0.1       0.1       0.1   Impairment (recovery) of assets     (0.3 )     0.8       –   Total costs and expenses     97.1       95.3       95.3   Income from operations     2.9       4.7       4.7   Non–operating income     1.0       1.7       2.6   Gain on acquisition of equity method investments     –       8.8       0.1   Unrealized losses on marketable equity securities     (1.4 )     (1.3 )     (2.3 ) Income before income taxes     2.5       13.9       5.1   Income tax provision     (0.7 )     (1.0 )     (1.0 ) Net income     1.8       12.9       4.1   Net loss attributable to noncontrolling interest     0.3       0.0       0.0   Net income attributable to common stockholders of NHC     2.1 %     12.9 %     4.1 %   34 Table of Contents   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)       2022 vs. 2021     2021 vs. 2020       Amount     Percent     Amount     Percent   Revenues:                                 Net patient revenues   $ 63,543       6.6 %   $ 33,747       3.6 % Other revenues     (204 )     (0.4 )     (3,517 )     (7.2 ) Government stimulus income     (51,903 )     (81.9 )     15,855       33.4   Net operating revenues and grant income     11,436       1.1       46,085       4.5   Costs and Expenses:                                 Salaries, wages and benefits     20,106       3.0       45,071       7.3   Other operating     22,618       8.5       (8,405 )     (3.1 ) Facility rent     159       0.4       324       0.8   Depreciation and amortization     (183 )     (0.4 )     (1,346 )     (3.2 ) Interest     (282 )     (33.4 )     (554 )     (39.6 ) Impairment (recovery) of assets     (11,953 )     (145.3 )     8,225       100.0   Total costs and expenses     30,465       3.0       43,315       4.4   Income from operations     (19,029 )     (37.4 )     2,770       5.8   Non–operating income     (6,633 )     (37.3 )     (8,753 )     (33.0 ) Gain on acquisition of equity method investment     (95,202 )     (100.0 )     93,495       5,477.2   Unrealized losses on marketable equity securities     (1,943 )     (14.0 )     10,103       42.2   Income before income taxes     (122,807 )     (81.9 )     97,615       186.2   Income tax provision     3,697       33.8       (518 )     (5.0 ) Net income     (119,110 )     (85.6 )     97,097       231.2   Net income attributable to noncontrolling interest     2,965       596.6       (378 )     (317.6 ) Net income attributable to common stockholders of NHC   $ (116,145 )     (83.8 )%   $ 96,719       231.0 %   2022 Compared to 2021   Results for the year ended December 31, 2022 compared to 2021 include a 1.1% increase in net operating revenues and grant income. The net operating revenues and grant income increase is primarily driven by the June 2021 acquisition of Caris hospice and the continued occupancy increase in our skilled nursing facilities. These increases were offset by the reduction in government stimulus income of $51.9 million for the year ended December 31, 2022 compared to 2021.   For the year ended December 31, 2022, GAAP net income attributable to NHC was $22,445,000 compared to net income of $138,590,000 for the same period in 2021. The large decrease in our reported GAAP net income for 2022 was primarily due to the $95.2 million gain recorded in 2021 from the acquisition of Caris. 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, 2022 was $37,323,000 compared to $62,645,000 for the year ended December 31, 2021. The decrease in adjusted net income for the year ended December 31, 2022 compared to 2021 is primarily due to the $51.9 million less government stimulus income recorded during the 2022 period. We also continue to incur inflationary wage pressures within all areas of our operations.   Net operating revenues and grant income   Net patient revenues totaled $1,029,085,000, an increase of $63,543,000, or 6.6%, compared to the prior year. Included in net patient revenues for the year ended December 31, 2022 and 2021, respectively, is $19,442,000 and $20,482,000 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 2022 was 83.8% compared to 80.6% in 2021. The composite skilled nursing facility per diem increased 2.3% in 2022 compared to 2021. Medicare and managed care per diem rates increased 2.3% and 6.0%, respectively, in 2022 compared to 2021. Medicaid and private pay per diem rates increased 3.0% and 4.7%, respectively, in 2022 compared to 2021.   In June 2021, the Company acquired the remaining ownership interest in Caris, which resulted in net patient revenues increasing $31,566,000 for the year ended December 31, 2022 compared to the prior year. In September 2022, the Company transferred the operations of seven skilled nursing facilities located in Massachusetts and New Hampshire resulting in net patient revenues decreasing $18,732,000 for the year ended December 31, 2022 compared to the prior year.   35 Table of Contents   Other revenues in 2022 were $45,196,000, a decrease of $204,000, or 0.4%, as further detailed in Note 4 to our consolidated financial statements.   For the years ended December 31, 2022 and 2021, respectively, we recorded $11,457,000 and $63,360,000 in government stimulus income related to funds received from the CARES Act Provider Relief Fund.   Total costs and expenses   Total costs and expenses for 2022 increased $30,465,000, or 3.0%, to $1,053,842,000 from $1,023,377,000 in 2021.   Salaries, wages, and benefits increased $20,106,000, or 3.0%, to $686,169,000 from $666,063,000. Salaries, wages, and benefits as a percentage of net operating revenues and grant income was 63.2% compared to 62.0% for the years ended December 31, 2022 and 2021, respectively. Our Caris acquisition in June 2021 increased salaries, wages, and benefits $19,040,000 for the year ended December 31, 2022 compared to 2021. We continue to face workforce and labor shortages within all of our operations, which increases wage pressure in regards to retaining and attracting qualified healthcare partners (employees). The labor and workforce challenges have resulted in us contracting with agency nurse staffing companies. The agency nurse staffing companies charge inflated hourly rates; therefore, we are working diligently to find solutions to reduce and eliminate the agency nurse staffing within our healthcare operations. For the year ended December 31, 2022, our agency nurse staffing expenses were $68,875,000 compared to $36,391,000 for the 2021 year. In September 2022, the Company transferred the operations of seven skilled nursing facilities located in Massachusetts and New Hampshire resulting in salaries, wages, and benefits decreasing $18,053,000 for the year ended December 31, 2022 compared to the prior year.   Other operating expenses increased $22,618,000, or 8.5%, to $289,372,000 for the year ended December 31, 2022 compared to $266,754,000 for the prior year. Other operating expenses as a percentage of net operating revenues and grant income was 26.7% and 24.8% for the years ended December 31, 2022 and 2021, respectively. Our Caris acquisition increased other operating expenses $10,190,000 for the year ended December 31, 2022 compared to the prior year. The transfer of the operations of the seven skilled nursing facilities located in Massachusetts and New Hampshire, as noted above, resulted in other operating expenses decreasing $6,859,000 for the year ended December 31, 2022 compared to the prior year. We incurred increased expenses from our professional liability actuarial report in the fourth quarter of 2022 compared to the prior year of $3,284,000. We also continue to face inflationary pressures in certain categories within other operating expenses as well, such as food/dietary supplies and drugs/pharmaceutical supplies.   Facility rent expense increased $159,000, or 0.4%, to $40,977,000. Depreciation and amortization decreased 0.4% to $40,489,000. Interest expense decreased $282,000 to $563,000 in 2022 from $845,000 in 2021. At December 31, 2022, we have no outstanding long-term debt.   During 2022, we had a note receivable recovery of $3,728,000.   Other income   Non–operating income decreased by $6,633,000, or 37.3% to $11,141,000 compared to the prior year, as further detailed in Note 5 to our consolidated financial statements. The decrease in our non-operating income is due to the June 2021 acquisition of Caris. Prior to the June 2021 acquisition date, Caris was our most significant equity method investment with a 75.1% non-controlling ownership interest. From the respective acquisition date, Caris’ financial information is now included in the Company’s consolidated financial statements and is no longer accounted for as an equity method investment.   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.    We recorded unrealized losses in the amount of $15,806,000 for the decrease in fair value of our marketable equity securities portfolio for the year ended December 31, 2022. The marketable equity securities portfolio consists mainly of publicly-traded healthcare REIT’s and other blue-chip public companies held within our insurance companies.   Income taxes   The income tax provision for 2022 is $7,254,000 (an effective income tax rate of 26.6%).   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 and a 231.2% increase in net income attributable to NHC.  For the year ended December 31, 2021, GAAP net income attributable to NHC was $138,590,000 compared to net income of $41,871,000 for the same period in 2020.  The large increase in our reported GAAP 2021 net income compared to 2020 is primarily due to the $95.2 million 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.   36 Table of Contents       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 4 of the consolidated financial statements.    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 used 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 $45,071,000, or 7.3%, to $666,063,000 from $620,992,000. Our salaries and wages were 62.0% and 60.4% 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. For the year ended December 31, 2021, our agency nurse staffing expenses were $36,391,000 compared to $11,686,000 for the 2020 year.   Other operating expenses decreased $8,405,000, or 3.1%, to $266,754,000 for 2021 compared to $275,159,000 in 2020. These costs were 24.8% and 26.8% 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. Our Caris acquisition increased other operating expenses $8,368,000 for the year ended December 31, 2021 compared to 2020.   37 Table of Contents   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.   Other income   Non–operating income in 2021 decreased $8,753,000, or 33.0% to $17,744,000, as further detailed in Note 5 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.    Income taxes   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 13.2% 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.     Liquidity, Capital Resources and Financial Condition   Sources and Uses of Funds   Our primary sources of cash include revenues from the operations of our healthcare operations, management and accounting services, rental income, and investment income. Our primary uses of cash include salaries, wages and other operating costs of our healthcare operations, the cost of additions to and acquisitions of real property, facility rent expenses, and dividend distributions. These sources and uses of cash are reflected in our interim condensed consolidated statements of cash flows and are discussed in further detail below.   The following is a summary of our sources and uses of cash flows (dollars in thousands) :       Year Ended     One Year Change     Year Ended     One Year Change       12/31/22     12/31/21     $     %     12/31/21     12/31/20     $     %   Cash, cash equivalents, restricted cash, and restricted cash equivalents at beginning of period   $ 119,743     $ 158,502     $ (38,759 )     (24.5 )   $ 158,502     $ 61,010     $ 97,492       159.8                                                                     Cash provided by operating activities     8,742       62,394       (53,652 )     (86.0 )     62,394       203,259       (140,865 )     (69.3 )                                                                   Cash used in investing activities     (5,978 )     (65,889 )     59,911       90.9       (65,889 )     (63,878 )     (2,011 )     (3.1 )                                                                   Cash used in financing activities     (47,642 )     (35,264 )     (12,378 )     (35.1 )     (35,264 )     (41,889 )     6,625       15.8                                                                     Cash, cash equivalents, restricted cash, and restricted cash equivalents at end of period   $ 74,865     $ 119,743     $ (44,878 )     (37.5 )   $ 119,743     $ 158,502     $ (38,759 )     (24.5 )   38 Table of Contents   Operating Activities   Net cash provided by operating activities for the year ended December 31, 2022 was $8,742,000 as compared to $62,394,000 and $203,259,000 for the years ended December 31, 2021 and 2020, respectively. Cash provided by operating activities consisted of net income of $19,977,000 and adjustments for non–cash items of $60,697,000. There was cash used for working capital in the amount of $73,697,000 for the year ended December 31, 2022 compared to 40,738,000 in 2021. We received cash distributions from our unconsolidated investments of $439,000 during the year ended December 31, 2022, compared to $6,314,000 in the prior year.    Included in the adjustments for non-cash items are depreciation expense, equity in earnings of unconsolidated investments, unrealized losses on our marketable equity securities, recovery of assets, deferred taxes, and stock compensation.   Investing Activities   Net cash used in investing activities totaled $5,978,000 for the year ended December 31, 2022, as compared to $65,889,000 and $63,878,000 for the years ended December 31, 2021 and 2020, respectively. Cash used for property and equipment additions was $30,200,000, $39,399,000, and $21,873,000 for the years ended December 31, 2022, 2021 and 2020, respectively. Proceeds from the sale of marketable securities, net of purchases, resulted in cash proceeds of $16,168,000 in 2022. In 2021, we had purchases of marketable securities, net of sales, that resulted in a net use of cash of $6,267,000. The Company collected notes receivable of $3,879,000 and $8,840,000 for the years ended December 31, 2022 and 2021, respectively. Additionally, the Company received proceeds from the sale of property and equipment of $4,175,000 for the year ended December 31, 2022. The acquisition of Caris hospice resulted in cash used of $28,713,000 in 2021.   Financing Activities   Net cash used in financing activities totaled $47,642,000, $35,264,000, and $41,889,000 for the years ended December 31, 2022, 2021, and 2020, respectively. Principal payments made under finance lease obligations was $4,695,000, $4,423,000, and $4,166,000 for the years ended December 31, 2022, 2021, and 2020, respectively. Dividends paid to common stockholders was $34,604,000, $32,030,000, and $31,921,000 for the years ended December 31, 2022, 2021 and 2020, respectively. Proceeds from the issuance of common stock totaled $2,114,000, $3,441,000, and $1,756,000 for 2022, 2021 and 2020, respectively. We repurchased common shares outstanding in the amount of $9,903,000, $836,000, and $53,000 for the years ended December 31, 2022, 2021, and 2020, respectively.   Short – term liquidity   We expect to meet our short–term liquidity requirements primarily from our cash flows from operating activities. In addition to cash flows from operations, our current cash on hand of $58,667,000 and unrestricted marketable securities of $123,922,000 are expected to be adequate to meet our contractual obligations, operating liquidity, and our growth and development plans in the next twelve months.   Long – term liquidity   We expect to meet our long–term liquidity requirements primarily from our cash flows from operating activities, our current cash on hand of $58,667,000, and unrestricted marketable securities of $123,922,000. We also have substantial value in our unencumbered real estate assets which could potentially be used as collateral in future borrowing opportunities. At December 31, 2022, we do not have any long-term debt.    Our ability to obtain long-term debt to meet our long–term contractual obligations and to finance our operating requirements, growth and development plans will depend upon our future performance, which will be affected by business, economic, financial and other factors, including potential changes in state and federal government payment rates for health care, customer demand, success of our marketing efforts, pressures from competitors, and the state of the economy, including the state of financial and credit markets.   Given the uncertainty in the rapidly changing market and economic conditions related to COVID-19, we will continue to evaluate the nature and extent of the impact to our business and financial position.     39 Table of Contents   Contingencies   See Note 16 to the consolidated financial statements for additional information on pending litigation and other contingencies.   Guarantees   At December 31, 2022, we have no agreements to guarantee the debt obligations of other parties.   We have no outstanding letters of credit. We may or may not in the future elect to use financial derivative instruments to hedge interest rate exposure in the future. At December 31, 2022, we did not participate in any such financial instruments.   New Accounting Pronouncements   The Company did not adopt any new accounting standards during 2022.   Application of Critical Accounting Policies   The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and cause our reported net income to vary significantly from period to period.   Our critical accounting policies that are both important to the portrayal of our financial condition and results and require our most difficult, subjective or complex judgments are as follows:   Net Patient Revenues and Accounts Receivable   Net patient revenues are derived from services rendered to patients for skilled and intermediate nursing, rehabilitation therapy, assisted living and independent living, 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. These amounts are due from patients, governmental programs, and other third-party payors, and include variable consideration for retroactive revenue adjustments due to settlement of audits, reviews, and investigations.   The Company recognizes revenue as its performance obligations are completed. Routine services are treated as a single performance obligation satisfied over time as services are rendered. These routine services represent a bundle of services that are not capable of being distinct. The performance obligations are satisfied over time as the patient simultaneously receives and consumes the benefits of the healthcare services provided. Additionally, there may be ancillary services which are not included in the daily rates for routine services, but instead are treated as separate performance obligations satisfied at a point in time when those services are rendered. Contract liabilities are recorded for payments the Company receives in which performance obligations have not been completed.   The Company determines the transaction price based on established billing rates reduced by explicit price concessions provided to third party payors. Explicit price concessions are based on contractual agreements and historical experience. The Company considers the patient's ability and intent to pay the amount of consideration upon admission. Credit losses are recorded as bad debt expense, which is included as a component of other operating expenses in the interim condensed consolidated statements of operations   Revenue Recognition – Third Party Payors   Medicare and Medicaid program revenues, as well as certain Managed Care program revenues, are subject to audit and retroactive adjustment by government representatives or their agents. Settlements with third-party payors for retroactive adjustments due to audits, reviews or investigations are considered variable consideration and are included in the determination of the estimated transaction price for providing patient care. These settlements are estimated based on the terms of the payment agreement with the payor, correspondence from the payor and the Company’s historical settlement activity, including an assessment to ensure that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the retroactive adjustment is subsequently resolved.   In our opinion, adequate provision has been made for any adjustments that may result from these reviews. Any differences between our original estimates of reimbursements and subsequent revisions are reflected in operations in the period in which the revisions are made often due to final determination or the period of payment no longer being subject to audit or review.   40 Table of Contents   Accrued Risk Reserves   We are self–insured for risks related to health insurance and have wholly–owned limited purpose insurance companies that insure risks related to workers’ compensation and general and professional liability insurance claims. The accrued risk reserves include a liability for reported claims and estimates for incurred but unreported claims. Our policy is to engage an external, independent actuary to assist in estimating our exposure for claims obligations (for both asserted and unasserted claims). We reassess our accrued risk reserves on a quarterly basis.   Professional liability remains an area of particular concern to us. The long-term care industry has seen an increase in personal injury/wrongful death claims based on alleged negligence by skilled nursing facilities and their employees in providing care to residents. The Company has been, and continues to be, subject to claims and legal actions that arise in the ordinary course of business, including potential claims related to patient care and treatment. A significant increase in the number of these claims, or an increase in the amounts due as a result of these claims could have a material adverse effect on our consolidated financial position, results of operations and cash flows. It is also possible that future events could cause us to make significant adjustments or revisions to these reserve estimates and cause our reported net income to vary significantly from period to period.   We are principally self-insured for incidents occurring in all centers owned or leased by us. The coverages include both primary policies and excess policies. In all years, settlements, if any, in excess of available insurance policy limits and our own reserves would be expensed by us.