What changed in this filing

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Item 1. Business

2021-02-03 compared with 2020-02-05 · 361 added, 217 removed, 471 unchanged (55% of the section changed)

Founded in 1999, The Ensign Group, Inc.

("Ensign") is a holding company with subsidiaries that provide skilled nursing, senior living and rehabilitative services, as well as other ancillary businesses, in 14 states.

In addition, we acquire, lease and own healthcare real estate in addition to servicing the post-acute care continuum through accretive acquisition and investment opportunities in healthcare properties.

("Ensign") is a holding company with subsidiaries that provide skilled nursing, senior living and rehabilitative services, as well as other ancillary businesses (including mobile diagnostics and medical transportation), in 13 states.

As part of our investment strategy, we also acquire, lease and own healthcare real estate to service the post-acute care continuum through acquisition and investment opportunities in healthcare properties.

For the year ended December 31, 2020, we generated approximately 95.2% of our revenue from our skilled nursing facilities.

The remainder of our revenue is primarily generated from our senior living and other ancillary services.

The remainder of our revenue is primarily generated from our real estate properties, senior living services and other ancillary services.

As of December 31, 2020, we offered skilled nursing, senior living and rehabilitative care services through 228 skilled nursing and senior living facilities.

Of the 228 facilities, we operated 164 facilities under long-term lease arrangements, and have options to purchase 11 of those 164 facilities.

We owned an additional 90 real estate properties, which included 62 operations we operated and managed, real estate properties of 29 senior living operations that were leased to The Pennant Group, Inc.

Our real estate portfolio includes 94 owned real estate properties, which included 64 operations we operated and managed, the real estate associated with 31 senior living operations that were leased to and operated by The Pennant Group, Inc.

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

Of the 29 real estate, two senior living operations are located on the same real estate properties as the skilled nursing facilities.

Of the 31 real estate operations leased to Pennant, two senior living operations are located on the same real estate properties as skilled nursing facilities that the Company owns and operates.

Our Unique Approach and Structure

The name "Ensign" is synonymous with a "flag" or a "standard" and refers to our goal of setting the standard by which all others in our industry are measured.

We believe that through our efforts and leadership, we can foster a new level of patient care and professional competence at our operating subsidiaries, and set a new industry standard for each patient we service.

We believe that through our efforts and leadership, we can foster a new level of patient care and professional competence at our affiliated operating subsidiaries, and set a new industry standard for each patient we service.

We view healthcare services primarily as a local business.

We believe our success is largely driven by our ability to build strong relationships with key stakeholders from the local healthcare community, leveraging our reputation for providing superior care.

We believe our success is largely driven by our proven ability to build strong relationships with key stakeholders in local healthcare communities, in part, by leveraging our reputation for providing superior care.

Accordingly, our brand strategy and organizational structure promotes the empowerment of local leadership and staff to make their facility the “operation of choice” in their community.

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We believe this organizational structure has improved the quality of our recruiting and will continue to facilitate successful acquisitions.

On October 1, 2019, we completed the separation of our home health and hospice operations and substantially all of our senior living operations into Pennant, separate, publicly traded company, through a tax-free distribution of all of the outstanding shares of common stock of Pennant to Ensign stockholders on a pro rata basis (the Spin-Off).

For further details on the Spin-Off, refer to section Separation of the Pennant Group, Inc.

below and Note 3, Spin-Off of Subsidiaries, in Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.

Since we spun-off our owned real estate properties into a public real estate investment trust (REIT) in 2014, we have continued to expand our real estate portfolio.

Following the real estate spin-off, we have acquired and currently own 94 real estate properties, including 31 real estate properties that are leased to a third party under triple-net long-term leases.

We manage and operate the remaining real estate properties, including the Service Center location.

We are committed to growing our real estate portfolio, which we believe will further enhance our earnings and maximize long-term shareholder value.

On October 1, 2019, we completed the separation of our home health and hospice operations and substantially all of our senior living operations into Pennant, a separate and publicly traded company, through a tax-free distribution of all of the outstanding shares of common stock of Pennant to Ensign stockholders on a pro rata basis (the Spin-Off).

For further details on the Spin-Off, refer to Note 21, Spin-Off Of Subsidiaries, in Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.

Table of Con tents

In the fourth quarter of 2020, we began reporting the results of our real estate portfolio as a new segment due to our expanding real estate investment strategy.

We now have two reportable segments:

(1) transitional and skilled services, which includes the operation of skilled nursing facilities and rehabilitation therapy services;

and (2) real estate, which is primarily comprised of properties owned by us and leased to skilled nursing and senior living operations, including our own operating subsidiaries and third-party operators and are subject to triple-net long-term leases.

Prior to this new segment structure, we had one reportable segment, transitional and skilled services.

We also report an “all other” category that includes operating results from our senior living operations, mobile diagnostics, transportation and other ancillary operations.

Our senior living, mobile diagnostics, transportation and other ancillary operations are neither significant individually, nor in aggregate and therefore do not constitute a reportable segment.

Our Chief Executive Officer, who is our chief operating decision maker, or CODM, reviews financial information at the operating segment level.

We have presented our segment results in this Annual Report on Form 10-K on a comparative basis to conform to the new segment structure.

For more information about our operating segment, as well as financial information, see Part II Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 7, Business Segments of the Notes to Consolidated Financial Statements.

Transitional and Skilled Services

As of December 31, 2019 , our skilled nursing companies provided skilled nursing care at 213 operations, with 22,625 operational beds, in Arizona, California, Colorado, Idaho, Iowa, Kansas, Nebraska, Nevada, South Carolina, Texas, Utah,

Washington and Wisconsin.

As of December 31, 2020, our skilled nursing companies provided skilled nursing care at 219 operations, with 23,172 operational beds, in Arizona, California, Colorado, Idaho, Iowa, Kansas, Nebraska, Nevada, South Carolina, Texas, Utah, Washington and Wisconsin.

We provide short and long-term nursing care services for patients with chronic conditions, prolonged illness, and the elderly.

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During the year ended December 31, 2020, approximately 45.3% and 31.8% of our transitional and skilled services revenue was derived from Medicaid and Medicare programs, respectively.

Revenue from our senior living operations, real estate properties, mobile diagnostics and other ancillary operations comprise approximately 5.0% of our annual revenue.

We engage in the acquisition and leasing of skilled nursing and senior living properties.

As of December 31, 2020, our owned real estate portfolio was comprised of 94 real estate properties located in Arizona, California, Colorado, Idaho, Kansas, Nebraska, Nevada, South Carolina, Texas, Utah, Washington and Wisconsin.

Of these properties, 64 are leased to affiliated skilled nursing facilities, wholly-owned and managed by the Company, 31 are leased to senior living operations, wholly-owned and managed by Pennant, and our Service Center location.

The Service Center real estate is leased to our Service Center and numerous third-parties for commercial office space.

Of the 31 real estate operations leased to Pennant, two senior living operations are located on the same real estate properties as skilled nursing facilities that the Company owns and operates.

We generate real estate revenue primarily by leasing post-acute care properties we have acquired, to healthcare operators, including our own operating subsidiaries, under triple-net lease arrangements whereby the tenant is solely responsible for the costs related to the property, including property taxes, insurance and maintenance and repair costs, subject to certain exceptions.

During the year ended December 31, 2020, we generated rental revenue of $61.3 million, of which $46.1 million was derived from affiliated wholly-owned healthcare facilities.

Intercompany rental revenue is eliminated in consolidation, along with corresponding intercompany rent expenses of related healthcare facilities.

Revenue from our senior living operations, mobile diagnostics and other ancillary operations comprise approximately 4.1% of our annual revenue.

Table of Con tents

Senior Living.

As of December 31, 2019 , we had 2,154 senior living units at 33 operations, of which 23 are located on the same site location as our skilled nursing care operations.

Our senior living companies located in Arizona, California, Colorado, Idaho, Iowa, Kansas, Nebraska, Texas, and Utah, provide residential accommodations, activities, meals, housekeeping and assistance in the activities of daily living to seniors who are independent or who require some support, but not the level of nursing care provided in a skilled nursing operation.

As of December 31, 2020, we had an aggregate of 2,254 senior living units across 33 operations, of which 24 are located on the same site location as our skilled nursing care operations.

Our senior living communities located in Arizona, California, Colorado, Idaho, Iowa, Kansas, Nebraska, Texas, and Utah, provide residential accommodations, activities, meals, housekeeping and assistance in the activities of daily living to seniors who are independent or who require some support, but not the level of nursing care provided in a skilled nursing operation.

Our independent living units are non-licensed independent living apartments in which residents are independent and require no support with the activities of daily living.

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Specifically, during the year ended December 31, 2020, approximately 72.3% of our senior living revenue was derived from private pay sources.

As part of the Spin-Off transaction, we lease 29 of the 90 real estate properties owned by us to Pennant on a triple-net basis.

Pennant affiliates are responsible for all costs at the properties, including property taxes, insurance, maintenance and repair costs.

Annual rental income generated from the leases with Pennant is $12.2 million .

To date, the rental income is not a meaningful contributor to our overall operating results.

As of December 31, 2019 , we held a majority membership interest of ancillary operations located in Arizona, California, Colorado, Idaho, Massachusetts, Texas, Utah and Washington.

As of December 31, 2020 , we held a majority membership interest of ancillary operations located in Arizona, California, Colorado, Idaho, Texas, Utah and Washington.

We have invested in and are exploring new business lines that are complementary to our existing transitional and skilled services and senior living services.

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From January 1, 2010 through December 31, 2020, we acquired 205 facilities, which added 15,017 operational skilled nursing beds and 5,797 senior living units to our operating subsidiaries, which included the operations that were contributed to Pennant.

The following table summarizes our growth from 2009 to 2019 as a result of the acquisition of these facilities:

The following table summarizes cumulative skilled nursing and senior living operation, operational skilled nursing bed and senior living unit counts at the end of 2010 and each of the last five years to reflect our growth over a ten year period and 5 year period as a result of the acquisition of these facilities:

Cumulative number of skilled nursing and senior living operations 82 210 230 244 223 228

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Cumulative number of senior living units 791 4,450 5,011 5,664 2,154 2,254

(1) Included in 2015-2019 number of operational beds and number of operations are operational beds and operation we no longer operate in 2016, 2017 and 2019.

(1) Included in our 2016-2019 number of operational beds and number of operations are operational beds and operations that we no longer operated in 2016, 2017 and 2019.

The number of operations and operational beds do not include the closed facilities beginning in the year of their closures.

(2) Included in 2009-2018 number of operational units and number of operations are the operational units and operation of senior living facilities we transferred to Pennant as part of the 2019 spin-off transaction.

In 2019, the number of operations and operational units do not include operations transferred to Pennant in the counts.

(2) Included in the 2010 and 2016-2018 number of operational units and number of operations are the operational units and operations of senior living facilities that we transferred to Pennant as part of the 2019 Spin-Off transaction.

In 2019, the number of operations and operational units do not include operations transferred to Pennant.

Much of our historical growth can be attributed to our expertise in acquiring real estate or leasing both under-performing and performing post-acute care operations and transforming them into market leaders in clinical quality, staff competency, employee loyalty and financial performance.

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• strategically investing in and integrating other post-acute care healthcare businesses.

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New Market CEO and New Ventures Programs.

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In addition, this program includes other lines of business that are closely related to the skilled nursing industry.

For example, we entered into home health and hospice industry as part of this program, which the business was part of the Spin-Off transaction in October 2019.

For example, we entered into the home health and hospice industry as part of this program, which was a part of the Spin-Off.

The New Ventures program encourages our local leaders to evaluate service offerings with the goal of establishing an operating platform in new markets and new businesses.

We believe that this program will not only continue to drive growth, but will also provide a valuable training ground for our next generation of leaders, who will have experienced the challenges of growing and operating a new business.

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 December 31, 2019 :

Number of facilities

Skilled nursing operations

Senior living communities

Number of operational beds/units

Operational skilled nursing beds

Senior living units

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

During the year ended December 31, 2019 , we expanded our continuing operations through a combination of long-term leases and real estate purchases, with the addition of 22 stand-alone skilled nursing operations, one stand-alone senior living operations, and four campus operations.

During the year ended December 31, 2020, we expanded our operations through a combination of long-term leases and real estate purchases, with the addition of five stand-alone skilled nursing operations, one stand-alone senior living operation, and one campus operation.

A campus represents a facility that offers both skilled nursing and senior living services.

The addition of these operations added a total of 507 operational skilled nursing beds and 298 operational senior living units to be operated by our affiliated operating subsidiaries.

We also invested in new ancillary services that are complementary to our existing businesses in addition to real estate and Medicare and Medicaid licenses acquired during the year.

The aggregate purchase price for these acquisitions was approximately $25.0 million.

Subsequent to December 31, 2019 , we expanded our operations through a real estate purchase with the addition of one stand-alone skilled nursing operation and one stand-alone independent living operation for a purchase price of $14.0 million .

The addition of this operation added 59 operational skilled nursing beds and 158 operational senior living units to be operated by our operating subsidiary.

Subsequent to December 31, 2020, we expanded our operations through long-term leases with the addition of four stand-alone skilled nursing operations.

The addition of these operations added 447 operational skilled nursing beds to be operated by our operating subsidiaries.

We did not acquire any material assets or assume any liabilities other than the tenant's post-assumption rights and obligations under the long-term leases.

We entered into a separate operations transfer agreement with the prior operator as part of each transaction.

For further discussion of our acquisitions, see Note 8, Acquisitions in the Notes to Consolidated Financial Statements.

SEPERATION OF THE PENNANT GROUP, INC.

On October 1, 2019, we completed the separation of our home health and hospice operations and substantially all of our senior living operations into a separate, publicly traded company called The Pennant Group, Inc.

through a tax-free distribution of all of the outstanding shares of common stock of Pennant to Ensign stockholders on a pro rata basis.

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

For further detail, refer to Note 3, Spin-Off of Subsidiaries, in Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.

Beginning in the fourth quarter of 2019 and subsequent to the Spin-Off, we have one reportable segment, transitional and skilled services, which includes the operation of skilled nursing facilities and rehabilitation therapy services and comprises approximately 95.0% of our annual revenue.

We also report an “all other” category that includes revenue from our senior living operations, real estate properties, mobile diagnostics, transportation and other ancillary operations.

Our senior living, real estate, mobile diagnostics, transportation and other ancillary operations businesses are neither significant individually nor in aggregate and therefore do not constitute a reportable segment.

Our Chief Executive Officer, who is our chief operating decision maker, or CODM, reviews financial information at the operating segment level.

Prior to the separation of Pennant, we had three reportable segments:

(1) transitional and skilled services, which included the operation of skilled nursing facilities;

(2) senior living services, which included the operation of assisted and independent living facilities;

and (3) home health and hospice services, which included home health, home care and hospice businesses.

We have presented 2019, 2018 and 2017 financial information in this Annual Report on Form 10-K on a comparative basis to conform with the current year segment presentation.

For more information about our operating segment, as well as financial information, see Part II Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 7, Business Segments of the Notes to Consolidated Financial Statements.

QUALITY OF CARE MEASURES

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At the time of acquisition, the majority of our facilities have 1 and 2-Star ratings.

To date, we have transformed over 80% of these to 4 and 5-Star ratings.

Over the last few years, CMS had modified the Star rating requirements.

These changes have been significant and made it more difficult to achieve a 4 or 5-Star rating.

CMS predicted that the 2019 changes would result in 47% of all nursing centers losing stars in their "Quality" ratings, with 33% to lose stars in their "Staffing" ratings, and some 36% to lose stars in their "Overall" ratings.

The 2019 changes resulted in nursing centers losing stars in their "Quality" and "Staffing" ratings, which negatively impacted the "Overall" ratings.

Nevertheless, we continue to demonstrate strong performance in the Five-Star Quality Rating System.

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Thus, we strive to aggressively increase quality and compliance in every facility we acquire, and to adjust our overall policies to adapt to CMS’s changing criteria for the Five-Star Quality Rating System.

As a result of the COVID-19 pandemic, CMS temporarily waived certain reporting timeframes and suspended certain inspections that impacted the underlying data used for calculating star-ratings.

This resulted in CMS freezing affected quality measures by only using data collected for periods not impacted by the COVID-19 waivers.

The star-rating calculations resumed on January 27, 2021.

The table below summarizes the number of our facilities with 4 and 5-Star ratings since 2016:

As of December 31,

2016 2017 2018 2019 2020

4 and 5-Star Quality Rated skilled nursing facilities 86 100 91 102 116

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Additionally, despite the fact that Ensign’s acquisition of facilities with 1 or 2-Star ratings skews our company-wide ratings, our mean score on the Five-Star Quality Rating System is 53.2%, which exceeds the national average score of 48.6%.

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INDUSTRY TRENDS

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According to the census projection released by the U.S.

Census Bureau in early 2018, between 2010 and 2030, the number of individuals over 65 years old is projected to be one of the fastest growing segments of the United States population, growing from 13% to 21%.

The Bureau expects this segment to increase nearly 90% to 73 million, as compared to the total U.S.

Census Bureau in early 2018 and revised in early 2020, between 2016 and 2060, the number of individuals over 65 years old is projected to be one of the fastest growing segments of the United States population, growing from 15% to 23%.

The Bureau expects this segment to increase approximately 92% to 75 million, as compared to the total U.S.

population which is projected to increase by 25% over that time period.

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In response to rising healthcare spending in the United States, commercial, government and other payors are generally shifting away from fee-for-service payment models towards value-based models, including risk-based payment models that tie financial incentives to quality, efficiency and coordination of care.

We believe that patient-centered outcomes driven reimbursement models will continue to grow in prominence.

We believe that patient-centered, outcome driven reimbursement models will continue to grow in prominence.

Many of our operations already receive value-based payments, and as valued-based payment systems continue to increase in prominence, it is our view that our strong clinical outcomes will be increasingly rewarded.

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A significant goal of U.S.

federal health care reform is to transform the delivery of health care by changing reimbursement to reflect and support the quality and safety of care that providers deliver, increase efficiency, and reduce growth in spending.

Reimbursement models that provide financial incentives to encourage efficiency, affordability, and high-quality care have been developed and implemented by government and commercial third-party payers.

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Reimbursement methodology reform includes Value-Based Purchasing (VBP), in which a portion of provider reimbursement is redistributed based on relative performance, or improvement on designated economic, clinical quality, and patient satisfaction metrics.

In addition, CMS has implementing Episode-based demonstration, voluntary and mandatory payment initiatives that bundle acute care and post-acute care reimbursement.

In addition, CMS has implemented Episode-based demonstration, voluntary and mandatory payment initiatives that bundle acute care and post-acute care reimbursement.

These bundled payment models incentivize cross-continuum care coordination and include financial and performance accountability for episodes of care.

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In addition, as a result of increased mobility in society, reduction of average family size, and the increased number of two-wage earner couples, more residents are looking for alternatives outside the family for their care.

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REVENUE SOURCES

We derive revenue primarily from the Medicaid and Medicare programs, managed care and commercial insurance payors, and private pay patients.

The majority of our revenue is derived from skilled nursing, which is highly dependent upon the Medicare and Medicaid programs.

The majority of our revenue is derived from skilled nursing, which is highly dependent upon the Medicaid and Medicare programs.

Thus, any changes to payment models, reimbursements and budgets impact our revenue, some positively and some negatively.

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In California, the state enacted legislation expanding their Medicaid program, which in recent years has continued to see budget increases.

It is projected that California General Fund spending on California Medicaid will increase by about $1.5 billion (7 percent) in 2020‑21, to a total of $23.5 billion.

It is projected that California General Fund spending on California Medicaid will increase by about $1.5 billion (7.0%) in 2020‑2021, to a total of $23.5 billion.

Further, the 2021-2022 estimated California General Fund will increase to a total of $28.4 billion.

In California, reimbursement rates for long term care facilities are calculated based upon the median rate of each peer group, which results in varying reimbursement rates among facilities.

Texas is one of the remaining states that has not expanded Medicaid under the Affordable Care Act.

In 2017, Texas lawmakers underfunded Medicaid, requiring a $4.4 billion infusion of state and federal funds.

Funding for the 2020-2021 biennium includes $25.5 billion in general revenue funds, which is a decrease of $1.4 billion in general funds from the 2018-2019 biennium amounts.

Texas lawmakers have, in the past, underfunded Medicaid, requiring an infusion of state and federal funds.

Funding for the 2020-2021 Texas biennium includes $25.5 billion in general revenue funds, which is a decrease of $1.4 billion in general funds from the 2018-2019 biennium amounts.

In Arizona, the state enacted legislation expanding their Medicaid program in 2013 but has seen decreased Medicaid enrollments in recent years.

Their 2020 budget for the state Medicaid program included $1.7 billion from the general fund, and the 2021 estimated budget rises to $1.9 billion.

Their 2020 budget for the state Medicaid program included $1.7 billion from the general fund, and the 2021 budget rose to over $1.9 billion.

Medicare is a federal program that provides healthcare benefits to individuals who are 65 years of age or older or are disabled.

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Another type of insurance, long-term care insurance, is also becoming more available to consumers, but is not expected to contribute significantly to industry revenues in the near term.

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Private and Other Payors.

Private and other payors consist primarily of individuals, family members or other third parties who directly pay for the services we provide.

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

Year Ended December 31,

Transitional and Skilled Services

Medicaid-skilled

Private and other

Total revenue

(1) Private and other payors in our "All Other" category includes revenue from all payors generated in our other ancillary operations.

Year Ended December 31,

Transitional and Skilled Services

Medicaid-skilled

Private and other

Total revenue

(1) Private and other payors in our "All Other" category includes revenue from all payors generated in our other ancillary operations.

Rental Revenue.

Real estate rental revenue is generated by leasing post-acute care properties that we acquired to healthcare operators under triple-net lease arrangements, whereby the tenant is solely responsible for the costs related to the property, including property taxes, insurance, and maintenance and repair costs, subject to certain exceptions.

The following charts sets forth our total service revenue by payor source generated by our consolidated operations and transitional and skilled services segment as a percentage of total revenue for the years ended December 31, 2020 and 2019, respectively:

CONSOLIDATED SERVICE REVENUE BY PAYOR

TRANSITIONAL AND SKILLED SERVICES REVENUE BY PAYOR

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Payor Sources as a Percentage of Skilled Nursing Services.

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Percentage of Skilled Nursing Days:

Medicare 15.6 % 12.0 %

Managed care 11.2 12.2

Other skilled 4.9 4.8

Skilled mix 31.7 29.0

Private and other payors 10.9 12.1

Medicaid 57.4 58.9

Total skilled nursing 100.0 % 100.0 %

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The payments are based on negotiated patient per diem rates or a negotiated fee schedule based on the type of service rendered.

Reimbursement for Senior Living and Other Ancillary Services.

Senior living facility and other ancillary revenue is primarily derived from private pay patients at rates we establish based upon the services we provide and market conditions in the area of operation, with only a small portion of such revenue derived from state-specific programs such as Medicaid.

Reimbursement for Senior Living.

Senior living facility revenue is primarily derived from private pay patients at rates we established, with only a small portion of such revenue derived from state-specific programs such as Medicaid.

Reimbursement for Other Ancillary Services.

Other ancillary revenue, such as mobile diagnostics and medical transportation, is primarily derived from Medicare Part B, Medicaid, managed care and private payors at rates we establish based upon the services we provide and market conditions in the area of operation.

RENTAL REVENUE

Rental revenue from third party rental property tenants.

Owned properties are leased pursuant to non-cancelable operating leases, generally with an initial term of 10 to 15 years.

All of the post-acute care healthcare properties leased to third parties contain renewal options.

The leases provide for fixed minimum base rent during the initial and renewal periods.

The majority of our leases contain provisions for specified annual increases over the rents of the prior year and those increases are generally computed on a calculation based on the Consumer Price Index.

Each lease is a triple net lease which requires the lessee to pay all taxes, insurance, maintenance and repairs, capital and non-capital expenditures and other costs necessary in the operations of the facilities.

In addition, our leases with third-parties are typically structured as master leases.

The master leases consist of multiple leases, each with its own pool of properties, that have varying maturities and diversity in property geography.

If a lessee makes payments for taxes and insurance directly to a third-party on our behalf, we are required to exclude these payments from variable payments and from revenue recognition in our consolidated statements of income.

Otherwise, tenant reimbursements paid to us for taxes and insurance are classified as additional rental revenue recognized by us on a gross basis.

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Rental revenue from Ensign-affiliated tenants .

Rental revenue from Ensign-affiliated operations is based on mutually agreed-upon base rents that are subject to change from time to time.

Intercompany revenue is eliminated in consolidation, along with the corresponding intercompany rent expenses of the related healthcare facilities.

The post-acute care industry is highly competitive, and we expect that the industry will become increasingly competitive in the future.

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Our operating subsidiaries also compete with inpatient rehabilitation facilities and long-term acute care hospitals.

Increasingly, we are competing with home health and community-based providers who have developed programs designed to provide services to seniors outside an institutional setting, potentially decreasing the time they need the higher level of care provided in a skilled nursing facility.

Increasingly, we are competing with home health and community-based providers who have developed programs designed to provide services to seniors outside a facility-based setting, potentially decreasing the time they need the higher level of care provided in a skilled nursing facility.

Competitiveness may vary significantly from location to location, depending upon factors such as the number of competing facilities, availability of services, expertise of staff, and the physical appearance and amenities of each location.

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The primary competitive factors in these businesses are similar to those for our skilled nursing facilities and include reputation, cost of services, quality of clinical services, responsiveness to patient/resident needs, location and the ability to provide support in other areas such as third-party reimbursement, information management and patient recordkeeping.

Our real estate segment competes for real property investments with healthcare providers, healthcare-related REITs, real estate partnerships, banks, private equity funds, venture capital funds and other investors.

Some of these competitors are significantly larger and have greater financial resources and lower costs of capital than us.

Our ability to compete successfully for real property investments will be determined by numerous factors, including our ability to identify suitable acquisition targets, our ability to negotiate acceptable terms for any such acquisition and our cost of capital in the event an acquisition requires debt or equity financing.

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OUR COMPETITIVE STRENGTHS

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We believe each of our operating subsidiaries is led by an experienced and caring leadership team, including dedicated front-line care staff, who participates daily in the clinical and operational improvement of their individual operations.

We have been successful in attracting, training, incentivizing and retaining a core group of outstanding business and clinical leaders to lead our operating subsidiaries.

We have been successful in attracting, training, incentivizing and retaining a core group of outstanding business and clinical leaders to spearhead our operating subsidiaries.

These leaders operate as separate local businesses.

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Most participate in training sessions at Ensign University, our in-house educational system.

Other training opportunities are generally offered on a monthly basis.

Training and educational topics include leadership development, our values, updates on Medicaid and Medicare billing requirements, updates on new regulations or legislation, emerging healthcare service alternatives and other relevant clinical, business and industry specific coursework.

Other training opportunities are generally offered via on-demand training tools, including podcasts.

In addition, we offer weekly cultural and interactive educational topics including leadership development, our values, updates on Medicaid and Medicare billing requirements, updates on new regulations or legislation, infection control, COVID-19 clinical and regulations, emerging healthcare service alternatives and other relevant clinical, business and industry specific coursework.

Additionally, we encourage and provide ongoing education classes for our clinical staff to maintain licensing and increase the breadth of their knowledge and expertise.

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We have established a disciplined acquisition strategy that is focused on selectively acquiring operations within our target markets.

Our acquisition strategy is highly operations driven.

Our acquisition strategy is driven by our operations team.

Prospective leaders are included in the decision-making process and compensated as these acquired operations reach pre-established clinical quality and financial benchmarks, helping to ensure that we only undertake acquisitions that key leaders believe can become clinically sound and contribute to our financial performance.

As of December 31, 2019 , we have expanded to 223 facilities with 22,625 operational skilled nursing beds and 2,154 senior living units, through both long-term leases and purchases.

As of December 31, 2020, we have expanded to 228 facilities with an aggregate of 23,172 operational skilled nursing beds and 2,254 senior living units, through both long-term leases and purchases.

We believe our experience in acquiring these operations and our demonstrated success in significantly improving their operations enables us to consider a broad range of acquisition targets.

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We have also constructed new facilities to target demand, which exists for high-end healthcare facilities when we determine that market conditions justify the cost of new construction in some of our markets.

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Successful Real Estate Investment Strategy.

We maintain a portfolio of long-term healthcare facilities of high-quality assets diversified by geographic location and operated by a diverse group of established healthcare providers.

We are focused on selectively acquiring real estate properties based on our industry experience and opportunistic strategy, which we believe provides us with greater investment and purchasing opportunities.

Due to our credit strength, we have the ability to acquire large portfolios of real estate properties;

a portion of which can be managed and operated by our Ensign affiliated established healthcare leaders and a portion of which can be leased to third parties.

As of December 31, 2020, we have expanded to 94 owned facilities, which include properties leased to and operated by third parties and properties we managed and operated.

We believe our real estate investment strategy has allowed us to accumulate a portfolio that aids our healthcare operators in improving performance and generating additional returns through leases with third parties.

Reputation for Quality Care.

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To develop these leaders, we have a rigorous “CEO-in-Training Program” that attracts proven business leaders from various industries and backgrounds, and provides them the knowledge and hands-on training they need to successfully lead one of our operating subsidiaries.

We generally have between five and 30 prospective administrators progressing through the various stages of this training program, which is generally much more rigorous, hands-on and intensive than the minimum 1,000 hours of training mandated by the licensing requirements of most states where we do business.

We generally have between 25 and 30 prospective administrators progressing through the various stages of this training program, which is generally much more rigorous, hands-on and intensive than the minimum 1,000 hours of training mandated by the licensing requirements of most states where we do business.

Once administrators are licensed and assigned to an operation, they continue to learn and develop in our operational Chief Executive Officer Program (CEO Program), which facilitates the continued development of these talented business leaders into outstanding operational chief executive officers, through regular peer review, our Ensign University and on-the-job training.

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In addition, our Chief Operating Officer Program (COO Program) recruits and trains highly-qualified Directors of Nursing to lead the clinical programs in our operations.

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Our average occupancy rates for our skilled nursing facilities was 73.5% and 79.2% for the years ended December 31, 2020 and 2019, respectively.

Our average occupancy rate in 2020 has been negatively impacted by surges in COVID-19 outbreaks.

We also believe we can generate organic growth by improving operating efficiencies and the quality of care at the patient level.

By focusing on staff development, clinical systems and the efficient delivery of quality patient care, we believe we are able to deliver higher quality care at lower costs than many of our competitors.

We also have achieved incremental occupancy and revenue growth by creating or expanding clinical service offerings in existing operations.

Historically, we have achieved incremental occupancy and revenue growth by creating or expanding clinical service offerings in existing operations.

For example, by expanding clinical programs to provide outpatient therapy services in many markets, we are able to increase revenue while spreading the fixed costs of maintaining these programs over a larger patient base.

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For the 201 facilities that we acquired from 2001 through 2019, the aggregate EBITDAR as a percentage of revenue improved from 10.8% during the first full three months of operations to 14.5% during the thirteenth through fifteenth months of operations.

Real Estate Portfolio Growth .

An important part of our business strategy is to continue to expand and diversify our real estate portfolio through accretive acquisition and investment opportunities in healthcare properties.

Our execution of this strategy hinges on our ability to successfully identify, secure and consummate beneficial transactions.

We have a proven track record of acquiring properties that we have determined are investment opportunities and develop these into thriving properties that are well-suited for operational purposes.

We then use these properties for our skilled nursing or assisted living operations or we lease the properties to other long-term care facility operators.

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The operation of our skilled nursing and senior living facilities requires a large number of highly skilled healthcare professionals and support staff.

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In most of the states where we operate, our skilled nursing facilities are subject to state mandated minimum staffing ratios, so our ability to reduce costs by decreasing staff, notwithstanding decreases in acuity or need, is limited and subject to government audits and penalties in some states.

manage our labor costs by improving staff retention, improving operating efficiencies, maintaining competitive wage rates and benefits and reducing reliance on overtime compensation and temporary nursing agency services.

We seek to manage our labor costs by improving staff retention, improving operating efficiencies, maintaining competitive wage rates and benefits and reducing reliance on overtime compensation and temporary nursing agency services.

The healthcare industry as a whole has been experiencing shortages of qualified professional clinical staff.

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Healthcare is an area of extensive and frequent regulatory change.

Changes in the law or new interpretations of existing laws may have a significant impact on our revenues, costs and the way we operate our business.

Changes in the law or new interpretations of existing laws may have a significant impact on our revenue, costs and the way we operate our business.

Our subsidiaries that provide healthcare services are subject to federal, state and local laws relating to, among other things, licensure, delivery, quality and adequacy of care, physical plant requirements, life safety, personnel and operating policies.

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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 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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These inquiries may originate from the HHS Office of the Inspector General (OIG) audits, state Medicaid agencies, local and state ombudsman offices and CMS Recovery Audit Contractors, among other agencies.

In response to the inquiries, investigations and audits, the federal and state governments continue to impose citations for regulatory deficiencies and other regulatory penalties, including demands for refund of overpayments, expanded Civil Money Penalties (CMPs) that extend over long periods of time and date back to incidents long before surveyor visits, Medicare and Medicaid payment bans and terminations from the Medicare and Medicaid programs.

We vigorously contest these matters where appropriate;

In response to the inquiries, investigations and audits, the federal and state governments continue to impose citations for regulatory deficiencies and other regulatory penalties, including demands for refund of overpayments, expanded civil monetary penalties that extend over long periods of time and date back to incidents long before surveyor visits, Medicare and Medicaid payment bans and terminations from the Medicare and Medicaid programs.

We vigorously contest each such matter when appropriate;

however, there are significant legal and other expenses involved that consume our financial and personnel resources.

Expansion of enforcement activity could adversely affect our business, financial condition or the results of our operations.

As previously mentioned, Medicare presently accounts for approximately 25.8% of our transitional and skilled nursing services revenue, being our second-largest payor.

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The COVID-19 pandemic has disrupted economies around the globe, including the markets in which we operate.

The rapid spread of the virus has led to the implementation of various responses, including federal, state and local government-imposed quarantines, shelter-in-place mandates, sweeping restrictions on travel, and other public health safety measures, as well as adverse impacts on healthcare resources, facilities and providers.

In March, 2020, the outbreak was declared a pandemic by the World Health Organization, and the Health and Human Services Secretary declared a public health emergency in the United States.

Additionally, the Centers for Disease Control and Prevention (CDC) has stated that older adults are at a higher risk for serious illness from the coronavirus.

In an effort to promote efficient care delivery and to decrease the spread of COVID-19, federal, state and local regulators have both implemented new regulations and waived certain existing regulations, including those set forth below.

Temporary suspension of certain patient coverage criteria and documentation and care requirements - The Coronavirus Aid, Relief, and Economic Security Act of 2020 (the CARES Act) and a series of temporary waivers and guidance issued by CMS suspended various Medicare patient coverage criteria to ensure patients continue to have adequate access to care, notwithstanding the burdens placed on healthcare providers as related to the COVID-19 pandemic.

Many of these regulatory waivers were issued pursuant to Section 1135 of the Social Security Act, which authorizes the HHS Secretary to temporarily waive or modify Medicare and Medicaid requirements for affected health care providers and facilities following the declaration of a public health emergency (Section 1135 Waivers).

HHS also waived requirements specific to skilled nursing facilities pursuant to its authority under Section 1812(f) of the Social Security Act (Section 1812(f) Waiver, and together with the Section 1135 Waivers, the Emergency Waivers).

The Emergency Waivers are expected to last throughout the duration of the COVID-19 public health emergency.

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.

CMS Hospital Without Walls);

(2) removing barriers for physicians, nurses, and other clinicians from the community or from other states to allow healthcare systems to provide clinical and workforce support where needed;

(3) increasing access to telehealth and corresponding reimbursement through Medicare to ensure patients have access to healthcare while remaining safe at home;

(4) expanding in-place COVID-19 testing to allow for more testing at home or in community based settings;

and (5) temporarily waiving certain documentation, reporting and audit requirements to allow providers, health care facilities, Medicare Advantage and Part D plans, and states to focus on the provision of care (e.g., Patients Over Paperwork).

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.

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

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.

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 organizations to focus on patient care.

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 reviews because of the COVID-19 pandemic.

This included pre-payment medical reviews conducted by Medicare Administrative Contractors (MACs) under the Targeted Probe and Educate program and post-payment reviews conducted by the MACs, Supplemental Medical Review Contractors (SMRC) reviews and Recovery Audit Contractors (RAC).

CMS authorized MACs to resume these audit activities beginning on August 3, 2020, regardless of the status of the public health emergency.

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

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 program for Medicare beneficiaries who are residents of the skilled nursing facilities that meet the skill-in-place criteria, foregoing the usual three-day qualifying hospital stay.

As patients qualify for skill-in-place for Medicare Part A stays, we could see a decrease in long-term care Medicare Part B programs.

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.

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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 directing that facilities restrict visitation to only compassionate care situations.

Then, in May 2020, CMS issued further 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.

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

CMS has since 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 - Beginning in April 2020, authorities in several states in which we operate began to mandate widespread COVID-19 testing at all nursing home and long-term care facilities.

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 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% and 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 repeat 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.

Reporting requirements - 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 National 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 resident/family/representative notification is required to take place by 5:00 p.m.

(local time) the next calendar day following the occurrence of:

(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.

The data collected as a result of the CDC National Health Safety Network reporting is publicly available on a dedicated website.

CMS may initiate enforcement activities and/or assess civil monetary penalties for not meeting these reporting requirements.

We do not believe these reporting requirements will have a material impact on our 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.

In addition, on January 4, 2021, CMS issued revisions to the previous Guidance of June 1, 2020, modifying the criteria requiring states to conduct focused infection control surveys due to the increased availability of resources for the testing of residents and staff, and factors related to the quality of care.

In addition, CMS provided Frequently Asked Questions related to health, emergency preparedness and life-safety code surveys.

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.

This Commission on Safety and Quality in Nursing Homes (Commission) was intended to identify opportunities for improvement to initiate 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.

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Federal COVID-19 Vaccination Program - On December 11, 2020, the U.S.

Food and Drug Administration (FDA) issued the first emergency use authorization (EUA) for the Pfizer-BioNTech vaccine for the prevention of COVID-19, followed by the second EUA for the use of the Moderna COVID-19 vaccine on December 28, 2020.

Vaccine distribution to all 50 states began Monday, December 14, 2020.

The CDC recommended that the initial phase of the COVID-19 vaccination program prioritize administration to healthcare personnel and residents of long-term care facilities, with states having the ultimate authority to decide who will receive the vaccine.

As the vaccines became available, including through the Pharmacy Partnership for Long-Term Care Program, our residents and staff were able to begin receiving vaccinations, and we anticipate continued participation in COVID-19 vaccination programs.

Medicare presently accounts for approximately 31.8% of our transitional and skilled nursing services year-to-date revenue, being our second-largest payor.

The Medicare program and its reimbursement rates and rules are subject to frequent change.

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Patient-Driven Payment Model (PDPM)

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

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

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.

PDPM utilizes five case-mix adjusted payment components:

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.

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

physician therapy, occupational therapy, speech language pathology, nursing and social services and non-therapy ancillary services.

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.

The structure of PDPM moves Medicare towards a more value-based, unified post-acute care payment system.

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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 facilities per diem payments to reflect varying costs throughout the stay, through the physician therapy, occupational therapy and non-therapy ancillary services 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 each such 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.

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

This effectively gave 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

Current law requires CMS to calculate an annual Medicare market basket update to the payment rates.

On August 7, 2019, CMS issued a final rule for fiscal year 2020 that updates the Medicare payment rates and the quality programs for skilled nursing facilities.

Under the final rule, effective October 1, 2019, the aggregate payments to skilled nursing facilities increase by 2.4% for fiscal year 2020, compared to fiscal year 2019.

This estimated increase is attributable to a 2.8% market basket increase factor with a 0.4% point reduction for multifactor productivity adjustment.

CMS is required to calculate an annual Medicare market-basket update to the payment rates.

On July 31, 2020, CMS issued a final rule for fiscal year 2021 that updates the Medicare payment rates and the quality programs for skilled nursing facilities.

Under the final rule, effective October 1, 2020, the aggregate payments to skilled nursing facilities increased by 2.2% for fiscal year 2021, compared to fiscal year 2020.

This estimated increase is attributable to a 2.2% market basket increase factor.

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.

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

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

Some of our revenue is paid by the Medicare Part B program under a fee schedule.

Part B services are limited with a payment cap by combined speech-language pathology services (SLP) and physical therapy (PT) services and a separate annual cap for OT services.

Part B services are limited with a payment cap by combined speech-language pathology services (SLP) and physical therapy (PT) services and a separate annual cap for occupational therapy (OT) services.

These caps were implemented under the authority of the Balanced Budget Amendments of 1997.

For PT and SLP combined, the limit on incurred expenses is $2,080 for 2020 compared to $2,040 in 2019.

The cap limit is the same for occupational therapy (OT) services.

On multiple occasions during the past two decades, Congress has interceded to suspend the “therapy caps” offering an “exceptions process” so claims in excess of the annualized cap can be processed.

The Deficit Reduction Act of 2005 (DRA) added Section 1833(g)(5) of the Social Security Act and directed CMS to develop a process that allows exceptions for Medicare beneficiaries to therapy caps when continued therapy is deemed medically necessary.

Specifically, the Middle Class Tax Relief and Job Creation Act of 2012 extended the therapy exceptions process but added a second tier cap mandating manual medical review (MMR) for claims submitted that exceeded $3,700 for PT and SLP services combined and another threshold of $3,700 for OT services.

On April 16, 2015, President Obama signed MACRA into law.

MACRA authorized payment reforms for physicians and other professional services, including the three rehabilitative therapies, included provisions not only stabilizing the professional fee schedules, but also extending the therapy cap exceptions process through December 31, 2017.

On February 9, 2018, the Bipartisan Budget Act of 2018 was signed into law, which provides for the repeal of all therapy caps retroactively to January 1, 2018.

The law retained the MMR process for claims over the threshold, but reduced the claim threshold to $3,000.

These amounts were previously associated with the financial limitation amounts.

The Bipartisan Budget Act (BBA) of 2018 repealed those caps while retaining and adding additional limitations to ensure appropriate therapy services.

This policy does not limit the amount of medically necessary Medicare Part B therapy services a beneficiary may receive.

The BBA establishes coding modifier requirements to obtain payments beyond the updated KX modifier thresholds, discussed below, and reaffirms the specific $3,000 claim audit threshold requirements for the Medicare Administrative Contractors.

For PT and SLP combined the threshold for coding modifier requirements is $2,080 for 2020 compared to $2,040 in 2019.

The threshold is the same for OT services.

During the fourth quarter of 2020, CMS published the annual update to the per-beneficiary incurred expenses amounts, now called the KX modifier thresholds, and related policy for fiscal year 2021.

For fiscal year 2021, the KX modifier threshold amounts are $2,110 for PT and SLP services combined, and $2,110 for OT services.

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.

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

On November 1, 2019, CMS issued the calendar year 2020 Physician Fee Schedule Final Rule establishing that therapy assistant claim modifiers will be required starting in CY 2020.

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 increases the amount of time that therapists can spend with their patients.

Effective January 1, 2021, CMS rescinded 21 problematic National Correct Coding Initiative edits impacting outpatient therapy services, including services furnished under Medicare Part B primarily related to PT and OT services.

These code edits were previously implemented on October 1, 2020 and required additional documentation

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and claim modifier coding burden when procedure codes representing many PT or OT evaluation codes or treatment codes performed under a PT, OT, or SLP plan of care was billed on the same date.

This additional burden is no longer required.

On November 1, 2019, CMS issued the calendar year 2020 Physician Fee Schedule (PFS) Final Rule establishing that therapy assistant claim modifiers will be required starting in calendar year 2020.

This rule is consistent with the requirement of the Balanced Budget Act (BBA) of 2018, which requires a 15% payment reduction when a physical therapist assistant (PTA) or occupational therapy assistant (OTA) provides services “in whole or in part” on a given day.

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 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.

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

specific to our industry, CMS is proposing cuts to Part B therapy services by 8%.

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.

On December 1, 2020, CMS issued the calendar year 2021 PFS Final Rule, which reduced the conversion factor (i.e.

the number by which CMS determine all current procedural terminology code payments) by 10.2%.

These changes will effectively lower the reimbursement rate for therapy Medicare Part B specialty providers, specific to our industry by 9% for PT and OT and by 6% for SLP Codes.

The Consolidated Appropriations Act of 2021 (CAA, also referred to as The Omnibus Appropriations Law) was signed into law on December 27, 2020.

The CAA includes three components relevant to the Medicare Part B PFS.

First, the CAA incorporates a rate relief of approximately 3.75% for fiscal year 2021.

Additionally, the CAA incorporates a freeze to the payment for the physician add-on code for three years which would effectively create relief on the initial cuts through 2023.

Finally, the relief calls for the 2% sequester to not be applied to the Medicare Part B program for the first quarter of 2021 (January-March 2021).

CMS incorporated the first and second components of the CAA relief into the fiscal year 2021 PFS files which were published on January 5, 2021.

While the 2021 PFS Final Rule reduced the fiscal year 2021 factor to $32.4085, subsequently, the CAA restored part of the reductions resulting in the final FY 2021 conversion factor of $34.8931.

These rates do not include the 2% sequester which will also qualify as temporary relief for the first quarter of 2021.

The Multiple Procedure Payment Reduction (MPPR) continues at a 50% reduction, which is applied to therapy procedures by reducing payments for practice expense of the second and subsequent procedures when services provided beyond one unit of one procedure are provided on the same day.

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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.

Sequestration of Medicare Rates:

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

Medicare 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 remain in place through at least 2023, unless Congress takes further action.

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 through the end of the public health emergency.

Subsequently, the calendar year 2021 PFS Final Rule added certain of these PT and OT services to the list of Medicare telehealth services on a temporary basis through the end of the calendar year in which the COVID-19 public health emergency ends.

The PFS Final Rule also increased the frequency limitation on nursing facility telehealth visits from once every 30 days to once every fourteen days.

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.

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, which is currently in effect through April 21, 2021.

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

On December 31, 2020, CMS announced the annual update to the list of codes that describe Medicare Part B outpatient therapy services, effective January 1, 2021.

Several existing and new codes introduced during the COVID-19 public health emergency impacting skilled nursing facilities providers for use under physical therapy, occupational therapy, or speech-language pathology plans of care were recently made permanent including several telehealth codes.

CMS designated all these new HCPCS/CPT codes as “sometimes therapy,” to permit physicians and certain non-physician practitioners, including nurse practitioners, physician assistants, and clinical nurse specialists, to render these services outside a therapy plan of care when appropriate.

“Sometimes Therapy” codes will not have the MPPR applied.

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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.

Ensign has seventeen Utah facilities that have entered into agreements with a NSG hospital in which operations have been transferred to the NSG hospital, but Ensign-related entities manage these facilities.

This has allowed these seventeen 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

On February 20, 2020, CMS published a proposed rule which would modernize requirements for the Preadmission Screening and Resident Review process.

This process assesses the needs of individuals with mental illness or intellectual disability that are applying to or residing in Medicaid-certified nursing facilities.

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.

Decisions Regarding Skilled Nursing Facility Payment

Medicare 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.

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 I, 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.

Patient Protection and Affordable Care Act

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These reforms include modifications to the conditions of qualification for payment, bundling of payments to cover both acute and post-acute care and the imposition of enrollment limitations on new providers.

The recent congressional elections in the United States and policies implemented by the current administration have resulted in significant changes in legislation, regulation, implementation of Medicare and/or Medicaid, and government policy, but the upcoming 2020 presidential and congressional elections could significantly alter the current regulatory framework and impact our business and the health care industry.

The recent Congressional elections in the United States and policies implemented by the former Presidential administration have resulted in significant changes in legislation, regulation, implementation of Medicare, Medicaid, and government policy.

The recent 2020 Presidential and Congressional elections may significantly alter the current regulatory framework and impact our business and the health care industry.

We continually monitor these developments so we can respond to the changing regulatory environment impacting our business.

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Requirements of Participation

CMS has requirements that providers, including SNFs and other long-term care (LTC) facilities must meet in order to participate in the Medicare and Medicaid Programs.

Some requirements can be burdensome and costly, and in recent years, CMS

has modified these requirements.

For example, in 2016 CMS instituted new requirements, to be met in three phases.

The first phase was effective November 28, 2016, the second phase was effective November 28, 2017 and the third phase became effective November 28, 2019 (despite recent proposals to delay implementation of specific portions of the rule).

Additionally, beginning in 2016, SNFs were required to comply with emergency preparedness requirements, which requirements have since been strengthened via promulgation of additional rules.

CMS has requirements that providers, including skilled nursing facilities and other long-term care (LTC) facilities must meet in order to participate in the Medicare and Medicaid Programs.

Some requirements can be burdensome and costly, and in recent years, CMS has modified these requirements.

For example, beginning in 2016, skilled nursing facilities were required to comply with emergency preparedness requirements, which requirements have since been strengthened via promulgation of additional rules.

Another relevant change is a 2019 final rule that removed the prohibition on the use of pre-dispute, binding arbitration agreements by LTC facilities.

The rule imposed specific requirements on the use these agreements, including requiring the use of plain language in drafting;

The rule imposed specific requirements on the use of these agreements, including requiring the use of plain language in drafting;

that facilities post a notice in plain language that describes the policy on the use of agreements for binding arbitration in an area that is visible to residents and visitors;

that admission to the facility not be conditioned on the signing of an arbitration agreement;

and that the facility explicitly inform the resident or his or her representative of the right not to sign the agreement as a condition of admission.

and that the facility expressly inform the resident or his/her representative of the right not to sign the agreement as a condition of admission.

Civil and Criminal Fraud and Abuse Laws and Enforcement

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The Health Insurance Portability and Accountability Act of 1996 (HIPAA), and the Balanced Budget Act of 1997 (BBA) expanded the penalties for healthcare fraud.

Additionally, in connection with our involvement with federal healthcare reimbursement programs, the government or those acting on its behalf may bring an action under the False Claims Act (FCA), alleging that a healthcare provider has defrauded the government by submitting a claim for items or services not rendered as claimed, which may include coding errors, billing for services not provided, and submitting false or erroneous cost reports.

Additionally, in connection with our involvement with federal healthcare reimbursement programs, the government or those acting on its behalf may bring an action under the FCA, alleging that a healthcare provider has defrauded the government by submitting a claim for items or services not rendered as claimed, which may include coding errors, billing for services not provided, and submitting false or erroneous cost reports.

The Fraud Enforcement and Recovery Act of 2009 (FERA) expanded the scope of the FCA by, among other things, creating liability for knowingly and improperly avoiding repayment of an overpayment received from the government and broadening protections for whistleblowers.

The FCA clarifies that if an item or service is provided in violation of the Anti-Kickback Statute, the claim submitted for those items or services is a false claim that may be prosecuted under the FCA as a false claim.

CMPs under the FCA range from approximately $11,600 to $23,000 and are adjusted annually for inflation.

Civil monetary penalties under the FCA range from approximately $11,665 to $23,331 and are adjusted each January for inflation.

Under the qui tam or “whistleblower” provisions of the FCA, a private individual with knowledge of fraud may bring a claim on behalf of the federal government and receive a percentage of the federal government’s recovery.

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In November 2019, the OIG released a report of its investigation into overpayments to hospitals that did not comply with Medicare’s post-acute-care transfer policy.

Hospitals violating this policy transferred patients to certain post-acute-care settings, such as SNFs, but claimed the higher reimbursements associated with discharges to homes.

A similar OIG audit, released in February 2019, focused on improper payments for SNF services when the Medicare 3-day inpatient hospital stay requirement was not met.

This investigatory actions by OIG demonstrate their increased scrutiny into post-hospital SNF care provided to beneficiaries.

The findings of this report which is expected to be issued in 2020 may have an impact on our industry (i.e., may encourage additional oversight or stricter compliance standards).

Hospitals violating this policy transferred patients to certain post-acute-care settings, such as skilled nursing facilities, but claimed the higher reimbursements associated with discharges to homes.

A similar OIG audit report, released in February 2019, focused on improper payments for skilled nursing facility services when the Medicare three-day inpatient hospital stay requirement was not met.

These investigatory actions by OIG demonstrate their increased scrutiny into post-hospital skilled nursing facility care provided to beneficiaries and may encourage additional oversight or stricter compliance standards.

On numerous occasions, CMS has indicated its intent to vigilantly monitor overall payments to skilled nursing facilities, paying particular attention to facilities that have high reimbursements for ultra-high therapy, therapy resource utilization groups with higher activities of daily living scores, and long average lengths of stay.

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These efforts may place us under greater scrutiny with the OIG, CMS, our fiscal intermediaries, recovery audit contractors and others.

Federal Health Care Reform

On October 30, 2015, CMS released a final rule addressing, among other things, implementation of certain provisions of MACRA, which changes the way physicians are paid who participate in Medicare through implementation of the Quality Payment

Program (QPP).

QPP creates two tracks for physician payment:

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Federal Healthcare Reform

In 2015, CMS released a final rule addressing, among other things, implementation of certain provisions of Medicare Access and CHIP Reauthorization Act of 2015, which changes the way physicians are paid who participate in Medicare through implementation of the Quality Payment Program.

Quality Payment Program creates two tracks for physician payment:

(1) the Merit-Based Incentive Payment System (MIPS) that streamlines multiple quality programs;

and (2) Alternative Payment Models (APMs) that give bonus payments for participation in eligible APMs.

The current Value-Based Payment Modifier program expired at the end of 2018 (CY 2018 will be the final payment adjustment period under the Value-Based Payment Modifier), with the first MIPS adjustments began in 2019.

The October 30, 2015 final rule added measures where gaps exist in the current Physician Quality Reporting System (PQRS), which is used by CMS to track the quality of care provided to Medicare beneficiaries.

The final rule also excludes services furnished in SNFs from the definition of primary care services for purposes of the Shared Savings Program.

The rule may have an impact on our revenue in the future.

Additionally, in 2015, CMS began implementing a series of changes to the Five-Star Quality Rating system that have made it more difficult for facilities to achieve the highest ratings.

These changes have included, among other things:

In 2015, changes include the use of antipsychotics in calculating the star ratings, modified calculations for staffing levels and reflect higher standards for nursing homes to achieve a high rating on the quality measure dimension.

In 2016, the addition of six new quality measures to the Nursing Home Five-Star Quality Ratings, including the rate of hospitalization, emergency room use, community discharge, improvements in function, independently worsened and anxiety or hypnotic medication among nursing home residents.

and (2) Alternative Payment Models that give bonus payments for participation in eligible Alternative Payment Models.

The final rule also excluded services furnished in skilled nursing facilities from the definition of primary care services for purposes of the Shared Savings Program.

The Five-Star Quality Rating system includes a rating of one to five in various categories including the use of antipsychotics in calculating the star ratings, modified calculations for staffing levels, reflect higher standards for nursing homes to achieve a high rating on the quality measure dimension, the rate of hospitalization, emergency room use, community discharge, improvements in function, independently worsened and anxiety or hypnotic medication among nursing home residents.

In 2018, (i) a freeze of the Health Inspection Five Star Ratings;

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and (iii) modifications to put more emphasis on registered nurse (RN) staffing, including a set rating for nursing homes that report four or more days in the quarter with no RN on site.

CMS predicted that the 2019 changes would result in 47 percent of all nursing centers to lose stars in their "Quality" ratings, 33 percent to lose stars in their "Staffing" ratings, and some 36 percent to lose stars in their "Overall" ratings.

Unsurprisingly, these changes resulted in a reduction in Ensign’s number of facilities with 4 or 5-star ratings in 2019.

Additionally, on October 7, 2019, CMS announced it will begin increasing quality measure thresholds by 50% of the average rate of improvement of QM score every six months, beginning in April 2020.

This means that if there is an average rate of improvement of 2%, the quality measure threshold will be raised 1%.

In 2020, in response to the COVID-19 pandemic, a temporary freeze of Skilled Nursing Facilities Quality Reporting Program data, Staffing Data, and Health Inspection data on the Nursing Home Compare website to account for the suspended reporting and inspection obligations due to the COVID-19 pandemic.

CMS predicted that the 2019 changes would result in 47% of all nursing centers to lose stars in their "Quality" ratings, 33% to lose stars in their "Staffing" ratings and some 36% to lose stars in their "Overall" ratings.

Unsurprisingly, these changes resulted in a reduction in Ensign’s number of facilities with four or five Star ratings in 2019.

In April 2020, CMS began increasing quality measure thresholds by 50% of the average rate of improvement of QM scores every six months.

This means if there is an average rate of improvement of 2%, the quality measure threshold will be raised 1%.

This frequent adjustment is intended to avoid larger adjustments to thresholds in the future.

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In 2019, CMS updated thresholds for assigning stars for both the staffing and quality components of the system and added measures of long-stay hospitalizations and long-stay ED visits were added to the quality measure rating.

Since the standards for performance are more difficult to achieve, the number of our 4 and 5 facilities could be reduced.

Since the standards for performance are more difficult to achieve, the number of our 4 and 5 Star facilities could be reduced.

Additionally, in April of 2019, CMS announced a new framework for informing CMS’s work related to the safety and quality in America’s nursing homes.

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The icon will be updated monthly, at the same time CMS inspection results are updated.

In February 2020, CMS announced that part of its Enhancing Enforcement efforts would include improved oversight of state survey agencies (SSA) and revisions to the State Performance Standards System, which is the program used to access SSA performance.

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In responding to the COVID-19 pandemic, CMS announced a new, targeted inspection plan to focus on urgent patient safety threats and infection control, therefore causing a shift in the number of nursing homes inspected and how the inspections are conducted.

As this change would disrupt the inspections conducted as part of the Nursing Home Five Star Quality Rating System, results of inspections conducted on or after March 4, 2020 were not used to calculate a nursing home’s health inspection star ratings.

CMS will resume calculating nursing homes' health inspection ratings on January 27, 2021.

In addition, beginning on July 29, 2020, data used to calculate staffing measures in the Five Star Quality ratings system for the first and second quarters of 2020 was frozen based upon the waiver of the requirement for facilities to submit staffing data through the PBJ system.

This waiver ended in June 2020 for the third and fourth quarters of 2020, and staffing data is expected to be reflected in the Five Star ratings started in January 2021.

Another impact of the COVID-19 pandemic to the Nursing Home Five-Star Quality Rating System is CMS’s decision to make submission of the minimum data set assessment data optional for the fourth quarter of 2019 and excepted for the first and second quarters of 2020.

Due to the gap in reported data, CMS is not including the two quality measures that are based on the minimum data set assessment-based data in its quality measure ratings in January 2021.

Monitoring Compliance in Our Facilities

Governmental agencies and other authorities periodically inspect our facilities to assess our compliance with various standards, rules and regulations.

The robust regulatory and enforcement environment continues to impact healthcare providers,

especially in connection with responses to any alleged noncompliance identified in periodic surveys and other inspections by governmental authorities.

The robust regulatory and enforcement environment continues to impact healthcare providers, especially in connection with responses to any alleged noncompliance identified in periodic surveys and other inspections by governmental authorities.

Unannounced surveys or inspections generally occur at least annually and may also follow a government agency's receipt of a complaint about a facility.

We must pass these inspections to maintain our licensure under state law, to obtain or maintain certification under the Medicare and Medicaid programs, to continue participation in the Veterans Administration (VA) program at some facilities, and to comply with our provider contracts with managed care clients at many facilities.

We must pass these inspections to maintain our licensure under state law, to obtain or maintain certification under the Medicare and Medicaid programs, to continue participation in the Veterans Administration program at some facilities, and to comply with our provider contracts with managed care clients at many facilities.

From time to time, we, like others in the healthcare industry, may receive notices from federal and state regulatory agencies alleging that we failed to substantially comply with applicable standards, rules or regulations.

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Accordingly, facilities that have poor regulatory histories before we acquire them and that develop new deficiencies after we acquire them are more likely to have sanctions imposed upon them by CMS or state regulators.

In addition, CMS has increased its focus on facilities with a history of serious quality of care problems through the special focus facility initiative.

In addition, CMS has increased its focus on facilities with a history of serious quality of care problems through the special focus facility (SFF) initiative.

A facility's administrators and owners are notified when it is identified as a special focus facility.

This information is also provided to the general public.

The special focus facility designation is based in part on the facility's compliance history typically dating before our acquisition of the facility.

The SFF designation is based in part on the facility's compliance history typically dating before our acquisition of the facility.

Local state survey agencies recommend to CMS that facilities be placed on special focus status.

A special focus facility receives heightened scrutiny and more frequent regulatory surveys.

SFFs receive heightened scrutiny and more frequent regulatory surveys.

Failure to improve the quality of care can result in fines and termination from participation in Medicare and Medicaid.

A facility “graduates” from the program once it demonstrates significant improvements in quality of care that are continued over time.

Furthermore, in November 2020, The Nursing Home Reform Modernization Act of 2020 (Modernization Act) was proposed.

If approved, the Modernization Act would expand oversight to SFF that currently do not receive it, increase educational resources for underperforming facilities, develop rankings for nursing homes from low to high and establish an independent Advisory Council to inform the U.S.

Department of Health and Human Services how best to foster quality improvements.

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Moreover, sanctions such as denial of payment for new admissions often are scheduled to go into effect before surveyors return to verify compliance.

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We are also subject to federal and state laws that regulate financial arrangement by healthcare providers, such as the federal and state anti-kickback laws, the Stark laws, and various state anti-referral laws.

The Anti-Kickback Statute, Section 1128B of the Social Security Act (the Anti-Kickback Statute or AKS) prohibits the knowing and willful offer, payment, solicitation, or receipt of any remuneration, directly or indirectly, overtly or covertly, in cash or in kind, to induce the referral of an individual, in return for recommending, or to arrange for, the referral of an individual for any item or service payable under any federal healthcare program, including Medicare or Medicaid.

The Anti-Kickback Statute, Section 1128B of the Social Security Act (Anti-Kickback Statute) prohibits the knowing and willful offer, payment, solicitation, or receipt of any remuneration, directly or indirectly, overtly or covertly, in cash or in kind, to induce the referral of an individual, in return for recommending, or to arrange for, the referral of an individual for any item or service payable under any federal healthcare program, including Medicare or Medicaid.

The OIG has issued regulations that create “safe harbors” for certain conduct and business relationships that are deemed protected under the Anti-Kickback Statute.

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Business arrangements of healthcare service providers that fail to satisfy the applicable safe harbor criteria, if investigated, will be evaluated based upon all facts and circumstances and risk increased scrutiny and possible sanctions by enforcement authorities.

Violations of the federal anti-kickback laws can result in criminal penalties of up to $100,000 and ten years' imprisonment.

Violations of the anti-kickback laws can also result in civil monetary penalties of up to $100,000 per violation and an assessment of up to three times the total amount of remuneration offered, paid, solicited, or received.

Violation of the anti-kickback laws may also result in an individual's or organization's exclusion from future participation in Medicare, Medicaid and other state and federal healthcare programs.

Violations of the Anti-Kickback Statute can result in criminal penalties of up to $100,000 and ten years imprisonment.

Violations of the Anti-Kickback Statute can also result in civil monetary penalties of up to $100,000 per violation and an assessment of up to three times the total amount of remuneration offered, paid, solicited, or received.

Violation of the Anti-Kickback Statute may also result in an individual's or organization's exclusion from future participation in federal healthcare programs.

State Medicaid programs are required to enact an anti-kickback statute.

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We believe that business practices of providers and financial relationships between providers have become subject to increased scrutiny as healthcare reform efforts continue on the federal and state levels.

In addition to these regulations, we may face adverse consequences if we violate the federal Stark laws related to certain Medicare physician referrals.

Section 1877 of the Social Security Act, commonly known as the “Stark Law,” provides that a physician may not refer a Medicare or Medicaid patient for a “designated health service” to an entity with which the physician or an immediate family member has a financial relationship unless the financial arrangement meets an exception under the Stark Law or its regulations.

Additionally, Section 1877 of the Social Security Act, commonly known as the “Stark Law,” provides that a physician may not refer a Medicare or Medicaid patient for a “designated health service” to an entity with which the physician or an immediate family member has a financial relationship unless the financial arrangement meets an exception under the Stark Law or its regulations.

Designated health services include inpatient and outpatient hospital services, PT, OT, SLP, durable medical equipment, prosthetics, orthotics and supplies, diagnostic imaging, enteral and parenteral feeding and supplies, home health services, and clinical laboratory services.

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Exceptions may have other requirements.

Any funds collected for an item or service resulting from a referral that violates the Stark Law must be repaid to Medicare or Medicaid, any other third-party payor, and the patient.

In addition, CMPs, which are adjusted for annual inflation, and treble damages may be imposed for presenting or causing to be presented, a claim for a service rendered in violation of the Stark Law.

Any funds collected for an item or service resulting from a referral that violates the Stark Law are not eligible for payment by federal healthcare programs and

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must be repaid to Medicare or Medicaid, any other third-party payor, and the patient.

Violations of the Stark Law may result in the imposition of civil monetary penalties, including, treble damages.

Individuals and organizations may also be excluded from participation in federal healthcare programs for Stark Law violations.

Many states have enacted healthcare provider referral laws that go beyond physician self-referrals or apply to a greater range of services than just the designated health services under the Stark Law.

Any services furnished pursuant to a prohibited referral are not eligible for payment by the Medicare programs, and the provider is prohibited from billing any third party for such services.

The Stark laws provide for the imposition of a civil monetary penalty of $15,000 per prohibited claim, and up to $100,000 for knowingly entering into certain prohibited cross-referral schemes, and potential exclusion from Medicare for any person who presents or causes to be presented a bill or claim the person knows or should know is submitted in violation of the Stark laws.

Regulations Regarding Patient Record Confidentiality

We are also subject to laws and regulations enacted to protect the confidentiality of patient health information.

For example, HHS has issued rules pursuant to HIPAA, which relate to the privacy of certain patient information.

These rules govern our use and disclosure of protected health information.

For example, HHS has issued rules pursuant to HIPAA, including the Health Information Technology for Economic and Clinical Health (HITECH) Act which governs our use and disclosure of protected health information of patients.

We have established policies and procedures to comply with HIPAA privacy and security requirements at our affiliated facilities and operating subsidiaries.

We maintain a company-wide HIPAA compliance plan, which we believe complies with the HIPAA privacy and security regulations.

The HIPAA privacy regulations and security regulations have and will continue to impose significant costs on our facilities in order to comply with these standards.

The HIPAA privacy and security regulations have and will continue to impose significant costs on our facilities in order to comply with these standards.

There are numerous other laws and legislative and regulatory initiatives at the federal and state levels addressing privacy and security concerns.

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These laws vary and could impose additional penalties for privacy and security breaches.

Healthcare entities are also required to afford patients with certain rights of access to their health information under HIPAA.

Recently, the Office of Civil Rights, the agency responsible for HIPAA enforcement, has targeted investigative and enforcement efforts on violations of patients’ rights of access, imposing significant fines for violations largely initiated from patient complaints.

Antitrust Laws

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Violators of the antitrust laws could be subject to criminal and civil enforcement by federal and state agencies, as well as by private litigants.

American with Disabilities Act

Our facilities must also comply with the American with Disabilities Act, or the ADA, and similar state and local laws to the extent that such facilities are "public accommodations" as defined in those laws.

The obligation to comply with the ADA and other similar laws is an ongoing obligation, and we continue to assess our facilities and make appropriate modifications.

REGULATIONS SPECIFIC TO SENIOR LIVING COMMUNITIES

As previously mentioned, senior living services revenue is primarily derived from private pay residents, with a small portion of senior living revenue (approximately 10%) derived from Medicaid funds.

As previously mentioned, senior living services revenue is primarily derived from private pay residents, with a small portion of senior living revenue (approximately 0.5% of total revenue) derived from Medicaid funds.

Thus, some of the regulations discussed above applicable to Medicaid providers, also apply to senior living.

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State Medicaid programs control costs for senior living and other home and community-based services by various means such as restrictive financial and functional eligibility standards, enrollment limits and waiting lists.

Because rates paid to senior living community operators are generally lower than rates paid to SNF operators, some states use Medicaid funding of senior living services as a means of lowering the cost of services for residents who may not need the higher level of health services provided in SNFs.

Because rates paid to senior living community operators are generally lower than rates paid to skilled nursing facility operators, some states use Medicaid funding of senior living services as a means of lowering the cost of services for residents who may not need the higher level of health services provided in skilled nursing facilities.

States that administer Medicaid programs for services in senior living communities are responsible for monitoring the services at, and physical conditions of, the participating communities.

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Most state licensing standards apply to senior living communities regardless of whether they accept Medicaid funding.

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Since 2003, CMS has commenced a series of actions to increase its oversight of state quality assurance programs for senior living communities and has provided guidance and technical assistance to states to improve their ability to monitor and improve the quality of services paid for through Medicaid waiver programs.

CMS is encouraging state Medicaid programs to expand their use of home and community-based services as alternatives to institutional services, pursuant to provisions of the ACA, and other authorities, through the use of several programs.

CMS is encouraging state Medicaid programs to expand their use of home and community-based services as alternatives to facility-based services, pursuant to provisions of the ACA, and other authorities, through the use of several programs.

The types of laws and statutes affecting the regulatory landscape of the post-acute industry continue to expand.

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In order to operate our businesses, we must comply with federal, state and local laws relating to licensure, delivery and adequacy of medical care, distribution of pharmaceuticals, equipment, personnel, operating policies, fire prevention, rate-setting, billing and reimbursement, building codes and environmental protection.

Additionally, we must also adhere to anti-kickback statues, physician referral laws, and safety and health standards set by the Occupational Safety and Health Administration (OSHA).

Additionally, we must also adhere to anti-kickback statues, physician referral laws, the ADA, and safety and health standards set by the Occupational Safety and Health Administration.

Changes in the law or new interpretations of existing laws may have an adverse impact on our methods and costs of doing business.

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Part of our operations involves the handling, use, storage, transportation, disposal and discharge of medical, biological, infectious, toxic, flammable and other hazardous materials, wastes, pollutants or contaminants.

we are sometimes unable to determine with certainty whether prior uses of our facilities and properties or surrounding properties may have produced continuing environmental contamination or noncompliance, particularly where the timing or cost of making such determinations is not deemed cost-effective.

In addition, we are sometimes unable to determine with certainty whether prior uses of our facilities and properties or surrounding properties may have produced continuing environmental contamination or noncompliance, particularly where the timing or cost of making such determinations is not deemed cost-effective.

These activities, as well as the possible presence of such materials in, on and under our properties, may result in damage to individuals, property or the environment;

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annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act.

These reports and other information concerning our company may be accessed through the SEC's website at http://www.sec.gov.

These reports, proxy and information statements and other information concerning our company may be accessed through the SEC's website at http://www.sec.gov.

You may also find on our website at http://www.ensigngroup.net, electronic copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act.

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Information contained in our website is not deemed to be a part of this Annual Report on Form 10-K.

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

What changed 10-K

Item 1. Business