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Item 2. Management’s Discussion and Analysis

2021-04-29 compared with 2020-10-28 · 440 added, 764 removed, 610 unchanged (66% of the section changed)

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The following discussion should be read in conjunction with the condensed consolidated financial statements and accompanying notes, which appear elsewhere in this Quarterly Report on Form 10-Q.

We urge you to carefully review and consider the various disclosures made by us in this Report and in our other reports filed with the Securities and Exchange Commission (SEC), including our Annual Report on Form 10-K for the year ended December 31, 2019 (Annual Report), which discusses our business and related risks in greater detail, as well as subsequent reports we may file from time to time on Form 10-Q and Form 8-K, for additional information.

The section entitled “Risk Factors” contained in Part II, Item 1A of this Report, and similar discussions in our other SEC filings, also describe some of the important risk factors that may affect our business, financial condition, results of operations and/or liquidity.

You should carefully consider those risks, in addition to the other information in this Report and in our other filings with the SEC, before deciding to purchase, hold or sell our common stock.

This Report contains "forward-looking statements," within the meaning of the Private Securities Litigation Reform Act of 1995, which include, but are not limited to the Company’s expected future financial position, results of operations, cash flows, financing plans, business strategy, budgets, capital expenditures, competitive positions, growth opportunities, plans and objectives of management.

We urge you to carefully review and consider the various disclosures made by us in this Quarterly Report and in our other reports filed with the Securities and Exchange Commission (SEC), including our Annual Report on Form 10-K for the year ended December 31, 2020 (Annual Report), which discusses our business and related risks in greater detail, as well as subsequent reports we may file from time to time on Form 10-Q and Form 8-K, for additional information.

The section entitled “Risk Factors” contained in Part II, Item 1A of this Quarterly Report on Form 10-Q, and similar discussions in our other SEC filings, also describe some of the important risk factors that may affect our business, financial condition, results of operations and/or liquidity.

You should carefully consider those risks, in addition to the other information in this Quarterly Report on Form 10-Q and in our other filings with the SEC, before deciding to purchase, hold or sell our common stock.

This Quarterly Report on Form 10-Q contains "forward-looking statements," within the meaning of the Private Securities Litigation Reform Act of 1995, which include, but are not limited to our expected future financial position, results of operations, cash flows, financing plans, business strategy, budgets, capital expenditures, competitive positions, growth opportunities, and plans and objectives of management.

Forward-looking statements can often be identified by words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “may,” “will,” “should,” “would,” “could,” “potential,” “continue,” “ongoing,” similar expressions, and variations or negatives of these words.

These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict.

Additionally, many of these risks and uncertainties are currently amplified by and in the future may be amplified by, the COVID-19 outbreak.

The developments with respect to the spread of COVID-19 and its impacts have been occurring rapidly and because of the unprecedented nature of the pandemic, we are unable to predict the full extent and duration of the adverse financial impact of COVID-19 on our business, financial condition and results of operations.

While we are not able to estimate the full impact of the COVID-19 outbreak on our financial condition and future results of operations, we expect that this situation will have an adverse effect on our reported results in the future.

Our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors, some of which are listed under the section “Risk Factors” contained in Part II, Item 1A of this Report.

These forward-looking statements speak only as of the date of this Report, and are based on our current expectations, estimates and projections about our industry and business, management’s beliefs, and certain assumptions made by us, all of which are subject to change.

Additionally, our business and operations for 2021 continue to be impacted by the COVID-19 pandemic.

Because of the unprecedented nature of the pandemic, we are unable to predict the full extent and duration of the financial impact of COVID-19 on our business, financial condition and results of operations.

Our actual results could differ materially from those expressed in any forward-looking statements as a result of various factors, some of which are listed under the section “Risk Factors” contained in Part II, Item 1A of this Quarterly Report on Form 10-Q.

These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q, and are based on our current expectations, estimates and projections about our industry and business, management’s beliefs, and certain assumptions made by us, all of which are subject to change.

We undertake no obligation to revise or update publicly any forward-looking statement for any reason, except as otherwise required by law.

As used in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, the words, “we,” “our” and “us” refer to The Ensign Group, Inc.

As used in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, the words, "Ensign," "Company," “we,” “our” and “us” refer to The Ensign Group, Inc.

and its consolidated subsidiaries.

All of our affiliated operations, the Service Center and the Captive are operated by separate, wholly-owned, independent subsidiaries that have their own management, employees and assets.

The use of “we,” “us,” “our” and similar verbiage in this Quarterly Report on Form 10-Q is not meant to imply that any of our affiliated operations, the Service Center or the Captive are operated by the same entity.

The use of "Ensign," "Company," “we,” “us,” “our” and similar verbiage in this Quarterly Report on Form 10-Q is not meant to imply that any of our affiliated operations, the Service Center or the Captive are operated by the same entity.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements and related notes included the Annual Report.

We are a provider of health care services across the post-acute care continuum, as well as other ancillary businesses located in Arizona, California, Colorado, Idaho, Iowa, Kansas, Massachusetts, Nebraska, Nevada, South Carolina, Texas, Utah, Washington and Wisconsin.

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

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

We are a provider of health care services across the post-acute care continuum, engaged in the ownership, acquisition, development and leasing of skilled nursing, senior living and other healthcare-related properties, and other ancillary businesses located in Arizona, California, Colorado, Idaho, Iowa, Kansas, Nebraska, Nevada, South Carolina, Texas, Utah, Washington and Wisconsin.

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

As of March 31, 2021, we offered skilled nursing, senior living and rehabilitative care services through 232 skilled nursing and senior living facilities.

Of the 232 facilities, we operated 168 facilities under long-term lease arrangements, and have options to purchase 11 of those 168 facilities.

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

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

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

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

Our real estate portfolio includes 94 owned real estate properties, which included 64 facilities operated and managed by us, 31 senior living operations leased to and operated by The Pennant Group, Inc., or Pennant, as part of the spin-off transaction that occurred in October 2019 (Spin-Off), and the Service Center location.

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.

The following table summarizes our affiliated facilities and operational skilled nursing beds and senior living units by ownership status as of March 31, 2021:

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

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Percentage of total 65.1 % 7.9 % 27.0 % 100.0 %

The Ensign Group, Inc.

(collectively, Ensign or the Company) is a holding company with no direct operating assets, employees or revenues.

Ensign is a holding company with no direct operating assets, employees or revenues.

Our operating subsidiaries are operated by separate, independent entities, each of which has its own management, employees and assets.

In addition, certain of our wholly owned subsidiaries, referred to collectively as the Service Center, provide centralized accounting, payroll, human resources, information technology, legal, risk management and other centralized services to the other operating subsidiaries through contractual relationships with such subsidiaries.

We also have a wholly owned captive insurance subsidiary (the Captive) that provides some claims-made coverage to our operating subsidiaries for general and professional liability, as well as coverage for certain workers’ compensation insurance liabilities.

References herein to the consolidated “Company” and “its” assets and activities, as well as the use of the terms “we,” “us,” “our” and similar terms in this Quarterly Report on Form 10-Q, are not meant to imply, nor should they be construed as meaning, that The Ensign Group, Inc.

We also have a wholly-owned captive insurance subsidiary (or the Captive) that provides some claims-made coverage to our operating subsidiaries for general and professional liability, as well as coverage for certain workers’ compensation insurance liabilities.

References herein to the consolidated “Company” and “its” assets and activities, as well as the use of the terms “we,” “us,” “our” and similar terms in this Annual Report, are not meant to imply, nor should they be construed as meaning, that The Ensign Group, Inc.

has direct operating assets, employees or revenue, or that any of the subsidiaries are operated by The Ensign Group.

Recent Activities

Coronavirus - The outbreak of the coronavirus disease (COVID-19), which was declared a global pandemic by the World Health Organization (WHO) on March 11, 2020, and the related responses by public health and governmental authorities to contain and combat its outbreak and spread, continues to spread and disrupt healthcare operations across the United States, 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 substantial changes to selected protocol within the healthcare system across 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 and death from COVID-19.

The extent to which COVID-19 impacts our operations will depend on future developments which continue to remain highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, additional or modified government actions, new information which may emerge concerning the severity of COVID-19 and the actions taken to contain COVID-19 or treat its impact, among others.

In response to the pandemic, federal and state agencies have been evolving and in some cases, relaxing enforcement requirements, trending toward granting healthcare providers with flexibility to prioritize resident care over stringent adherence to regulatory compliance.

Coronavirus Update — We are continuing to closely monitor the impact of the global COVID-19 pandemic on our business and are taking proactive steps designed to protect the health and safety of our residents and employees and to maintain business continuity.

As the vaccines became more accessible in all 50 states, we began to see a significant decline in COVID-19 cases in our affiliated operations as we worked diligently to vaccinate all of our willing residents and staff.

Our primary focus throughout the COVID-19 pandemic has remained ensuring the health and safety of our patients, residents, employees, and their respective families.

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

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

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

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

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

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

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

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

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

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

Although the ultimate impact of the COVID-19 pandemic remains uncertain, we can offer the following observations regarding the impact of COVID-19 on our operations, as well as significant regulatory and legislative relief initiatives.

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

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

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

Our operations are located in 14 states and range from metropolitan, suburban and rural communities.

The prevalence of the virus varies dramatically by state, within the same state or within the same county.

Accordingly, the impact on each of our operations has also varied widely.

Our first location to have a confirmed positive COVID-19 patient and staff member was in the state of Washington, which was one of the first states to have confirmed COVID-19 cases in the United States.

Accordingly, our Washington locations were impacted beginning in mid-February.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The surge of COVID-19 positive patients, or patients suspected to have been exposed to COVID-19, has resulted in an increase in the number of patients requiring skilled services, which we are able to serve through skilled-in-place (SIP) precautions and procedures.

In addition, patients that are not COVID-19 positive or suspected to be COVID-19 positive but require skilled services and qualify to be cared for under the SIP precautions and procedures, have remained in our facilities instead of moving to the hospitals first.

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

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

Legislative and Regulatory Relief

In March 2020, the federal government began to undertake numerous legislative and regulatory initiatives designed to provide relief to the healthcare industry during the COVID-19 pandemic.

These initiatives include:

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

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

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

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

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

Providers have also been able to apply for additional funding.

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

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

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

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

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

This funding will include four separate distributions:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

• Temporary suspension of certain patient coverage criteria and documentation and care requirements - The CARES Act and a series of temporary waivers and guidance issued by the Centers for Medicare and Medicaid Services (CMS) suspend various Medicare patient coverage criteria, as well as, certain documentation and care requirements.

These accommodations are intended to ensure patients have adequate access to care notwithstanding the burdens placed on healthcare providers due to the COVID-19 pandemic.

These regulatory actions have and will continue to contribute to an increase in census volumes and skilled mix, that may not otherwise occur.

• Medicare Accelerated and Advance Payment Program - The CARES Act expands the Medicare Accelerated and Advance Payment Program to ensure providers and suppliers have the resources needed to combat the pandemic.

Our operations began to receive advances in April 2020.

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

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

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

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

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

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

We paid these estimated amounts in the third quarter.

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

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

CMS has authorized these services through skilled in place (SIP) programs.

These programs are designed to allow skilled nursing providers to provide skilled services to higher acuity patients, while allowing hospitals to have increased capacity to care for critical care patients (including COVID-19 positive patients) and limiting the risks related to moving patients between care settings in the midst of a pandemic.

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

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

Operating Expenses

We have and continued to experience increased operating expenses during the period impacted by COVID-19 due to the higher utilization, cost and type of personal protective equipment, testing for COVID-19 as well as increased purchasing of other medical supplies and cleaning and sanitization materials.

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

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

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

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

and global economy.

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

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

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

As the vaccine distribution commenced and infection rates are began to decline, we experienced a recovery in occupancy rates throughout the first quarter of 2021, when compared to the fourth quarter of 2020.

The improvements in occupancy were due to our operations developing innovative approaches to confront the occupancy declines, including strategic partnerships with upstream and downstream continuum partners and increasing clinical competencies to treat high-acuity patients, including those that are COVID-19 positive.

Additionally, we have seen increases in hospital volumes for surgeries.

Some operations added COVID-19 wings, while others become COVID-19 dedicated facilities, enabling an important offloading of strained hospital capacity.

As a result of our local, one operation at a time approach, our Same Facilities and Transitioning Facility occupancy rebounded by 0.4% and 1.6%, respectively, during the first quarter of 2021 compared the fourth quarter of 2020.

By strengthening existing partnerships and creating new partnerships, and most importantly, demonstrating clinical capabilities and favorable outcomes, our census has continued to stabilize.

We believe that our operations are prime to rebuild occupancies and continue to gain additional market share as a result of relationships with acute care providers and other health care partners.

During the three months ended March 31, 2021, we received approximately $9.1 million in provider relief fund distributions (Provider Relief Fund) from the Coronavirus Aid, Relief and Economic Security Act of 2020 (the CARES Act) from the federal government.

As of March 31, 2021, and the date hereof, we have returned all Provider Relief Funds that we received related to this distribution.

We may receive additional relief fund payments in the future.

Further, we repaid the remaining $102.0 million of Medicare Accelerated and Advance Payment Program funds in March 2021.

During the three months ended March 31, 2021, we received an additional $15.6 million in state relief funding and recognized $16.5 million as revenue, of which $6.5 million was classified as unapplied state funding included in our liabilities as of December 31, 2020.

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

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

We recorded $48.3 million of deferred payments of social security taxes as a liability in 2020, of which $24.2 million will be paid out in the fourth quarter of 2021 and the remaining liabilities in 2022.

Until the COVID-19 pandemic has been resolved as a public health crisis, it has the potential to cause further and more severe disruption of the global and national economies.

Despite these challenges, we believe we are well-positioned to operate effectively in the current environment.

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

We continue to focus on navigating the challenges presented by COVID-19 through utilizing the infrastructure of our local operational approach.

Each location is partnering with its local leaders and community outreach to ensure the operations are well equipped to deliver quality care.

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

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

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

These repurchase programs expired upon the repurchase of the full authorized amount under the two plans.

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

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

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

We believe our current cash management strategy is appropriate at this time and will consider approving stock repurchase programs in the future after we gain additional visibility into our cash flows and how to best utilize those funds.

Spin-Off of Subsidiaries

On October 1, 2019, we completed the separation of our transitional and skilled nursing services, home health and hospice operations and substantially all of our senior living operations into two separate, publicly traded companies:

• Ensign, which includes skilled nursing and senior living services, physical, occupational and speech therapies and other rehabilitative and healthcare services, post-acute-related new business ventures and real estate investments;

• The Pennant Group, Inc.

(Pennant), which is a holding company of operating subsidiaries that provide home health, hospice and senior living services.

We completed the separation through a tax-free distribution of substantially all of the outstanding shares of common stock of Pennant to Ensign stockholders on a pro rata basis (the Spin-Off).

We transferred to Pennant net assets of 63 home health, hospice and home care agencies and 52 senior living communities.

We retained ownership of all the real estate, which includes 29 of the 52 senior living operations that were contributed to Pennant.

These assets are leased to Pennant on a triple-net basis.

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

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

Pennant's remaining 23 senior living operations are leasing the underlying real estate from unrelated third parties.

As part of the Spin-Off, we amended the Master Leases with CareTrust and other third-party lease agreements.

These amendments terminate the leases related to the operations that transferred to Pennant and modified the rental payments and lease terms of the operations that remained with Ensign.

The net impact of the lease termination and modification of the senior living properties is a reduction in annual rent expense of approximately $23.0 million.

We entered into several agreements with Pennant in connection with the Spin-off, including a transition services agreement (TSA), separation and distribution agreement, tax matters agreement and employee matters agreement.

Pursuant to the TSA, Ensign and Pennant and our respective subsidiaries agreed to provide various services to each other on an interim, transitional basis.

Services being provided by us include, among others, certain finance, information technology human resources, employee benefits and other administrative services.

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

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

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

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

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.

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

See Note 4, Spin-Off of Subsidiaries , in the notes to condensed consolidated financial statements for further detail.

On October 1, 2019, in connection with the Spin-Off, we entered into the Credit Facility, with a revolving line of credit of up to $350.0 million in aggregate principal amount.

The maturity date of the Credit Facility is October 1, 2024.

Borrowings are supported by a lending consortium arranged by Truist.

In connection with the amendment, we also terminated the term loan under the prior credit facility.

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 September 30, 2020:

Facility Information

The following table sets forth the location of our operated and owned facilities by type as well as the number of beds and units located at operated and owned facilities as of March 31, 2021:

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

Number of facilities

Number of operated facilities

Skilled nursing operations 59 50 29 18 11 9 9 4 4 4 2 1 — 200

Senior living communities 1 — — 2 5 — — 1 — — — — — 9

5 1 3 1 1 — 2 2 2 — — — 7 24

Number of operational beds/units

Senior living operations 1 — — 2 5 — — 1 — — — — — 9

Campuses(1) 4 1 3 1 1 — 2 2 2 — — — 7 23

Number of operated beds/units

Operational skilled nursing beds 7,679 5,080 4,203 1,940 972 841 904 413 368 426 100 92 601 23,619

Senior living units 505 65 315 165 620 — 37 301 31 — — — 206 2,245

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

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

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

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

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

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

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

Number of owned and operated facilities

Skilled nursing properties 14 6 7 7 4 2 4 1 — 4 2 — — 51

Senior living communities 1 — — — 3 — — 1 — — — — — 5

Campuses(1) 2 — 3 — — — 1 — — — 0 — 2 8

Number of owned and operated beds/units

Owned skilled nursing beds 1,830 691 1,264 633 348 204 454 88 — 426 100 — 220 6,258

Owned Senior living units 439 — 315 — 355 — 16 262 — — — — 74 1,461

(1) Campuses represent facilities that offer both skilled nursing and senior living services.

During the three months ended March 31, 2021, we expanded our operations through long-term leases with the addition of four stand-alone skilled nursing operations.

These new operations added a total of 447 operational skilled nursing beds operated by our affiliated operating subsidiaries.

Subsequent to March 31, 2021, we expanded our operations through long-term leases with the addition of three stand-alone skilled nursing operations.

These new operations added 322 operational skilled nursing beds to be operated by our affiliated operating subsidiaries.

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

Key Performance Indicators

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Transitional and Skilled Services

• Routine revenue.

Routine revenue is generated by the contracted daily rate charged for all contractually inclusive skilled nursing services.

• Routine revenue — Routine revenue is generated by the contracted daily rate charged for all contractually inclusive skilled nursing services.

The inclusion of therapy and other ancillary treatments varies by payor source and by contract.

Services provided outside of the routine contractual agreement are recorded separately as ancillary revenue, including Medicare Part B therapy services, and are not included in the routine revenue definition.

• Skilled revenue.

The amount of routine revenue generated from patients in the skilled nursing facilities who are receiving higher levels of care under Medicare, managed care, Medicaid, or other skilled reimbursement programs.

• Skilled revenue — The amount of routine revenue generated from patients in the skilled nursing facilities who are receiving higher levels of care under Medicare, managed care, Medicaid, or other skilled reimbursement programs.

The other skilled patients who are included in this population represent very high acuity patients who are receiving high levels of nursing and ancillary services which are reimbursed by payors other than Medicare or managed care.

Skilled revenue excludes any revenue generated from our senior living services.

• Skilled mix .

The amount of our skilled revenue as a percentage of our total skilled nursing routine revenue.

• Skilled mix — The amount of our skilled revenue as a percentage of our total skilled nursing routine revenue.

Skilled mix (in days) represents the number of days our Medicare, managed care, or other skilled patients are receiving skilled nursing services at the skilled nursing facilities divided by the total number of days patients from all payor sources are receiving skilled nursing services at the skilled nursing facilities for any given period.

• Average daily rates.

The routine revenue by payor source for a period at the skilled nursing facilities divided by actual patient days for that revenue source for that given period.

• Average daily rates — The routine revenue by payor source for a period at the skilled nursing facilities divided by actual patient days for that revenue source for that given period.

These rates exclude additional FMAP payments we recognized as part of The Family First Coronavirus Response Act.

• Occupancy percentage (operational beds).

The total number of patients occupying a bed in a skilled nursing facility as a percentage of the beds in a facility which are available for occupancy during the measurement period.

• Number of facilities and operational beds.

The total number of skilled nursing facilities that we own or operate and the total number of operational beds associated with these facilities.

• Occupancy percentage (operational beds) — The total number of patients occupying a bed in a skilled nursing facility as a percentage of the beds in a facility which are available for occupancy during the measurement period.

• Number of facilities and operational beds — The total number of skilled nursing facilities that we own or operate and the total number of operational beds associated with these facilities.

Like most skilled nursing providers, we measure both patient days and revenue by payor.

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

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

2020 2019 2020 2019

Three Months Ended March 31,

Days 34.4 % 29.3 %

Revenue 55.6 % 50.1 %

We define occupancy derived from our transitional and skilled services as the ratio of actual patient days (one patient day equals one patient occupying one bed for one day) during any measurement period to the number of beds in facilities which are available for occupancy during the measurement period.

Occupancy — We define occupancy derived from our transitional and skilled services as the ratio of actual patient days (one patient day equals one patient occupying one bed for one day) during any measurement period to the number of beds in facilities which are available for occupancy during the measurement period.

The number of licensed beds in a skilled nursing facility that are actually operational and available for occupancy may be less than the total official licensed bed capacity.

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

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

Three Months Ended March 31,

Occupancy for transitional and skilled services:

2020 2019 2020 2019

Operational beds at end of period 23,619 22,883

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Occupancy percentage (based on operational beds) 71.1 % 79.4 %

We have one reportable segment, transitional and skilled services, which includes the operation of skilled nursing facilities.

In the fourth quarter of fiscal year 2020, we began reporting the results of our real estate portfolio as a new segment as we continue to expand our real estate investment strategy.

We 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 comprised of properties owned by us and leased to skilled nursing and assisted 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 reported 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 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.

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

These operations are neither significant individually nor in aggregate and therefore do not constitute a reportable segment.

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

Revenue Sources

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

Three Months Ended September 30,

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

Three Months Ended March 31,

Transitional and Skilled Services Other (1)

2021 2020 2021 2020 2021 2020

Medicaid $ 218,840 $ 202,665 $ 3,352 $ 3,280 $ 222,192 $ 205,945

Medicare 189,237 119,633 — — 189,237 119,633

Medicaid-skilled 38,232 34,080 — — 38,232 34,080

Subtotal 446,309 356,378 3,352 3,280 449,661 359,658

Managed care 87,648 88,542 — — 87,648 88,542

Private and other 36,427 41,053 25,519 22,856 61,946 63,909

Total revenue $ 570,384 $ 485,973 $ 28,871 $ 26,136 $ 599,255 $ 512,109

Medicaid 38.4 % 41.7 % 11.6 % 12.5 % 37.1 % 40.2 %

$ 227,741 $ 220,969 $ 3,617 $ 3,226 $ 231,358 $ 224,195

Medicare 190,303 155,584 — — 190,303 155,584

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Total revenue $ 601,036 $ 558,304 $ 22,240 $ 27,647 $ 623,276 $ 585,951

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

Nine Months Ended September 30,

Three Months Ended March 31,

Transitional and Skilled Services Other (1)

2021 2020 2021 2020 2021 2020

Medicaid $ 662,733 $ 576,504 $ 9,773 $ 9,718 $ 672,506 $ 586,222

Medicare 519,865 355,141 — — 519,865 355,141

Medicaid-skilled 110,626 96,323 — — 110,626 96,323

Subtotal 1,293,224 1,027,968 9,773 9,718 1,302,997 1,037,686

Managed care 271,993 258,205 — — 271,993 258,205

Private and other 120,351 118,296 78,226 62,146 198,577 180,442

Total revenue $ 1,685,568 $ 1,404,469 $ 87,999 $ 71,864 $ 1,773,567 $ 1,476,333

Medicaid 39.3 % 41.0 % 11.1 % 13.5 % 37.9 % 39.7 %

37.9 % 39.6 % 16.3 % 11.7 % 37.1 % 38.3 %

Medicare 31.7 27.9 — — 30.5 26.6

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

(2) Medicaid payor includes revenue for senior living operations and revenue related to FMAP.

In addition to the service revenue above, our rental revenue derived from triple-net lease arrangements with third parties is $3,977 and $3,662, respectively for the three months ended March 31, 2021 and 2020.

Transitional and Skilled Services

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

We generate rental revenue primarily by leasing post-acute care properties 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.

As of March 31, 2021, our real estate portfolio was comprised of 94 real estate properties.

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

During the year ended March 31, 2021, we generated rental revenues of $15.9 million, of which $11.9 million was derived from affiliated wholly-owned healthcare operators, and therefore eliminated in consolidation.

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

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

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

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

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Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S.

Our discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with U.S.

Generally Accepted Accounting Principles (GAAP).

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While we believe that our estimates, assumptions, and judgments are reasonable, they are based on information available when the estimate was made.

Refer to Note 2, Summary of Significant Accounting Policies , within the Condensed Consolidated Financial Statements for further information on our critical accounting estimates and policies, which are as follows:

Refer to Note 2, Summary of Significant Accounting Policies , within the Notes to the Condensed Consolidated Financial Statements for further information on our critical accounting estimates and policies, which are as follows:

• Revenue recognition — the estimate of variable considerations to arrive at the transaction price, including methods and assumptions used to determine settlements with Medicare and Medicaid payors or retroactive adjustments due to audits and reviews;

• Self-insurance — the valuation methods and assumptions used in estimating costs to settle open claims of insureds, as well as an estimate of the cost of insured claims that have been incurred but not reported;

• Lease s - the incremental borrowing rate determination;

• Acquisition accounting — the assumptions used to allocate the purchase price paid for assets acquired and liabilities assumed in connection with our acquisitions;

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

• Shift of Patient Care to Lower Cost Alternatives .

The growth of the senior population in the U.S.

• Shift of Patient Care to Lower Cost Alternatives — The growth of the senior population in the U.S.

continues to increase healthcare costs, often faster than the available funding from government-sponsored healthcare programs.

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As a result, skilled nursing facilities are generally serving a larger population of higher-acuity patients than in the past.

• Significant Acquisition and Consolidation Opportunities .

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

• Significant Acquisition and Consolidation Opportunities — The skilled nursing industry is large and highly fragmented, characterized predominantly by numerous local and regional providers.

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

• Improving Supply and Demand Balance .

The number of skilled nursing facilities has declined modestly over the past several years.

• Improving Supply and Demand Balance — The number of skilled nursing facilities has declined modestly over the past several years.

We expect that the supply and demand balance in the skilled nursing industry will continue to improve due to the shift of patient care to lower cost settings, an aging population and increasing life expectancies.

• Increased Demand Driven by Aging Populations .

As seniors account for an increasing percentage of the total U.S.

• Increased Demand Driven by Aging Populations — As seniors account for an increasing percentage of the total U.S.

population, we believe the demand for skilled nursing and senior living services will continue to increase.

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As a high-quality provider in lower cost settings, we believe we are well-positioned to benefit from this trend.

• Transition to Value-Based Payment Models .

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.

• Transition to Value-Based Payment Models — 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.

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.

• Accountable Care Organizations and Reimbursement Reform .

A significant goal of U.S.

• Accountable Care Organizations and Reimbursement Reform — 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.

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

In addition, the Centers for Medicare and Medicaid Services (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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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.

In addition, our provider subsidiaries are subject to federal and state laws that govern billing and reimbursement, relationships with vendors and business relationships with physicians.

In addition, our provider subsidiaries are subject to federal and state laws that govern billing and reimbursement, relationships with vendors and business relationships with physicians, and workplace protection for healthcare staff.

Such laws include the Anti-Kickback Statue, the federal False Claims Act (FCA), the Stark Law and state corporate practice of medicine statutes.

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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 civil monetary penalties, temporary payment bans, loss of certification as a provider in the Medicare or Medicaid program, or revocation of a state operating license.

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.

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

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

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).

While many of the Emergency Waivers are expected to last throughout the duration of the COVID-19 public health emergency, CMS has announced that will end several Emergency Waivers that are no longer needed as early as May 10, 2021.

Examples of requirements that were waived due to 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 to be readily hired from the community or from other states to allow healthcare systems to rapidly expands their workforce;

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

(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;

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

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

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

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

We believe these regulatory actions could contribute to changes in skilled mix potentially impacting the timing, amount or duration, which may have been different without the existence of the waivers.

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

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

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

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

In addition, CMS is re-prioritizing scheduled program audits and contract-level Risk Adjustment Data Validation audits for Medicare Advantage (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 review 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 Contractor (SMRC) reviews and Recovery Audit Contractor (RAC).

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

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” (SIP) program for Medicare beneficiaries who are residents of the skilled nursing facilities that meet the SIP criteria, foregoing the usual 3-day qualifying hospital stay.

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

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.

Resuming visitation and resident rights.

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

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

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

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

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

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

Testing requirements

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.

Resuming visitation and resident rights — CMS has issued guidance to facilities throughout the public health emergency regarding patients’ rights to visitors.

While the CMS guidance issued in March 2020 directed that facilities severely restrict visitation, through the course of the Pandemic, CMS has subsequently provided guidance that broadens visitation.

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.

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

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

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 testing identifies no new cases of COVID-19 infection among staff or residents for a 14-day period.

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

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

Reporting requirements

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

On April 27, 2021, CMS again issued revised parameters for testing, specifying that the requirement for routine testing of staff applies only to those staff members that are unvaccinated - fully vaccinated staff do not have to be routinely tested.

The routine 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, regardless of vaccination status, 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 or are enforcing testing mandates under existing or expanded workplace safety regulations.

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

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.

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

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

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 Condensed Consolidated Financial Statements.

Survey Activity and Enforcement.

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

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.

On June 1, 2020 (and subsequently updated in January 2021), CMS introduced an enhanced enforcement program with respect to infection control deficiencies.

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

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

Independent Commission on Safety and Quality in Nursing Homes.

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

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

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

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

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

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, and the third EUA for the Johnson & Johnson vaccine on February 27, 2021.

Vaccine distribution is now widespread in all 50 states.

Medicare presently accounts for approximately 31.7% of our transitional and skilled nursing services revenue year-to-date, 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 Skilled Nursing Facility Prospective Payment System (SNF PPS) Rule was effective October 1, 2019.

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

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).

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 (RUG-IV).

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 skilled nursing facilties 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.

Under the new SNF PPS PDPM system, the payment to skilled nursing facilities and nursing homes is based heavily on the patient’s condition rather than the specific services provided by each skilled nursing facility.

Under the SNF PPS PDPM system, the payment to skilled nursing facilities and nursing homes is based heavily on the patient’s condition rather than the specific services provided by each skilled nursing facility.

Skilled Nursing Facility - Quality Reporting Program (SNF QRP)

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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 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.

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

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

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.

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 increase 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 with a 0.0% point reduction for multifactor productivity adjustment.

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.

On April 8, 2021, CMS issued a proposed rule for fiscal year 2022 that updates the Medicare payment rates and the quality programs for skilled nursing facilities.

Under the proposed rule, which would become effective October 1, 2021, the aggregate net market basket rate is expected to increase by 1.3%, for fiscal year 2022.

This estimated increase is attributable to a 2.3% market basket increase factor with a 0.8% point reduction for forecast error adjustment and a 0.2% point reduction for multifactor productivity adjustment.

On April 12, 2021, CMS revealed its intent to recalibrate PDPM’s parity adjustment up to 5.0% based on the prior year aggregate spending under the new model.

The reimbursement change, if proposed and finalized, could adversely impact our reimbursement rates.

Sequestration of Medicare Rates

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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.

On April 14, 2021, Congress extended the suspension of the 2.0% payment adjustment through December 31, 2021.

To pay for the change, Congress would increase the sequester cuts by one year to fiscal year 2030.

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

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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 FY 2020 SNF PPS Rules estimate the 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.

The FY 2021 SNF PPS rule updated the deadlines for baseline period qualify measure quarterly reporting and announced performance periods and standards for the FY 2023 program year, but otherwise made no changes to the measures, scoring or payment policies.

In the FY 2022 program, CMS proposed changes to account for COVID-19 impacting readmission rates and SNF admissions during the performance periods of FY 2020.

These proposed changes would impact the SNF-VBP rate adjustment.

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 $2,110 for 2021, compared to $2,080 for 2020.

The threshold is the same 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, skilled nursing facilities are no longer required to append selected G-codes or the severity modifiers on outpatient therapy claims.

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

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 calendar year 2020.

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 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.

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

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

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

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

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

specific to our industry, by 9%.

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.

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 (calendar year conversion factor was $36.0896), subsequently, the CAA restored part of the reductions resulting in the final FY 2021 conversion factor of $34.8931.

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

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

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

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.

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

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

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

Pursuant to the Emergency Waivers, CMS allowed 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 July 20, 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.

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.

Preadmission Screening and Resident Review (PASRR)

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

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.

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Decisions Regarding Skilled Nursing Facility Payment

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

Medicare reimbursement rates and rules are subject to frequent change.

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

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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.

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.

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

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.

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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 $11,665 to $23,331 and are adjusted each January 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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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 3-day inpatient hospital stay requirement was not met.

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.

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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:

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 skilled nursing facilities 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.

• In 2020, in response to COVID-19 pandemic, a freeze of Skilled Nursing Facilities Quality Reporting Program data on the Nursing Home Compare website after the October 2020 refresh until April 2022.

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.

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

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%.

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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 inspection domain of the Nursing Home Five Star Quality Rating System, results of inspections conducted on or after March 4, 2020 will not be used to calculate a nursing home’s health inspection star ratings.

In addition, on June 25, 2020, CMS announced that beginning July 29, 2020, data used to calculate measures in the Five Star Quality ratings system will be frozen based on the data collection period ending December 31, 2019 so as to exclude data from resident assessments that are impacted by the waiver associated with the public health emergency.

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

Due to the gap in reported QRP data, CMS is freezing the data on the Nursing Home Compare website beginning October 2020 through April 2022.

This will impact facilities’ that may have less favorable data in October 2020 from being able to demonstrate improvements on the public-facing website through mid-2022.

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 resumed 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 was reflected in the Five Star ratings 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 did not include 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

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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.

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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.

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.

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.

Under the Stark Law, a “financial relationship” is defined as an ownership or investment interest or a compensation arrangement.

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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 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 and the 21st Century Cures Act (Cures Act).

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.

The Office of the National Coordinator for Health Information Technology can also investigate and impose separate penalties for information blocking violations under the Cures Act.

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.

Americans 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

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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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Our results serve as a strong indicator that our strategy is working and our transformation is underway.

We experienced healthy census growth during the first two months of 2020, achieving record revenue and net income.

However, we experienced sharp declines in census beginning in late March 2020, which was attributable to concerns relating to the COVID-19 pandemic.

Our net revenues for the three months ended September 30, 2020 continued to be impacted by COVID-19 as we experience revenue loss from a decline in occupancy which was partially offset by our skilled mix changes.

To respond to the COVID-19 pandemic and ease the healthcare system burdens, CMS has waived existing regulatory requirements under the Emergency Waivers a series of temporary waivers and guidance issued by CMS, including a waiver of the requirement to have a three-day stay in a hospital to get Medicare coverage of a skilled nursing stay as well as the authorization of renewed skilled nursing facility coverage without having to start a new benefit period for certain beneficiaries who recently exhausted their skilled nursing facility benefits.

As our communities experience surges of COVID-19 cases, our patients' needs have required the use of skilled care, resulting in an increase in Medicare Part A days.

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

For the three and nine months ended September 30, 2020, we recorded FMAP revenue of $11.7 million and $24.8 million, respectively, which directly offset against COVID-19 related expenses we incurred in those states.

See Recent Activities for further information.

Our total revenue for the quarter increased $87.1 million, or 17.0% while our diluted continuing operations GAAP earning per share grew more than 97.4%, from $0.39 to $0.77, compared to the third quarter in 2019.

Over the past four quarters, we have continued to make progress on initiatives which we established more than two years ago.

Including our foundational structure of local operations that are the centers of excellence in the communities they serve.

As part of this focus, we have been able to expand our relationships with doctors, hospitals and managed care plans.

As vaccines continue to become more readily available and COVID-19 cases are declining in the communities we serve, we have begun to see a recovery in our census during the quarter ended March 31, 2021, compared to the fourth quarter of 2020.

We continue to experience healthy growth and achieve record revenue and net income.

Our total revenue for the quarter increased $37.6 million, or 6.4% while our diluted GAAP earning per share grew more than 17.8%, from $0.73 to $0.86, compared to the first quarter in 2020.

Revenue from our transitional and skilled services collectively increased by 7.7%.

We have also strengthened our collection process as well as identified non-clinical areas where we can manage spending.

These operational fundamentals coupled with the reduction of interest expense due to the deferral of payroll tax payments and proceeds from Medicare Accelerated and Advance Payment Program resulted in strong third quarter performance.

See Recent Activities for further information.

Our one operation at a time approach demonstrates our affiliated operators focus on clinical results and operational fundamentals.

We have also strengthened our collection process and identified non-clinical areas where we can manage spending.

These operational fundamentals coupled with the reduction of interest expense due to the deferral of payroll tax payments and cash generated from strong performance resulted in strong financial success in the quarter.

The following table sets forth details of operating results for our revenue, expenses and earnings, and their respective components, as a percentage of total revenue for the periods indicated:

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

2020 2019 2020 2019

Revenue 100.0 % 100.0 % 100.0 % 100.0 %

Three Months Ended March 31,

Service revenue 99.4 % 99.4 %

Rental revenue 0.6 0.6

Total revenue 100.0 % 100.0 %

Cost of services 76.8 77.1

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Provision for income taxes 2.1 2.1

Net income from continuing operations 7.2 4.4 7.1 4.4

Net income from discontinued operations, net of tax — 1.0 — 1.3

Net income 7.9 7.0

net income attributable to noncontrolling interests in continuing operations — 0.1 0.1 0.1

Net income attributable to noncontrolling interests in discontinued operations — — — —

net income attributable to noncontrolling interests 0.1 0.1

Net income attributable to The Ensign Group, Inc.

7.2 % 5.3 % 7.0 % 5.6 %

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

Three Months Ended March 31,

Segment Income (1)

(In thousands)

Transitional and skilled services $ 88,931 $ 80,591

Real estate (2)

$ 8,821 $ 6,325

Non-GAAP Financial Measures:

(In thousands)

Performance Metrics

EBITDA from continuing operations (1)

$ 68,573 $ 43,814 $ 207,333 $ 126,596

EBITDA total (2)

$ 68,573 $ 52,595 $ 207,333 $ 153,479

Adjusted EBITDA from continuing operations (1)

$ 72,872 $ 46,160 $ 219,065 $ 135,215

Adjusted EBITDA total (2)

$ 72,872 $ 58,484 $ 219,065 $ 172,016

EBITDA $ 76,707 $ 70,161

Adjusted EBITDA $ 80,879 $ 73,810

FFO for real estate segment $ 13,514 $ 10,840

Valuation Metric

Adjusted EBITDAR $ 114,297

$ 105,351 $ 316,311

(1) EBITDA and Adjusted EBITDA represents results without discontinued operations of the Spin-Off, which occurred on October 1, 2019.

(2) EBITDA and Adjusted EBITDA total for 2019 represents results inclusive of discontinued operations.

(3) Presented for current year only.

The following discussion includes references to EBITDA, Adjusted EBITDA and Adjusted EBITDAR which are non-GAAP financial measures (collectively, Non-GAAP Financial Measures).

Regulation G, Conditions for Use of Non-GAAP Financial Measures, and other provisions of the Exchange Act of 1934, as amended (the Exchange Act), define and prescribe the conditions for use of certain non-GAAP financial information.

(1) Segment income represents operating results of the reportable segments excluding gain and loss on sale of assets, impairment charges and provision for income taxes.

Segment income is reconciled to the Condensed Consolidated Statement of Income in Note 7, Business Segments in Notes to Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

(2) Real estate segment income includes rental revenue from Ensign affiliated tenants and related expenses.

The following discussion includes references to EBITDA, Adjusted EBITDA, Adjusted EBITDAR and Funds from Operations (FFO) which are non-GAAP financial measures (collectively, the Non-GAAP Financial Measures).

Regulation G, Conditions for Use of Non-GAAP Financial Measures, and other provisions of the Securities Exchange Act of 1934, as amended (the Exchange Act), define and prescribe the conditions for use of certain non-GAAP financial information.

These Non-GAAP Financial Measures are used in addition to and in conjunction with results presented in accordance with GAAP.

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These Non-GAAP Financial Measures reflect an additional way of viewing aspects of our operations that, when viewed with our GAAP results and the accompanying reconciliations to corresponding GAAP financial measures, provide a more complete understanding of factors and trends affecting our business.

We believe the presentation of Non-GAAP Financial Measures are useful to investors and other external users of our financial statements regarding our results of operations because:

We believe the presentation of certain Non-GAAP Financial Measures are useful to investors and other external users of our financial statements regarding our results of operations because:

• they are widely used by investors and analysts in our industry as a supplemental measure to evaluate the overall performance of companies in our industry without regard to items such as interest expense, net and depreciation and amortization, which can vary substantially from company to company depending on the book value of assets, capital structure and the method by which assets were acquired;

• they help investors evaluate and compare the results of our operations from period to period by removing the impact of our capital structure and asset base from our operating results.

We use Non-GAAP Financial Measures:

We use the Non-GAAP Financial Measures:

• as measurements of our operating performance to assist us in comparing our operating performance on a consistent basis;

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• to compare our operating performance to that of our competitors.

We typically use Non-GAAP Financial Measures to compare the operating performance of each operation.

We use certain Non-GAAP Financial Measures to compare the operating performance of each operation.

These measures are useful in this regard because they do not include such costs as net interest expense, income taxes, depreciation and amortization expense, which may vary from period-to-period depending upon various factors, including the method used to finance operations, the amount of debt that we have incurred, whether an operation is owned or leased, the date of acquisition of a facility or business, and the tax law of the state in which a business unit operates.

We also establish compensation programs and bonuses for our leaders that are partially based upon the achievement of Adjusted EBITDAR targets.

Despite the importance of these measures in analyzing our underlying business, designing incentive compensation and for our goal setting, Non-GAAP Financial Measures have no standardized meaning defined by GAAP.

Therefore, our Non-GAAP Financial Measures have limitations as analytical tools, and they should not be considered in isolation, or as a substitute for analysis of our results as reported in accordance with GAAP.

Despite the importance of these measures in analyzing our underlying business, designing incentive compensation and for our goal setting, the Non-GAAP Financial Measures have no standardized meaning defined by GAAP.

Therefore, certain of our Non-GAAP Financial Measures have limitations as analytical tools, and they should not be considered in isolation, or as a substitute for analysis of our results as reported in accordance with GAAP.

Some of these limitations are:

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We compensate for these limitations by using them only to supplement net income on a basis prepared in accordance with GAAP in order to provide a more complete understanding of the factors and trends affecting our business.

Management strongly encourages investors to review our consolidated financial statements in their entirety and to not rely on any single financial measure.

Management strongly encourages investors to review our condensed consolidated financial statements in their entirety and to not rely on any single financial measure.

Because these Non-GAAP Financial Measures are not standardized, it may not be possible to compare these financial measures with other companies’ Non-GAAP financial measures having the same or similar names.

These Non-GAAP Financial Measures should not be considered a substitute for, nor superior to, financial results and measures determined or calculated in accordance with GAAP.

We strongly urge you to review the reconciliation of income from operations to the Non-GAAP Financial Measures in the table below, along with our consolidated financial statements and related notes included elsewhere in this document.

We strongly urge you to review the reconciliation of income from operations to the Non-GAAP Financial Measures in the table below, along with our condensed consolidated financial statements and related notes included elsewhere in this document.

We use the following Non-GAAP financial measures that we believe are useful to investors as key valuation and operating performance measures:

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• stock-based compensation expense;

• gain on sale of assets;

• acquisition related costs.

• gain on sale of fixed assets, net of impairment charges.

Funds from Operations (FFO)

We consider FFO to be a useful supplemental measure of the operating performance of our real estate segment.

Historical cost accounting for real estate assets in accordance with U.S.

GAAP implicitly assumes that the value of real estate assets diminishes predictably over time as evidenced by the provision for depreciation.

However, since real estate values have historically risen or fallen with market conditions, many real estate investors and analysts have considered presentations of operating results for real estate companies that use historical cost accounting to be insufficient.

In response, the National Association of Real Estate Investment Trusts (NAREIT) created FFO as a supplemental measure of operating performance for REITs, which excludes historical cost depreciation from net income.

We define (in accordance with the definition used by NAREIT) FFO to mean net income attributable to common stockholders (NICS), computed in accordance with U.S.

GAAP, excluding gains (or losses) from sales of real estate and impairment of depreciable real estate assets and including depreciation and amortization related to real estate to earnings.

VALUATION MEASURE:

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The table below reconciles net income to EBITDA, Adjusted EBITDA and Adjusted EBITDAR for the periods presented:

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

2020 2019 2020 2019

Three Months Ended March 31,

Consolidated statements of income data:

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Net income $ 49,837 $ 41,201

net income attributable to noncontrolling interests in continuing operations 253 390 1,045 591

net income from discontinued operations — 5,290 — 19,473

net income attributable to noncontrolling interests 631 352

Interest expense, net 893 2,967

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Depreciation and amortization 13,659 13,720

EBITDA from continuing operations 68,573 43,814 207,333 126,596

EBITDA from discontinued operations(d) — 8,781 — 26,883

EBITDA $ 76,707 $ 70,161

Results related to operations not at full capacity(a) 81 555 620 1,184

Stock-based compensation expense 4,054 3,235

Results related to operations not at full capacity(a) 584 342

Gain on sale of assets (540) —

Acquisition related costs(b) 36 50

Gain on sale of fixed assets, net of impairment charges(c) — (1,402) — (1,402)

Rent related to items above 38 22

Adjusted EBITDA from continuing operations 72,872 46,160 219,065 135,215

Adjusted EBITDA from discontinued operations(d) — 12,324 — 36,801

Adjusted EBITDA $ 80,879 $ 73,810

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rent related to items above (38) (22)

Adjusted rent from continuing operations 32,479 31,580 97,246 92,800

Adjusted rent included in discontinued operations — 5,849 — 17,283

Adjusted EBITDAR from continuing operations $ 105,351 $ 316,311

Adjusted rent 33,418 32,308

Adjusted EBITDAR $ 114,297

(a) Represents results of operations not at full capacity during the period presented.

(b) Costs incurred to acquire operations which are not capitalizable.

(c) Gain on sale of fixed assets includes impairment charges of $1.5 million at two of our senior living operations, offset by the gain recognized for the sale of real estate of $2.9 million in the three and nine months ended September 30, 2019.

(d) All adjustments included in the table below are presented within net income from discontinued operations, net of tax.

Three Months Ended September 30, 2019 Nine Months Ended September 30, 2019

Net income from discontinued operations, net of tax $ 5,290 $ 19,473

net income attributable to noncontrolling interests in discontinued operations 279 629

Interest and other income, net (4) (26)

Provision for income taxes 2,860 5,663

Depreciation and amortization 914 2,402

EBITDA from discontinued operations $ 8,781 $ 26,883

Losses related to operations in the start-up phase 59 377

Stock-based compensation expense 149 1,018

Spin-Off transaction costs 3,261 7,909

Acquisition related costs 70 603

Rent related to items above 4 11

Adjusted EBITDA from discontinued operations $ 12,324 $ 36,801

Three Months Ended September 30, 2020 Compared to the Three Months Ended September 30, 2019

Three Months Ended September 30,

(Dollars in thousands)

Transitional and skilled services $ 570,384 95.2 % $ 485,973 94.9 %

All other (1)

28,871 4.8 26,136 5.1

Three Months Ended March 31, 2021 Compared to the Three Months Ended March 31, 2020

The following table sets forth details of operating results for our revenue and earnings, and their respective components, by our reportable segment for the periods indicated:

Three Months Ended March 31, 2021

Transitional and skilled services Real estate All Other Eliminations Consolidated

Total revenue 601,036 15,879 22,240 (11,902) $ 627,253

(1) Includes revenue from rental income and services generated from our senior living services, real estate properties and other ancillary services.

Our total revenue increased $87.1 million, or 17.0%, compared to the three months ended September 30, 2019.

Total expenses, including other expense, net 512,105 7,058 57,646 (11,902) 564,907

Segment income (loss) 88,931 8,821 (35,406) — 62,346

Gain from sale of real estate (1)

Income before provision for income taxes $ 62,786

(1) Gain from sale of real estate includes gains or losses from the sale of real estate, insurance recoveries and impairment charges from operations.

Three Months Ended March 31, 2020

Transitional and skilled services Real estate All Other Eliminations Consolidated

Total revenue $ 558,304 $ 14,944 $ 27,647 $ (11,282) $ 589,613

Total expenses, including other expense, net 477,713 8,619 60,737 (11,282) 535,787

Segment income (loss) 80,591 6,325 (33,090) — 53,826

Income before provision for income taxes $ 53,826

Our total revenue increased $37.6 million, or 6.4%, compared to the three months ended March 31, 2020.

The increase in revenue was primarily driven by an increase in our skilled mix days and revenue per patient day from our transitional and skilled services operations, along with the impact of acquisitions.

Total revenue from operations acquired on or subsequent to October 1, 2019 increased our consolidated revenue by $42.4 million during the three months ended September 30, 2020, when compared to the same period in 2019.

In addition, we recorded $11.7 million of FMAP revenue, which correlate directly to the additional COVID-19 related expenses incurred.

All FMAP revenue is included in Medicaid revenue.

Total revenue from operations acquired on or subsequent to January 1, 2020 increased our consolidated revenue by $19.1 million during the three months ended March 31, 2021, when compared to the same period in 2020.

In addition, we recorded $16.5 million of state relief revenue, which correlated directly to the additional COVID-19 related expenses incurred.

All state relief revenue is included in Medicaid revenue.

Transitional and Skilled Services

The following table presents the transitional and skilled services revenue and key performance metrics by category during the three months ended September 30, 2020 and 2019:

Three Months Ended September 30,

The following table presents the transitional and skilled services revenue and key performance metrics by category during the three months ended March 31, 2021 and 2020:

Three Months Ended March 31,

2021 2020 Change % Change

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Transitional and skilled revenue (4)

$ 601,036 $ 558,304 $ 42,732 7.7 %

Number of facilities at period end 200 194 6 3.1 %

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Actual patient days (4)

1,509,600 1,643,390 (133,790) (8.1) %

Occupancy percentage — Operational beds 71.1 % 79.4 % (8.3) %

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Skilled mix by nursing revenue 55.6 % 50.1 % 5.5 %

Three Months Ended September 30,

Three Months Ended March 31,

2021 2020 Change % Change

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Transitional and skilled revenue (4)

$ 491,790 $ 476,896 $ 14,894 3.1 %

Number of facilities at period end 165 165 — — %

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Actual patient days (4)

1,219,693 1,371,803 (152,110) (11.1) %

Occupancy percentage — Operational beds 72.2 % 80.4 % (8.2) %

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Skilled mix by nursing revenue 56.6 % 52.1 % 4.5 %

Three Months Ended September 30,

Three Months Ended March 31,

2021 2020 Change % Change

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Transitional and skilled revenue (4)

$ 89,025 $ 79,027 $ 9,998 12.7 %

Number of facilities at period end 26 26 — — %

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Actual patient days (4)

235,668 263,341 (27,673) (10.5) %

Occupancy percentage — Operational beds 66.9 % 74.7 % (7.8) %

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Skilled mix by nursing revenue 51.2 % 38.7 % 12.5 %

Three Months Ended September 30,

Three Months Ended March 31,

2021 2020 Change % Change

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(Dollars in thousands)

Transitional and skilled revenue $ 75,134 $ 25,570 $ 49,564 NM

Transitional and skilled revenue (4)

$ 20,221 $ 2,381 $ 17,840 NM

Number of facilities at period end 9 3 6 NM

Number of campuses at period end* 1 — 1 NM

Actual patient days 207,582 84,554 123,028 NM

Occupancy percentage — Operational beds 65.6 % 71.4 % NM

Skilled mix by nursing days 27.7 % 23.5 % NM

Skilled mix by nursing revenue 49.1 % 41.3 % NM

Three Months Ended September 30,

2020 2019 Change % Change

(Dollars in thousands)

Facility Closed Results(4):

Skilled nursing revenue $ — $ 2,747 $ (2,747) NM

Actual patient days — 8,873 (8,873) NM

Actual patient days (4)

54,239 8,246 45,993 NM

Occupancy percentage — Operational beds 66.8 % 73.6 % NM

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(3) Recently Acquired Facility (Acquisitions) results represent all facilities purchased on or subsequent to January 1, 2020.

(4) Facility Closed results represents closed operations during the three months ended September 30, 2019, which were excluded from Same Facilities results for the three months ended September 30, 2019 and 2020 for comparison purposes.

Transitional and skilled services revenue increased $84.4 million, or 17.4%, compared to the three months ended September 30, 2019.

Of the $84.4 million increase, Medicare revenue increased $69.6 million , or 58.2%, Medicaid custodial revenue increased $16.2 million, or 8.0% and Medicaid skilled revenue increased $4.1 million, or 11.9%.

Private and other revenue decreased $4.6 million, or 11.3% and managed care revenue decreased by $0.9 million, or 1.0%.

Revenue in our Same Facilities increased $31.9 million, or 7.8% due to greater patient acuity and SIP days, even while occupancy and census declined by 8.3% and 10.2%, respectively, due to COVID-19.

The decline in our occupancy is mainly in our non-skilled patient days, which is being offset by a shift to higher Medicare census, which also drove up skilled mix days and revenue.

Our skilled mix days increased by 4.9% coupled with an increase from our skilled revenue daily rate of 13.2%, which included the impact of 2% sequestration reversal.

(4) The first quarter of 2021 included 90 days compared to 91 days for the same period in 2020 as a result of the leap year.

Transitional and skilled services revenue increased $42.7 million, or 7.7%, compared to the three months ended March 31, 2020.

Of the $42.7 million increase, Medicare revenue increased $34.7 million , or 22.3%, Medicaid custodial revenue increased $6.8 million, or 3.1%, Medicaid skilled revenue increased $4.0 million, or 11.1%, and managed care revenue increased by $6.3 million, or 6.2%.

Private and other revenue decreased $9.1 million, or 20.7%.

The increase in revenue was primarily driven by strong performance across our transitional and skilled services operations.

The negative impact of COVID-19 on our census started in March 2020 and continues in 2021.

Our occupancy decreased by 8.3% compared to the same period in the prior year.

The decline is partially offset by the increase in skilled mix days due to a shift toward high acuity patients.

Revenue in our Same Facilities increased $14.9 million, or 3.1% due to greater patient acuity and skilled days, even while occupancy and census declined by 8.2% and 11.1%, respectively, due to COVID-19.

The decline in our occupancy is mainly in our non-skilled patient days, which is being primarily offset by a shift to higher Medicare census, which also drove up skilled mix days and revenue.

Our skilled mix days increased by 4.4% coupled with an increase from our skilled revenue daily rate of 6.1%, which included the impact of 2% sequestration reversal and 2.2% net market basket Medicare rates.

This resulted in an increase in skilled mix revenue of $18.0 million .

We continued to experience decreased Medicaid custodial and private patient census days related to COVID-19 during the second quarter of 2020 that continued into our third quarter.

We continued to experience decreased Medicaid custodial and private patient census days related to COVID-19.

Our Medicaid census decreased by 15.0%, but was offset by an increase in our Medicaid daily rate of 8.6% as a result of our successful participation in the quality improvement programs and the supplemental programs in various states.

In addition, included in total revenue for Same Facilities is $8.9 million of Medicaid revenue related to FMAP program.

Revenue generated by our Transitioning Facilities increased $5.7 million, or 12.3%, primarily due to an increase of 13.4% in skilled patient days .

W e experienced and continued to see a shift in higher patient acuity, resulting in an increase in skilled mix revenue of $4.3 million, or 26.8%, compared to the three months ended September 30, 2019.

Transitional and skilled services revenue generated by facilities purchased on or subsequent to January 1, 2019 (Recently Acquired Facilities) increased by approximately $49.6 million compared to the three months ended September 30, 2019 .

We acquired 16 operations between October 1, 2019 and September 30, 2020 across four states.

In addition, included in total revenue for Same Facilities is $13.8 million of Medicaid revenue related to state relief funding.

Revenue generated by our Transitioning Facilities increased $10.0 million , or 12.7% , primarily due to increases in our daily rate and skilled mix days compared to the three months ended March 31, 2020 , demonstrating our ability to transition these healthcare operations that were acquired two and three years ago.

In addition, we experienced and continued to see a shift toward higher acuity patients, as demonstrated by increased census in all skilled payors .

As a result, skilled mix revenue increased by $12.6 million, or 43.7%, compared to the three months ended March 31, 2020.

Our skilled days increased by 32.3%, resulting in an increase in our skilled mix revenue daily rate of 8.6% .

Transitional and skilled services revenue generated by facilities purchased on or subsequent to January 1, 2020 (Recently Acquired Facilities) increased by approximately $17.8 million compared to the three months ended March 31, 2020 .

We acquired seven operations between April 1, 2020 and March 31, 2021 across three states.

In the future, if we acquire additional turnaround or start-up operations, we expect to see lower occupancy rates and skilled mix, and these metrics are expected to vary from period to period based upon the maturity of the facilities within our portfolio.

1 unchanged sentence

The following table reflects the change in skilled nursing average daily revenue rates by payor source, excluding services that are not covered by the daily rate (1) :

Three Months Ended September 30,

Three Months Ended March 31,

Same Facility Transitioning Acquisitions Total

9 unchanged sentences

Total skilled nursing revenue $ 371.89 $ 333.89 $ 344.15 $ 283.62 $ 343.36 $ 277.07 $ 366.53 $ 325.54

(1) These rates exclude additional FMAP revenue we recognized as part of The Family First Coronavirus Response Act and include sequestration reversal of 2%.

Our Medicare daily rates at Same Facilities and Transitioning Facilities increased by 10.6% and 11.1%, respectively, compared to the three months ended September 30, 2019.

(1) These rates exclude additional FMAP we recognized and include sequestration reversal of 2%.

Our Medicare daily rates at Same Facilities and Transitioning Facilities increased by 4.3% and 8.0%, respectively, compared to the three months ended March 31, 2020.

The increase is attributable to the 2.2% net market basket increase that became effective in October 2020 coupled with our continued shift towards higher acuity patients.

Included in revenue for the three months ended September 30, 2020 is the results of the temporary suspension of the 2% Medicare sequestration, which started on May 1, 2020 and will go through December 31, 2020.

In addition, our new payment model, PDPM, became effective on October 1, 2019.

Included in revenue for the three months ended March 31, 2021 is the result of the temporary suspension of the 2% Medicare sequestration, which started on May 1, 2020 and will go through March 31, 2021.

On April 14, 2021, through passage of An Act to Prevent Across-the-Board Direct Spending Cuts, and for Other Purposes, Congress extended the suspension of the 2.0% payment adjustment through December 31, 2021.

Our average Medicaid rates increased 8.8% due to state reimbursement increases and our participation in supplemental Medicaid payment programs and quality improvement programs in various states.

Medicaid rates exclude the amount of FMAP revenue we recorded.

Medicaid rates exclude the amount of state relief revenue we recorded.

Payor Sources as a Percentage of Skilled Nursing Services.

1 unchanged sentence

The following tables set forth our percentage of skilled nursing patient revenue and days by payor source:

Three Months Ended September 30,

Three Months Ended March 31,

Same Facility Transitioning Acquisitions Total

9 unchanged sentences

Total skilled nursing 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %

Three Months Ended September 30,

Three Months Ended March 31,

Same Facility Transitioning Acquisitions Total

9 unchanged sentences

Total skilled nursing 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %

Our other revenue increased by $2.7 million, or 10.5% to $28.9 million, compared to the three months ended September 30, 2019.

Other revenue for the third quarter in 2020 includes senior living revenue of $11.8 million;

mobile diagnostics revenue of $6.6 million, medical transportation revenue of $4.9 million and rental and other ancillary operations revenue of $5.6 million.

This increase in other revenue is due to acquisitions and rental income from Pennant.

Cost of Services

The following table sets forth total cost of services for continuing operations of our transitional and skilled services and "All Other" category for the periods indicated (dollars in thousands):

Three Months Ended September 30,

2020 2019 Change

Transitional and skilled services $ 438,110 76.8 % $ 389,519 80.2 % $ 48,591 12.5 %

All other 26,998 93.5 20,997 80.3 6,001 28.6

Total cost of services $ 465,108 77.6 % $ 410,516 80.2 % $ 54,592 13.3 %

(1) This represents cost of services as a percentage of revenue.

Consolidated cost of services increased $54.6 million, or 13.3%, compared to the three months ended September 30, 2019.

Consolidated cost of services as a percentage of revenue decreased by 2.6%.

Transitional and Skilled Services

Cost of services related to our transitional and skilled services segment increased $48.6 million, or 12.5%, due primarily to additional costs related to COVID-19 related expenses and new acquisitions.

The following table sets forth total cost of services for our transitional and skilled services segment for the periods indicated (dollars in thousands):

Three Months Ended March 31, Change

2021 2020 $ %

Cost of service $ 462,960 $ 430,540 $ 32,420 7.5 %

Revenue percentage 77.0 % 77.1 % (0.1) %

Cost of services related to our transitional and skilled services segment increased $32.4 million, or 7.5%, primarily due to additional costs related to new acquisitions, which accounted for $13.4 million of the increase to cost of services.

Cost of services as a percentage of revenue decreased to 77.0% from 77.1%, a decrease of 0.1%.

We experienced an increase in expenses on a per patient day basis related to COVID-19, including wages, supplies and additional ancillary costs.

These increases were offset with better collections and lower purchased services expenses.

Other Operating Expenses

Rent — cost of services.

Our rent — cost of services as a percentage of total revenue decreased by 0.8% to 5.4%, primarily due to our recent acquisitions including real estate assets, coupled with the growth in revenue outpacing the increase in rent expense.

General and administrative expense.

G eneral and administrative expense increased $7.3 million or 28.6%, to $32.8 million.

This increase was primarily due to increases in wages and benefits due to enhanced performance and growth.

In addition, general and administrative expense as a percentage of revenue increased by 0.5% to 5.5%.

Depreciation and amortization .

Depreciation and amortization expense increased $0.4 million, or 2.6%, to $13.8 million.

This increase was primarily related to the additional depreciation and amortization incurred as a result of our newly acquired operations.

Depreciation and amortization decreased 0.3%, to 2.3%, as a percentage of revenue.

Other expense, net.

Other expense, net as a percentage of revenue decreased by 0.4%, to 0.2%.

Other expense primarily includes interest expense related to borrowings under our credit facility.

During the quarter, we were able to utilize the proceeds from Medicare Accelerated and Advance Payment Program and deferral of social security taxes to reduce the amount outstanding on our revolving credit facility.

The repayment period for the Medicare Accelerated and Advance Payment Program starts in March 2021.

Provision for income taxes.

Our effective tax rate was 20.1% for the three months ended September 30, 2020, compared to 18.4% for the same period in 2019.

The higher effective tax rate is driven by the impact of the tax benefit from stock-based payment awards, offset by non-deductible expenses.

See Note 15, Income Taxes , in the Notes to Condensed Consolidated Financial Statements for further discussion.

Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019

Nine Months Ended September 30,

(Dollars in thousands)

Transitional and skilled services $ 1,685,568 95.0 % $ 1,404,469 95.1 %

All other (1)

87,999 5.0 71,864 4.9

Total revenue $ 1,773,567 100.0 % $ 1,476,333 100.0 %

(1) Includes revenue from rental income and services generated from our senior living services, real estate properties and other ancillary services.

Our total revenue increased $297.2 million, or 20.1%, compared to the nine months ended September 30, 2019.

The increase in revenue was primarily driven by an increase in our skilled mix days and revenue per patient day from transitional and skilled services operations, along with the impact of acquisitions.

Total revenue from operations acquired on or subsequent to October 1, 2019 increased our consolidated revenue by $117.3 million during the nine months ended September 30, 2020, when compared to the same period in 2019.

In addition, we recorded $24.8 million of FMAP payments received.

Transitional and Skilled Services

The following table presents the transitional and skilled services revenue and key performance metrics by category during the nine months ended September 30, 2020 and 2019:

Nine Months Ended September 30,

2020 2019 Change % Change

Total Facility Results:

(Dollars in thousands)

Transitional and skilled revenue $ 1,685,568 1,404,469 $ 281,099 20.0 %

Number of facilities at period end 193 179 14 7.8 %

Number of campuses at period end* 24 22 2 9.1 %

Actual patient days 4,668,961 4,395,864 273,097 6.2 %

Occupancy percentage — Operational beds 74.5 % 79.2 % (4.7) %

Skilled mix by nursing days 30.6 % 29.1 % 1.5 %

Skilled mix by nursing revenue 51.8 % 48.7 % 3.1 %

Nine Months Ended September 30,

2020 2019 Change % Change

Same Facility Results(1):

(Dollars in thousands)

Transitional and skilled revenue $ 1,319,620 $ 1,216,841 $ 102,779 8.4 %

Number of facilities at period end 152 152 — — %

Number of campuses at period end* 15 15 — — %

Actual patient days 3,570,174 3,762,109 (191,935) (5.1) %

Occupancy percentage — Operational beds 75.0 % 79.7 % (4.7) %

Skilled mix by nursing days 32.5 % 30.4 % 2.1 %

Skilled mix by nursing revenue 54.1 % 50.4 % 3.7 %

Nine Months Ended September 30,

2020 2019 Change % Change

Transitioning Facility Results(2):

(Dollars in thousands)

Transitional and skilled revenue $ 154,601 $ 136,155 $ 18,446 13.5 %

Number of facilities at period end 16 16 — — %

Number of campuses at period end* 4 4 — — %

Actual patient days 456,714 458,633 (1,919) (0.4) %

Occupancy percentage — Operational beds 78.0 % 79.0 % (1.0) %

Skilled mix by nursing days 24.8 % 21.9 % 2.9 %

Skilled mix by nursing revenue 41.8 % 36.9 % 4.9 %

Nine Months Ended September 30,

2020 2019 Change % Change

Recently Acquired Facility Results(3):

(Dollars in thousands)

Transitional and skilled revenue $ 211,347 $ 43,334 $ 168,013 NM

Number of facilities at period end 25 11 14 NM

Number of campuses at period end* 5 3 2 NM

Actual patient days 642,073 148,385 493,688 NM

Occupancy percentage — Operational beds 69.5 % 71.6 % NM

Skilled mix by nursing days 23.7 % 22.2 % NM

Skilled mix by nursing revenue 44.7 % 39.3 % NM

Nine Months Ended September 30,

2020 2019 Change % Change

(Dollars in thousands)

Facility Closed Results(4):

Skilled nursing revenue $ — $ 8,139 $ (8,139) NM

Actual patient days — 26,737 (26,737) NM

Occupancy percentage — Operational beds — % 65.7 % NM

Skilled mix by nursing days — % 17.4 % NM

Skilled mix by nursing revenue — % 37.5 % NM

* Campus represents a facility that offers both skilled nursing and senior living services.

Revenue and expenses related to skilled nursing and senior living services have been allocated and recorded in the respective operating segment.

(1) Same Facility results represent all facilities purchased prior to January 1, 2017.

(2) Transitioning Facility results represent all facilities purchased from January 1, 2017 to December 31, 2018.

(3) Recently Acquired Facility (Acquisitions) results represent all facilities purchased on or subsequent to January 1, 2019.

(4) Facility Closed results represents closed operations during the nine months ended September 30, 2019, which were excluded from Same Facilities results for the nine months ended September 30, 2019 and 2020 for comparison purposes.

Transitional and skilled services revenue increased $281.1 million, or 20.0%, compared to the nine months ended September 30, 2019.

Of the $281.1 million increase, Medicare and managed care revenue increased $178.6 million , or 29.1%, Medicaid custodial revenue increased $86.2 million , or 15.0%, Medicaid skilled revenue increased $14.3 million , or 14.8% and private and other revenue increased $2.0 million , or 1.7%.

The increase in revenue was primarily driven by strong performance across our transitional and skilled services operations during the first quarter of 2020, which grew first quarter revenue by $109.1 million.

We began experiencing the impact of COVID-19 during the second and third quarters, which negatively impacted our census.

Our occupancy decreased by 4.7% compared to the same period in prior year.

The decline is offset by the increase in skilled mix days due to a shift toward high acuity patients.

Revenue in our Same Facilities increased $102.8 million, or 8.4%.

The impact of COVID-19 resulted in a decrease in occupancy of 4.7%.

The decline in our occupancy is mainly in our non-skilled patient days, which is being offset by the shift toward high acuity patients.

Our skilled days increased by 1.6%, coupled with an increase in our skilled revenue daily rate of 11.5%, resulting in an increase in skilled mix revenue of $78.7 million, or 13.3%.

We continued to experience decreased Medicaid custodial and private patient days census related to COVID-19 during the second quarter of 2020.

Our Medicaid census decreased by 7.0% but is offset by an increase in our Medicaid daily rate of 6.0% as a result of our successful participation in the quality improvement programs and the supplemental programs in various states.

In addition, included in total revenue for Same Facilities is $19.3 million of Medicaid revenue related to the FMAP program.

Revenue generated by our Transitioning Facilities increased $18.4 million, or 13.5%, primarily due to increases in our daily rate and patient days compared to the nine months ended September 30, 2019 , demonstrating our ability to transition these healthcare operations that were acquired two and three years ago.

In addition, we continued to see a shift toward higher acuity patients .

Our skilled days increased by 2.9%, coupled with an increase from our skilled mix revenue daily rate of 10.3%.

Transitional and skilled services revenue generated by Recently Acquired Facilities increased by approximately $168.0 million compared to the nine months ended September 30, 2019.

We acquired 16 operations between October 1, 2019 and September 30, 2020 across four states.

In the future, if we acquire additional facilities that are underperforming and need to be turned around or start up-operations, we expect to see lower occupancy rates and skilled mix, and these metrics are expected to vary from period to period based upon the maturity of the facilities within our portfolio.

Historically, we have generally experienced lower occupancy rates, lower skilled mix at Recently Acquired Facilities and therefore, we anticipate generally lower overall occupancy during years of growth.

The following table reflects the change in skilled nursing average daily revenue rates by payor source, excluding services that are not covered by the daily rate (1) :

Nine Months Ended September 30,

Same Facility Transitioning Acquisitions Total

2020 2019 2020 2019 2020 2019 2020 2019

Skilled Nursing Average Daily

Revenue Rates:

Medicare $ 668.14 $ 599.34 $ 591.32 $ 532.09 $ 643.17 $ 633.93 $ 658.38 $ 594.51

Managed care 489.23 456.95 465.22 425.47 470.43 429.89 485.33 453.94

Other skilled 534.44 490.70 509.31 466.05 341.41 346.85 526.54 487.06

Total skilled revenue 579.53 519.87 532.29 482.40 572.14 515.17 574.99 517.24

Medicaid 237.32 223.83 246.69 232.93 221.48 227.80 235.88 225.10

Private and other payors 233.18 228.84 237.79 220.85 213.42 214.28 230.81 226.66

Total skilled nursing revenue $ 348.15 $ 314.75 $ 316.27 $ 285.47 $ 303.66 $ 289.92 $ 338.91 $ 310.71

(1) These rates exclude additional FMAP revenue we recognized as part of The Family First Coronavirus Response Act.

Our Medicare daily rates at Same Facilities and Transitioning Facilities increased by 11.5% and 11.1%, respectively, compared to the nine months ended September 30, 2019.

Included in revenue for the nine months ended September 30, 2020 is the results of five months of the temporary suspension of the 2% Medicare sequestration, which started on May 1, 2020 and will go through December 31, 2020.

In addition, our new payment model, PDPM, became effective on October 1, 2019.

Our average Medicaid rates increased 4.8% due to state reimbursement increases and our participation in supplemental Medicaid payment programs and quality improvement programs in various states.

Payor Sources as a Percentage of Skilled Nursing Services.

We use our skilled mix as measures of the quality of reimbursements we receive at our affiliated skilled nursing facilities over various periods.

The following tables set forth our percentage of skilled nursing patient revenue and days by payor source:

Nine Months Ended September 30,

Same Facility Transitioning Acquisitions Total

2020 2019 2020 2019 2020 2019 2020 2019

Percentage of Skilled

Nursing Revenue:

Medicare 28.8 % 23.3 % 23.0 % 20.3 % 31.4 % 22.4 % 28.6 % 23.0 %

Managed care 16.7 18.9 14.7 13.3 11.9 13.9 15.9 18.1

Other skilled 8.6 8.2 4.1 3.3 1.4 3.0 7.3 7.6

Skilled mix 54.1 50.4 41.8 36.9 44.7 39.3 51.8 48.7

Private and other payors 7.1 8.1 10.8 12.2 8.5 8.0 7.7 8.5

Medicaid 38.8 41.5 47.4 50.9 46.8 52.7 40.5 42.8

Total skilled nursing 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %

Nine Months Ended September 30,

Same Facility Transitioning Acquisitions Total

These increases were offset with better collections.

Real Estate Segment

Three Months Ended March 31, Change

2021 2020 $ %

Percentage of Skilled

Nursing Days:

Medicare 15.0 % 12.2 % 12.3 % 10.9 % 14.8 % 10.3 % 14.7 % 12.0 %

Managed care 11.9 13.0 10.0 8.9 7.7 9.4 11.1 12.4

Other skilled 5.6 5.2 2.5 2.1 1.2 2.5 4.8 4.7

Skilled mix 32.5 30.4 24.8 21.9 23.7 22.2 30.6 29.1

Private and other payors 10.6 11.5 14.5 15.5 12.2 10.6 11.1 12.0

Medicaid 56.9 58.1 60.7 62.6 64.1 67.2 58.3 58.9

Total skilled nursing 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %

Our other revenue increased by $16.1 million, or 22.5% to $88.0 million, compared to the nine months ended September 30, 2019.

Other revenue for the nine months ended September 30, 2020 includes senior living revenue of $35.1 million;

mobile diagnostics revenue of $21.0 million, medical transportation revenue of $15.6 million and rental and other ancillary operations revenue of $16.3 million.

The increase in other revenue is due to acquisitions and rental income from Pennant.

Cost of Services

The following table sets forth total cost of services for continuing operations of our transitional and skilled services and "All Other" category for the periods indicated (dollars in thousands):

Nine Months Ended September 30,

2020 2019 Change

Transitional and skilled services $ 1,299,777 77.1 % $ 1,116,828 79.5 % $ 182,949 16.4 %

All other 71,601 81.4 60,418 84.1 11,183 18.5

Total cost of services $ 1,371,378 77.3 % $ 1,177,246 79.7 % $ 194,132 16.5 %

(1) This represents cost of services as a percentage of revenue.

Consolidated cost of services increased $194.1 million, or 16.5% compared to the nine months ended September 30, 2019.

Consolidated cost of services as a percentage of revenue decreased by 2.4% to 77.3%.

Transitional and Skilled Services

Cost of services related to our transitional and skilled services segment increased $182.9 million, or 16.4%, due primarily to additional costs at new acquisitions, which accounted for $118.8 million of the increase, coupled with additional COVID-19 related expenses.

Cost of services as a percentage of revenue decreased to 77.1% from 79.5%, a decrease of 2.4%.

Other Operating Expenses

(In thousands)

Rental revenue generated from third-party tenants $ 3,977 $ 3,662 $ 315 8.6 %

Rental revenue generated from Ensign affiliated operations 11,902 11,282 620 5.5

Total rental revenue $ 15,879 $ 14,944 $ 935 6.3 %

Segment income 8,821 6,325 2,496 39.5

Depreciation and amortization 4,693 4,515 178 3.9

FFO $ 13,514 $ 10,840 $ 2,674 24.7 %

Rental revenue.

Our rental revenue, including revenue generated from our affiliated facilities, increased by $0.9 million, or 6.3%, to $15.9 million, compared to the three months ended March 31, 2020.

The increase in revenue is primarily attributable to acquisitions and CPI increases.

Our FFO increased $2.7 million, or 24.7% to $13.5 million, compared to the three months ended March 31, 2020.

The increase in FFO is primarily related to the increase in rental revenue and the decrease in interest expense.

All Other Service Revenue

Our other revenue decreased by $5.4 million, or 19.6%, to $22.2 million, compared to the three months ended March 31, 2020.

Other revenue for 2021 includes senior living revenue of $11.8 million and revenue from other ancillary services of $10.4 million.

The decrease in other revenue is due to the impact of COVID-19, which negatively impacted services in our other ancillary services.

Consolidated Financial Expenses

Rent — cost of services.

Our rent — cost of services as a percentage of total revenue decreased by 0.8% to 5.5%, primarily due to our recent acquisitions including real estate assets, coupled with the growth in revenue outpacing the increase in rent expense.

General and administrative expense.

General and administrative expense increased $17.9 million or 22.7%, to $96.5 million.

Our rent — cost of services as a percentage of total revenue decreased by 0.2% to 5.3%, primarily due to the growth in revenue outpacing the increase in rent expense.

General and administrative expense — G eneral and administrative expense increased $2.0 million or 6.3%, to $34.3 million.

This increase was primarily due to increases in wages and benefits due to enhanced performance and growth.

In addition, general and administrative expense as a percentage of revenue increased by 0.1% to 5.4%.

Depreciation and amortization .

Depreciation and amortization expense increased $3.4 million, or 9.0%, to $41.1 million.

This increase was primarily related to the additional depreciation and amortization incurred as a result of our newly acquired operations.

In addition, general and administrative expense as a percentage of revenue remained consistent at 5.5%.

Depreciation and amortization — Depreciation and amortization expense decreased $0.1 million, or 0.4%, to $13.7 million.

Depreciation and amortization decreased 0.1%, to 2.2%, as a percentage of revenue.

Other expense, net.

Other expense, net as a percentage of revenue decreased by 0.4%, to 0.3%.

Other expense primarily includes interest expense related to borrowings under our credit facility.

Interest expense during the second and third quarter of 2020 decreased as we were able to utilize the proceeds from Medicare Accelerated and Advance Payment Program and deferral tax programs to reduce the amount outstanding on our revolving credit facility.

Provision for income taxes.

Our effective tax rate was 22.8% for the nine months ended September 30, 2020, compared to 18.7% for the same period in 2019.

The higher effective tax rate is driven by the impact of the tax benefit from stock-based payment awards.

See Note 15, Income Taxes , in the Notes to Condensed Consolidated Financial Statements for further discussion.

Other expense, net — Other expense, net as a percentage of revenue decreased by 0.3%, to 0.2%.

Other expense primarily includes interest expense related to debt.

During the quarter, we were able to utilize the funds available from the deferral of social security taxes to reduce the amount outstanding on our revolving credit facility.

The deferral of taxes are due to be repaid in part by the end of fiscal year 2021, with the remaining half due at the end of fiscal year 2022.

Provision for income taxes — Our effective tax rate was 20.6% for the three months ended March 31, 2021, compared to 23.5% for the same period in 2020.

The lower effective tax rate reflects an increase in additional tax benefit from share-based payment awards.

The lower effective tax rate was partially offset by increases in certain non-taxable and non-deductible items.

See Note 14, Income Taxes , in the Notes to the Condensed Consolidated Financial Statements for further discussion.

Liquidity and Capital Resources

Our primary sources of liquidity have historically been derived from our cash flows from operations and long-term debt secured by our real property and our revolving credit facilities.

Our liquidity as of September 30, 2020 is impacted by cash receipts and payments related to the Provider Relief Funds and Medicare Accelerated and Advance Payment Program.

Historically, we have primarily financed the majority of our acquisitions through the financing of our operating subsidiaries through mortgages, our revolving credit facility, and cash generated from operations.

Cash paid to fund acquisitions was $9.1 million and $74.5 million for the nine months ended September 30, 2020 and 2019, respectively.

Total capital expenditures for property and equipment were $37.8 million and $49.9 million for the nine months ended September 30, 2020 and 2019, respectively.

We currently have approximately $47.0 million budgeted for renovation projects for 2020 , which incorporates the temporary suspension of non-essential capital expenditure projects.

Our primary sources of liquidity have historically been derived from our cash flows from operations and long-term debt secured by our real property and our Credit Facility.

Our liquidity as of March 31, 2021 is impacted by cash generated from strong operational performance and the repayment of Medicare Accelerated and Advance Payment Program funds.

Historically, we have primarily financed the majority of our acquisitions through the financing of our operating subsidiaries through mortgages, our Credit Facility, and cash generated from operations.

Total capital expenditures for property and equipment were $15.3 million and $15.8 million for the three months ended March 31, 2021 and 2020, respectively.

We currently have approximately $65.0 million budgeted for renovation projects for 2021.

We believe our current cash balances, our cash flow from operations and the amounts available under our Credit Facility will be sufficient to cover our operating needs for at least the next 12 months.

We may, in the future, seek to raise additional capital to fund growth, capital renovations, operations and other business activities, but such additional capital may not be available on acceptable terms, on a timely basis, or at all.

Our cash and cash equivalents as of September 30, 2020 consisted of bank term deposits, money market funds and U.S.

Our cash and cash equivalents as of March 31, 2021 consisted of bank term deposits, money market funds and U.S.

Treasury bill related investments.

In addition, as of September 30, 2020, we held debt security investments of approximately $49.3 million, which were split between AA, A and BBB rated securities.

We believe our debt security investments that were in an unrealized loss position as of September 30, 2020 were not other-than-temporarily impaired, nor has any event occurred subsequent to that date, including the recent developments related to COVID-19, that would indicate any other-than-temporary impairment.

As mentioned above, one primary source of cash is generated from our ongoing operations.

In addition, as of March 31, 2021, we held debt security investments of approximately $49.0 million, which were split between AA, A and BBB rated securities.

We believe our debt security investments that were in an unrealized loss position as of March 31, 2021 were not other-than-temporarily impaired, nor has any event occurred subsequent to that date that would indicate any other-than-temporary impairment.

As mentioned above, our primary sources of cash is from our ongoing operations.

Our positive cash flows have supported our business and have allowed us to pay regular dividends to our stockholders.

We currently anticipate that existing cash and total investments as of September 30, 2020, along with projected operating cash flows and available financing, will support our normal business operations for the foreseeable future.

Given the uncertainty in the rapidly changing market and economic conditions related to the COVID-19 outbreak, we will continue to evaluate the nature and extent of the impact to our business and financial position.

The following table presents selected data on our continuing operations from our condensed consolidated statement of cash flows for the periods presented:

Nine Months Ended September 30,

We currently anticipate that existing cash and total investments as of March 31, 2021, along with projected operating cash flows and available financing, will support our normal business operations for the foreseeable future.

The following table presents selected data from our condensed consolidated statement of cash flows for the periods presented:

Three Months Ended March 31,

Net cash provided by/(used in):

(In thousands)

Continuing operating activities $ 282,161 $ 109,077

Continuing investing activities (48,485) (121,183)

Continuing financing activities (117,471) 25,502

Net decrease in cash and cash equivalents from discontinued operations — (83)

Net increase in cash and cash equivalents 116,205 13,313

Cash and cash equivalents beginning of period, including cash of discontinued operations 59,175 31,083

Cash and cash equivalents end of period, including cash of discontinued operations $ 175,380 $ 44,396

Less cash of discontinued operations at end of period — 47

Operating activities $ 34,294 $ 27,123

Investing activities (12,212) (15,542)

Financing activities (103,117) (7,539)

Net (decrease)/increase in cash and cash equivalents (81,035) 4,042

Cash and cash equivalents beginning of period 236,562 59,175

Cash and cash equivalents at end of period $ 155,527 $ 63,217

1 unchanged sentence

Cash provided by operating activities is net income adjusted for certain non-cash items and changes in operating assets and liabilities.

The $173.1 million increase in cash provided by continuing operating activities for the nine months ended September 30, 2020 compared to the same period in 2019 w as primarily due to higher net income and changes in working capital in 2020 compared to 2019.

Changes in working capital was driven by deferred payment of the employer portion of social security taxes, strong accounts receivable collections, timing of accrued expenses and accrued wages and related liabilities.

The $7.2 million increase in cash provided by operating activities for the three months ended March 31, 2021 compared to the same period in 2020, w as primarily due to higher net income and changes in working capital.

Changes in working capital was driven by strong accounts receivable collections and timing of accounts payable , which is partially offset by the timing of accrued wages and related liabilities and prepaid expenses and other assets.

Investing Activities

Investing cash flows consist primarily of capital expenditures, investment activities and cash used for acquisitions.

The decrease in cash used in continuing investing activities for the nine months ended September 30, 2020 compared to the same period in 2019 of $72.7 million was primarily due to a decrease in cash used for acquisitions, net of escrow deposits, of $65.5 million coupled with a decrease in capital expenditures of $12.0 million.

Investing cash flows consist primarily of capital expenditures, investment activities, insurance proceeds and cash used for acquisitions.

The $3.3 million decrease in cash used in investing activities for the three months ended March 31, 2021 compared to the same period in 2020, was primarily due to an increase in cash from insurance proceeds of $6.3 million which was partially offset by an increase in purchases of investments, net of maturities, of $3.8 million.

Financing Activities

Financing cash flows consist primarily of repurchases of common stock, payment of dividends to stockholders, issuance and repayment of short-term and long-term debt, net proceeds from the Medicare Accelerated and Advance Payment Program, Provider Relief Fund, net and sale of shares of common stock through employee equity incentive plans.

The decrease in cash provided by continuing financing activities for the nine months ended September 30, 2020 compared to the same period in 2019 of $143.0 million was primarily due to a net debt repayment of $211.7 million in 2020 compared to a net borrowing of $31.5 million in the same period in 2019.

Additionally, during the first quarter of 2020 we repurchased $25.0 million of common stock under our authorized common stock repurchase programs.

We did not have any repurchases of common stock in 2019.

The decreases are offset by net proceeds received under Provider Relief Funds and the Medicare Accelerated and Advance Payment Program of $124.0 million.

Financing cash flows consist primarily of payment of dividends to stockholders, issuance and repayment of short-term and long-term debt, repayment of the Medicare Accelerated and Advance Payment Program funds and sale of shares of common stock through employee equity incentive plans.

The decrease in cash provided by financing activities for the three months ended March 31, 2021 compared to the same period in 2020 of $95.6 million was primarily due to the repayment of the Medicare Accelerated and Advance Payment Program funds of $102.0 million.

Credit Facility with a Lending Consortium Arranged by Truist

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Mortgage Loans and Promissory Notes

As of June 30, 2020, 19 of our subsidiaries are under mortgage loans insured with Department of Housing and Urban Development (HUD) for an aggregate amount of $114.4 million, which subjects these subsidiaries to HUD oversight and periodic inspections.

As of March 31, 2021, 19 of our subsidiaries have mortgage loans insured with HUD for an aggregate amount of $113.3 million, which subjects these subsidiaries to HUD oversight and periodic inspections.

The mortgage loans bear fixed interest rates range of 2.6% to 3.5% per annum.

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The term of the mortgage loans are 25 to 35 years.

In addition to the HUD mortgage loans above, we have two promissory notes.

The notes bear fixed interest rates of 5.3% and 4.3% per annum and the term of the notes are 12 years and 10 months, respectively.

The 12 year note which was used for an acquisition is secured by the real property comprising the facility and the rent, issues and profits thereof, as well as all personal property used in the operation of the facility.

In addition to the HUD mortgage loans above, we have a promissory note in connection with an acquisition.

The note bears a fixed interest rate of 5.3% per annum and the term of the note is 12 years.

The note is secured by the real property comprising the facility and the rent, issues and profits thereof, as well as all personal property used in the operation of the facility.

Operating Leases

During the third quarter of 2020, 163 of our facilities are under long-term lease arrangements, of which 85 of the operations are under the triple-net Master Leases with CareTrust REIT, Inc.

In connection with the Spin-Off, 11 of the original 94 properties were transferred to Pennant.

Of the 11 properties, two of the senior living operations are located on the same real estate properties as the skilled nursing facilities.

During the fiscal year of 2020, 164 of our facilities are under long-term lease arrangements, of which 88 of the operations are under nine triple-net Master Leases and one stand-alone lease with CareTrust REIT, Inc.

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

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If we elect to renew the term of a Master Lease, the renewal will be effective as to all, but not less than all, of the leased property then subject to the Master Lease.

Additionally, four of the 89 facilities leased from CareTrust include an option to purchase that we can exercise starting on December 1, 2024.

We also lease certain affiliated facilities and our administrative offices under non-cancelable operating leases, most of which have initial lease terms ranging from five to 20 years and is subject to annual escalation equal to the percentage change in the Consumer Price Index with a stated cap percentage.

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Most of these leases contain renewal options, certain of which involve rent increases.

Forty of our affiliated facilities, excluding the facilities that are operated under the Master Leases from CareTrust, are operated under eight separate master lease arrangements.

Forty of our affiliated facilities, excluding the facilities that are operated under the Master Leases from CareTrust, are operated under seven separate master lease arrangements.

Under these master leases, a breach at a single facility could subject one or more of the other affiliated facilities covered by the same master lease to the same default risk.

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Department of Justice stating that it is investigating to determine whether we have violated the False Claims Act and/or the Anti-Kickback Statute with respect to the relationships between certain of our skilled nursing facilities and persons who served as medical directors, advisory board participants or other referral sources.

The CID covered the period from October 3, 2013 to the present, and was limited in scope to ten of our Southern California skilled nursing facilities.

In October 2018, the Department of Justice made an additional request for information covering the period of January 1, 2011 to the present, relating to the same topic.

The CID covered the period from October 3, 2013 through 2018, and was limited in scope to ten of our Southern California skilled nursing facilities.

In October 2018, the Department of Justice made an additional request for information covering the period of January 1, 2011 through 2018, relating to the same topic.

As a general matter, our operating entities maintain policies and procedures to promote compliance with the False Claims Act, the Anti-Kickback Statute, and other applicable regulatory requirements.

We have fully cooperated with the U.S.

Department of Justice to promptly respond to the requests for information and have recently been advised that the U.S.

Department of Justice to promptly respond to the requests for information and have been advised that the U.S.

Department of Justice has declined to intervene in any subsequent action based on or related to the subject matter of this investigation.

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Recent Accounting Standards Adopted by the Company

In August 2018, the FASB issued amended guidance to simplify fair value measurement disclosure requirements.

The new provisions eliminate the requirements to disclose (1) transfers between Level 1 and Level 2 of the fair value hierarchy, (2) policies related to valuation processes and the timing of transfers between levels of the fair value hierarchy, and (3) net asset value disclosure of estimates of timing of future liquidity events.

The FASB also modified disclosure requirements of Level 3 fair value measurements.

We adopted this standard effective January 1, 2020 and determined there was no material impact on our consolidated financial statements.

In January 2017, the FASB issued amended authoritative guidance to simplify and reduce the cost and complexity of the goodwill impairment test.

The new provisions eliminate step 2 from the goodwill impairment test and shifts the concept of impairment from a measure of loss when comparing the implied fair value of goodwill to its carrying amount to comparing the fair value of a reporting unit with its carrying amount.

The FASB also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment or step 2 of the goodwill impairment test.

The new guidance does not amend the optional qualitative assessment of goodwill impairment.

We adopted this standard effective January 1, 2020 and determined there was no material impact on our consolidated financial statements.

In June 2016, the FASB issued Accounting Standards Update (ASU) 2016-13 “ Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments ”, which replaces the existing incurred loss impairment model with an expected credit loss model and requires a financial asset measured at amortized cost to be presented at the net amount expected to be collected.

We adopted this standard effective January 1, 2020 and determined there was no material impact on our consolidated financial statements.

Accounting Standards Recently Issued but Not Yet Adopted by the Company

In December 2019, the FASB issued ASU 2019-12 "Simplifying the Accounting for Income Taxes (Topic 740)", as part of its simplification initiative to reduce the cost and complexity in accounting for income taxes.

In December 2019, the FASB issued Accounting Standards Update (ASU) 2019-12 "Simplifying the Accounting for Income Taxes (Topic 740)", as part of its simplification initiative to reduce the cost and complexity in accounting for income taxes.

ASU 2019-12 removes certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences.

ASU 2019-12 also amends other aspects of the guidance to help simplify and promote consistent application of GAAP.

The guidance is effective for interim and annual periods beginning after December 15, 2020 and we have elected not to early adopt this ASU.

We do not expect the adoption of ASU 2019-12 to have a material impact on our financial position, results of operations and liquidity.

In February 2020, the FASB issued ASU 2020-04 "Reference Rate Reform (Topic 848)" which provides temporary, optional practical expedients and exceptions to enable a smoother transition to the new reference rates which will replace LIBOR and other reference rates expected to be discontinued.

Adoption of the provisions of ASU 2020-04 is optional.

The amendments are effective for all entities from the beginning of the interim period that includes the issuance date of the ASU.

An entity may elect to apply the amendments prospectively through December 31, 2022.

We are currently evaluating the impact of ASU.

2020-04 on our financial position, results of operations and liquidity.

We adopted this standard on January 1, 2021 and determined there was no material impact on our financial position, results of operations and liquidity.

In May 2020, the SEC issued Final Rule Release No.

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and (4) thresholds used to determine the significance of acquisitions and dispositions of real estate operations, and related financial statement requirements, among others.

The amendments are effective for all SEC registrants beginning January 1, 2021, with early compliance permitted.

We do not expect the amendments to have a material impact on our condensed consolidated financial statements.

We adopted this standard on January 1, 2021 and determined there was no material impact on our condensed consolidated financial statements.

Accounting Standards Recently Issued but Not Yet Adopted by the Company

In February 2020, the FASB issued ASU 2020-04 "Reference Rate Reform (Topic 848)" which provides temporary, optional practical expedients and exceptions to enable a smoother transition to reference rates which are expected to replace LIBOR reference rates.

Adoption of the provisions of ASU 2020-04 is optional.

The amendments are effective for all entities from the beginning of the interim period that includes the issuance date of the ASU.

An entity may elect to apply the amendments prospectively through December 31, 2022.

We are currently evaluating the impact of ASU.

2020-04 on our financial position, results of operations and liquidity.

In November 2020, the SEC issued final rules 33-10890 and 34-90459 “ Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information ,” which modernizes and simplifies certain disclosure requirements of Regulation S-K.

Certain key rule amendments eliminate the requirement to disclose Selected Financial Data;

Selected Quarterly Financial Data, with certain exceptions;

the impact of inflation and changing prices, provided the impact is not material;

off-balance sheet arrangements in tabular form;

and the aggregate amount of contractual obligations in tabular form.

The final rules also amended various aspects of Item 303, “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ,” among others.

The final rules are effective for all registration statements, annual reports and quarterly reports filed on or after August 9, 2021, with early adoption permitted.

We are currently evaluating the impact of the disclosure changes in our annual and quarterly reports.

Off-Balance Sheet Arrangements

During the three months ended September 30, 2020, we increased our outstanding letters of credit by $1.8 million to $7.6 million.

As of September 30, 2020, we had approximately $7.6 million on our Credit Facility of borrowing capacity pledged as collateral to secure outstanding letters of credit.

As of March 31, 2021, we had approximately $7.6 million on our Credit Facility of borrowing capacity pledged as collateral to secure outstanding letters of credit.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis