What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-10-28 compared with 2020-08-05 · 313 added, 278 removed, 1061 unchanged (36% of the section changed)

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Our operating subsidiaries, each of which strives to be the service of choice in the community it serves, provide a broad spectrum of skilled nursing, senior living and other ancillary services.

As of June 30, 2020, we offered skilled nursing, senior living and rehabilitative care services through 225 skilled nursing and senior living facilities.

As of September 30, 2020, we offered skilled nursing, senior living and rehabilitative care services through 226 skilled nursing and senior living facilities.

Of the 226 facilities, we operated 163 facilities under long-term lease arrangements, and have options to purchase 11 of those 163 facilities.

We owned an additional 92 real estate properties, which included 62 operations we operated and managed, real estate properties of 31 senior living operations that were leased to The Pennant Group, Inc.

We owned an additional 93 real estate properties, which included 63 facilities operated and managed by us, 31 senior living operations leased to The Pennant Group, Inc.

as part of the Spin-Off (defined below), and the Service Center location.

Of those 31 senior living operations, two are located on the same real estate properties as the skilled nursing facilities.

The following table summarizes our affiliated facilities and operational skilled nursing beds and senior living units by ownership status as of June 30, 2020:

The following table summarizes our affiliated facilities and operational skilled nursing beds and senior living units by ownership status as of September 30, 2020:

Owned and Operated Leased (with a Purchase Option) Leased (without a Purchase Option) Total for Facilities Operated

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We continue to implement measures necessary to provide the safest possible environment within our sites of service taking into consideration the vulnerable nature of our patients and the unique exposure risks of our staff.

The CDC has stated that older adults, such as our patients, are at a higher risk for serious illness and death from COVID-19 due to the prevalence of chronic medical conditions.

In addition, our employees are at higher risk of contracting or spreading the disease due to the nature of the work environment when caring for patients.

The CDC has stated that older adults, such as our patients, are at a higher risk for serious illness and death from COVID-19 due to the higher prevalence of chronic medical conditions.

In addition, our employees are at higher risk of contracting or spreading the disease when caring for patients due to the nature of the work environment.

Consistent with CDC guidelines and recommendations applicable to nursing facilities, we implemented new infection control policies and practices to prevent the introduction of COVID-19 into our facilities and to control the spread of COVID-19 within communities.

These changed include restricting visitors at all of our facilities except for essential healthcare personnel and certain end-of-life situations, screening employees and others permitted to enter the building, restricted communal dining, and reducing or restricting activities programming and optional therapies.

Upon confirmation of a positive COVID-19 exposure at a facility, we follow CDC guidance to minimize further exposure, including implementing personal protection protocols, restricting new admissions, and cohorting and isolating patients.

Due to the vulnerable nature of our patients, we expect many of these protections will continue at our facilities, even as federal, state, and local stay-at-home and social distancing orders and recommendations are relaxed.

Notwithstanding these protocols and our other response efforts, the virus will likely continue to be introduced to and transmitted within certain facilities due to the transmissible nature of COVID-19.

The full financial impact of COVID-19 will continue to be dependent upon numerous factors, including the nature of the COVID-19 pandemic (such as geographic concentration of virus, rate of spread, and duration), as well as access and costs of staffing, testing and supplies), legal and regulatory matters and federal and state stimulus and other measures intended to mitigate the clinical and financial harm of the pandemic.

These changing guidelines include visitor policies, screening and testing employees and others permitted to enter the building, restricted communal dining, and reducing or restricting activities programming and optional therapies.

Upon confirmation of a positive COVID-19 exposure at a facility, we follow CDC and local healthcare guidance to minimize further exposure, including implementing personal protection protocols, restricting new admissions, and cohorting and isolating patients.

Due to the vulnerable nature of our patients, we continue to adhere to CDC infection prevention guidelines at our facilities, even as federal, state, and local stay-at-home and social distancing orders and recommendations have relaxed.

Notwithstanding these protocols and our other response efforts, the virus will likely continue to be introduced to and transmitted within certain facilities due to the highly transmissible nature of the virus.

The full financial impact of COVID-19 depends upon numerous factors, including the nature and duration of the COVID-19 pandemic (such as geographic concentration of virus, rate of spread, and duration), access and costs of staffing, testing and supplies, legal and regulatory matters and stimulus funding and other measures intended to mitigate the clinical and financial harm of the pandemic and the spread of it in the communities we serve.

While the operating environment for healthcare providers is continuously changing during this pandemic, the safety and well-being of our patients and employees remains our top priority.

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Prior to COVID-19, we were exhibiting consistent growth in our occupancy and skilled mix.

However, following the introduction of COVID-19 into the U.S., our operations have experienced declines in occupancy as a result of local government-imposed quarantines, including shelter-in-place mandates, sweeping restrictions on travel, and substantial restrictions and changes to protocol within the healthcare system across the U.S., including temporary limitations on certain medical procedures, which limited the number of patients visiting the hospital and needing skilled nursing services.

However, following the introduction of COVID-19 into the U.S., our operations have experienced declines in occupancy as a result of local government-imposed quarantines, including shelter-in-place mandates, sweeping restrictions on travel, and substantial restrictions and changes to protocol within the healthcare system across the U.S., including temporary limitations on certain medical procedures, which limited the number of patients in the hospital that needed skilled nursing services.

The introduction of the virus into our operations is typically contemporaneous with the virus’ impact in each community in which we operate.

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As the weeks continued, and as reported and confirmed cases of COVID-19 infections in the United States increased, we also began experiencing an impact on our revenues and expenses throughout the organization.

As of June 30, 2020, we have 138 operations that have positive cases of COVID-19 amongst patients or staff.

Most of these operations have seen only a few cases amongst patients, staff or both and a small number of operations have had multiple positive cases amongst the patients, staff or both.

We expect to contin ue to see new positive cases in some of our operations as the virus continues to impact each community and as testing is more readily available and mandated in certain circumstances.

Approximately 80% of the patient and resident positive COVID-19 cases that we experienced in our facilities have occurred in the states of Arizona, California and Texas.

These are states which have experienced significant community outbreaks.

Beginning in mid-February and continuing throughout the second quarter, we experienced decreased volumes which we believe resulted from a number of factors related to the spread of COVID-19, including lower census at acute-care hospitals.

Many acute care hospitals took affirmative steps to prepare for an increase of COVID-19 and critical care patients, and imposed admission restrictions due to the need to preserve personal protective equipment and a heightened anxiety among patients and caregivers regarding the risk of exposure to COVID-19.

Occupancy was also initially impacted by decisions of our operating subsidiaries to limit new admissions into their operations due to the risks and uncertainties surrounding the potential spread of the virus by individuals that had either tested positive for COVID-19, were symptomatic of COVID-19 but had not yet been tested positive due to a shortage of tests, or that were asymptomatic of COVID-19 but had an unknown status and were potentially positive and contagio us.

On March 13, 2020, President Trump issued a national emergency declaration in connection with the COVID-19 situation.

Following the State of Emergency declarations, California was the first state to have a shelter-in-place order, which was subsequently followed by similar orders in 42 other states.

As COVID-19 cases began to decline in late May and June, we saw an increase in occupancy and a slight decrease of skilled mix as the needs of high acuity patients were fewer.

Between mid-May to mid-June, Same Facilities and Transitioning Facilities occupancy increased by 0.4% and skilled mix decreased by 1.1%.

However, the recent influx of COVID-19 cases in several key states, occupancy again began to decrease slightly while skilled mix improved as the number of high acuity patients increased.

Between mid-June and mid-July, combined Same Facilities and Transitioning Facilities occupancy was down by approximately 2.3% and skilled mix increased by 8.1%.

Although census trends declined significantly during the second quarter, the rate of decline in occupancy has continued to slow.

Beginning in June and continued into July, occupancy has remained stable.

As of October 14, 2020, our 217 affiliated skilled nursing operations across 13 states had 207 confirmed COVID-19 patients in-house.

Also, as of October 14, 2020, eight operations had over 20 COVID-19 positive cases, 48 operations had less than 20 cases and 161 operations had no confirmed cases of COVID-19 in house.

The vast majority of COVID-19 positive patients at our operations have recovered and returned home.

We experienced an increase in COVID-19 cases in our facilities in correlation with the trends occurring in the local community, that as the number of cases increases in the community overall, such as in parts of Texas, Arizona and California, those trends also impact skilled nursing operations in those areas.

We expect to continue to see new positive cases in some of our operations as the virus continues to impact each community, as testing mandates have been enacted and we enter into colder months in many of our markets.

Beginning in mid-Febr uary and continuing through the third quarter, we've seen a decrease in the number of patients due to a number of factors related to the spread of COVID-19, including lower overall patient flow into the acute-care setting.

In response to the pandemic, many acute care hospitals took affirmative steps to prepare for an increase of COVID-19 and critical care patients, and imposed admission restrictions due to the need to preserve personal protective equipment and a heightened anxiety among patients and caregivers regarding the risk of exposure to COVID-19.

Occupancy was also impacted by decisions of our operating subsidiaries to limit new admissions into their operations due to the risks and uncertainties surrounding the potential spread of the virus by individuals that had either tested positive for COVID-19, were symptomatic of COVID-19 but had not yet been tested positive due to a shortage of tests, or that were asymptomatic of COVID-19 but had an unknown status and were potentially positive and contagio us.

On March 13, 2020, President Trump issued a national emergency declaration in connection with the COVID-19 pandemic.

Following the State of Emergency declarations, California was the first state to have a shelter-in-place order, which was subsequently followed by similar orders in the remaining states.

Starting in June, as states began lifting stay-at-home restrictions, many of the communities in which we operate experienced an overall increase in COVID-19 cases.

As the prevalence of COVID-19 increased in the communities we serve, we experienced an increase in COVID-19 cases in our operations, particularly in Texas, Arizona and California.

The increase in COVID-19 cases also have a direct impact on skilled nursing operations in those communities in the quarter, resulting in a decrease in occupancy and, in many cases, a higher skilled mix.

More specifically, during the quarter combined Same Facilities and Transitioning Facilities occupancy declined by 2.4% and skilled mix increased by 2.9 %, both from second quarter as the pandemic worsened in many of its key states.

However, from mid-July to mid-September, our census remained flat with a slight decrease in skilled mix days.

Towards the end of the quarter and into October as the number of elective care/non-urgent procedures and surgeries normalized and the number of COVID-19 cases in the communities stabilized, we experienced an increase in our occupancy and skilled mix days.

Specifically, between mid-September to mid-October, combined Same Facilities and Transitioning Facilities occupancy increased by approximately 1.0% and skilled mix increased by 4.0%, respectively.

The number of admissions continued to progressively increase through the quarter, demonstrating that the flow of patients has improved as certain markets have begun to loosen restrictions on admissions and as the sentiment towards high quality post-acute care providers has continued to improve.

As COVID-19 has progressed and spread throughout the community we serve, our local operations and caregivers have been serving higher acuity patients who have or have been suspected of having COVID-19.

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This not only allows hospitals to maintain open acute care beds for COVID-19 patients and other highly acute patients, but it also limits the risks involved with moving patients back and forth from one care setting to another.

Accordingly, our skilled mix days have substantially recovered to rates similar to those prior to the COVID-19 impact.

Accordingly, our skilled mix days have substantially recovered, reaching levels similar to pre-COVID-19.

Legislative and Regulatory Relief

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These initiatives include:

• Temporary suspension of Medicare sequestration - The Coronavirus Aid, Relief, and Economic Security Act of 2020 (the CARES Act) temporarily suspends the automatic 2% reduction of Medicare claim reimbursements for the period of May 1, 2020 through December 31, 2020.

The suspension of the Medicare sequestration increased our revenue by approximately $2.5 million in the second quarter.

• Temporary suspension of Medicare sequestration - The Coronavirus Aid, Relief, and Economic Security Act of 2020 (the CARES Act) temporarily suspended the automatic 2% reduction of Medicare claim reimbursements for the period of May 1, 2020 through December 31, 2020.

The suspension of the Medicare sequestration increased our revenue by approximately $3.9 million and $6.5 million during the three and nine months ended September 30, 2020, respectively.

The magnitude of the positive impact will depend on the continued impact of the virus on our census and skilled mix through the remainder of the year.

• Relief funds for healthcare providers - The CARES Act also authorized the distribution of relief fund grants from the Department of Health and Human Services (HHS) to healthcare providers “to support healthcare-related expenses or lost revenue attributable to COVID-19…” Distributions were automatically paid to each provider by HHS based upon the provider’s patient revenue, number of facilities and operational beds, as well as various other factors.

To keep the funds, HHS requires providers to submit an attestation accepting certain terms and conditions within 90 days of receipt of each distribution of funds.

Providers could also apply for additional funding.

• Relief funds for healthcare providers - The CARES Act also authorized the Department of Health and Human Services (HHS) to distribute relief fund grants to healthcare providers “to support healthcare-related expenses or lost revenue attributable to COVID-19”.

HHS has made several rounds of automatic distributions to providers based upon a variety of factors.

Providers have also been able to apply for additional funding.

To keep the funds, HHS requires providers to submit an attestation accepting certain terms and conditions;

providers who are unwilling to accept the terms must return the funds.

Our operations began automatically receiving relief fund payments in April 2020.

We received approximately $108.8 million in relief distributions.

We have elected not to accept any of the CARES Act relief funds received to date and have returned all funds to an agent of HHS.

For further discussion, see Note 3, COVID-19 Update in the Notes to Condensed Consolidated Financial Statements.

During the first half of the year, we received approximately $108.8 million in relief distributions, which we returned in full in July 2020.

In July 2020, HHS announced that a new $5.0 billion Provider Relief Fund distribution to be used to protect residents of nursing homes and long-term care facilities from the impact of COVID-19.

This funding will include four separate distributions:

$2.5 billion of the Nursing Home Infection Control Relief is distributed to be used primarily for testing.

We received $23.3 million of the funds in the third quarter of 2020 and have reflected these as a liability.

We currently intend to repay the entirety of this distribution, but have not yet begun the repayment process.

HHS has announced that it intends to issue another round of Provider Relief Funds to SNFs that pass two gateway qualification tests based upon a facility’s COVID-19 infection and mortality rates.

To qualify, facilities must demonstrate COVID-19 infection rates below the rate of infection in the counties they are located and demonstrate mortality rates below nationally established performance thresholds for nursing home residents infected with COVID-19.

Facilities that qualify during each of the monthly performance periods, running from September 2020 through December 2020, will be eligible for additional funds based upon their aggregate performance on these infection and mortality measures.

To date, we have not received additional funding related to this distribution.

$250 million of the funds is to be allocated for distribution to “COVID only” facilities.

$250 million of the funds will be part of a program for providers that partner with outside groups.

See Note 3, COVID-19 Update in the Notes to Condensed Consolidated Financial Statements.

• Increase in Federal Medical Assistance Percent (FMAP) - The Family First Coronavirus Response Act provides a 6.2% increase to FMAP.

The Act permits states to retroactively increase the Medicaid rates to January 1, 2020.

The FMAP funding will terminate at the end of the quarter when the national emergency status is lifted.

To date, we have recognized $13.1 million of FMAP reimbursement relief.

Depending on the state, the FMAP funding will terminate either when the national emergency status is lifted, at the end of the quarter when the national emergency status is lifted or sometime between.

During the three and nine months ended September 30, 2020 we recognized $11.7 million and $24.8 million of FMAP reimbursement relief, respectively.

The temporary increase on FMAP and the timing of payments has and will continue to vary substantially dependent on the state.

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Our operations began to receive advances in April 2020.

Year to date, we have received $98.9 million through the Medicare Accelerated and Advance Payment Program.

The payment acceleration from Medicare is to be repaid starting 120 days after the receipt of cash.

We have paid a portion of the fund back in July 2020.

We have retained $100.7 million through the Medicare Accelerated and Advance Payment Program through September 30, 2020.

The repayment obligations associated with these payments begin one year from the date the accelerated or advance payment was issued.

We also paid a portion of the funds back in July 2020.

For further discussion, see Note 3, COVID-19 Update in the Notes to Condensed Consolidated Financial Statements.

• Deferral of Taxes - The CARES Act also provides for deferred payment of the employer portion of social security taxes through the end of 2020, with 50% of the deferred amount due by December 31, 2021 and the remaining 50% due by December 31, 2022.

Treasury Department and Internal Revenue Service, also allows corporate taxpayers to defer their estimated federal income taxes for the first and second quarters of 2020 to July 15, 2020.

Our net revenues for the three months ended June 30, 2020 were impacted by COVID-19 as we experienced revenue lost from a decline in occupancy, which was partially offset by our skilled mix changes.

Treasury Department and Internal Revenue Service also allowed corporate taxpayers to defer their estimated federal income taxes for the first and second quarters of 2020 to July 15, 2020.

We paid these estimated amounts in the third quarter.

Our net revenues for the three and nine months ended September 30, 2020 were impacted by COVID-19 as we experienced revenue loss due to a decline in occupancy, which was partially offset by our skilled mix changes.

As part of the healthcare community, we have been actively participating in ensuring our patients receive necessary services.

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In addition, the FMAP program has been designed to enhance the reimbursements to provide additional funding to cover COVID-19 related expenses in selected states.

In the second quarter, we recorded FMAP revenue of $12.4 million, which correlate directly to the additional COVID-19 related expenses we incurred.

We recorded FMAP revenue of $11.7 million and $24.8 million for the three and nine months ended September 30, 2020, which correlates directly to the additional COVID-19 related expenses we incurred.

Operating Expenses

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In addition, we have and expect to continue to have increases in labor costs on a per patient basis.

In response, we have reduced spending on non-essential supplies, travel costs and all other discretionary items, ceased all non-essential capital expenditure projects and temporarily instituted wage reductions and hiring freezes for non-clinical staff which were both reinstated in June 2020.

In response, we have reduced spending on non-essential supplies, travel costs and all other discretionary items, slowing non-essential capital expenditure projects and temporarily instituted wage reductions and hiring freezes for non-clinical staff.

The hiring freeze and wage reductions were lifted in June 2020.

The exact timing and pace of the recovery is uncertain given the impact of the pandemic on the overall U.S.

and global economy.

While we are uncertain as to the duration of the lower census volumes we are experiencing due to the COVID-19 pandemic, we expect the adverse impact to continue through the end of the third quarter.

We also expect to experience a modest recovery in the fourth quarter of 2020 as the volumes in the hospitals increase and as the spread of the virus continues to slow in addition to our typical fourth quarter seasonality in our business.

Our forecasted measures may be modified as the pace of the recovery in our volumes becomes more clear over the coming months.

While we are uncertain as to the duration of our lower census due to the COVID-19 pandemic, we expect the adverse impact to recover as we see increases in hospital volumes and elective surgeries and decrease of COVID-19 case in each of the respective communities we serve.

Our forecasted measures may be modified as the pace of the recovery in our volumes become clearer over the coming months.

We are focused on navigating the challenges presented by COVID-19 through utilizing the infrastructure of our local operational approach.

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Consistent with previous hurdles, our local leaders are adjusting their operation to meet the clinical and financial challenges, including utilizing the expertise of our Service Center resources to implement best practices.

Common Stock Repurchase Program - As approved by the Board of Directors on March 4, 2020 and March 13, 2020, we entered into two separate stock repurchase programs pursuant to which we may repurchase up to $20.0 million and $5.0 million, respectively, of our common stock under the programs for a period of approximately 12 months each.

Common Stock Repurchase Program - As approved by the Board of Directors on March 4, 2020 and March 13, 2020, we entered into two separate stock repurchase programs pursuant to which we were authorized to repurchase up to $20.0 million and $5.0 million, respectively, of our common stock under the programs for a period of approximately 12 months each.

During the three months ended March 31, 2020, we repurchased 0.5 million and 0.2 million shares of our common stock for a total of $20.0 million and $5.0 million under the March 4, 2020 and March 13, 2020 repurchase programs, respectively.

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The stock repurchases were supported with funds from our ordinary operations and took place prior to the passage of The CARES Act, which was passed by Congress and signed into law by President Trump on March 27, 2020.

Currently we have no active repurchase plans and do not intend to approve another repurchase plan at this time.

Currently, we have no active repurchase plans and do not intend to approve another repurchase plan.

As we enter a period of economic uncertainty, we are taking steps to manage our expenses and preserve our cash.

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The services generally commenced on October 1, 2019 and will terminate on or before September 30, 2021.

Revenue to Ensign under the TSA was not material during the quarter ended March 31, 2020.

Immediately after the Spin-Off, we no longer consolidated our home health and hospice operations and the senior living operations that were contributed to Pennant into our financial results.

Revenue to Ensign under the TSA was not material during the three and nine months ended September 30, 2020.

Immediately after the Spin-Off, we ceased to consolidate our home health and hospice operations and the senior living operations that were contributed to Pennant into our financial results.

As a result, the consolidated financial statements included in this Quarterly Report on Form 10-Q and related financial information reflect the Pennant operations, assets and liabilities, and cash flows as discontinued operations for 2019 financial periods presented.

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Acquisition History

The following table sets forth the location of our facilities and the number of operational beds and units located at our facilities as of June 30, 2020:

The following table sets forth the location of our facilities and the number of operational beds and units located at our facilities as of September 30, 2020:

TX CA AZ UT CO WA ID NE IA SC WI NV KS Total

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(1) Campus represents a facility that offers both skilled nursing and senior living services.

During the six months ended June 30, 2020, we expanded our operations through a combination of long-term leases and real estate purchases, with the addition of three stand-alone skilled nursing operations and one stand-alone independent living operation.

The addition of these operations added a total of 247 operational skilled nursing beds and 162 operational senior living units to be operated by our affiliated operating subsidiaries.

The purchase price for the acquisitions during the six months ended June 30, 2020 was $14.1 million.

During the first quarter of 2020, the Company entered into a long-term lease agreement to transfer two senior living operations to Pennant.

During the nine months ended September 30, 2020, we expanded our operations through a combination of long-term leases and real estate purchases, with the addition of three stand-alone skilled nursing operations, one stand-alone independent living operation and one campus operation.

These new operations added a total of 303 operational skilled nursing beds and 298 operational senior living units operated by our affiliated operating subsidiaries.

The aggregate purchase price for these acquisitions during the nine months ended September 30, 2020 was $23.1 million.

During the first quarter of 2020, we entered into a long-term lease agreement to transfer two senior living operations to Pennant.

Our affiliated operations retained ownership of the real estate for these two senior living communities.

For further discussion of our acquisitions, see Note 9, Acquisitions in the Notes to Condensed Consolidated Financial Statements.

Subsequent to June 30, 2020, we expanded our operations through the acquisition of one campus operation for a purchase price of $8 million, which added 62 operational skilled nursing beds and 162 operational senior living units to be operated by our operating subsidiary.

Key Performance Indicators

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The following table summarizes our overall skilled mix from our skilled nursing services for the periods indicated as a percentage of our total skilled nursing routine revenue and as a percentage of total skilled nursing patient days:

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

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The following table summarizes our overall occupancy statistics for skilled nursing operations for the periods indicated:

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

Occupancy for transitional and skilled services:

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The following table sets forth our total revenue by payor source generated by our transitional and skilled services and our "Other" category and as a percentage of total revenue for the periods indicated (dollars in thousands):

Three Months Ended June 30,

Three Months Ended September 30,

Transitional and Skilled Services Other (1)

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(1) Private and other payors in our "all other" category includes revenue from rental income, senior living operations and all payors generated in our other ancillary operations.

Six Months Ended June 30,

Nine Months Ended September 30,

Transitional and Skilled Services Other (1)

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Each affected operating subsidiary agreement between the hospital district and our subsidiary is terminable by either party to fully restore the prior license status.

Within our senior living operations, we generate revenue primarily from private pay sources, with a portion earned from Medicaid or other state-specific programs.

Within our senior living operations, we generate revenue primarily from private pay sources, with a portion earned from Medicaid payors or through other state-specific programs.

As part of, and subsequent to, the Spin-Off, we lease 31 of the 93 real estate properties owned by us to Pennant on a triple-net basis.

Annual rental income generated from the leases with Pennant is approximately $14.0 million.

In addition, we held majority membership interests in our other ancillary operations.

In addition, we hold majority membership interests in our other ancillary operations.

Payment for these services varies and is based upon the service provided.

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Industry Trends

The post-acute care industry has evolved to meet the growing demand for post-acute and custodial healthcare services generated by an aging population, increasing life expectancies and the trend toward shifting of patient care to lower cost settings.

The industry has evolved in recent years, which we believe has led to a number of favorable improvements in the industry, as described below:

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The skilled nursing industry is large and highly fragmented, characterized predominantly by numerous local and regional providers.

Due to the increasing demands from hospitals and insurance carriers to implement sophisticated and expensive reporting systems, we believe this fragmentation provides significant acquisition and consolidation opportunities for us.

Due to the increasing demands from hospitals and insurance carriers to implement sophisticated and expensive reporting systems, we believe this fragmentation provides us with significant acquisition and consolidation opportunities.

• Improving Supply and Demand Balance .

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These statements of deficiency may require us to take corrective action to regain and maintain compliance.

In some cases, federal or state regulators may impose other remedies including imposition of CMPs, temporary payment bans, loss of certification as a provider in the Medicare and/or Medicaid program or revocation of a state operating license.

In some cases, federal or state regulators may impose other remedies including imposition of civil monetary penalties, temporary payment bans, loss of certification as a provider in the Medicare or Medicaid program, or revocation of a state operating license.

We believe that the regulatory environment surrounding the healthcare industry subjects providers to intense scrutiny.

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Temporary suspension of certain patient coverage criteria and documentation and care requirements - The CARES Act and a series of temporary waivers and guidance issued by the CMS suspend various Medicare patient coverage criteria as well as documentation and care requirements to provide regulatory relief to ensure patients continue to have adequate access to care notwithstanding the burdens placed on healthcare providers due to the COVID-19 pandemic.

Examples include the following:

Examples of requirements that have been waived since the COVID-19 emergency declaration include the following:

(1) approving temporary expansion sites to ensure that local hospitals and health systems have the capacity to handle a potential surge of COVID-19 patients ( e.g.

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Many states have also waived regulations to ease regulatory burdens on the healthcare industries.

It remains uncertain when federal and state regulators will resume enforcement of those regulations which are waived or otherwise not being enforced during the public health emergency due to the exercise of enforcement discretion.

It remains uncertain when federal and state regulators will resume enforcement of those regulations which are waived or otherwise not being enforced during the public health emergency.

We believe these regulatory actions could contribute to an increase in skilled mix that may not otherwise occur.

CMS also authorized temporary waivers on medical review requirements, effective March 1, 2020, for the duration of the public health emergency.

CMS is also pausing standard medical review activities, including prior authorization and other reviews that require providers to provide documentation.

Pursuant to the Emergency Waivers, CMS also authorized temporary waivers on medical review requirements, effective March 1, 2020, for the duration of the public health emergency.

CMS is also pausing standard medical review activities, including prior authorization and other reviews that require providers to provide certain types of documentation.

In addition, CMS is re-prioritizing scheduled program audits and contract-level Risk Adjustment Data Validation audits for MA organizations, Part D sponsors, Medicare-Medicaid Plans, and Programs of All-Inclusive Care for the Elderly organizations.

Re-prioritizing these audit activities will allow providers, CMS and the organizations to focus on patient care.

CMS recently updated their COVID-19 Provider Burden Relief Frequently Asked Questions (FAQs) related to claim audit waivers for multiple services.

In July 2020, CMS updated their COVID-19 Provider Burden Relief Frequently Asked Questions (FAQs) related to claim audit waivers for multiple services.

On March 30, 2020, CMS suspended most Medicare Fee-For-Service (FFS) medical review because of the COVID-19 pandemic.

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All reviews will be conducted in accordance with statutory and regulatory provisions, as well as related billing and coding requirements.

Waivers and flexibility in place at the time of the dates of service of any claims potentially selected for review will also be applied.

The COVID 1135 Waiver also allows the SNF to provide a “skill-in-place” program for Medicare beneficiaries who are residents of the SNF and who meet the skill in place criteria, foregoing the usual 3-day qualifying hospital stay, as outlined in the waiver.

Available waivers and flexibilities for the claims selected for review will also be applied.

Under the Emergency Waivers, CMS is also allowing skilled nursing facilities to provide a “skill-in-place” (SIP) program for Medicare beneficiaries who are residents of the skilled nursing facilities that meet the SIP criteria, foregoing the usual 3-day qualifying hospital stay.

As patients qualify for SIP for Medicare Part A stays, we could see a decrease in long-term care Medicare Part B PT, OT, SLP program.

This waiver remains valid for the duration of the COVID-19 public health emergency.

On August 24, 2020, CMS released a Medicaid Informational Bulletin providing guidance to states on flexibilities that are available to increase reimbursement for nursing facilities implementing specific infection control practices.

Resuming visitation and resident rights.

CMS has issued guidance to facilities throughout the public health emergency regarding patients’ rights to visitors.

In March 2020, CMS issued guidance that facilities restrict visitation to only compassionate care situations.

Then, in May 2020, CMS issued guidance for facilities to follow based upon local phases of reopening.

In June 2020, CMS expanded on alternative modes of visitation including outdoor visits, compassionate care situations, and communal activities.

Most recently, in September 2020, CMS issued guidance on reasonable ways in which nursing facilities can safely facilitate in-person visitation to address the psychosocial needs of residents.

In this guidance, CMS indicated that a facility’s failure to facilitate visitation, without adequate reason related to clinical necessity or resident safety, could result in citations for violating resident rights.

Testing requirements

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This came after the CDC stated that older adults are at a higher risk for serious illness from the coronavirus and issued updated testing guidelines for nursing homes.

On June 19, 2020, CMS instructed Medicare Administrative Contractors and Medicare Advantage plans to cover COVID-19 testing for nursing home residents consistent with CDC testing guidelines and recommendations.

Subsequently, on July 22, 2020, CMS announced that nursing homes in states with a 5% or greater positivity rate for COVID-19 will be required to test all nursing home staff each week.

In response to CDC guidelines recommending COVID-19 testing guidelines, mandated Medicare coverage of such tests, and mandates for staff testing in specific situations, in addition to recommended infection prevention control measures, we anticipate that the number of states mandating COVID-19 testing of patients and staff may increase.

Testing mandates can vary by state and may require testing for 1) residents, 2) staff, or 3) both residents and staff.

The responsibility for performing testing varies by payor and state.

In addition, CMS may also implement federal testing requirements.

Non-compliance with these state or federal mandates may result in imposition of fines or other administrative action, including license revocation.

Additionally, the responsibility for payment of such tests will vary based on the patient's payor.

On July 22, 2020, CMS announced that nursing homes in states with a 5% or greater positivity rate for COVID-19 will be required to test all nursing home staff each week.

On August 26, 2020, CMS issued new parameters for testing, requiring routine monthly testing of all facility staff if the facility’s county positivity rate is less than 5%;

weekly testing if the county positivity rate is between 5-10%;

and twice weekly testing if the county positivity rate exceeds 10%.

These testing requirements are in addition to obligations to screen staff each shift, residents daily, and all persons entering the facility for signs and symptoms of COVID-19.

Facilities must test any staff or resident who has signs or symptoms of COVID-19.

In the event of a COVID-19 outbreak in the facility, all staff and residents must be tested at regular intervals until testing identifies no new cases of COVID-19 infection among staff or residents for a 14-day period.

In addition to CMS's testing mandates, some states have imposed their own testing requirements for residents and staff.

Non-compliance with state or federal mandates may result in imposition of fines or other administrative action, including license revocation.

Reporting requirements

On April 19, 2020, CMS announced new regulatory requirements requiring skilled nursing homes to report cases of COVID-19 directly to the CDC.

This information must be reported in accordance with existing privacy regulations and statues.

In addition, skilled nursing homes are required to inform residents, their families and representatives of COVID-19 cases in their facilities.

Effective May 8, 2020, CMS published an interim final rule requiring skilled nursing facilities to report information related to COVID-19 cases among facility residents and staff directly to the CDC Health Safety Network no less than weekly.

In addition, skilled nursing facilities are required to inform residents, their families and representatives of confirmed or suspected COVID-19 cases in their facilities.

This notification is required to take place by 5:00 p.m.

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(1) a single confirmed infection of COVID-19, or (2) three or more residents or staff with new-onset of respiratory symptoms that occur within 72 hours of one another.

CMS is making COVID-19 nursing home data collected under this mandate publicly available on a dedicated website.

CMS is making this data collected under this mandate publicly available on a dedicated website.

There could be civil monetary penalties for not meeting these reporting requirements.

We believe these reporting requirements will not have a material impact on our Condensed Consolidated Financial Statements.

We do not believe these reporting requirements will have a material impact on our Condensed Consolidated Financial Statements.

Survey Activity and Enforcement.

On March 20, 2020, CMS announced the initiation of focused infection control surveys intended to assess long-term care facility compliance with infection control requirements in connection with the COVID-19 pandemic.

CMS prioritized infection control surveys over annual recertification and complaint surveys at the non-immediate jeopardy level, confirming its commitment to infection prevention and control in the skilled nursing industry.

Effective August 17, 2020, CMS provided guidance authorizing resumption of traditional survey activity.

On June 1, 2020, CMS introduced an enhanced enforcement program with respect to infection control deficiencies.

The program contemplates more significant remedies against facilities with a prior history of infection control deficiencies, and imposes more stringent penalties with deficiencies identified at a higher scope and severity.

The spectrum of remedies available to CMS for imposition on skilled nursing facilities in connection with this enhancement includes increased monetary fines, shortened time periods to return to compliance, and other administrative penalties.

Independent Commission on Safety and Quality in Nursing Homes.

On April 30, 2020, CMS announced that it would be convening an independent commission to conduct comprehensive assessments of nursing home responses to the COVID-19 pandemic.

On June 19, 2020 CMS announced the initial membership of the Coronavirus Commission on Safety and Quality in Nursing Homes (Commission on Safety and Quality).

The Commission on Safety and Quality consists of resident advocates, infectious disease experts, directors and administrators of nursing homes, academics, state authorities, clinicians, a medical ethicist and a nursing home resident.

In addition to the official Commission on Safety and Quality members, there may also be new members added to help bring additional viewpoints and insights.

The Commission on Safety and Quality will conduct a comprehensive assessment of the overall response to the COVID-19 pandemic in nursing homes.

Based on its assessment, the Commission on Safety and Quality will make recommendations on actions and best practices for immediate and future actions.

The Commission on Safety and Quality's key areas of focus include:

(1) protecting residents from COVID-19 and improving the responsiveness of care delivery;

(2) strengthening regulations to enable rapid and effective identification and mitigation of COVID-19 transmissions in nursing homes;

and (3) enhancing enforcement strategies to improve compliance with infection control policies.

This Commission on Safety and Quality in Nursing Homes (Commission) was intended to identify opportunities for improvement to inform immediate and future actions.

On September 16, 2020, the Commission issued its final report and recommendations to CMS.

Based upon these recommendations, CMS may implement additional measures to combat COVID-19 in nursing facilities.

Medicare presently accounts for approximately 30.8% of our transitional and skilled nursing services year-to-date revenue, being our second-largest payor.

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The Skilled Nursing Facility Prospective Payment System (SNF PPS) Rule was effective October 1, 2019.

The SNF PPS Rule includes a new case-mix model that focuses on the patient’s condition and resulting care needs (clinically relevant factors), rather than on the volume of care provided, to determine reimbursement from Medicare.

The case mix-model is called the Patient-Driven Payment Model (PDPM), which utilizes clinically relevant factors for determining Medicare payment by using ICD-10 diagnosis codes and other patient characteristics as the basis for patient classification.

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physician therapy (PT), occupational therapy (OT), speech language pathology (SLP), nursing and social services (nursing) and non-therapy ancillary services (NTA).

It also uses a sixth non-case mix component to cover utilization of SNF resources that do not vary depending on resident characteristics.

It also uses a sixth non-case mix component to cover utilization of skilled nursing facilities resources that do not vary depending on resident characteristics.

PDPM replaces the existing case-mix classification methodology, Resource Utilization Groups, Version IV (RUG-IV).

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PDPM also removes therapy minutes as the basis for therapy payment.

Finally, PDPM adjusts the SNF per diem payments to reflect varying costs throughout the stay, through the PT, OT and NTA components.

Finally, PDPM adjusts the skilled nursing facilties 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.

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The IMPACT Act requires that each skilled nursing facility submit their quality measures data.

Beginning with fiscal year 2018, and each subsequent year, if a skilled nursing facility does not submit required quality data, their payment rates for the year are reduced by 2.0% for that fiscal year.

Beginning with fiscal year 2018, and each subsequent year, if a skilled nursing facility does not submit required quality data, their payment rates are reduced by 2.0% for that fiscal year.

Application of the 2.0% reduction may result in payment rates for a fiscal year being less than the preceding fiscal year.

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Skilled nursing facilities that do not meet the SNF QRP requirements for a program year will receive a notice of non-compliance.

Beginning in March 2020, due to the COVID-19 pandemic, CMS issued a temporary suspension of QRP reporting requirements effective until June 30, 2020.

This effectively allowed skilled nursing facilities discretion as to whether to report data from the fourth quarter (October 1, 2019 – December 31, 2019), and removed reporting requirements entirely for the first and second quarters of 2020 (January 1, 2020 – June 30, 2020).

Skilled nursing facilities were required to resume timely quality data collection and submission of measure and patient assessment data effective June 30, 2020.

Medicare Annual Market Basket

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This estimated increase is attributable to a 2.2% market basket increase factor with a 0.0% point reduction for multifactor productivity adjustment.

Sequestration of Medicare Rates

The Budget Control Act of 2011 requires a mandatory, across the board reduction in federal spending, called a sequestration.

Medicare Fee-For-Service (FFS) claims with dates of service or dates of discharge on or after April 1, 2013 incur a 2.0% reduction in Medicare payments.

All Medicare rate payments and settlements have incurred this mandatory reduction and it will continue to be in place through at least 2023, unless Congress takes further action.

In response to COVID-19, the CARES Act temporarily suspended the automatic 2.0% reduction of Medicare claim reimbursements for the period of May 1, 2020 through December 31, 2020.

Skilled Nursing Facility Value-Based Purchasing (SNF-VBP) Program

The SNF-VBP Program rewards SNFs with incentive payments based on the quality of care they provide to Medicare beneficiaries, as measured by a hospital readmissions measure.

CMS annually adjusts its payment rules for SNFs using the SNF-VBP Program.

Effective October 1, 2018, CMS began withholding 2.0% to fund the SNF-VBP incentive payment pool and will redistribute 60% of the withheld payments back to SNFs through the program.

The FY 2020 SNF PPS Rules estimate an economic impact of the SNF-VBP Program to be a reduction of $213.6 million in aggregate payments to SNFs during fiscal year 2020.

The SNF-VBP Program rewards skilled nursing facilities with incentive payments based on the quality of care they provide to Medicare beneficiaries, as measured by a hospital readmissions measure.

CMS annually adjusts its payment rules for skilled nursing facilities using the SNF-VBP Program.

Effective October 1, 2018, CMS began withholding 2.0% to fund the SNF-VBP incentive payment pool and will redistribute 60% of the withheld payments back to skilled nursing facilities through the program.

The FY 2020 SNF PPS Rules estimate an economic impact of the SNF-VBP Program to be a reduction of $213.6 million in aggregate payments to skilled nursing facilities during fiscal year 2020.

The Rule also introduced two new quality measures to assess how health information is shared and adopted a number of standardized patient assessment data elements that assess factors such as cognitive function and mental status, special services, and social determinants of health.

Decisions Regarding Skilled Nursing Facility Payment

In addition to setting the payment rules for skilled nursing facility services using the SNF-VBP Program, CMS annually adjusts its payment rules for other acute and post-acute service providers including hospitals and home health agencies using a similar SNF-VBP Program.

It is important to understand the Medicare program and that its reimbursement rates and rules are subject to frequent change.

Historically, adjustments to reimbursement under Medicare have had a significant effect on our revenue.

The federal government and state governments continue to focus on efforts to curb spending on healthcare programs such as Medicare and Medicaid.

We are not able to predict the outcome of the legislative process.

We also cannot predict the extent to which proposals will be adopted or, if adopted and implemented, what effect, if any, such proposals and existing new legislation will have on us.

Efforts to impose reduced allowances, greater discounts and more stringent cost controls by government and other payors are expected to continue and could adversely affect our business, financial condition and results of operations.

These include statutory and regulatory changes, rate adjustments (including retroactive adjustments), administrative or executive orders and government funding restrictions, all of which may materially adversely affect the rates at which Medicare reimburses us for our services.

Budget pressures often lead the federal government to reduce or place limits on reimbursement rates under Medicare.

Implementation of these and other types of measures has in the past, and could in the future, result in substantial reductions in our revenue and operating margins.

For a discussion of historic adjustments and recent changes to the Medicare program and related reimbursement rates, see Part II, Item 1A Risk Factors under the headings Risks Related to Our Business and Industry - “O ur revenue could be impacted by federal and state changes to reimbursement and other aspects of Medicaid and Medicare,” “Our future revenue, financial condition and results of operations could be impacted by continued cost containment pressures on Medicaid spending,” “We may not be fully reimbursed for all services for which each facility bills through consolidated billing, which could adversely affect our revenue, financial condition and results of operations ” and “ Reforms to the U.S.

healthcare system will impose new requirements upon us and may lower our reimbursements.

Part B Rehabilitation Requirements

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Consistent with CMS’ “Patients over Paperwork” initiative, the agency has also been moving toward eliminating burdensome claims-based functional reporting requirements for Part B therapy services.

For example, beginning in January 2019, SNFs are no longer required to append selected G-codes or the severity modifiers on outpatient therapy claims.

For example, beginning in January 2019, skilled nursing facilities are no longer required to append selected G-codes or the severity modifiers on outpatient therapy claims.

This reduces the reporting burden on therapists providing outpatient services and increase the amount of time that therapists can spend with their patients.

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While the modifiers are required to be applied to the claims beginning in calendar year 2020, the 15% therapist assistant payment reduction will not be applied until calendar year 2022.

The final rule clarified the meaning of “in whole or in part” to mean when 10% or more of the services are provided by a PTA or OTA.

The final rule clarified that “in whole or in part” means when 10% or more of the services are provided by a PTA or OTA.

The FY 2020 Physician Fee Schedule (PFS), indicates that there will be no decrease in physical and occupational therapy code payments in 2020.

However, in the proposed and final FY 2020 PFS, CMS also indicated its intent to make changes to reimbursement rates that would become effective January 1, 2021.

The FY 2021 PFS Proposed Rule was released on August 17, 2020, which proposed to reduce the conversion factor (i.e., the number by which CMS determines all current procedural terminology code payments) by 10.61%.

These changes, if finalized in the fiscal year 2021 PFS Rule, will effectively lower the reimbursement rate for therapy Medicare Part B specialty providers;

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and (2) providers in private practice, including speech-language pathologists, who perform and bill for multiple services in a single day.

On May 27, 2020, CMS added physical therapy, occupational therapy and speech-language pathology to list of approved telehealth Providers for the Medicare Part B programs provided by a skilled nursing facility as a part of the COVID-19 1135 waiver provisions.

On May 27, 2020, pursuant to its authority under the Emergency Waivers, CMS added physical therapy, occupational therapy and speech-language pathology to list of approved telehealth Providers for the Medicare Part B programs provided by a skilled nursing facility.

This waiver allows the reimbursement of certain HCPCS codes delivered by PT, OT, SLP through telehealth.

The reimbursement follows the existing physician fee screen reimbursement through the duration of the public health emergency.

These services have been used to provide some services to community based outpatients from our SNFs that are eligible through local rules to provide community-based outpatient services.

These services have been used to provide some services to community based outpatients from our skilled nursing facilities that are eligible through local rules to provide community-based outpatient services.

Eligible PT, OT, SLP services delivered through telehealth to long-term care residents, when the local COVID-19 quarantine requirements suggest provision of PT, OT, SLP services through alternative means, are also reimbursed per the waiver.

The COVID-19 1135 waiver provisions also allow for the facility to bill an originating site fee to CMS for telehealth services provided to Medicare Part B beneficiary residents of the facility when the services are provided by a physician from an alternate location, effective March 6, 2020 through the end of the public health emergency.

Our facilities are utilizing this waiver as physicians elect to provide telehealth visits to Medicare Part B beneficiaries residing in the SNF.

Sequestration of Medicare Rates

The Budget Control Act of 2011 requires a mandatory, across the board reduction in federal spending, called a sequestration.

Medicare Fee-For-Service (FFS) claims with dates of service or dates of discharge on or after April 1, 2013 incur a 2.0% reduction in Medicare payments.

All Medicare rate payments and settlements have incurred this mandatory reduction and it will continue to be in place through at least 2023, unless Congress takes further action.

In response to COVID-19, the CARES Act temporarily suspended the automatic 2% reduction of Medicare claim reimbursements for the period of May 1, 2020 through December 31, 2020.

The waivers covering the COVID exceptions, including the provision of telehealth services, will remain in effect through the end of the emergency declaration.

Pursuant to the Emergency Waivers, CMS is allowing for the facility to bill an originating site fee to CMS for telehealth services provided to Medicare Part B beneficiary residents of the facility when the services are provided by a physician from an alternate location, effective March 6, 2020 through the end of the public health emergency.

Our facilities are utilizing this waiver as physicians elect to provide telehealth visits to Medicare Part B beneficiaries residing in the skilled nursing facility.

Programs of All-Inclusive Care for the Elderly

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Further, non-physician primary care providers can provide certain services in place of primary care physicians.

Medicaid Fiscal Accountability Regulation (MFAR)

On November 18, 2019, CMS published a proposed rule, the Medicaid Fiscal Accountability Regulation (MFAR) that could impact our federal Medicaid revenue in some of our facilities.

Specifically, some states’ Medicaid programs allow for upper payment limit (UPL) payments to be made to SNFs that are owned or operated by a non-state government (NSG) provider, such as a city or county hospital.

These supplemental UPL payments are paid through federal Medicaid funds, but administered through the state.

In 2012, the Utah Medicaid Program was amended to allow for such UPL payments.

In 2015, the Texas Medicaid Program was amended to also allow for such UPL payments (the program in Texas is currently called the Quality Incentive Payment Program or "QIPP).

Ensign has 17 Utah facilities and 52 Texas facilities that have entered into agreements with NSG hospitals in which operations have been transferred to the NSG hospitals, but Ensign-related entities manage these facilities.

This has allowed the 69 facilities to obtain supplemental UPL funds from the federal Medicaid program.

The proposed MFAR rule, if enacted as currently written, would institute sweeping changes to the UPL program, including changes to:

(i) the calculations related to the UPL payments;

(ii) the definition of “public funds” that can be used for intergovernmental transfers (IGTs) (which would negatively impact the available revenue for UPL payments);

and (iii) the definition of a “non-state government” provider (making fewer entities eligible to participate).

Additionally, the proposed MFAR rule requires additional and detailed reporting by states related to UPL payments and suggests that CMS will increase scrutiny of hospitals/facilities that are part of such arrangements.

Preadmission Screening and Resident Review (PASRR)

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The proposed rule, if enacted as currently drafted, would impose additional resident review requirements that are not reflected in current regulations, authorize the use of telehealth, and simplify the list of information that must be collected during evaluations.