NHC recognizes stock–based compensation expense for all stock options granted over the requisite service period using the fair value at the date of grant using the Black–Scholes pricing model. Stock–based compensation totaled $340,000$518,000 and $361,000$340,000 for the three months ended September 30, 20192020 and 2018,2019, respectively. Stock-based compensation totaled $1,448,000$1,807,000 and $1,538,000$1,448,000 for the nine months ended September 30, 20192020 and 2018,2019, respectively. Stock–based compensation is included in “Salaries, wages and benefits” in the interim condensed consolidated statements of operations.
The following table summarizes the significant assumptions used to value the options granted for the nine months ended September 30, 20192020 and for the year ended December 31, 2018.2019.
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 both for our owned and leased entities and certain of the entities to which we provide management or accounting services. The liability we have recognized for reported claims and estimates for incurred but unreported claims totals $98,279,000$105,953,000 and $96,024,000$96,011,000 at September 30, 20192020 and December 31, 2018,2019, respectively. The liability is included in accrued risk reserves in the interim condensed consolidated balance sheets and is subject to adjustment for actual claims incurred. It is possible that these claims plus unasserted claims could exceed our insurance coverages and our reserves, which could have a material adverse effect on our consolidated financial position, results of operations and cash flows.
Laws and regulations governing the Medicare, Medicaid and other federal healthcare programs are complex and subject to interpretation. Management believes that it is following all applicable laws and regulations in all material respects. However, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusions from the Medicare, Medicaid and other federal healthcare programs. There have been several enacted and proposed federal and state relief measures as a result of COVID-19 which should provide support to us during this pandemic; however, the full benefit of any such programs would not be realized until these payments are fully implemented, government agencies issue applicable regulations, or guidance and such relief is provided.
23
As evidenced by the October 22, 2020 Notice, HHS' interpretation of the underlying terms and conditions of these Provider Relief Fund payments, including auditing and reporting requirements, continues to change and evolve. Additional guidance or new and amended interpretations of existing guidance on the terms and conditions may result in changes in the Company's estimates, and such changes may be material. Additionally, any such changes may result in the Company's inability to recognize additional Provider Relief Fund payments or may result in derecognition of amounts previously recognized, which may be material.
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations. |
Forward–Looking Statements
References throughout this document to the Company include National HealthCare Corporation and its wholly owned subsidiaries. In accordance with the Securities and Exchange Commissions “Plain English” guidelines, this Quarterly Report on Form 10–Q has been written in the first person. In this document, the words “we”, “our”, “ours” and “us” refer only to National HealthCare Corporation and its wholly–owned subsidiaries and not any other person.
This Quarterly Report on Form 10–Q and other information we provide from time to time, contains certain “forward–looking” statements as that term is defined by the Private Securities Litigation Reform Act of 1995. All statements regarding our expected future financial position, results of operations or cash flows, continued performance improvements, ability to service and refinance our debt obligations, ability to finance growth opportunities, ability to control our patient care liability costs, ability to respond to changes in government regulations, ability to execute our three–year strategic plan, and similar statements including, without limitations, those containing words such as “believes”, “anticipates”, “expects”, “intends”, “estimates”, “plans”, and other similar expressions are forward–looking statements.
Forward–looking statements involve known and unknown risks and uncertainties that may cause our actual results in future periods to differ materially from those projected or contemplated in the forward–looking statements as a result of, but not limited to, the following factors:
| ● | national and local economic conditions, including their effect on the availability and cost of labor, utilities and materials; |
| | |
| ● | the effect of government regulations and changes in regulations governing the healthcare industry, including our compliance with such regulations; |
| | |
| ● | changes in Medicare and Medicaid payment levels and methodologies and the application of such methodologies by the government and its fiscal intermediaries; |
| | |
| ● | liabilities and other claims asserted against us, including patient care liabilities, as well as the resolution of current litigation (see Note 15:16: Contingencies and Commitments); |
| | |
| ● | the abilityuncertainty of third parties for whom we have guaranteed debt, if any, to refinance certain short-term debt obligations;the extent, duration and effects of the COVID-19 pandemic and the response of governments |
| | |
| ● | the ability to attract and retain qualified personnel; |
| | |
| ● | the availability and terms of capital to fund acquisitions and capital improvements; |
| | |
| ● | the ability to refinance existing debt on favorable terms; |
| | |
| ● | the competitive environment in which we operate; |
|
| | | ● | the ability to maintain and increase census levels; and |
| | |
| ● | demographic changes. |
See the notes to the quarterly financial statements, and “Item 1. Business” in our 20182019 Annual Report on Form 10–K for a discussion of various governmental regulations and other operating factors relating to the healthcare industry and the risk factors inherent in them. This may be found on our web site at www.nhccare.com. You should carefully consider these risks before making any investment in the Company. These risks and uncertainties are not the only ones facing us. There may be additional risks that we do not presently know of or that we currently deem immaterial. If any of the risks actually occur, our business, financial condition or results of operations could be materially adversely affected. In that case, the trading price of our shares of stock could decline, and you may lose all or part of your investment. Given these risks and uncertainties, we can give no assurances that these forward–looking statements will, in fact, transpire and, therefore, caution investors not to place undue reliance on them.
Overview
National HealthCare Corporation (“NHC” or the “Company”) is a leading provider of senior health care services. We operate or manage, through certain affiliates, 7576 skilled nursing facilities with a total of 9,5109,633 licensed beds, 2624 assisted living facilities, five independent living facilities, one behavioral health hospital and 3635 homecare programs. We operate specialized care units within certain of our healthcare centers such as Alzheimer's disease care units and sub-acute nursing units. We also have a non-controlling ownership interest in a hospice care business that services NHC owned health care centers and others. In addition, we provide insurance services, management and accounting services, and we lease properties to operators of skilled nursing and assisted living facilities. We operate in 10 states and are located primarily in the southeastern United States.
Impact of COVID-19
In early March 2020, COVID-19, a disease caused by the novel strain of the coronavirus, was characterized as a pandemic by the World Health Organization. The COVID-19 virus has spread rapidly, with every state in the United States (“U.S.”) having confirmed cases. The rapid spread has resulted in authorities around the U.S. implementing various measures to contain the virus, such as quarantines, shelter-in-place orders and business shutdowns. The pandemic and these containment measures have had, and are expected to continue to have, an adverse impact on the Company's results of operations.
As a provider of healthcare services, we are significantly exposed to the public health and economic effects of the COVID-19 pandemic. 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 Centers for Medicare and Medicaid Services (“CMS”), the Centers for Disease Control and Prevention (“CDC”), and state and local health departments to prevent the spread of the disease within our operations. The financial results for the second and third quarters of 2020 have been significantly impacted by COVID-19 with census in our skilled nursing facilities dropping to 81.3% during the third quarter of 2020, while we also incurred significantly increased operating expenses. Since the first week of March, our census has declined due to the lack of new admissions from our acute care providers and referral partners. Our operating expenses have also increased with incentive compensation being paid to our frontline partners, as well as increased costs of personal protective equipment (“PPE”), sanitizers and cleaning supplies, COVID-19 testing of our patients and partners, and food and dietary products. Besides the incentive compensation being paid to our tireless partners on the frontlines, we continue to take every possible action to support our partners with free meals on their shifts, a one-month health insurance premium holiday in April, as well as extended paid sick leave days. Despite COVID-19 disrupting operations, our capital and financial resources, including our overall liquidity, remain strong. Our liquidity and low debt levels provide us with significant flexibility to maintain the strength of our balance sheet in periods of uncertainty or stress.
At this time, we are not able to quantify the impact that the COVID-19 pandemic will have on our future financial results, but we expect the developments related to COVID-19 to adversely affect our financial performance in 2020 and 2021. The ultimate impact of the pandemic on our financial results will depend on, among other factors, the duration and severity of the pandemic, the volume of acute and post-acute healthcare patients cared for across the broader health care systems, the timing and availability of effective medical treatments and vaccines, and the impact of government actions and administrative regulations on our industry and broader economy, including future government stimulus efforts. We have received and may continue to receive payments and advances from the various federal and state initiatives. These legislative initiatives have been beneficial to partially mitigate the impact of the COVID-19 pandemic on our results of operations and financial position to date. The federal and state governments may consider additional stimulus and relief efforts, but we are unable to predict whether any of the additional stimulus measures will be enacted or their impact.
Legislation and Government Stimulus Due to COVID-19
The U.S. government enacted several laws beginning in March 2020 designed to help the nation respond to the COVID-19 pandemic. The new laws impact healthcare providers in a variety of ways, but the largest legislation from a monetary relief perspective is the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). The CARES Act provided $2.2 trillion of economy-wide financial stimulus in the form of financial aid to individuals, businesses, nonprofits, states and municipalities. The CARES Act originally appropriated $100 billion to establish the Public Health and Social Services Emergency Fund, which is referred to as the Provider Relief Fund. The Provider Relief Fund is administered through grants and other mechanisms to skilled nursing providers, home health providers, hospitals, and other Medicare and Medicaid enrolled providers to cover any unreimbursed health care related expenses or lost revenue attributable to the public health emergency resulting from COVID-19. On April 24, 2020, another $75 billion was added to the Provider Relief Fund by the Paycheck Protection Program and Health Care Enactment Act, bringing the total amount appropriated in the fund to $175 billion.
During the second and third quarters of 2020, we received four disbursements from the Provider Relief Fund which totaled $58,184,000. These funds come with terms and condition certifications in which all providers are required to submit documents to ensure the funds will be used for healthcare-related expenses or lost revenue attributable to COVID-19. Of the $58,184,000 of funds received, the Company recorded $12,132,000 and $36,780,000 of government stimulus income for the three and nine months ended September 30, 2020, respectively. As of September 30, 2020, amounts not recognized as income are $21,404,000 and are reflected in the current liability section of our interim condensed consolidated balance sheet (provider relief funds). We anticipate incurring additional COVID-19 related expenses or lost revenues in the future; therefore, at this time, we believe that we will fully utilize the remaining $21,404,000 of provider relief funds before the reporting requirement deadlines outlined by the U.S. Department of Health and Human Services (“HHS”).
Additionally, as part of the CARES Act, the legislation included an expansion of the Medicare Accelerated and Advance Payment Program. The expanded Medicare Accelerated and Advance Payment Program is a streamlined version of existing policy that allows the Medicare Administrative Contractors (“MAC’s”) to issue up to three months of advance Medicare payments to help increase cash flow and liquidity to Medicare Part A and Part B providers in certain circumstances that include national emergencies. We received approximately $51,253,000 as part of this program. On October 8, 2020 as part of the Continuing Appropriations Act, 2021 and Other Extensions Act, CMS amended the repayment terms for the accelerated and advance payments. These funds will begin to be applied against claims for services provided to Medicare patients after approximately one year from the date we received the funds. During the first eleven months after repayment begins, repayment will occur through an automatic recoupment of twenty-five percent of Medicare payments. During the succeeding six months, repayment will occur through an automatic recoupment of fifty percent of Medicare payments. Any remaining balance that was not paid through the recoupment process within twenty-nine months of receipt of the funds will be required to be paid on-demand, subject to an interest rate of four percent. As of September 30, 2020, the accelerated payments are reflected within contract liabilities in the interim condensed consolidated balance sheets as the related performance obligations have not been completed.
The CARES Act temporarily suspended Medicare sequestration beginning May 1, 2020 through December 31, 2020. The Medicare sequestration policy reduces fee-for-service Medicare payments by 2 percent. The CARES Act extends the sequestration policy through 2030 in exchange for this temporary suspension. We expect our net patient revenues to increase by approximately $2,600,000 in 2020 (2nd, 3rd, and 4th quarter impact) due to sequestration being temporarily suspended for the eight-month period.
The CARES Act also temporarily permits employers to defer the deposit and payment of the employer’s portion of the social security taxes (6.2% of employee wages) that otherwise would be due between March 27, 2020 and December 31, 2020. The provision requires that the deferred taxes be paid over a two-year period with half the amount required to be paid by December 31, 2021, and the other half by December 31, 2022. Currently, we expect the deferral of these payroll taxes to improve our liquidity and cash available for operations during 2020 by approximately $21 million to $24 million, or $7 million to $8 million per quarter (2nd, 3rd, and 4th quarter impact). As of September 30, 2020, we have deferred $14,854,000 of the Company’s share of the social security taxes. This deferral is included in other noncurrent liabilities within our interim condensed consolidated balance sheets.
We have also received from many of the states in which we operate a supplemental Medicaid payment to help mitigate the incremental costs resulting from the COVID-19 public health emergency. At this time, we expect our net patient revenues to increase by approximately $14,000,000 in 2020 due to these supplemental Medicaid payments. For the three months and nine months ended September 30, 2020, we have recorded $4,845,000 and $10,378,000, respectively, in net patient revenues in our interim condensed consolidated statements of operations for these supplemental Medicaid payments.
Provider Relief Funds Guidance
On September 19, 2020, HHS issued a six-page Post-Payment Notice of Reporting Requirements ("September 19, 2020 Notice") pertaining to the guidance and reporting process for recipients of Provider Relief Funds. This September 19, 2020 Notice was used to estimate the government stimulus income recorded in the interim condensed consolidated statements of operations for the three and nine months ended September 30, 2020. On October 22, 2020, HHS issued a subsequent Post-Payment Notice of Reporting Requirements ("October 22, 2020 Notice") document that materially revises the definition of lost revenues compared to the September 19, 2020 Notice. The definition of lost revenues has subsequently changed to refer to the negative year-over-year difference in 2019 and 2020 actual revenues from patient care related sources as opposed to the negative year-over-year change in net patient care operating income. As stated in Note 3, the Company's estimate for recording government stimulus income for the three and nine months ended September 30, 2020 has not been updated for the October 22, 2020 Notice. The Company's evaluation of the October 22, 2020 Notice is ongoing and its impact on our financial statements is not yet known. U.S. GAAP does not permit amounts recognized as of September 30, 2020 to be updated on the basis of new information in the October 22, 2020 Notice.
Summary of Goals and Areas of Focus
Occupancy
A primary area of management focus continues to be the rates of occupancy within our skilled nursing facilities. The overall census in owned and leased skilled nursing facilities for the nine months ending September 30, 20192020 was 90.3%85.7% compared to 89.7%90.3% for the same period a year ago. Although our census was strong for most of the first quarter of 2020, during the second half of March, our census began to decline due to COVID-19 and the lack of new admissions from our acute care providers and referral partners. For the three months ended September 30, 2020, overall census in our owned and leased skilled nursing facilities was 81.3% compared to 90.1% in the third quarter of 2019.
With the average length of stay decreasing for a skilled nursing patient, across the industry, as well as the increased availability of assisted living facilities and home and community-based services, the challenge of maintaining desirable patient census levels has been amplified. Management has undertaken a number of steps in order to best position our current and future health care facilities. This includes working internally to examine and improve systems to be most responsive to referral sources and payors. Additionally, NHC is in various stages of partnerships with hospital systems, payors, and other post–acute alliances to better position ourselves so we are an active participant in the delivery of post-acute healthcare services.
Quality of Patient Care
CMS introduced the Five-Star Quality Rating System to help consumers, their families and caregivers compare skilled nursing facilities more easily. The Five-Star Quality Rating System gives each skilled nursing operation a rating ranging between one and five stars in various categories (five stars being the best). The Company has always strived for patient-centered care and quality outcomes as precursors to outstanding financial performance.
On April 24, 2019, CMS announced several changes to the Five-Star Quality Rating System which included updating thresholds for both the staffing and quality components of the system. The new changes include separate ratings for short-stay and long-stay quality of resident care in addition to an overall quality of resident care rating. The measures of long-stay hospitalizations and long-stay emergency department visits were added to the quality component of the rating, and the long-stay physical restraints measure was dropped from the quality component of the rating. The scoring rules for the quality measures changed to give more weight to measures with greater opportunity for improvement. Further, the staffing rating thresholds were changed with CMS placing a strong emphasis on registered nurse (“RN”) staffing.
CMS estimated the changes will cause 47% of all nursing centers to lose stars in their "Quality" ratings and 33% are expected to lose stars in their "Staffing" ratings. Therefore, approximately 36% of all nursing centers are expected to lose stars in their "Overall" ratings. As anticipated, the implementation of these changes impacted our overall ratings, as well as everyone in the industry.
The tables below summarize NHC's overall performance in these Five-Star ratings versus the skilled nursing industry as of September 30, 2019:2020:
| | | NHC Ratings | | | Industry Ratings | | | NHC Ratings | | | Industry Ratings | |
Total number of skilled nursing facilities, end of period | | 75 | | | | | | 76 | | | | |
Number of 4 and 5-star rated skilled nursing facilities | | 54 | | | | | | 55 | | | | |
Percentage of 4 and 5-star rated skilled nursing facilities | | 72% | | | 44% | | | 72% | | | 47% | |
Average rating for all skilled nursing facilities, end of period | | 3.97 | | | 3.09 | | | 4.00 | | | 3.22 | |
Development and Growth
We are undertaking to expand our senior care operations while protecting our existing operations and markets. The following table lists our recent development activities.
Type of Operation | | Description | | Size | | Location | | Placed in Service |
SNF
| | Bed Addition
| | 30 beds
| | Springfield, MO
| | April, 2018
|
Behavioral Health Hospital
| | Acquisition
| | 14 beds
| | Osage Beach, MO
| | August, 2018
|
Memory Care | | New Facility | | 60 beds | | Farragut, TN | | January, 2019 |
Memory Care | | Acquisition | | 60 beds | | St. Peters, MO | | June, 2019 |
Skilled Nursing | | Acquisition | | 166 beds | | Knoxville, TN | | February, 2020 |
Assisted Living | | Bed Addition | | 20 beds | | Gallatin, TN | | Under Construction |
Skilled Nursing | | Bed Addition | | 30 beds | | Kingsport, TN | | Under Construction |
Accrued Risk Reserves
Our accrued professional liability and workers’ compensation reserves totaled $98,279,000$105,953,000 at September 30, 20192020 and are a primary area of management focus. We have set aside restricted cash and cash equivalents and marketable securities to fund our estimated professional liability and workers’ compensation liabilities.
As to exposure for professional liability claims, we have developed performance certification criteria to measure and bring focus to the patient care issues most likely to produce professional liability exposure, including in–house acquired pressure ulcers, significant weight loss and numbers of falls. These programs for certification, which we regularly modify and improve, have produced measurable improvements in reducing these incidents. Our experience is that achieving goals in these patient care areas improves both patient and employee satisfaction.
Government Program Financial ChangesReimbursement Programs
Medicare – Skilled Nursing Facilities
In August 2018, CMS issued a final rule outlining fiscal year 2019 Medicare payments and quality changes for skilled nursing facilities. The 2019 final rule, which began October 1, 2018, provided for an approximate 2.4% market basket update that was included in the Bipartisan Budget Act of 2018. The market basket increase is expected to increase overall payments to skilled nursing facilities in fiscal year 2019 by $820 million compared to fiscal year 2018 levels.
For the first nine months of 2019, our average Medicare per diem rate for skilled nursing facilities decreased 0.2% as compared to the same period in 2018.
EffectiveOn October 1, 2019, CMS is using athe new case-mix reimbursement model called the Patient-Drivenof Patient Driven Payment Model (“PDPM”), which focuses on a resident’s condition and care needs, rather than the amount of care provided to determine reimbursement levels. The PDPM utilizes clinically relevant factors for determining Medicare payment by using ICD-10 diagnosis codes and other patient characteristics as the basis for patient classification. PDPM utilizes five case-mix adjusted payment components: physical therapy (“PT”), occupational therapy (“OT”), speech language pathology (“SLP”), nursing and social services and non-therapy ancillary services (“NTA”). It also uses a sixth non-case mix component to cover utilization of skilled nursing facility (“SNF”("PDPM") resources that do not vary depending on resident characteristics.
PDPM replaces the existing case-mix classification methodology, Resource Utilization Groups, Version IV. The structure of the PDPM moves Medicare towards a more value-based, unified post-acute care payment system. PDPM also removes therapy minutes as the basis for therapy payment and adjusts the SNF per diem payments to reflect varying costs throughout the stay, through the PT, OT and NTA components. In addition, PDPM is intended to reduce paperwork requirements for performing patient assessments.became effective. Under the new PDPM, system, the payment to skilled nursing facilities is based heavily on the patient’spatient's condition rather than the specific services provided by each skilled nursing facility.
In July 2019, CMS released its final rule outlining fiscal year 2020 Medicare payment rates and policy changes for skilled nursing facilities, which began October 1, 2019. The CMS' fiscal year 2020 final rule provided for an approximate net 2.4% increase, or $851 million, compared to the fiscal year 2019 levels. This included a 2.8% market-basket update, offset by a statutorily required 0.4% productivity reduction.
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 continues to reflect the commitment to shifting Medicare payments from volume to value, with the continued implementation of PDPM and value-based purchasing to improve interoperability, operational quality, and safety.
The fiscal yearCARES Act temporarily suspended Medicare sequestration beginning May 1, 2020 final rule also included new guidance onthrough December 31, 2020. The Medicare sequestration policy reduces fee-for-service Medicare payments by 2 percent. The CARES Act extends the componentssequestration policy through 2030 in exchange for this temporary suspension. We expect our net patient revenues to increase by approximately $2,600,000 in 2020 (2nd, 3rd, and 4th quarter impact) due to sequestration being temporarily suspended for the eight-month period.
For the first nine months of PDPM. The rule instituted an expected sub-regulatory process2020, our average Medicare per diem rate for classification of diseases and corresponding ICD-10 codes, suchskilled nursing facilities increased 11.1% as when a prior code is split into two new codes. Also, group therapy was defined and covers therapy sessions with groups of two to six patients. The rule also instituted two new quality reporting measures designed to improve interoperability. Those require providers to document the transfer of health information to other healthcare providers and to document the transfer of health informationcompared to the patient. The agency’s goal is to improve medication management among subsequent providers and discharged patients, especially through the usesame period in 2019.
Medicaid – Skilled Nursing Facilities
Effective July 1, 20192020 and for the fiscal year 2020,2021, the state of Tennessee implemented specific individual nursing facility rate increases. We estimate the resulting increase in revenue for the 20202021 fiscal year will be approximately $1,680,000 annually,$2,000,000, or $420,000$500,000 per quarter.
Effective October 1, 2019 and for the fiscal year 2020, South Carolina implemented specific individual nursing facility rate changes. We estimate theThe resulting increase in revenue for the 2020 fiscal year will bewas approximately $2,012,000 annually, or $503,000 per quarter.
We have also received from many of the states in which we operate a supplemental Medicaid payment to help mitigate the incremental costs resulting from the COVID-19 public health emergency. At this time, we expect our net patient revenues to increase by approximately $14,000,000 in 2020 due to these supplemental Medicaid payments. For the three months and nine months ended September 30, 2020, we have recorded $4,845,000 and $10,378,000, respectively, in net patient revenues in our interim condensed consolidated statements of operations for these supplemental Medicaid payments.
For the first nine months of 2019,2020, our average Medicaid per diem increased 3.6%5.8% compared to the same period in 2018.2019.
We face challenges with respect to states’ Medicaid payments, because many currently do not cover the total costs incurred in providing care to those patients. States will continue to control Medicaid expenditures and also look for adequate funding sources, including provider assessments. There are several pieces of legislation that include provisions designed to reduce Medicaid spending. These provisions include, among others, provisions strengthening the Medicaid asset transfer restrictions for persons seeking to qualify for Medicaid long-term care coverage, which could, due to the timing of the penalty period, increase facilities’ exposure to uncompensated care. Other provisions could increase state funding for home and community-based services, potentially having an impact on funding for nursing facilities.
Medicare – Homecare Programs
In November 2018, CMS published a final rule which updated the Medicare HH PPS rates, including the conversion factor and case-mix weights for calendar years 2019 and 2020. Effective January 1, 2019, CMS estimates the net impact of the PPS rule results in a 2.2% increase ($420 million) in Medicare payments for agencies in 2019. The increase reflects the effects of a 2.2% home health payment update percentage; a 0.1% increase in payments due to decreasing the fixed-dollar-loss ratio in order to pay no more than 2.5% of total payments as outlier payments; and a 0.1% decrease in payments due to the new rural add-on policy mandated by the Bipartisan Budget Act of 2018.
Also published in the final rule and effective January 1, 2020, there will be an elimination of therapy thresholds for payment, implementation of the Patient-Driven Group Model (“PDGM”) case-mix methodology refinements and a change in the unit of payment from a sixty (60) day episode to a thirty (30) day episode period. These changes focus on providing value over volume of services to patients. Once the changes are implemented, home health payments will no longer be based on the number of visits provided, but rather the patient’s medical condition and care needs.
In November 2019, CMS released a final rule that sets forth the implementation of the PDGM and a 30-day unit of payment as mandated by the Bipartisan Budget Act of 2018 (“BBA”). The new rule ends request for anticipated payments ("RAP"), or prepayments, and these will be completely phased out by 2021. CMS projectsprojected payments to home health agencies in fiscal year 2020 willwould increase in aggregate by 1.3%, or $250 million, based on proposed policies.million. The increase reflects the effects of the 1.5% home health payment update percentage as mandated by the BBA and a 0.2% decrease in aggregate payments due to reductions made by the new rural add-on policy, also mandated by the BBA.
In June 2020, CMS released its proposed rule outlining fiscal year 2021 Medicare payment rates. CMS projects payments to home health agencies in fiscal year 2021 will increase in aggregate by 2.6%, or $540 million, based on proposed policies. The increase reflects the effects of the 2.7% home health payment update percentage and a 0.1% decrease due to reductions made by the rural add-on policy. This Rule also includes a provision to make permanent the regulatory changes related to telecommunication technologies in providing care under the Medicare home health benefit beyond the expiration of the COVID-19 public health emergency.
Segment Reporting
The Company has two reportable operating segments: (1) inpatient services, which includes the operation of skilled nursing facilities, assisted and independent living facilities, and our behavioral health hospital; and (2) homecare services. These reportable operating segments are consistent with information used by the Company’s Chief Executive Officer, as chief operating decision maker (“CODM”), to assess performance and allocate resources.
The Company also reports an “all other” category that includes revenues from rental income, management and accounting services fees, insurance services, and costs of the corporate office. For additional information on these reportable segments see Note 2 – Summary of Significant Accounting Policies.
The Company’s CODM evaluates performance and allocates capital resources to each segment based on an operating model that is designed to improve the quality of patient care and profitability of the Company while enhancing long-term shareholder value. The CODM does not review assets by segment in his resource allocation and therefore, assets by segment are not disclosed below.
The following table sets forth the Company’s unaudited interim condensed consolidated statements of operations by business segment (in thousands):
| | | Three Months Ended September 30, 2019 | | | Three Months Ended September 30, 2020 | |
| | | Inpatient Services | | | Homecare | | | All Other | | | Total | | | Inpatient
Services | | | Homecare | | | All Other | | | Total | |
Revenues: | | | | | | | | | | |
Revenues and grant income: | | | | | | | | | | |
Net patient revenues | | $ | 222,246 | | | $ | 12,844 | | | $ | - | | | $ | 235,090 | | | $ | 214,211 | | | $ | 13,172 | | | $ | - | | | $ | 227,383 | |
Other revenues | | | 199 | | | | - | | | | 11,778 | | | | 11,977 | | | 84 | | | - | | | 11,027 | | | 11,111 | |
Net operating revenues | | 222,445 | | | 12,844 | | | 11,778 | | | 247,067 | | |
Government stimulus income | | | | 12,132 | | | | - | | | | - | | | | 12,132 | |
Net operating revenues and grant income | | | 226,427 | | | 13,172 | | | 11,027 | | | 250,626 | |
| | | |
Costs and expenses: | | | | | | | | | | | | | | | | | | |
Salaries, wages and benefits | | 133,949 | | | 8,630 | | | 9,596 | | | 152,175 | | |
Salaries, wages, and benefits | | | 132,245 | | | 8,210 | | | 11,109 | | | 151,564 | |
Other operating | | 60,800 | | | 4,267 | | | 1,663 | | | 66,730 | | | 65,066 | | | 3,311 | | | 2,510 | | | 70,887 | |
Rent | | 8,234 | | | 450 | | | 1,483 | | | 10,167 | | | 8,377 | | | 448 | | | 1,495 | | | 10,320 | |
Depreciation and amortization | | 9,666 | | | 61 | | | 936 | | | 10,663 | | | 9,629 | | | 106 | | | 813 | | | 10,548 | |
Interest | | | 312 | | | | - | | | | 452 | | | | 764 | | | | 325 | | | | - | | | | (40 | ) | | | 285 | |
Total costs and expenses | | | 212,961 | | | | 13,408 | | | | 14,130 | | | | 240,499 | | | | 215,642 | | | | 12,075 | | | | 15,887 | | | | 243,604 | |
| | | |
Income (loss) from operations | | 9,484 | | | (564 | ) | | (2,352 | ) | | 6,568 | | | 10,785 | | | 1,097 | | | (4,860 | ) | | 7,022 | |
Non-operating income | | - | | | - | | | 6,663 | | | 6,663 | | | - | | | - | | | 6,478 | | | 6,478 | |
Unrealized gains on marketable equity securities | | | - | | | | - | | | | 9,312 | | | | 9,312 | | |
Unrealized losses on marketable equity securities | | | | - | | | | - | | | | (241 | ) | | | (241 | ) |
| | | |
Income (loss) before income taxes | | $ | 9,484 | | | $ | (564 | ) | | $ | 13,623 | | | $ | 22,543 | | |
Income before income taxes | | | $ | 10,785 | | | $ | 1,097 | | | $ | 1,377 | | | $ | 13,259 | |
| | | Three Months Ended September 30, 2018 | |
| | | Inpatient Services | | | Homecare | | | All Other | | | Total | |
Revenues: | | | | | | | | | | | | | | | | |
Net patient revenues | | $ | 220,099 | | | $ | 14,728 | �� | | $ | - | | | $ | 234,827 | |
Other revenues | | | 136 | | | | - | | | | 11,363 | | | | 11,499 | |
Net operating revenues | | | 220,235 | | | | 14,728 | | | | 11,363 | | | | 246,326 | |
| | | | | | | | | | | | | | | | | |
Costs and expenses: | | | | | | | | | | | | | | | | |
Salaries, wages and benefits | | | 131,418 | | | | 8,367 | | | | 9,403 | | | | 149,188 | |
Other operating | | | 57,371 | | | | 4,797 | | | | 2,339 | | | | 64,507 | |
Rent | | | 8,255 | | | | 488 | | | | 1,447 | | | | 10,190 | |
Depreciation and amortization | | | 9,570 | | | | 55 | | | | 812 | | | | 10,437 | |
Interest | | | 369 | | | | - | | | | 801 | | | | 1,170 | |
Total costs and expenses | | | 206,983 | | | | 13,707 | | | | 14,802 | | | | 235,492 | |
| | | | | | | | | | | | | | | | | |
Income (loss) from operations | | | 13,252 | | | | 1,021 | | | | (3,439 | ) | | | 10,834 | |
Non-operating income | | | - | | | | - | | | | 8,467 | | | | 8,467 | |
Unrealized gains on marketable equity securities | | | - | | | | - | | | | 3,486 | | | | 3,486 | |
| | | | | | | | | | | | | | | | | |
Income before income taxes | | $ | 13,252 | | | $ | 1,021 | | | $ | 8,514 | | | $ | 22,787 | |
| | | Nine Months Ended September 30, 2019 | | | Three Months Ended September 30, 2019 | |
| | | Inpatient Services | | | Homecare | | | All Other | | | Total | | | Inpatient
Services | | | Homecare | | | All Other | | | Total | |
Revenues: | | | | | | | | | | | | | | | | | | |
Net patient revenues | | $ | 664,768 | | | $ | 41,697 | | | $ | - | | | $ | 706,465 | | | $ | 222,246 | | | $ | 12,844 | | | $ | - | | | $ | 235,090 | |
Other revenues | | | 672 | | | | - | | | | 35,366 | | | | 36,038 | | | | 199 | | | | - | | | | 11,778 | | | | 11,977 | |
Net operating revenues | | 665,440 | | | 41,697 | | | 35,366 | | | 742,503 | | | 222,445 | | | 12,844 | | | 11,778 | | | 247,067 | |
| | | |
Costs and expenses: | | | | | | | | | | | | | | | | | | |
Salaries, wages and benefits | | 390,770 | | | 25,136 | | | 25,535 | | | 441,441 | | |
Salaries, wages, and benefits | | | 133,949 | | | 8,630 | | | 9,596 | | | 152,175 | |
Other operating | | 183,602 | | | 13,193 | | | 6,965 | | | 203,760 | | | 60,800 | | | 4,267 | | | 1,663 | | | 66,730 | |
Rent | | 24,754 | | | 1,400 | | | 4,448 | | | 30,602 | | | 8,234 | | | 450 | | | 1,483 | | | 10,167 | |
Depreciation and amortization | | 28,790 | | | 183 | | | 2,542 | | | 31,515 | | | 9,666 | | | 61 | | | 936 | | | 10,663 | |
Interest | | | 979 | | | | - | | | | 1,665 | | | | 2,644 | | | | 312 | | | | - | | | | 452 | | | | 764 | |
Total costs and expenses | | | 628,895 | | | | 39,912 | | | | 41,155 | | | | 709,962 | | | | 212,961 | | | | 13,408 | | | | 14,130 | | | | 240,499 | |
| | | |
Income (loss) from operations | | 36,545 | | | 1,785 | | | (5,789 | ) | | 32,541 | | | 9,484 | | | (564 | ) | | (2,352 | ) | | 6,568 | |
Non-operating income | | - | | | - | | | 20,936 | | | 20,936 | | | - | | | - | | | 6,663 | | | 6,663 | |
Unrealized gains on marketable equity securities | | | - | | | | - | | | | 16,096 | | | | 16,096 | | | | - | | | | - | | | | 9,312 | | | | 9,312 | |
| | | |
Income before income taxes | | $ | 36,545 | | | $ | 1,785 | | | $ | 31,243 | | | $ | 69,573 | | |
Income (loss) before income taxes | | | $ | 9,484 | | | $ | (564 | ) | | $ | 13,623 | | | $ | 22,543 | |
| | | Nine Months Ended September 30, 2020 | |
| | | Inpatient
Services | | | Homecare | | | All Other | | | Total | |
Revenues and grant income: | | | | | | | | | | | | | | | | |
Net patient revenues | | $ | 659,585 | | | $ | 37,564 | | | $ | - | | | $ | 697,149 | |
Other revenues | | | 645 | | | | - | | | | 33,818 | | | | 34,463 | |
Government stimulus income | | | 34,754 | | | | 2,026 | | | | - | | | | 36,780 | |
Net operating revenues and grant income | | | 694,984 | | | | 39,590 | | | | 33,818 | | | | 768,392 | |
| | | | | | | | | | | | | | | | | |
Costs and expenses: | | | | | | | | | | | | | | | | |
Salaries, wages, and benefits | | | 403,840 | | | | 24,490 | | | | 27,617 | | | | 455,947 | |
Other operating | | | 194,170 | | | | 11,471 | | | | 7,775 | | | | 213,416 | |
Rent | | | 25,134 | | | | 1,351 | | | | 4,487 | | | | 30,972 | |
Depreciation and amortization | | | 28,826 | | | | 266 | | | | 2,439 | | | | 31,531 | |
Interest | | | 1,073 | | | | - | | | | 77 | | | | 1,150 | |
Total costs and expenses | | | 653,043 | | | | 37,578 | | | | 42,395 | | | | 733,016 | |
| | | | | | | | | | | | | | | | | |
Income (loss) from operations | | | 41,941 | | | | 2,012 | | | | (8,577 | ) | | | 35,376 | |
Non-operating income | | | - | | | | - | | | | 20,578 | | | | 20,578 | |
Unrealized losses on marketable equity securities | | | - | | | | - | | | | (40,580 | ) | | | (40,580 | ) |
| | | | | | | | | | | | | | | | | |
Income (loss) before income taxes | | $ | 41,941 | | | $ | 2,012 | | | $ | (28,579 | ) | | $ | 15,374 | |
| | | Nine Months Ended September 30, 2018 | | | Nine Months Ended September 30, 2019 | |
| | | Inpatient Services | | | Homecare | | | All Other | | | Total | | | Inpatient
Services | | | Homecare | | | All Other | | | Total | |
Revenues: | | | | | | | | | | | | | | | | | | |
Net patient revenues | | $ | 652,066 | | | $ | 45,107 | | | $ | - | | | $ | 697,173 | | | $ | 664,768 | | | $ | 41,697 | | | $ | - | | | $ | 706,465 | |
Other revenues | | | 588 | | | | - | | | | 33,668 | | | | 34,256 | | | | 672 | | | | - | | | | 35,366 | | | | 36,038 | |
Net operating revenues | | 652,654 | | | 45,107 | | | 33,668 | | | 731,429 | | | 665,440 | | | 41,697 | | | 35,366 | | | 742,503 | |
| | | |
Costs and expenses: | | | | | | | | | | | | | | | | | | |
Salaries, wages and benefits | | 382,913 | | | 25,009 | | | 26,827 | | | 434,749 | | |
Salaries, wages, and benefits | | | 390,770 | | | 25,136 | | | 25,535 | | | 441,441 | |
Other operating | | 171,275 | | | 14,816 | | | 6,177 | | | 192,268 | | | 183,602 | | | 13,193 | | | 6,965 | | | 203,760 | |
Rent | | 24,780 | | | 1,460 | | | 4,451 | | | 30,691 | | | 24,754 | | | 1,400 | | | 4,448 | | | 30,602 | |
Depreciation and amortization | | 28,602 | | | 137 | | | 2,437 | | | 31,176 | | | 28,790 | | | 183 | | | 2,542 | | | 31,515 | |
Interest | | | 1,149 | | | | - | | | | 2,514 | | | | 3,663 | | | | 979 | | | | - | | | | 1,665 | | | | 2,644 | |
Total costs and expenses | | | 608,719 | | | | 41,422 | | | | 42,406 | | | | 692,547 | | | | 628,895 | | | | 39,912 | | | | 41,155 | | | | 709,962 | |
| | | |
Income (loss) from operations | | 43,935 | | | 3,685 | | | (8,738 | ) | | 38,882 | | | 36,545 | | | 1,785 | | | (5,789 | ) | | 32,541 | |
Non-operating income | | - | | | - | | | 11,056 | | | 11,056 | | | - | | | - | | | 20,936 | | | 20,936 | |
Unrealized gains on marketable equity securities | | | - | | | | - | | | | 417 | | | | 417 | | | | - | | | | - | | | | 16,096 | | | | 16,096 | |
| | | |
Income before income taxes | | $ | 43,935 | | | $ | 3,685 | | | $ | 2,735 | | | $ | 50,355 | | | $ | 36,545 | | | $ | 1,785 | | | $ | 31,243 | | | $ | 69,573 | |
Non-GAAP Financial Presentation
The Company is providing certain non-GAAP financial measures as the Company believes that these figures are helpful in allowing investors to more accurately assess the ongoing nature of the Company’s operations and measure the Company’s performance more consistently across periods. Therefore, the Company believes this information is meaningful in addition to the information contained in the GAAP presentation of financial information. The presentation of this additional non-GAAP financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP.
Specifically, the Company believes the presentation of non-GAAP financial information that excludes the unrealized gains or losses on our marketable equity securities, operating results for the newly constructed healthcare facilities not at full capacity, share-based compensation expense, and any gains on the acquisitionacquisitions of equity method investments and the legal costs and charges related to the settlement of a Qui Tam investigation within our Caris hospice partnership is helpful in allowing investors to more accurately access the Company’s operations.
The operating results for the newly constructed healthcare facilities not at full capacity for the nine months ended September 30, 2020 include facilities that began operations from 2018 to 2020, which is one memory care facility. For the nine months ended September 30, 2019, includeincluded are facilities that began operations from 2017 to 2019, (onewhich is one skilled nursing facility, two assisted living facilities, and one memory care facility). For the nine months ended September 30, 2018, included are facilities that began operations from 2016 to 2018 (two skilled nursing facilities and three assisted living facilities).facility.
The tables below provide reconciliations of GAAP to non-GAAP items (dollars in thousands, except per share data):
| | | Three Months Ended September 30 | | | Nine Months Ended September 30 | | | Three Months Ended September 30 | | | Nine Months Ended September 30 | |
| | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2020 | | | 2019 | | | 2020 | | | 2019 | |
| | | |
Net income attributable to National Healthcare Corporation | | $ | 19,461 | | | $ | 21,142 | | | $ | 54,441 | | | $ | 40,812 | | | $ | 12,849 | | | $ | 19,461 | | | $ | 14,321 | | | $ | 54,441 | |
Non-GAAP adjustments | | | | | | | | | | | | | | | | | | |
Unrealized gains on marketable equity securities | | (9,312 | ) | | (3,486 | ) | | (16,096 | ) | | (417 | ) | |
Gain on acquisition of equity method investment | | - | | | (2,050 | ) | | (1,975 | ) | | (2,050 | ) | |
Unrealized (gains)/losses on marketable equity securities | | | 241 | | | (9,312 | ) | | 40,580 | | | (16,096 | ) |
Gain on acquisitions of equity method investments | | | - | | | - | | | (1,707 | ) | | (1,975 | ) |
Operating results for newly opened facilities not at full capacity | | 152 | | | 917 | | | 884 | | | 1,972 | | | 87 | | | 152 | | | 401 | | | 884 | |
Share-based compensation expense | | 340 | | | 361 | | | 1,448 | | | 1,538 | | | 518 | | | 340 | | | 1,807 | | | 1,448 | |
Legal costs and charges related to Caris’ legal investigation | | - | | | - | | | - | | | 8,364 | | |
Tax Cuts and Jobs Act of 2017 adjustment | | - | | | (1,434 | ) | | - | | | (1,434 | ) | |
Provision of income taxes on non-GAAP adjustments | | | 2,293 | | | | 574 | | | | 4,092 | | | | (2,150 | ) | |
Provision (benefit) of income taxes on non-GAAP adjustments | | | | (220 | ) | | | 2,293 | | | | (10,681 | ) | | | 4,092 | |
Non-GAAP Net income | | $ | 12,934 | | | $ | 16,024 | | | $ | 42,794 | | | $ | 46,635 | | | $ | 13,475 | | | $ | 12,934 | | | $ | 44,721 | | | $ | 42,794 | |
| | | |
| | | |
GAAP diluted earnings per share | | $ | 1.27 | | | $ | 1.39 | | | $ | 3.55 | | | $ | 2.68 | | | $ | 0.84 | | | $ | 1.27 | | | $ | 0.93 | | | $ | 3.55 | |
Non-GAAP adjustments | | | | | | | | | | | | | | | | | | |
Unrealized gains on marketable equity securities | | (0.45 | ) | | (0.17 | ) | | (0.78 | ) | | (0.02 | ) | |
Gain on acquisition of equity method investment | | - | | | (0.13 | ) | | (0.09 | ) | | (0.13 | ) | |
Unrealized (gains)/losses on marketable equity securities | | | 0.01 | | | (0.45 | ) | | 1.95 | | | (0.78 | ) |
Gain on acquisitions of equity method investments | | | - | | | - | | | (0.08 | ) | | (0.09 | ) |
Operating results for newly opened facilities not at full capacity | | - | | | 0.04 | | | 0.04 | | | 0.10 | | | 0.01 | | | - | | | 0.02 | | | 0.04 | |
Share-based compensation expense | | 0.02 | | | 0.02 | | | 0.07 | | | 0.07 | | | | 0.02 | | | | 0.02 | | | | 0.09 | | | | 0.07 | |
Legal costs and charges related to Caris’ legal investigation | | - | | | - | | | - | | | 0.46 | | |
Tax Cuts and Jobs Act of 2017 adjustment | | | - | | | | (0.10 | ) | | | - | | | | (0.10 | ) | |
Non-GAAP diluted earnings per share | | $ | 0.84 | | | $ | 1.05 | | | $ | 2.79 | | | $ | 3.06 | | | $ | 0.88 | | | $ | 0.84 | | | $ | 2.91 | | | $ | 2.79 | |
Results of Operations
The following table and discussion set forth items from the interim condensed consolidated statements of incomeoperations as a percentage of net operating revenues and grant income for the three months and nine months ended September 30, 20192020 and 2018.2019.
Percentage of Net Operating Revenues and Grant Income
| | | Three Months Ended September 30 | | | Nine Months Ended September 30 | | | Three Months Ended
September 30 | | | Nine Months Ended September 30 | |
| | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2020 | | | 2019 | | | 2020 | | | 2019 | |
Net operating revenues: | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | |
Net operating revenues and grant income: | | | 100.0 | % | | 100.0 | % | | 100 | % | | 100 | % |
Costs and expenses: | | | | | | | | | | | | | | | | | | |
Salaries, wages and benefits | | 61.6 | | | 60.6 | | | 59.5 | | | 59.4 | | |
Salaries, wages, and benefits | | | 60.5 | | | 61.6 | | | 59.3 | | | 59.5 | |
Other operating | | 27.0 | | | 26.2 | | | 27.4 | | | 26.3 | | | 28.3 | | | 27.0 | | | 27.8 | | | 27.4 | |
Facility rent | | 4.1 | | | 4.1 | | | 4.1 | | | 4.2 | | | 4.1 | | | 4.1 | | | 4.1 | | | 4.1 | |
Depreciation and amortization | | 4.3 | | | 4.2 | | | 4.2 | | | 4.3 | | | 4.2 | | | 4.3 | | | 4.1 | | | 4.2 | |
Interest | | | 0.3 | | | | 0.5 | | | | 0.4 | | | | 0.5 | | | | 0.1 | | | | 0.3 | | | | 0.1 | | | | 0.4 | |
Total costs and expenses | | | 97.3 | | | | 95.6 | | | | 95.6 | | | | 94.7 | | | | 97.2 | | | | 97.3 | | | | 95.4 | | | | 95.6 | |
Income from operations | | 2.7 | | | 4.4 | | | 4.4 | | | 5.3 | | | 2.8 | | | 2.7 | | | 4.6 | | | 4.4 | |
Non–operating income | | 2.7 | | | 3.4 | | | 2.8 | | | 1.6 | | | 2.6 | | | 2.7 | | | 2.7 | | | 2.8 | |
Unrealized gains on marketable equity securities | | | 3.8 | | | | 1.4 | | | | 2.2 | | | | 0.1 | | |
Unrealized gains/(losses) on marketable equity securities | | | | (0.1 | ) | | | 3.8 | | | | (5.3 | ) | | | 2.2 | |
Income before income taxes | | 9.2 | | | 9.2 | | | 9.4 | | | 7.0 | | | 5.3 | | | 9.2 | | | 2.0 | | | 9.4 | |
Income tax provision | | | (1.3 | ) | | | (0.7 | ) | | | (2.1 | ) | | | (1.3 | ) | | | (0.2 | ) | | | (1.3 | ) | | | (0.1 | ) | | | (2.1 | ) |
Net income | | 7.9 | | | 8.5 | | | 7.3 | | | 5.7 | | | 5.1 | | | 7.9 | | | 1.9 | | | 7.3 | |
Net loss attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | |
Net (income)/loss attributable to noncontrolling interest | | | | 0.0 | | | | 0.0 | | | | 0.0 | | | | 0.0 | |
Net income attributable to stockholders of NHC | | | 7.9 | | | | 8.5 | | | | 7.3 | | | | 5.7 | | | | 5.1 | | | | 7.9 | | | | 1.9 | | | | 7.3 | |
Three Months Ended September 30, 20192020 Compared to Three Months Ended September 30, 20182019
Results for the quarter ended September 30, 20192020 compared to the third quarter of 20182019 include a 0.3%1.4% increase in net operating revenues and grant income and a 6.9% increase in income from operations. Excluding the grant income recorded during the third quarter of 2020, net income attributable to NHC of $19,461,000operating revenues decreased 3.5% compared to $21,142,000, which is an 8.0% decrease. Also,the third quarter of 2019. Excluding the unrealized gains in our marketable equity securities portfolio and the other non-GAAP adjustments, non-GAAP net income for the three months ended September 30, 20192020 was $12,934,000$13,475,000 compared to $16,024,000$12,934,000 for the third quarter of 2018.2019, which is an increase of 4.2%.
Net operating revenues and grant income
Net patient revenues increased $263,000,decreased $7,707,000, or 0.1%3.3%, compared to the same period last year.
The total census at owned and leased skilled nursing facilities for the quarter averaged 90.1%81.3%, compared to an average of 90.1% for the same quarter a year ago. The decline in census is due to COVID-19 and the lack of new admissions from our acute care providers and referral partners. Our Medicare per diem rates increased 0.8%11.4% and managed care per diem rates decreased 1.5%increased 4.3% compared to the same quarter a year ago. Medicaid and private pay per diem rates increased 3.6%8.4% and 1.8%5.1%, respectively, compared to the same quarter a year ago. Overall, the composite skilled nursing facility per diem at our owned and leased skilled nursing facilities increased 0.3% compared to the same quarter a year ago. Our skilled patient mix (Medicare and managed care patients) declined approximately 1.4% in the third quarter of 2019 compared to the third quarter of 2018 (24.6% vs 26.0%), which resulted in our composite skilled nursing facility per diem being flat despite some of the inflationary per diem increases when comparing the two periods.
Beginning January 1, 2019, the Company’s Institutional Special Needs Plan (“I-SNP”) began offering and providing insurance and healthcare services in the state of Tennessee. Our I-SNP, which is called NHC Advantage, is a managed care insurance company that enrolls Medicare Advantage eligible individuals who are patients in our skilled nursing facilities. We believe the I-SNP will benefit our patients by providing nurse practitioners and care-coordination teams that will continue to enhance the patient-centered experience and our quality of care. We also believe our progressive improvement to patient care will continue to drive positive financial results for the Company. For the three months ended September 30, 2019, the I-SNP increased net patient revenues approximately $2,423,0007.3% compared to the same quarter a year ago.
The Company has opened four assisted living facilities and a memory care facilityOur Medicare per diem rates have benefited from the years 2016new case-mix reimbursement model of PDPM, which was implemented on October 1, 2019. The CARES Act also temporarily suspended Medicare sequestration beginning May 1, 2020 through December 31, 2020. The Medicare sequestration policy reduces fee-for-service Medicare payments by 2 percent. Our Medicaid per diem rates have benefited from many of the states paying a supplemental Medicaid payment to 2019. These four assisted living facilities andhelp mitigate the memory care facility continue to stabilize and increased net patient revenues approximately $1,994,000 forincremental costs resulting from the COVID-19 public health emergency. For the three months ended September 30, 2019 compared2020, we have recorded $4,845,000 due to these supplemental Medicaid payments.
In February 2020, the same quarterCompany acquired the remaining 75% ownership interest in a year ago. Our homecare operations had a decline166-bed skilled nursing facility in Knoxville, Tennessee. For the three months ended September 30, 2020, this skilled nursing facility increased net patient revenues of approximately $1,884,000 in the third quarter of 2019$3,503,000 compared to the third quarter of 2018. Our homecare net patient revenue decline was primarily due to volume declines, as well as an unfavorable payor mix change with less Medicare patients and more managed care patients. In October 2018, we sold a skilled nursing facility in Madisonville, Kentucky. The sale of this facility decreased net patient revenues for the third quarter of 2019 by $1,670,000 compared to the same quarter of 2018.2019.
Other revenues increased $478,000,decreased $866,000, or 4.2%7.2%, compared to the same quarter last year, as further detailed in Note 45 to our interim condensed consolidated financial statements. The increase in management fee revenue for
During the three months ended September 30, 2019 compared2020, we recorded $12,132,000 in government stimulus income related to funds received from the same quarter of 2018 is the primary reasonCARES Act Provider Relief Fund. See Note 3 - Coronavirus Pandemic for the increase in other revenues.additional information.
Total costs and expenses
Total costs and expenses for the three months ended September 30, 20192020 compared to the same quarterperiod of 20182019 increased $5,007,000$3,105,000, or 2.1%1.3%, to $240,499,000$243,604,000 from $235,492,000.$240,499,000.
Salaries, wages, and benefits increased $2,987,000,decreased $611,000, or 2.0%0.4%, to $152,175,000$151,564,000 from $149,188,000.$152,175,000. Salaries, wages, and benefits as a percentage of net operating revenues and grant income was 61.6%60.5% compared to 60.6%61.6% for the three months ended September 30, 20192020 and 2018,2019, respectively. The primary reason for salaries and wages and benefits increasing as a percentagedecreasing was the implementation of net operating revenues is dueexpense controlling measures among our all of operations to mitigate the decrease in our existingoccupancy among our skilled nursing facilities and the continued wage pressure in most of the markets in which we operate. The four assisted living facilities, which also includes temporary pay reductions for our corporate office personnel. The expense controlling measures were offset by the incentive compensation, or "combat pay", paid to our frontline partners in fighting the COVID-19 pandemic. We incurred approximately $2,506,000 in incentive compensation related to COVID-19 for the three months ended September 30, 2020. For the three months ended September 30, 2020, we also incurred approximately $1,863,000 in salaries and a memory carewages from the skilled nursing facility that opened from the years 2016 to 2019 increased salaries, wages and benefits by approximately $1,097,000 for the third quarter of 2019we acquired in February 2020, compared to the third quarter of 2018. These salaries and wage increases have been offset by the Madisonville, Kentucky skilled nursing facility disposition in October 2018.2019.
Other operating expenses increased $2,223,000,$4,157,000, or 3.4%6.2%, to $70,887,000 for the 2020 period compared to $66,730,000 for the 2019 period compared to $64,507,000 for the 2018 period. Other operating expenses as a percentage of net operating revenuerevenues and grant income was 27.0%28.3% and 26.2%27.0% for the three months ended September 30, 2020 and 2019, respectively. During the third quarter of 2020, we incurred approximately $8,419,000 in COVID-19 related expenses in purchasing personal protective equipment, nursing supplies, and 2018, respectively.lab and testing supplies. The majority ofexpense controlling efforts have helped mitigate the increase in other operating expenses due to COVID-19. Excluding the COVID-19 related expenses, other operating expenses have decreased $4,262,000, or 6.4%, for the third quarter of 2019three months ended September 30, 2020 compared to the third quarter of 2018 is due to the January 1, 2019 start of our I-SNP insurance plan, NHC Advantage. For the three months ended September 30, 2019, the I-SNP increased other operating expenses approximately $2,637,000 compared to the third quarter a year ago. 2019.
The decrease in interest expense is due from our long-term debt continuing to bebeing paid down. Duringoff in the thirdsecond quarter of 2019, we paid down $25,000,000 of our long-term debt.2020. At September 30, 2019,2020, we have $30 million outstanding on our credit facility.no long-term debt outstanding.
Other income (expense)
Non–operating income decreased by $1,804,000$185,000 compared to the same period last year, as further detailed in Note 56 to our interim condensed consolidated financial statements. The decrease in non-operating income is primarily due to the 2018 third quarter gain of $2,050,000 recorded on the acquisition of a controlling financial interest in a 14-bed geriatric psychiatric hospital in Osage Beach, Missouri. We previously held a noncontrolling ownership interest and an equity method investment in this hospital.
Income taxes
The income tax provision for the three months ended September 30, 20192020 is $3,167,000$391,000 (an effective income tax rate of 14.0%2.9%). Excluding nondeductible expenses,certain items, we expect our corporate (federal and state) income tax rate for 20192020 to be approximately 26.0%. For the three months ended September 30, 2020, our income tax provision benefitted primarily from the statute of limitation expirations of our income tax contingency reserves of $2,234,000.
Noncontrolling interest
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, 20192020 Compared to Nine Months Ended September 30, 20182019
Results for the nine months ended September 30, 20192020 compared to the first nine monthmonths of 20182019 include a 1.5%3.5% increase in net operating revenues and a 7.3%grant income and an 8.7% increase in income from operations. Excluding the grant income recorded for the nine months ended September 30,2020, net income attributableoperating revenues would have decreased 1.5% compared to NHC.the same nine-month period in 2019. Excluding the unrealized gains in our marketable equity securities portfolio and the 2018 Caris Qui Tam settlement, income before income taxes for the nine months ended September 30, 2019 decreased 8.3% compared to the same nine-month period in 2018. Also,other non-GAAP adjustments, non-GAAP net income for the nine months ended September 30, 20192020 was $42,794,000$44,721,000 compared to $46,635,000$42,794,000 for the nine monthssame period of 2018.2019, which is an increase of 4.5%.
Net operating revenues and grant income
Net patient revenues increased $9,292,000,decreased $9,316,000, or 1.3%, compared to the same period last year.
The total census at owned and leased skilled nursing facilities for the first nine months ended September 30, 2019of 2020 averaged 90.3%85.7% compared to an average of 89.7%90.3% for the same period a year ago. The decline in census is due to COVID-19 and the lack of new admissions from our acute care providers and referral partners. Our Medicare per diem rates decreased 0.2%,increased 11.1% and managed care per diem rates decreased 1.8%increased 3.0% compared to the same nine-month period a year ago. Medicaid and private pay per diem rates increased 3.6%5.8% and 2.7%, respectively, compared to the same period a year ago. Overall, the composite skilled nursing facility per diem at our owned and leased skilled nursing facilities increased 7 basis points, or 0.07%, compared to the nine months a year ago. Our skilled patient mix (Medicare and managed care patients) declined approximately 1.4% for the nine months ended September 30, 2019 compared to the same period in 2018 (25.4% vs 26.8%), which resulted in our composite skilled nursing facility per diem being flat despite some of the inflationary per diem increases when comparing the two periods.
Beginning January 1, 2019, the Company’s Institutional Special Needs Plan (“I-SNP”) began offering and providing insurance and healthcare services in the state of Tennessee. Our I-SNP, which is called NHC Advantage, is a managed care insurance company that enrolls Medicare Advantage eligible individuals who are patients in our skilled nursing facilities. We believe the I-SNP will benefit our patients by providing nurse practitioners and care-coordination teams that will continue to enhance the patient-centered experience and our quality of care. We also believe our progressive improvement to patient care will continue to drive positive financial results for the Company. For the nine months ended September 30, 2019, the I-SNP increased net patient revenues approximately $8,633,0004.2% compared to the same period a year ago.
In August 2018, the Company acquired a controlling ownership interest in a 14-bed behavioral health hospital. For the nine months ending September 30, 2019, this hospital increased net patient revenues approximately $3,404,000 compared to the same period a year ago (since we acquired the operations in August 2018, we only had two months of revenue at September 30, 2018). The Company has opened four assisted living facilities and a memory care facilityOur Medicare per diem rates have benefited from the years 2016new case-mix reimbursement model of PDPM, which was implemented on October 1, 2019. The CARES Act also temporarily suspended Medicare sequestration beginning May 1, 2020 through December 31, 2020. The Medicare sequestration policy reduces fee-for-service Medicare payments by 2 percent. Since March 2020, our Medicaid per diem rates benefited from many of the states paying a supplemental Medicaid payment to 2019. These four assisted living facilities andhelp mitigate the memory care facility continue to stabilize and increased net patient revenues by approximately $4,394,000 forincremental costs resulting from the COVID-19 public health emergency. For the nine months ended September 30, 20192020, we have recorded $10,378,000 due to these supplemental Medicaid payments.
In February 2020, the Company acquired the remaining 75% ownership interest in a 166-bed skilled nursing facility in Knoxville, Tennessee. For the nine months ended September 30, 2020, this skilled nursing facility increased net patient revenues approximately $7,896,000 compared to the same period a year ago. in the prior year.
Our homecare operations had a decline in net patient revenues of approximately $3,409,000 for$4,134,000 in the first nine months ended September 30, 2019of 2020 compared to the same nine-month period in 2018.of 2019. Our homecare net patient revenue decline has beenwas primarily due to volume declines as well as an unfavorable payor mix change with less Medicare patients and more managed care patients. In October 2018, we sold a skilled nursing facility in Madisonville, Kentucky. The sale of this facility decreased net patient revenues for the first nine months of 2019 by $4,865,000 comparedand second quarter due to the same period of 2018.COVID-19.
Other revenues increased $1,782,000,decreased $1,575,000, or 5.2%4.4%, compared to the first nine months last year, as further detailed in Note 4 to our interim condensed consolidated financial statements. The increase in management fee revenue for the nine months ended September 30, 2019 compared to the same period of 2018 is the primary reason for the increase in other revenues.
Total costs and expenses
Total costs and expenses for the first nine months of 2019 compared to the first nine months of 2018 increased $17,415,000 or 2.5%, to $709,962,000 from $692,547,000.
Salaries, wages and benefits increased $6,692,000, or 1.5%, to $441,441,000 from $434,749,000. Salaries, wages and benefits as a percentage of net operating revenues was 59.5% compared to 59.4% for the nine months ended September 30, 2019 and 2018, respectively. The increase in salaries, wages and benefits is primarily due to our existing skilled nursing facilities and the continued wage pressure in most of the markets in which we operate. The four assisted living facilities and a memory care facility that opened from the years 2016 to 2019 increased salaries, wages and benefits by approximately $2,405,000 for the nine months ended September 30, 2019 compared to the same nine-month period in 2018. These salaries and wage increases have been offset by the Madisonville, Kentucky skilled nursing facility disposition in October 2018.
Other operating expenses increased $11,492,000, or 6.0%, to $203,760,000 for the 2019 period compared to $192,268,000 for the 2018 period. Other operating expenses as a percentage of net operating revenue was 27.4% compared to 26.3% for the nine months ended September 30, 2019 and 2018, respectively. The increase in other operating expenses for the first nine months of 2019 compared to the first nine months of 2018 is primarily due to the January 1, 2019 start of our I-SNP insurance plan, NHC Advantage. For the nine months ended September 30, 2019, the I-SNP increased other operating expenses approximately $8,912,000 compared to the same period a year ago. We also experienced unfavorable results within our self-insured accrued risk reserve programs for the nine months ended September 30, 2019. Our self-insured accrued risk reserve programs increased other operating expenses by approximately $1,104,000 for the nine months ended September 30, 2019 compared to the same period a year ago.
The decrease in interest expense is due from our long-term debt continuing to be paid down. For the nine months ended September 30, 2019, we have paid down $25,000,000 of our long-term debt. At September 30, 2019, we have $30 million outstanding on our credit facility.
Other income (expense)
Non–operating income increased by $9,880,000 compared to the same period last year, as further detailed in Note 5 to our interim condensed consolidated financial statements.
During the nine months ended September 30, 2020, we recorded $36,780,000 in government stimulus income related to funds received from the Provider Relief Fund. See Note 3 - Coronavirus Pandemic for additional information.
Total costs and expenses
Total costs and expenses for the nine months ended September 30, 2020 compared to the same period of 2019 increased $23,054,000 or 3.2%, to $733,016,000 from $709,962,000.
Salaries, wages, and benefits increased $14,506,000, or 3.3%, to $455,947,000 from $441,441,000. Salaries, wages, and benefits as a percentage of net operating revenues and grant income was 59.3% compared to 59.5% for the nine months ended September 30, 2020 and 2019, respectively. The primary reason for salaries and wages increasing is due to the incentive compensation, or "combat pay", paid to our frontline partners in fighting the COVID-19 pandemic. We incurred approximately $9,220,000 in incentive compensation related to COVID-19 for the nine months ended September 30, 2020. For the nine months ended September 30, 2020, we also incurred approximately $4,259,000 in salaries and wages from the skilled nursing facility that we acquired in February 2020, compared to the same period of 2019. Due to COVID-19, we have implemented expense controlling measures within all of our operations that have mitigated the increase in non-operating income is due fromsalaries and wages, including temporary pay reductions for our equity in earnings investment in our Caris hospice operations. During the first quartercorporate office personnel.
Other operating expenses increased $9,656,000, or 4.7%, to earnings of $8,500,000$213,416,000 for the settlement2020 period compared to $203,760,000 for the 2019 period. Other operating expenses as a percentage of a Qui Tam investigation, of which 75.1% is included innet operating revenue was 27.8% and 27.4% for the Company’s earnings. In total, with the $8,500,000 million settlementnine months ended September 30, 2020 and legal expenses, Caris’ earnings negatively impacted NHC’s non-operating income by $8,364,000 for2019. During the first nine months of 2018.2020, we incurred $15,048,000 in COVID-19 related expenses in purchasing personal protective equipment, nursing supplies, and lab and testing supplies. The expense controlling efforts have helped mitigate the increase in other operating expenses due to COVID-19. Excluding the COVID-19 related expenses, other operating expenses have decreased $5,392,000, or 2.6%, for the nine months ended September 30, 2020 compared to the same period in 2019.
The decrease in interest expense is due from our long-term debt being paid off in the second quarter of 2020. At September 30, 2020, we have no outstanding long-term debt.
Other income
Non–operating income decreased by $358,000 compared to the same period last year, as further detailed in Note 6 to our interim condensed consolidated financial statements.
Income taxes
The income tax provision for the nine months ended September 30, 20192020 is $15,284,000$800,000 (an effective income tax rate of 22.0%5.2%). Excluding nondeductible expenses,certain items, we expect our corporate (federal and state) income tax rate for 20192020 to be approximately 26.0%. For the nine months ended September 30, 2020, our income tax provision benefitted primarily from the statute of limitation expirations of our income tax contingency reserves of $2,234,000.
Noncontrolling interest
The noncontrolling interest in subsidiariesa subsidiary is presented within total equity of the Company’s consolidated balance sheets. The company presents the noncontrolling interest and the amount of consolidated net income attributable to NHC in its consolidated statements of operations. The Company’s earnings per share is calculated based on net income attributable to NHC’s stockholders. The carrying amount of the noncontrolling interest is adjusted based on an allocation of subsidiary earnings based on ownership interest.
Liquidity, Capital Resources, and Financial Condition
Our primary sources of cash include revenues from the operations of our healthcare and senior living facilities, management and accounting services, rental income, and investment income. Our primary uses of cash include salaries, wages and other operating costs of our healthcare and senior living facilities, the cost of additions to and acquisitions of real property, facility rent expenses, and dividend distributions. These sources and uses of cash are reflected in our interim condensed consolidated statements of cash flows and are discussed in further detail below.
The following is a summary of our sources and uses of cash flows (dollars in thousands):
| | | Nine Months Ended September 30 | | | Nine Month Change | | | Nine Months Ended September 30 | | | Nine Month Change | |
| | | 2019 | | | 2018 | | | | | | | % | | | 2020 | | | 2019 | | | | | | | % | |
Cash, cash equivalents, restricted cash and restricted cash equivalents, at beginning of period | | $ | 54,920 | | | $ | 67,421 | | | $ | (12,501 | ) | | (18.5 | ) | |
Cash, cash equivalents, restricted cash, and restricted cash equivalents, at beginning of period | | | $ | 61,010 | | | $ | 54,920 | | | $ | 6,090 | | | 11.1 | |
| | | |
Cash provided by operating activities | | 74,884 | | | 77,066 | | | (2,182 | ) | | (2.8 | ) | | 183,900 | | | 74,884 | | | 109,016 | | | 145.6 | |
| | | |
Cash used in investing activities | | (9,823 | ) | | (27,090 | ) | | 17,267 | | | 63.7 | | | (15,273 | ) | | (9,823 | ) | | (5,450 | ) | | (55.5 | ) |
| | | |
Cash used in financing activities | | | (51,899 | ) | | | (49,664 | ) | | | (2,235 | ) | | | (4.5 | ) | | | (33,519 | ) | | | (51,899 | ) | | | 18,380 | | | | 35.4 | |
| | | |
Cash, cash equivalents, restricted cash and restricted cash equivalents, at end of period | | $ | 68,082 | | | $ | 67,733 | | | $ | 349 | | | | 0.5 | | |
Cash, cash equivalents, restricted cash, and restricted cash equivalents, at end of period | | | $ | 196,118 | | | $ | 68,082 | | | $ | 128,036 | | | | 188.1 | |
Operating Activities
Net cash provided by operating activities for the nine months ended September 30, 20192020 was $74,884,000$183,900,000 as compared to $77,066,000 for$74,884,000 in the same period last year. Cash provided by operating activities consisted of net income of $54,289,000$14,574,000 and adjustments for non–cash items of $13,531,000.$53,358,000. There was cash provided by working capital in the amount of $3,297,000$106,053,000 for the nine months ended September 30, 20192020 compared to cash usedprovided by working capital needs in the amount of $483,000$3,297,000 for the same nine-month period a year ago. We also received cash distributions from our unconsolidated investments of $3,884,000$10,050,000 during the nine months ended September 30, 20192020, compared to $3,830,000$3,884,000 for the same period a year ago. There
Included in cash provided by working capital is $51,253,000 from the Medicare Accelerated Payment Program, $21,404,000 provided from the Provider Relief Fund that has not been recognized as income, and $14,854,000 from the deferral of the Company’s employer social security taxes. All three of these working capital cash flow items were also gains on sales of restricted marketable debt securities of $117,000 forinitiated by the nine months ended September 30, 2019 compared to $18,000 for the same period in 2018.CARES Act legislation.
Included in the adjustments for non-cash items are depreciation expense, equity in earnings of unconsolidated investments, unrealized gains/losses on our marketable equity securities, deferred taxes, stock compensation, and a gain on the acquisition of a 166-bed skilled nursing facility in Knoxville, Tennessee in which we previously held a noncontrolling ownership interest.
Investing Activities
Net cash used in investing activities totaled $15,273,000 for the nine months ended September 30, 2020 compared to $9,823,000 for the nine months ended September 30, 2019 compared to $27,090,000 for the nine months ended September 30, 2018.2019. Cash used for property and equipment additions was $19,670,000$17,717,000 and $22,708,000$19,670,000 for the nine months ended September 30, 2020 and 2019, and 2018, respectively. Cash was also used in theThe acquisition of an equity method investment (St. Peters Memory Care)the 166-bed skilled nursing facility in Knoxville, Tennessee resulted in cash used of $6,648,000 for the nine months ended September 30, 2019 of $15,589,000. Investments in2020. The Company collected notes receivable were $5,462,000of $1,572,000 and $1,010,000 for the nine months ended September 30, 2019. The Company collected notes receivable of $1,010,0002020 and $1,180,000 for the nine months ended September 30, 2019, and 2018, respectively. Sales of restricted marketable debt securities, net of purchases, resulted in providingpositive cash flow of $8,250,000 and $30,085,000 for the nine months ended September 30, 2020 and 2019, compared to purchases of restricted marketable securities, net of sales, resulted in using cash of $5,411,000 for the nine months ended September 30, 2018.respectively.
Financing Activities
Net cash used in financing activities totaled $51,899,000$33,519,000 and $49,664,000$51,899,000 for the nine months ending September 30, 20192020 and 2018,2019, respectively. Cash was used for principal paymentsrepayments on the Company’s long-term debtcredit facility has been a net of $25,000,000$10,000,000 for each of the nine-month periods endingnine months ended September 30, 2020. We made principal payments under our finance lease obligations in the amount of $3,101,000 and $2,920,000 for the nine months ended September 30, 2020 and 2019, and 2018.respectively. Cash used for dividend payments to common stockholders totaled $23,240,000$23,935,000 in the current year period compared to $22,214,000$23,240,000 for the same period a year ago. In the current period, $1,383,000 was provided by the issuance of common stock compared to $1,327,000 in the prior year period. In the current period, repurchases of common stock totaled $872,000 compared to $867,000 in the prior period.
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 $59,261,000,$183,765,000 and our marketable equity securities of $156,319,000, and as needed, our borrowing capacity on the credit facility,$111,873,000 are expected to be adequate to meet our contractual obligations, operating liquidity, and our growth and development plans in the next twelve months.
Long–term liquidity
We expect to meet our long-term liquidity requirements primarily from our cash flows from operating activities, our current cash on hand of $59,261,000,$183,765,000 and our marketable equity securities of $156,319,000 and$111,873,000. We also have substantial value in our unencumbered real estate assets which could potentially be used as collateral in future borrowing capacity on the credit facility. At September 30, 2019, the outstanding balance on the credit facility is $30,000,000; therefore, leaving $30,000,000 available for future borrowings. The maturity date on the credit facility is October 7, 2020. The credit facility is available for general corporate purposes, including working capital and acquisitions.opportunities.
Our ability to refinance the credit agreement, to meet our long–term contractual obligations, and to finance our operating requirements and growth and development plans will depend upon our future performance. 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 healthcare, customer demand, success of our marketing efforts, pressures from competitors, and the state of the economy, including the state of financial and credit markets.markets, as well as many unforeseen factors.
Commitment and Contingencies
Nutritional Support Services, L.P., Qui Tam Litigation
On June 19, 2018, a First Amended Complaint was filed naming Nutritional Support Services, L.P. (“NSS”), a wholly owned subsidiary of the Company, as a defendant in the action captioned U.S. ex rel. McClain v. Nutritional Support Services, L.P., No. 6:17-cv-2608-AMQ (D.S.C.), which was filed in the United States District Court for the District of South Carolina. The action alleges that NSS violated the False Claims Act by reporting a National Drug Code (“NDC”) number that did not correspond to the NDC for dispensed prescriptions. The plaintiffs are seeking unspecified damages. On April 16, 2018, the United States filed a Notice of Election to Decline Intervention with respect to the allegations asserted in this action. NSS intendsOn March 14, 2020, the Court entered an Order granting the Defendant’s Motion to vigorously defend itself with respectDismiss. On May 6, 2020, the Court entered a Final Judgment dismissing the case.
Divestiture of Skilled Nursing Facility
On August 21, 2020, the Company entered into a definitive agreement for the sale of the real estate and operations of a skilled nursing facility in Town and Country, Missouri. This transaction is expected to this action.be completed in the fourth quarter of 2020.
Governmental Regulations
Laws and regulations governing the Medicare, Medicaid and other federal healthcare programs are complex and subject to interpretation. Management believes that it is following all applicable laws and regulations in all material respects. However, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusions from the Medicare, Medicaid, and other federal healthcare programs. There have been several enacted and proposed federal and state relief measures as a result of COVID-19 which should provide support to us during this pandemic; however, the full benefit of any such programs would not be realized until these payments are fully implemented, government agencies issue applicable regulations, or guidance and such relief is provided.
New Accounting Pronouncements
See Note 2 to the interim condensed consolidated financial statements for the impact of new accounting standards.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
Market risk represents the potential economic loss arising from adverse changes in the fair value of financial instruments. Currently, our exposure to market risk relates primarily to our fixed–income and equity portfolios. These investment portfolios are exposed primarily to, but not limited to, interest rate risk, credit risk, equity price risk, and concentration risk. We also have exposure to market risk that includes our cash and cash equivalents, notes receivable, revolving credit facility, and long–term debt. The Company's senior management has established comprehensive risk management policies and procedures to manage these market risks.
Interest Rate Risk
The fair values of our fixed–income investments fluctuate in response to changes in market interest rates. Increases and decreases in prevailing interest rates generally translate into decreases and increases, respectively, in the fair values of those instruments. Additionally, the fair values of interest rate sensitive instruments may be affected by the creditworthiness of the issuer, prepayment options, the liquidity of the instrument and other general market conditions. At September 30, 2019,2020, we have available for sale restricted marketable debt securities in the amount of $149,557,000.$142,040,000. The fixed maturity portfolio is comprised of investments with primarily short–term and intermediate–term maturities. The portfolio composition allows flexibility in reacting to fluctuations of interest rates. The fixed maturity portfolio allows our insurance company subsidiaries to achieve an adequate risk–adjusted return while maintaining sufficient liquidity to meet obligations.
As of September 30, 2019, the Company has $30,000,000 of long–term debt that bears interest at variable interest rates. Based on our outstanding long–term debt, a 1% change in interest rates would change our annual interest cost by approximately $300,000.
Our cash and cash equivalents consist of highly liquid investments with a maturity of less than three months when purchased. As a result of the short–term nature of our cash instruments, a hypothetical 1% change in interest rates would have minimal impact on our future earnings and cash flows related to these instruments.
We do not currently use any derivative instruments to hedge our interest rate exposure. We have not used derivative instruments for trading purposes and the use of such instruments in the future would be subject to approvals by the Investment Committee of the Board of Directors.
Credit Risk
Credit risk is managed by diversifying the fixed maturity portfolio to avoid concentrations in any single industry group or issuer and by limiting investments in securities with lower credit ratings.
Equity Price and Concentration Risk
Our marketable equity securities are recorded at their fair market value based on quoted market prices. Thus, there is exposure to equity price risk, which is the potential change in fair value due to a change in quoted market prices. At September 30, 2019,2020, the fair value of our marketable equity securities is approximately $156,319,000.$111,873,000. Of the $156.0$111.9 million equity securities portfolio, our investment in NHI comprises approximately $134.3$98.3 million, or 86%87.8%, of the total fair value. We manage our exposure to NHI by closely monitoring the financial condition, performance, and outlook of the company. Hypothetically, a 10% change in quoted market prices would result in a related increase or decrease in the fair value of our equity investments of approximately $15.6$11.2 million. At September 30, 2019,2020, our equity securities had unrealized gains of $126.1$81,697,000 million. Of the $126.1$81.7 million of unrealized gains, $109.6$73.5 million is related to our investment in NHI.
Item 4. | Controls and Procedures. |
As of September 30, 2019,2020, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Principal Accounting Officer (“PAO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s management, including the CEO and PAO, concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2019. There have been no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.2020.
PART II. OTHER INFORMATION
Item 1. | Legal Proceedings. |
For a discussion of prior, current, and pending litigation of material significance to NHC, please see Note 1516 of this Form 10–Q.
DuringWe are providing the nine months ended September 30, 2019, there were no material changes todisclosure below and supplementing the risk factors that were disclosed in Item 1A of National HealthCare Corporation’s Annual Report on Form 10–K for the year ended December 31, 2018.2019 based on information currently known to us and recent developments since the date of the 2019 Form 10-K filing. The additional risk factor identified should be read in conjunction with the risk factors described in the 2019 Annual Report.
COVID-19 and other pandemics, epidemics, or outbreaks of a contagious illness may adversely affect our operating results, cash flows and financial condition. COVID-19 coronavirus outbreak and other pandemics, epidemics, or outbreaks of a contagious illness, and similar events, may cause harm to us, our partners (employees), our patients, our vendors and supply chain partners, and financial institutions, which could have a material adverse effect on our results of operations, financial condition and cash flows. The impacts may include, but would not be limited to:
● | Disruption to operations due to the unavailability of partners due to illness, quarantines, risk of illness, travel restrictions or factors that limit our existing or potential workforce. |
● | Decreased availability and increased cost of supplies due to increased demand around essential personal protective equipment (“PPE”), sanitizers and cleaning supplies including disinfecting agents, and food and food-related products due to increased global demand and disruptions along the global supply chains of these manufactures and distributors. |
● | Decreased census across all our operations, which could negatively impact our operating cash flows and financial condition. |
● | Elevated partner turnover which may increase payroll expense, increase third party agency nurse staffing, and recruiting-related expenses. |
● | Significant disruption of the global financial markets, which could have a negative impact on our ability to access capital in the future. |
The further spread of COVID-19, and the requirements to take action to help limit the spread of the virus, could impact the resources required to carry out our business as usual and may have a material adverse effect on our results of operations, financial condition and cash flows. The extent to which COVID-19 will impact our business and our financial results will depend on future developments, which are highly uncertain and cannot be predicted. Such developments may include the ongoing geographic spread of the virus, the severity of the virus, the duration of the outbreak and the type and duration of actions that may be taken by various governmental authorities in response to the outbreak. Any of these developments, individually or in aggregate, could materially impact our business and our financial results and condition.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
Not applicable
Item 3. | Defaults Upon Senior Securities. |
None
Item 4. | Mine Safety Disclosures. |
Not applicable
Item 5. | Other Information. |
None
EXHIBIT INDEX
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| NATIONAL HEALTHCARE CORPORATION |
| (Registrant) |
| |
Date: November 5, 20192020 | /s/ Stephen F. Flatt |
| Stephen F. Flatt |
| Chief Executive Officer |
| |
| |
Date: November 5, 20192020 | /s/ Brian F. Kidd |
| Brian F. Kidd |
| Senior Vice President and Controller |
| (Principal Accounting Officer) |
| |
36
