What changed in this filing

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Item 1A. Risk Factors

2021-10-27 compared with 2021-07-28 · 70 added, 35 removed, 703 unchanged (13% of the section changed)

2 unchanged sentences

Risks Related to our Business and Industry

• We face numerous risks related to the continued COVID-19 public health emergency, which could individually or in the aggregate have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects.

• We face numerous risks related to the COVID-19 public health emergency, which could individually or in the aggregate have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects.

• Changes to reimbursement rates and rules and other aspects of Medicare and Medicaid could have a material, adverse effect on our revenues, financial condition and results of operations.

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• The recent U.S.

Presidential and Congressional elections may create significant changes to the regulatory framework, enforcements, and reimbursements.

Presidential and Congressional elections and upcoming midterm elections in 2022, for which certain primary campaigns are already underway, may create significant changes to the regulatory framework, enforcements, and reimbursements.

• We are subject to various government reviews, audits and investigations that could adversely affect our business, including an obligation to refund amounts previously paid to us, potential criminal charges, the imposition of fines, and/or the loss of our right to participate in Medicare and Medicaid programs.

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• Compliance with the regulations of the Department of Housing and Urban Development may require us to make unanticipated expenditures which could increase our costs.

• Failure to safeguard our patient trust funds may be subject us to citations, fines and penalties.

• Failure to safeguard our patient trust funds may subject us to citations, fines and penalties.

• We are a holding company with no operations and rely upon our multiple independent operating subsidiaries to provide us with the funds necessary to meet our financial obligations.

Liabilities of any one or more of our subsidiaries could be imposed upon us or our other subsidiaries.

• We may incur operational difficulties or be exposed to claims and liabilities as a result of the separation of Pennant, including if the Spin-Off and the CareTrust Spin-Off (defined below) are not tax-free for U.S.

• We may incur operational difficulties or be exposed to claims and liabilities as a result of the separation of Pennant, including if the Spin-Off is not tax-free for U.S.

federal income tax purposes.

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Risks Related to Our Business and Industry

We face numerous risks related to the continued COVID-19 public health emergency, which could have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects.

We face numerous risks related to the COVID-19 public health emergency, which could have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects.

The extent to which the COVID-19 public health emergency will continue impacting our operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, federal vaccination program efforts, additional or modified government actions, new information which may emerge concerning the severity of the virus, variant outbreaks and efficacy of vaccinations, and the actions taken to contain the virus or treat its impact, among others.

Some of the risks of COVID-19 are being mitigated as a result of the federal vaccination program, including vaccinations of nursing facility staff and residents, but there remains uncertainty as to when the pandemic will officially end.

As discussed in Item 2., under Government Regulation , federal, state and local regulators have implemented new regulations and waived existing regulations to promote care delivery during the COVID-19 public health emergency.

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Additionally, most of the accommodations are limited in duration and tied to the COVID-19 public health emergency declaration, thus there may be significant operational change requirements on short notice.

Other proposed changes, could include requirements for employees to be vaccinated as a condition of Medicare participation or in order to avoid fines or penalties under other laws, may be prospective in nature and affect the ability to retain and attract a qualified workforce.

Also, the reinstatement of waived state and federal regulations may not occur simultaneously, requiring heightened monitoring to ensure compliance.

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• negative impacts on our patients' ability or willingness to pay for healthcare services and our third parties' ability or willingness to pay rents;

• new regulations which will require that all of our workers be fully vaccinated against COVID-19 as a condition of participating in Medicare and Medicaid programs.

The extent and duration of the impact of the COVID-19 pandemic on our stock price is uncertain, our stock price may be more volatile, and our ability to raise capital could be impaired.

Our revenue could be impacted by federal and state changes to reimbursement and other aspects of Medicare.

We derived 26.8% and 28.6% of our service revenue from the Medicare programs for the three and six months ended June 30, 2021, respectively, and 30.1% and 28.3% for the three and six months ended June 30, 2020, respectively.

We derived 26.6% and 27.9% of our service revenue from the Medicare programs for the three and nine months ended September 30, 2021, respectively, and 31.8% and 29.5% for the three and nine months ended September 30, 2020, respectively.

In addition, many other payors may use published Medicare rates as a basis for reimbursements.

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• changes in methodology for patient assessment and/or determination of payment levels;

• changes in staff requirements (i.e.

requiring all workers to be vaccinated against COVID-19) as a condition of payment or eligibility for Medicare reimbursement (See also, Item 2., under Government Regulation );

• the reduction or elimination of annual rate increases (See also, Item 2., under Government Regulation );

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Reductions in reimbursement rates or the scope of services being reimbursed could have a material, adverse effect on our revenue, financial condition and results of operations or even result in reimbursement rates that are insufficient to cover our operating costs.

Loss of Medicare reimbursement entirely would also have a material adverse effect on our revenue.

Medicare may rescind our certification and terminate its payor agreements if not all of our employees are fully vaccinated consistent with the Administration’s statements on August 18 and September 9.

In California, Washington, and Colorado, if our employees are not fully vaccinated as required by those states’ vaccination mandates, we could incur a deficiency that could endanger our Medicaid certification and participation status for certain locations within those states where employees have not been vaccinated.

Any penalty, suspension, termination, or other sanction under any state’s Medicaid program could lead to reciprocal and commensurate penalties being imposed under the Medicare program, up to termination or rescission of our Medicare participation and payor agreements as noted above.

Additionally, any delay or default by the government in making Medicare reimbursement payments could materially and adversely affect our business, financial condition and results of operations.

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A significant portion of reimbursement for skilled nursing services comes from Medicaid.

In fact, Medicaid is our largest source of revenue, accounting for 46.3% and 45.0% of our service revenue for the three and six months ended June 30, 2021, respectively, and 45.2% and 44.8% for the three and six months ended June 30, 2020, respectively.

In fact, Medicaid is our largest source of revenue, accounting for 47.0% and 45.7% of our service revenue for the three and nine months ended September 30, 2021, respectively, and 43.7% and 44.5% for the three and nine months ended September 30, 2020, respectively.

Medicaid is a state-administered program financed by both state funds and matching federal funds.

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However, any material changes to the ACA or its implementing regulations may negatively impact our operations.

Similarly, the proposed Nursing Home Improvement Act may have an impact on our business due to the proposed two percent decrease in payments to skilled nursing facilities, as well as the staffing and reporting requirements contained within the bill.

This bill primarily creates penalties such as reduced reimbursement and monetary penalties for submitting inaccurate cost reports or staffing data.

If passed in its current form, however, this bill would provide participating states with a temporary enhanced federal Medicaid match to fund improvements in nursing home workforce and care.

This match would last six years, and states would be responsible for showing CMS that Medicaid reimbursement increases were used to increase worker wages and yield new training resources and opportunities for nursing home staff.

While it is difficult to determine whether the Nursing Home Improvement Act will be amended prior to adoption, or even passed into law, if passed, this bill may negatively impact our business and the scope and nature of its consequences are not yet known.

We cannot predict what effect future reforms to the U.S.

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The results of recent U.S.

Presidential and Congressional elections may create significant changes to regulatory framework, enforcements and reimbursements.

The recent Presidential and Congressional elections in the United States could result in significant changes in, and uncertainty with respect to, legislation, regulation, implementation or repeal of laws and rules related to government health programs, including Medicare and Medicaid.

Presidential and Congressional elections and upcoming midterm elections in 2022, for which certain primary campaigns are already underway, may create significant changes to regulatory framework, enforcements and reimbursements.

The recent Presidential and Congressional elections in the United States and upcoming midterm elections in 2022, could result in significant changes in, and uncertainty with respect to, legislation, regulation, implementation or repeal of laws and rules related to government health programs, including Medicare and Medicaid.

Democratic proposals for Medicare for All or significant expansion of Medicare, could significantly impact our business and the healthcare industry if implemented.

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Sustained failure to demonstrate improvement towards meeting all claim filing and documentation requirements could ultimately lead to Medicare decertification.

As of June 30, 2021, none of our independent operating subsidiaries had Reviews scheduled, on appeal, or in a dispute resolution process, either pre or post-payment.

As of September 30, 2021 and subsequently, seven of our independent operating subsidiaries had Reviews scheduled, on appeal, or in a dispute resolution process, either pre or post-payment.

We anticipate that these Reviews could increase in frequency in the future.

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If the federal or state governments were to issue regulations which materially change the way compliance with the minimum staffing standard is calculated or enforced, our labor costs could increase and the current shortage of healthcare workers could impact us more significantly, including the increased scrutiny on staffing at the state and federal levels as a result of the COVID-19 virus.

The broader labor market where we compete is in a unique state of disequilibrium where the needs of businesses such as ours outstrip the supply of available and willing workers.

There is additional upward pressure on wages from different industries, some of which compete with us for labor and others that do not, which makes it difficult to make significant hourly wage and salary increases due to the fixed nature of our reimbursement under insurance contracts as well as Medicare and Medicaid, in addition to our increasing variable costs.

Due to the limited supply of qualified applicants who seek or are willing to accept employment, these broader concerns, as well as those specific to both forthcoming federal COVID-19 vaccination mandates and existing state mandates, may increase our labor costs or lead to potential staffing shortages, reduced operations to comply with applicable laws and regulations, or difficulty compling with those laws and regulations at current operational levels.

Federal laws and regulations may increase our costs of maintaining qualified nursing and skilled personnel, or make it more difficult for us to attract or retain qualified nurses and skilled staff members.

The proposed Nursing Home Improvement Act, if passed into law in substantially the same form as the proposed bill, may increase our responsibility to provide nursing coverage and the costs associated with that increased coverage.

The Administration’s September 9, 2021 statement that Medicare and Medicaid-participating medical facilities will require all workers to be fully vaccinated against COVID-19, which is expected to be memorialized in a rule published in the fourth quarter of 2021, may cause disruption to our affiliated facilities’ nursing staff and may additionally disrupt our operations if affected personnel decline to be vaccinated and replacement staffing cannot be located.

Additionally, the Administration’s September 9, 2021 statement that employers with more than 100 employees must mandate their employees to be fully vaccinated or tested weekly for COVID-19, which is expected to be reduced to a rule implemented by OSHA in the fourth quarter of 2021, may cause disruption in the event a material number of our employees are not fully vaccinated and require disciplinary actions up to termination, necessitating their replacement.

Similar state-level requirements in the states where our affiliated skilled nursing facilities operate, whether such requirements are passed by statute, regulation, or executive order, may result in shortage or inability to obtain nurses and skilled staff.

As noted above, California, Washington, and Colorado have all mandated vaccinations for workers in health care facilities that include nursing homes.

These administrative mandates precede, may be more restrictive than, and are not likely to be preempted than, anticipated federal regulations by CMS, requiring vaccination of healthcare facility workers and by OSHA requiring companies with more than 100 employees to mandate vaccines.

On October 11, 2021, Texas issued an executive order banning the practice of mandating vaccination, including by private employers.

The State of Montana issued a similar order on May 7, 2021, prohibiting private employers from mandating their employees be vaccinated.

The validity of these state orders that may conflict with anticipated federal rulemaking by CMS and OSHA is not yet known and likely will be decided by the courts once CMS and OSHA issue their respective interim final rules regarding employee vaccination requirements and litigation commences.

Increased competition for, or a shortage of, nurses or other trained personnel, or general inflationary pressures may require that we enhance our pay and benefits packages to compete effectively for such personnel.

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As discussed in detail in Item 2., under Government Regulation , sub-heading Part B Rehabilitation Requirements , several government actions have been taken in recent years to try and contain the costs of rehabilitation therapy services provided under Medicare Part B, including the MPPR, institution of annual caps, mandatory medical reviews for annual claims beyond a certain monetary threshold, and a reduction in reimbursement rates for therapy assistant claim modifiers.

Of specific concern is CMS's decision to lower Medicare Part B reimbursement rates for outpatient therapy services by 9%, beginning in January 1, 2021.

Of specific concern is CMS' decision to lower Medicare Part B reimbursement rates for outpatient therapy services by 9%, beginning in January 1, 2021.

Such cost-containment measures and ongoing payment changes could have an adverse effect on our revenue.

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Fair Labor Standards Act which governs such matters as minimum wages, overtime and other working conditions, the Americans with Disabilities Act and similar state laws that provide civil rights protections to individuals with disabilities in the context of employment, public accommodations and other areas, the National Labor Relations Act, regulations of the Equal Employment Opportunity Commission, regulations of the Office of Civil Rights, regulations of state Attorneys General, family leave mandates and a variety of similar laws enacted by the federal and state governments that govern these and other employment law matters.

Because labor represents such a large portion of our operating costs, changes in federal and state employment-related laws and regulations could increase our cost of doing business.

Additionally, the Administration announced that OSHA would be issuing an interim final rule in the fourth quarter of 2021 that would require employers with more than 100 employees to have its employees fully vaccinated or tested weekly for COVID-19.

Subject to the terms of the interim final rule expected in the fourth quarter of 2021, this directive may result in limitations on staff availability, disruption caused by staff departure, potential claims under the ADA and other laws and potential government sanctions which could cause disruptions to the operations of our subsidiaries, limit our ability to grow and otherwise adversely affect our business and financial results.

Rising operating costs due to labor shortages, greater compensation and incentives required to attract and retain qualified personnel and higher-than-usual inflation on items including energy, utilities, food and other goods used in our facilities and the costs for transporting these items could increase our cost and decrease our profits.

The compliance costs associated with these laws and evolving regulations could be substantial.

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Changes in the acuity level of patients we attract, as well as our payor mix among Medicaid, Medicare, private payors and managed care companies, significantly affect our profitability because we generally receive higher reimbursement rates for high acuity patients and because the payors reimburse us at different rates.

For the three and six months ended June 30, 2021, 73.1% and 73.6% of our service revenue was provided by government payors that reimburse us at predetermined rates, respectively.

For both the three and nine months ended September 30, 2021, 73.6% of our service revenue was provided by government payors that reimburse us at predetermined rates.

If our labor or other operating costs increase, we will be unable to recover such increased costs from government payors.

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If insurers or managed care companies from whom we receive substantial payments were to reduce the amounts they pay for services, we may lose patients if we choose not to renew our contracts with these insurers at lower rates.

The Administration’s September 9, 2021 statement that Medicare and Medicaid-participating medical facilities will require all workers to be fully vaccinated against COVID-19, which is expected to be memorialized in a rule published in October of 2021, may cause disruption to our affiliated facilities’ nursing staff and may further disrupt our operations if affected personnel decline to be vaccinated and replacement staff cannot be located.

In the event we or our affiliated facilities do not comply with this requirement, our Medicare and Medicaid agreements could be terminated and the termination of those agreements may lead to other payors terminating their agreements with us or our affiliated facilities and operating subsidiaries.

CMS terminating Medicare or Medicaid participation agreements and the loss of the payment agreements with private payors as a result of CMS terminating Medicare or Medicaid participation agreements with our affiliated facilities and operating subsidiaries would materially and adversely affect our business, financial condition and results of operations.

We are subject to litigation that could result in significant legal costs and large settlement amounts or damage awards.

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Congress has repeatedly considered, without passage, a bill that would require, among other things, that agreements to arbitrate nursing home disputes be made after the dispute has arisen rather than before prospective patients move in, to prevent nursing home operators and prospective patients from mutually entering into a pre-admission pre-dispute arbitration agreement.

This bill, known as the Fairness in Nursing Home Arbitration Act, was introduced in the House of Representatives as a H.R.

5326 in 2019 and H.R.

2812 in 2021;

neither bill made it out of the committees to which it was referred for discussion to be voted on by the entire House of Representatives.

We use arbitration agreements, which have generally been favored by the courts, to streamline the dispute resolution process and reduce our exposure to legal fees and excessive jury awards.

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If we are unable to accomplish any of these objectives at the operating subsidiaries we acquire, we will not realize the anticipated benefits and we may experience lower than anticipated profits, or even losses.

During the six months ended June 30, 2021, we expanded our operations through long-term leases and a real estate purchase, with the addition of twelve stand-alone skilled nursing operations.

During the nine months ended September 30, 2021, we expanded our operations through long-term leases and a real estate purchase, with the addition of fourteen stand-alone skilled nursing operations.

This growth has placed and will continue to place significant demands on our current management resources.

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CMS, as well as certain private organizations engaged in similar monitoring activities, provides comparative public data, rating every skilled nursing facility operating in each state based upon quality-of-care indicators.

CMS’s system is the Five-Star Quality Rating System, introduced in 2008, to help consumers, their families and caregivers compare nursing homes more easily.

CMS’ system is the Five-Star Quality Rating System, introduced in 2008, to help consumers, their families and caregivers compare nursing homes more easily.

The Five-Star Quality Rating System gives each nursing home a rating of between one and five stars in various categories, and the ratings are available on a consumer-facing website, Nursing Home Compare.

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Over the years, the Five-Star Quality Rating System has been modified, with the most recent changes being implemented in 2018 and 2019.

Additionally, as a result of the COVID-19 pandemic and CMS’s suspension of certain inspection and reporting requirements, the data used to calculate the star ratings of facilities was interrupted.

CMS temporarily froze certain data on the Nursing Home Compare website through January 2021.

Other data related to quality-reporting measures will not be factored into star calculations until 2022 and will not be reflected on the Nursing Home Compare website until April 2022.

Additionally, as a result of the COVID-19 pandemic and CMS’ suspension or modification of certain inspection and reporting requirements, the data used to calculate the star ratings of facilities was interrupted.

CMS temporarily froze certain data on the Nursing Home Compare website through January 2021, and recalculated its Five Star Quality ratings with modified data used to calculate the nursing home's rating.

Other data related to quality reporting measures, including new or worsened pressure-related injuries and discharges to home, are not presently factored into CMS' star calculations;

this data is not and will not be reflected on the Nursing Home Compare website until a future recalculation expected to be in April of 2022.

The temporary adjustments due to COVID-19 could impact facilities that might have less favorable Five-Star Ratings from being able to demonstrate improvements on the public-facing website through mid-2022.

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In Washington, the insurance coverage is financed through premiums paid by the employers and employees.

Due to the nature of our business and the residents we serve, including the risk of claims from residents as well as potential governmental action, it may be difficult to complete the underwriting process and obtain insurance at commercially reasonable rates.

If we are unable to obtain insurance, or if insurance becomes more costly for us to obtain, or if the coverage levels we can economically obtain decline, our business may be adversely affected.

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Because we lease the majority of our affiliated facilities, we are subject to risks associated with leased real property, including risks relating to lease termination, lease extensions and special charges, any of which could adversely affect our business, financial position or results of operations.

As of June 30, 2021, we leased 175 of our 240 affiliated facilities.

As of September 30, 2021, we leased 177 of our 242 affiliated facilities.

Most of our leases are triple-net leases, which means that, in addition to rent, we are required to pay for the costs related to the property (including property taxes, insurance, and maintenance and repair costs).

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We maintain a revolving credit facility under the Third Amended and Restated Credit Agreement, dated as of October 1, 2019, between our company and a lending consortium arranged by Truist Financial Corporation (Truist) (formerly known as SunTrust Bank, Inc.) with a revolving line of credit of up to $350.0 million in aggregate principal amount (the Credit Facility).

As of June 30, 2021, we have no outstanding debt under our Credit Facility.

Nineteen of our subsidiaries have mortgage loans insured with Department of Housing and Urban Development (HUD) for an aggregate amount of $112.9 million, which subjects these subsidiaries to HUD oversight and periodic inspections.

As of September 30, 2021, we have no outstanding debt under our Credit Facility.

Twenty-two of our subsidiaries have mortgage loans insured with Department of Housing and Urban Development (HUD) for an aggregate amount of $143.8 million, which subjects these subsidiaries to HUD oversight and periodic inspections.

The terms of the mortgage loans range from 25- to 35-years.

We also have two outstanding promissory notes of approximately $3.7 million as of June 30, 2021.

The term of the notes are 10 months and 12 years.

We also have two outstanding promissory notes with an aggregate principal amount of approximately $3.5 million as of September 30, 2021.

The terms of the notes are 10 months and 12 years.

Because these mortgage loans are insured with HUD, our borrower subsidiaries under these loans are subject to HUD oversight and periodic inspections.

In addition, we had $1.8 billion of future operating lease obligations as of June 30, 2021.

In addition, we had $1.9 billion of future operating lease obligations as of September 30, 2021.

We intend to continue financing our operating subsidiaries through mortgage financing, long-term operating leases and other types of financing, including borrowings under our lines of credit and future credit facilities we may obtain.

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Occupancy levels at skilled nursing facilities are likely to remain vulnerable to the effects of COVID-19 even after the pandemic is over.

Facilities experiencing decreases in move-in rates in the second quarter of 2021 cite resident or family member concerns as the basis for such decreases.

Facilities experiencing decreases in move-in rates in the third quarter of 2021 cite resident or family member concerns as the basis for such decreases.

These and other similar concerns may continue to impact our ability to attract new residents and our ability to retain existing residents.

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Compliance with the regulations of the Department of Housing and Urban Development may require us to make unanticipated expenditures which could increase our costs.

Nineteen of our affiliated facilities are currently subject to regulatory agreements with HUD that give the Commissioner of HUD broad authority to require us to be replaced as the operator of those facilities in the event that the Commissioner determines there are operational deficiencies at such facilities under HUD regulations.

Twenty-two of our affiliated facilities are currently subject to regulatory agreements with HUD that give the Commissioner of HUD broad authority to require us to be replaced as the operator of those facilities in the event that the Commissioner determines there are operational deficiencies at such facilities under HUD regulations.

Compliance with HUD's requirements can often be difficult because these requirements are not always consistent with the requirements of other federal and state agencies.

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Our inability to effectively manage the transition activities and related events could adversely affect our business, financial condition or results of operations.

If either of our two Spin-Offs fail to qualify as generally tax-free for U.S.

If our Spin-Off fails to qualify as generally tax-free for U.S.

federal income tax purposes, we and our stockholders could be subject to significant tax liabilities.

In addition to the Spin-Off, in June 2014, we completed the separation of our healthcare business and our real estate business into two separate and independent publicly traded companies through the distribution of all of the outstanding shares of common stock of CareTrust REIT, Inc.

(CareTrust) to Ensign stockholders on a pro rata basis (the CareTrust Spin-Off).

Both of these transactions were intended to qualify for tax-free treatment to us and our stockholders for U.S.

The Spin-Off is intended to qualify for tax-free treatment to us and our stockholders for U.S.

federal income tax purposes.

Accordingly, completion of the transactions were conditioned upon, among other things, our receipt of opinions from outside tax advisors that the distributions would qualify as a transaction that is intended to be tax-free to both us and our stockholders for U.S.

Accordingly, completion of the transaction was conditioned upon, among other things, our receipt of opinions from outside tax advisors that the distributions would qualify as a transaction that is intended to be tax-free to both us and our stockholders for U.S.

federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Internal Revenue Code.

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federal income tax purposes.

If either the Spin-Off or the CareTrust Spin-Off fails to qualify as a transaction that is generally tax-free under Sections 355 and 368(a)(1)(D) of the Internal Revenue Code, in general, for U.S.

If the Spin-Off fails to qualify as a transaction that is generally tax-free under Sections 355 and 368(a)(1)(D) of the Internal Revenue Code, in general, for U.S.

federal income tax purposes, we would recognize taxable gain with respect to the distributed securities and our stockholders who received securities in such distribution would be subject to tax as if they had received a taxable distribution equal to the fair market value of such shares.

We also have obligations to provide indemnification to a number of parties as a result of these two transactions.

We also have obligations to provide indemnification to a number of parties as a result of the transaction.

Any indemnity obligations for tax issues or other liabilities related to the Spin-Off, could be significant and could adversely impact our business.

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THE ENSIGN GROUP, INC.

July 28, 2021 BY:

October 27, 2021 BY:

/s/ SUZANNE D.

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

What changed 10-Q

Item 1A. Risk Factors