What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-04-28 compared with 2021-10-27 · 459 added, 622 removed, 709 unchanged (60% of the section changed)

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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 "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.

All of our affiliated operations, the Service Center, our wholly-owned captive insurance subsidiary and our captive real estate investment trust (REIT) called Standard Bearer Healthcare REIT, Inc.

(Standard Bearer) are operated by separate, wholly-owned, independent subsidiaries that have their own management, employees and assets.

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.

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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 September 30, 2021, we offered skilled nursing, senior living and rehabilitative care services through 242 skilled nursing and senior living facilities.

As of March 31, 2022, we offered skilled nursing, senior living and rehabilitative care services through 250 skilled nursing and senior living facilities.

Of the 250 facilities, we operated 179 facilities under long-term lease arrangements and have options to purchase 11 of those 179 facilities.

Our real estate portfolio includes 102 owned real estate properties, which included 71 facilities operated and managed by us, 32 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 September 30, 2021:

Of the 32 real estate operations leased to Pennant, two senior living operations are located on the same real estate properties as skilled nursing facilities that we own and operate.

The following table summarizes our affiliated facilities and operational skilled nursing beds and senior living units by ownership status as of March 31, 2022:

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

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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 (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.

We also have a wholly-owned captive insurance subsidiary 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 and our captive real estate trust owns and operates our real estate portfolio.

Our captive real estate investment trust, Standard Bearer, owns and manages our real estate business.

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, 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 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 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.

Revolving Credit Facility Amendment — On April 8, 2022, we entered into the Second Amendment to Third Amended and Restated Credit Facility (the Amended Credit Facility), which increased the revolving credit facility by $250.0 million to an aggregate principal amount of up to $600.0 million.

The maturity date of the Amended Credit Facility is April 8, 2027.

Borrowings are supported by a lending consortium arranged by Truist Securities (Truist).

The interest rates applicable to loans under the Amended Credit Facility are, at our option, equal to either a base rate plus a margin ranging from 0.25% to 1.25% per annum or Secured Overnight Financing Rate (SOFR) plus a margin range from 1.25% to 2.25% per annum, based on the Consolidated Total Net Debt to Consolidated EBITDA ratio (as defined in the agreement).

In addition, we will pay a commitment fee on the unused portion of the commitments that will range from 0.20% to 0.40% per annum, depending on the Consolidated Total Net Debt to Consolidated EBITDA ratio.

Captive Real Estate Investment Trust — In January of 2022, we formed Standard Bearer Healthcare REIT, Inc.

or Standard Bearer, a captive REIT.

Standard Bearer is a holding company with subsidiaries that own most of our real estate portfolio.

We expect the REIT structure will allow us to better demonstrate the growing value of our owned real estate and provides us with an efficient vehicle for future acquisitions of properties that could be operated by Ensign affiliates or other third parties.

We believe this structure will give us new pathways to growth with transactions we would not have considered in the past.

Standard Bearer intends to qualify and elects to be taxed as a REIT, for U.S.

federal income tax purposes, commencing with its taxable year ending December 31, 2022.

The real estate portfolio in Standard Bearer consists of a select 95 of our 102 owned real estate properties.

Of the 95 owned real estate properties in Standard Bearer, 67 facilities are operated by Ensign operating subsidiaries and 30 facilities are leased to and operated by Pennant.

Of the 30 real estate operations leased to Pennant, two senior living operations are located on the same real estate properties as skilled nursing facilities that we own and operate.

The fair value of Standard Bearer's real estate portfolio is more than $1.0 billion.

The fair value was determined by a third party independent valuation specialist and incorporated each property's rental income, capitalization rate, rental yield rate and discount rate as appropriate.

In January of 2022, as part of the formation of Standard Bearer, certain of our operating subsidiaries and the 67 Standard Bearer subsidiaries entered into five "triple-net" master lease agreements (collectively, the Standard Bearer Master Leases).

The lease period ranges from 15 to 19 years with three five-year renewal option beyond the initial term, on the same terms and conditions.

The rent structure under the Standard Bearer Master Leases includes a fixed component, subject to annual escalation equal to the lesser of (1) the percentage change in the Consumer Price Index (but not less than zero) or (2) 2.5%.

In addition to rent, the operating subsidiaries are required to pay the following:

(1) all impositions and taxes levied on or with respect to the leased properties (other than taxes on the income of the lessor);

(2) all utilities and other services necessary or appropriate for the leased properties and the business conducted on the leased properties;

(3) all insurance required in connection with the leased properties and the business conducted on the leased properties;

(4) all facility maintenance and repair costs;

and (5) all fees in connection with any licenses or authorizations necessary or appropriate for the leased properties and the business conducted on the leased properties.

During the three months ended March 31, 2022, we acquired the real estate of two skilled nursing facilities for a purchase price of $17.0 million and leased these facilities to certain of our operating subsidiaries through the Standard Bearer Master Leases.

Total annual rental income under the Standard Bearer Master Lease is approximately $56 million.

In addition, as we expand our real estate portfolio through our acquisition strategy, we anticipate that the acquired real estate will be included in Standard Bearer.

Standard Bearer has no employees.

Personnel and services provided to Standard Bearer by the Service Center are pursuant to the management agreement between Standard Bearer and the Service Center.

The management agreement provides for a base management fee and an incentive management fee, payable in cash, among other terms.

The base management fee for each applicable period is equal to 5.0% of the total revenue of Standard Bearer.

The incentive management fee is equal to 5.0% of funds from operations (FFO) and is capped at 1.0% of total revenue.

In addition, operating expenses incurred by the Service Center on Standard Bearer's behalf, which includes the cost of legal, tax, consulting, accounting and other similar services rendered by the Service Center, its advisers or other third parties, are reimbursed by Standard Bearer.

During the three months ended March 31, 2022, management fee was $1.0 million or 6.0% of total revenue of Standard Bearer.

Standard Bearer will obtain its funding through various sources including operating cash flows, access to debt arrangements and intercompany loans.

The intercompany debt arrangements include mortgage loans and a credit revolver between the Ensign Group, Inc., the real estate properties and Standard Bearer and will fund acquisitions and working capital needs.

The interest rate under the credit revolver is a base rate plus a margin ranging from 0.50% to 1.50% per annum or LIBOR (or an alternative reference rate) plus a margin range from 1.50% to 2.50% per annum.

The intercompany mortgage loan amount is $93.0 million.

As of March 31, 2022, there is $16.8 million outstanding under the intercompany credit revolver.

In addition, third party debt held by Department of Housing and Urban Development (HUD) mortgage loans and promissory notes are outstanding in an aggregate amount of $159.0 million, are included in Standard Bearer.

Coronavirus Update — We are continuing to closely monitor the impact of the global COVID-19 pandemic on our business as evidenced by the extension of the public health emergency (PHE) through July 14, 2022.

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.

As the vaccine distribution commenced and infection rates began to decline, our occupancy rates started to recover in the first quarter of 2021 and continued throughout the second and third quarter of 2021.

We continue to execute on key initiatives to rebuild occupancy lost due to the pandemic.

During the first quarter of 2022, our combined Same Facilities and Transitioning Facilities occupancy increased by 3.4% compared to first quarter of 2021 and 0.2% compared to the fourth quarter of 2021.

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 became COVID-19 dedicated facilities, enabling an important offloading of strained hospital capacity.

Even with COVID-19 demands waning, the partnerships developed during the pandemic will continue to benefit us into the future.

As a result of our local, one operation at a time approach, our Same Facilities and Transitioning Facilities occupancy rebounded by 2.6% and 5.1%, respectively, during the third quarter of 2021 compared to the fourth quarter of 2020, and 0.5% and 2.0%, respectively, compared to the second quarter of 2021.

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

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

The nationwide spread of the Delta variant has caused some moderation in our recent occupancy growth rate as many states and areas in which our communities are located are experiencing new COVID-19 caseloads.

Our monthly occupancy for Same Facilities and Transitioning Facilities grew 17 basis points from August to September after growth had accelerated sequentially in the prior five months to 324 basis points from January to June.

The Company expects sequential monthly occupancy to again grow for October 2021, but at a slightly more moderated rate.

During the three and nine months ended September 30, 2021, we received approximately $0.1 million and $11.6 million, respectively, 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.

To date, we have returned all Provider Relief Funds that we received.

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

On September 10, 2021, HHS made an additional round of $17 billion in Provider Relief Fund available to support healthcare-related expenses or lost revenue attributable to COVID-19.

We have not received any funding related to the additional round of Provider Relief Fund distributions.

During the three and nine months ended September 30, 2021, we received an additional $17.8 million and $50.3 million, respectively, in state relief funding and recognized $19.2 million and $52.4 million, respectively, as revenue, of which $4.4 million and $6.5 million were classified as unapplied state funding included in our liabilities as of September 30, 2021 and December 31, 2020, respectively.

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

We did not receive any 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 during the three months ended March 31, 2022.

To date, we have returned all Provider Relief Funds that we received and repaid all of the Medicare Accelerated and Advance Payment Program funds received.

During the three months ended March 31, 2022 and March 31, 2021, we received state relief funding of $17.3 million and $15.6 million and recognized $17.6 million and $16.5 million, respectively, as revenue.

Our unapplied state funding as of December 31, 2021 and 2020 was $1.5 million and $1.8 million, respectively.

See Note 3, COVID-19 Update in the Notes to the Unaudited 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 and related activity 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.

Department of Housing and Urban Development (HUD) Mortgage Loans — During nine months ended September 30, 2021, three of our subsidiaries entered into the Department of Housing and Urban Development (HUD) mortgage loans in the aggregate amount of $31.4 million.

The mortgage loans are insured with HUD, which subjects these subsidiaries to HUD oversight and periodic inspections.

Loan proceeds were used to fund acquisitions, to renovate and upgrade existing and future facilities, to cover working capital needs and for other business purposes.

Common Stock Repurchase Program — On October 21, 2021, the Board of Directors approved a stock repurchase program pursuant to which we may repurchase up to $20.0 million of our common stock under the program for a period of approximately 12 months that starts on October 29, 2021.

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

During the three months ended March 31, 2022, the Company repurchased 0.1 million shares of our common stock for $9.9 million.

This repurchase program expired upon the repurchase of the full authorized amount under the plan.

On February 9, 2022, the Board of Directors approved a stock repurchase program pursuant to which we may repurchase up to $20.0 million of our common stock under the program for a period of approximately 12 months that follow February 10, 2022.

During the three months ended March 31, 2022, we did not purchase any shares pursuant to this stock repurchase program.

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 September 30, 2021:

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, 2022:

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

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

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

Of these additions, one is related to a purchase of owned property, further expanding our real estate portfolio.

These new operations added a total of 1,504 operational skilled nursing beds operated by our affiliated operating subsidiaries.

Subsequent to September 30, 2021, we expanded its operations through long-term leases with the addition of three stand-alone skilled nursing operations.

These new operations added 328 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 .

During the three months ended March 31, 2022, we expanded our operations and real estate portfolio through a combination of long-term leases and real estate purchases, with the addition of four stand-alone skilled nursing operations.

Of these additions, two include purchases of real estate properties, further expanding our Standard Bearer real estate portfolio.

In addition, we added two senior living operations that were transferred from Pennant, one of which is part of a campus operated by our affiliated operating subsidiaries.

These new operations added a total of 453 operational skilled nursing beds and 403 operational senior living units to be operated by our affiliated operating subsidiaries.

Subsequent to March 31, 2022, we expanded our operations and real estate portfolio through a real estate purchase, which added one stand-alone senior living operation.

In addition, we added three senior living operation that were transferred from Pennant, two of which are part of healthcare campuses operated by our affiliated operating subsidiaries.

These new operations added 281 operational senior living units to be operated by our affiliated operating subsidiaries.

We also invested in new ancillary services that are complementary to our existing businesses

For further discussion of our acquisitions, see Note 7, Standard Bearer and Note 9, Operation Expansions in the Notes to the Unaudited Condensed Consolidated Financial Statements .

Key Performance Indicators

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• 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.

These rates exclude additional state relief funding, which includes 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.

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

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

Medicare, managed care and other skilled patients, whom we refer to as high acuity patients, typically require a higher level of skilled nursing and rehabilitative care.

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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,

2021 2020 2021 2020

Three Months Ended March 31,

Days 33.7 % 34.4 %

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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 skilled services:

2021 2020 2021 2020

Operational beds at end of period 25,513 23,619

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Occupancy percentage (based on operational beds) 74.2 % 71.1 %

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) 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, 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.

(1) skilled services, which includes the operation of skilled nursing facilities and rehabilitation therapy services and (2) Standard Bearer, which is comprised of selected properties owned by us through our captive REIT and leased to skilled nursing and senior living operations, including our own operating subsidiaries and third party operators.

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

These 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 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 service revenue by payor source generated by our 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,

Skilled Services Other (1)

Total Service Revenue

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

Three Months Ended March 31,

Skilled Services Other Service Revenue Total Service Revenue

2022 2021 2022 2021 2022 2021

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Private and other (2)

Total service revenue $ 642,075 $ 570,282 $ 22,522 $ 25,059 $ 664,597 $ 595,341

Three Months Ended September 30,

Skilled Services Other (1)

Total Service Revenue

43,038 34,654 17,624 18,623 60,662 53,277

41.0 % 38.4 % 17.5 % 13.4 % 40.2 % 37.3 %

Medicare 27.5 33.2 — — 26.6 31.8

Medicaid-skilled 7.1 6.7 — — 6.8 6.4

Subtotal 75.6 78.3 17.5 13.4 73.6 75.5

Managed care 17.9 15.4 — — 17.3 14.7

Private and other 6.5 6.3 82.5 86.6 9.1 9.8

Total service revenue $ 686,771 $ 601,036 $ 22,385 $ 22,240 $ 709,156 $ 623,276

(1) Private and other payors in our "all other" category includes revenue from 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.

Nine Months Ended September 30,

Skilled Services Other (1)

Total Service Revenue

Three Months Ended March 31,

Skilled Services Other Service Revenue Total Service Revenue

2022 2021 2022 2021 2022 2021

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Private and other (2)

Total service revenue $ 1,855,993 $ 1,685,263 $ 66,489 $ 77,108 $ 1,922,482 $ 1,762,371

Nine Months Ended September 30,

Skilled Services Other (1)

Total Service Revenue

6.3 5.8 78.7 83.7 8.6 8.5

39.8 % 39.3 % 17.1 % 12.7 % 39.0 % 38.2 %

Medicare 28.9 30.8 — — 27.9 29.5

Medicaid-skilled 6.9 6.6 — — 6.7 6.3

Subtotal 75.6 76.7 17.1 12.7 73.6 74.0

Managed care 18.1 16.1 — — 17.5 15.4

Private and other 6.3 7.2 82.9 87.3 8.9 10.6

Total service revenue 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %

(1) Private and other payors in our "all other" category includes revenue from 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 $3.9 million and $11.8 million, respectively, for the three and nine months ended September 30, 2021 and $3.9 million and $11.2 million, respectively, for the three and nine months ended September 30, 2020.

(1) Medicaid payor includes revenue generated from senior living operations and revenue related to FMAP.

(2) Private and other payors also includes revenue from senior living operations and all payors generated in other ancillary services.

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.

Standard Bearer

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 September 30, 2021, our real estate portfolio was comprised of 95 real estate properties.

Of these properties, 65 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.

As of March 31, 2022, our real estate portfolio within Standard Bearer comprised of 95 real estate properties.

Of these properties, 67 are leased to affiliated skilled nursing facilities wholly-owned and managed by us and 30 are leased to senior living operations wholly owned and managed by Pennant.

Of the 30 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 three and nine months ended September 30, 2021, we generated rental revenues of $16.3 million and $48.2 million, of which $12.3 million and $36.3 million, respectively, was derived from affiliated wholly-owned healthcare operators, and therefore eliminated in consolidation.

During the three months ended March 31, 2022, we generated rental revenues of $17.2 million, of which $13.4 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.

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The payment is adjusted for an inability to obtain appropriate billing documentation or authorizations acceptable to the payor and other reasons unrelated to credit risk.

Critical Accounting Policies

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).

The preparation of these financial statements and related disclosures requires us to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.

On an ongoing basis, we review our judgments and estimates, including but not limited to those related to the variable considerations to arrive at the transaction price for revenue recognition, income taxes, intangible assets and loss contingencies.

We base our estimates and judgments upon our historical experience, knowledge of current conditions and our belief of what could occur in the future considering available information, including assumptions that we believe to be reasonable under the circumstances.

By their nature, these estimates and judgments are subject to an inherent degree of uncertainty, and actual results could differ materially from the amounts reported.

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 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;

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

• Income taxes — the estimation of valuation allowance or the need for and magnitude of liabilities for uncertain tax position.

Critical Accounting Estimates

Our condensed consolidated financial statements included in this report have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S.

The preparation of these financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, cash flows, revenues and expenses, and related disclosure of contingent assets and liabilities.

See Item 2., Management’s Discussion and Analysis of Financial Condition and Results of Operations , in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 for further discussion of critical accounting estimates.

There were no material changes to our critical accounting policies with which the estimates are developed since December 31, 2021.

Industry Trends

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We believe the post-acute industry has been and will continue to be impacted by several other trends.

The use of long-term care insurance is increasing among seniors as a means of planning for the costs of skilled nursing services.

The use of long-term care (LTC) insurance is increasing among seniors as a means of planning for the costs of skilled nursing services.

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

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

Our independent, operating 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.

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

In addition, these same 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, the Health Care Emergency Temporary Standard, and state corporate practice of medicine statutes.

Governmental and other authorities periodically inspect our skilled nursing facilities, senior living facilities and outpatient rehabilitation agencies to verify that we continue to comply with applicable regulations and standards.

We must pass these inspections to remain licensed under state laws and to comply with our Medicare and Medicaid provider agreements.

We can only participate in these third-party payment programs if inspections by regulatory authorities reveal that our operations are in substantial compliance with applicable requirements.

In the ordinary course of business, we may receive notices from federal or state regulatory authorities alleging deficiencies in certain regulatory practices.

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

Governmental and other authorities periodically inspect the skilled nursing facilities, senior living facilities and outpatient rehabilitation agencies of our independent operating subsidiaries to verify continued compliance with applicable regulations and standards.

The operations must pass these inspections to remain licensed under state laws and to comply with Medicare and Medicaid provider agreements.

The operations can only participate in these third-party payment programs if inspections by regulatory authorities reveal that the operations are in substantial compliance with applicable state and federal requirements.

In the ordinary course of business, federal or state regulatory authorities may issue notices to the operations alleging deficiencies in certain regulatory practices.

These statements of deficiency may require 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.

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In the ordinary course of business, providers are subject to inquiries, investigations and audits by federal and state agencies related to compliance with participation and payment rules under government payment programs.

These inquiries may originate from the HHS Office of the Inspector General (OIG), 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 monetary penalties that extend over long periods of time and date back to incidents prior to surveyor visits, Medicare and Medicaid payment bans and terminations from the Medicare and Medicaid programs.

These inquiries may originate from the United States Department of Health and Human Services (HHS) Office of the Inspector General (OIG), state Medicaid agencies, state Attorney Generals, local and state ombudsman offices and CMS Recovery Audit Contractors, among other agencies.

In response to the inquiries, investigations and audits, federal and state agencies 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 prior to surveyor visits, Medicare and Medicaid payment bans and terminations from the Medicare and Medicaid programs, which may be temporary or permanent in nature.

We vigorously contest each such regulatory outcome 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.

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.

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

In an effort to promote efficient care delivery and to decrease the spread of COVID-19, federal, state and local regulators have implemented new regulations and waived (in some cases, temporarily) 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 ended several Emergency Waivers effective May 10, 2021.

Examples of requirements that were waived due to the COVID-19 emergency declaration include the following:

While many of the Emergency Waivers are expected to last throughout the duration of the COVID-19 PHE, CMS ended several Emergency Waivers effective May 10, 2021.

Due to the prevalence of waves of COVID-19 variants in 2021 and continuing into 2022, it is unclear when the remaining Emergency Waivers will expire, or whether previously expired Emergency Waivers will be reinstated.

Effective April 16, 2022, the COVID-19 PHE was extended until at least July 14, 2022.

HHS has reported that it will provide at least 60 days' advance notice prior to the expiration or termination of the PHE.

Examples of the Emergency Waivers include, but are not limited to the following:

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

CMS Hospital Without Walls);

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

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

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

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

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

(5) waiving the requirement for LTC facilities' directors of food and nutrition services to have specified higher education or other credentials in the areas of food service and management and safety;

and (6) temporarily waiving certain documentation, reporting and audit requirements to allow providers, health care facilities, Medicare Advantage (MA) and Part D plans, and states to focus on the provision of care (e.g., Patients Over Paperwork).

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

It remains uncertain when federal and state regulators will resume enforcement of those regulations, which 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.

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.

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 PHE.

We believe these regulatory actions could contribute to changes in skilled mix, which may have been different without the existence of the Emergency Waivers.

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

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 allows providers, CMS and organizations to focus on patient care.

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

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

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

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

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

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

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

On March 30, 2020, CMS suspended most Medicare FFS medical reviews because of the COVID-19 pandemic.

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

All reviews would 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 would also be applied.

In December of 2021, CMS issued a 2019 Novel Coronavirus Medicare Provider Enrollment Relief FAQ document, which addressed Medicare enrollment and re-enrollment during the ongoing PHE.

Within this December 2021 FAQ, CMS indicated that it would resume collecting application fees in 2021 and revalidating enrollees in 2022.

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.

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

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 PHE.

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

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.

On September 8, 2021, CMS clarified that CMS’ waivers do not waive or change other requirements for SNF coverage under Medicare, including the SNF level of care criteria, which is unchanged by the public health emergency.

CMS used this transmittal to further clarify that CMS will review and take action in connection with SNF admissions that do not satisfy SNF level of care criteria that existed prior to the public health emergency and the institution of CMS’ blanket waivers.

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

While the CMS guidance issued in March 2020 directed that facilities severely restrict visitation, CMS has subsequently provided guidance through the course of the pandemic (and last updated in September 2020) that broadens visitation.

Testing requirements — Beginning in April 2020, authorities in several states in which our independent operating subsidiaries are located began to mandate widespread COVID-19 testing at all nursing home and long-term care facilities.

On September 8, 2021, CMS clarified that CMS's waivers do not waive or change other requirements for SNF coverage under Medicare, including the SNF level of care criteria, which is unchanged by the PHE.

CMS used this update of its March 16, 2021 Medicare FFS Response to the PHE on COVID-19 article to further clarify that CMS will review and take action in connection with SNF admissions that do not satisfy SNF level of care criteria that existed prior to the PHE and CMS's institution of applicable waivers that facilitated payment for SNF services.

On April 7, 2022, CMS issued a memorandum that identified 16 Emergency Waivers that would expire for SNFs and LTC facilities during the next 60 days.

CMS stated that the Emergency Waivers would expire in two groups.

The first group of Emergency Waivers to expire within 30 days of CMS’s memorandum, on May 7, 2022, contains seven Emergency Waivers.

The second group of Emergency Waivers to expire 60 days after the memorandum’s issuance, on June 6, 2022, contains nine Emergency Waivers.

The Emergency Waivers expiring on May 7, 2022 are:

(1) waiver of the requirement that residents participate in-person during resident groups;

(2) physicians’ ability to delegate tasks that otherwise would need to be personally performed by a physician within a SNF;

(3) waiver of the requirement for physicians to make personal visits to patients, which the Emergency Waivers allow physicians to delegate to other clinicians;

(4) waiver of the requirement for physicians and non-physician providers to conduct in-person visits to nursing home residents (and allowing those visits to be made via telemedicine as appropriate);

(5) reducing LTC facilities’ requirements to develop, implement and maintain a QAPI program that satisfies federal standards;

(6) waiver of LTC facilities’ obligation to participate in discharge planning for residents ending their care at the facility;

and (7) waiver of the requirement for LTC facilities to provide residents with a copy of their records within two working days of a resident’s request for those records.

The Emergency Waivers that will expire on June 6, 2022 are:

(1) waivers of SNF physical environment conditions for temporary use facilities (including COVID-19 treatment locations) and use of interior or non-residential space within a SNF to accommodate residents;

(2) waivers of requirements for timely preventative maintenance for certain equipment, including dialysis equipment;

(3) the waiver of inspection, testing and maintenance for the facilities and medical equipment used within ICFs and SNFs;

(4) the waiver of inspection, testing, and maintenance for compliance with applicable life safety codes and health care facility codes for intermediate care facilities (ICFs) and SNFs;

(5) the waiver of CMS’s requirement for ICFs and SNFs to have an exterior door or window in every room used for sleeping;

(6) life safety code waivers of quarterly fire drills and allowing SNFs to erect temporary walls and barriers between patients;

(7) waiving CMS’s minimum training requirements for paid feeding assistants in LTC facilities;

(8) CMS’s waiver of its requirement for nurse aides within SNFs to receive at least 12 hours of annual in-service training;

and (9) the waiver of an SNF’s normal obligation not to employ any nursing aid longer than 4 months if he or she does not satisfy federal training and certification requirements.

Select waivers including the three-day qualifying stay will remain in effect, however there may be additional or other Emergency Waivers that will be terminated or allowed to expire in coming weeks or days.

CMS’s memorandum may also exacerbate the care differential between hospitals and non-hospital facilities.

Notably, CMS’s April 7, 2022, memorandum specified that the Emergency Waivers will remain in effect for hospitals and critical access hospitals, but the specified Emergency Waivers will expire for SNFs, LTC facilities, and inpatient hospices, among other facility types.

The expiration or termination of Emergency Waivers are determined at the agency level and may occur quickly as well as with little public notice.

Resuming visitation and resident rights — CMS has issued guidance to facilities throughout the PHE regarding patients’ rights to visitation.

While the CMS guidance issued in March 2020 directed facilities to severely restrict visitation, CMS has subsequently provided guidance through the course of the pandemic (and most recently updated in November 2021 and January 2022) that broadens visitation and provides guidance on visitation procedures.

This came after the Centers for Disease Control and Prevention (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 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.

On September 9, 2021, the Biden-Harris administration (the Administration) announced a forthcoming interim final rule that would require all workers in Medicare and Medicaid participating health facilities to be fully vaccinated and the text of this interim final rule is expected in the fourth quarter of 2021.

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.

Federal and state COVID-19 vaccination requirements — 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.

Pfizer and Moderna's COVID-19 vaccines have since received full FDA approval.

Vaccine distribution, including the administration of first vaccine booster shots, is now widespread in all 50 states.

Through a series of amendments to the EUA beginning in 2021 through March 2022, the FDA authorized and the CDC recommended the use of first a single booster dose, and then a second booster dose, to be administered to qualifying individuals.

First boosters were approved and recommended at least six months after completing the primary vaccination series of Pfizer-BioNTech or Moderna, or two months after completing the primary Johnson & Johnson vaccination.

Second boosters of either the Pfizer-BioNTech or Moderna vaccines were approved and recommended to be administered to qualifying individuals at least four months after receipt of their first vaccine booster injection.

On August 18, 2021, the Administration announced that CMS was developing an emergency regulation requiring all workers within Medicare and Medicaid-participating nursing homes to be vaccinated against COVID-19 as a condition of participation in the Medicare and Medicaid programs.

The Administration expanded the scope of this forthcoming emergency regulation on September 9, 2021, and on the same day the Administration announced that OSHA would introduce an emergency temporary standard (ETS) requiring employers with more than 100 employees to mandate that its employees be fully vaccinated against COVID-19 or submit to weekly testing for the virus.

Both CMS’s IFR and OSHA’s ETS for vaccination were challenged in court and halted from enforcement in certain states.

On November 5, 2021, CMS issued the Omnibus COVID-19 Health Care Staff Vaccination interim final rule (IFR), requiring all eligible staff in certain Medicare and Medicaid participating health facilities to complete their one- or two-injection vaccination sequences by or before January 13, 2022.

CMS's enforcement of this IFR was temporarily blocked in certain states pending appeal to the United States Supreme Court.

By January 20, 2022, decisions of the United States Supreme Court and other courts affirmed CMS’s authority to enforce the IFR in all states, with the last among them, Texas, subject to a deadline of March 21, 2022 for full compliance with the IFR’s vaccination requirements.

Additionally, 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.

Additional guidance may be issued in connection with the forthcoming interim final rules regarding mandatory worker vaccinations expected by CMS for Medicare and Medicaid-participating facilities, which may also contain provisions affecting the testing and vaccination of residents.

In addition to CMS' 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.

In addition to expected interim final rules mandating vaccinations for health facility workers by CMS and vaccinations or testing by the U.S.

Department of Labor’s Occupational Safety and Health Administration (OSHA).

Several states where our independent operating facilities are located have issued vaccine mandates that apply to facility employees.

California, the most populous state, issued an order on August 5, 2021, requiring workers in nursing homes and other health facilities to receive at least one vaccine dose by September 30, 2021.

On August 20, 2021, the State of Washington’s governor issued a proclamation requiring workers in long-term care facilities and healthcare settings—including employees, contractors, and volunteers—to be fully vaccinated against COVID-19 by October 2021.

On August 30, 2021, the Colorado Board of Health approved a COVID-19 vaccine requirement for employees, contractors, and other individuals working in certain health care facilities including nursing homes and assisted living facilities, mandating that these workers fully vaccinated by October 2021.

None of these state mandates allow for regular COVID-19 testing as an alternative to vaccination.

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;

Additional guidance may be issued in connection with this IFR.

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.

In addition to the IFR mandating vaccinations for health facility workers, several states where our independent operating facilities are located have issued vaccine mandates that apply to facility staff.

California, the most populous state, issued an order on August 5, 2021 (and expanded on September 28, 2021), requiring adult care facilities and direct care workers to be vaccinated as well, and for all affected workers to be fully vaccinated by November 30, 2021.

On February 22, 2022, California's Department of Public Health updated its directive to allow workers who had completed their primary vaccination series and contracted COVID-19 since becoming fully vaccinated to defer the receipt of a vaccine booster dose by up to 90 days after infection with COVID-19;

otherwise, booster vaccine doses were required to be completed by March 1, 2022.

On August 20, 2021, the State of Washington required workers (including employees, contractors, and volunteers) in LTC facilities and healthcare settings to be fully vaccinated against COVID-19 by October 2021.

On August 30, 2021, the Colorado Board of Health approved (and extended by 120 days on December 15, 2021) a COVID-19 vaccine requirement for employees, contractors, and other individuals working in certain health care facilities including nursing homes and senior living facilities to be fully vaccinated by October 2021.

None of these states have been enjoined from enforcing their respective mandates.

Non-compliance with state or federal mandates may result in imposition of fines or other administrative action, and compliance with these laws may be difficult due to legal challenges and changes in the applicable laws, regulations, or directives.

Reporting requirements — Effective May 8, 2020, CMS published an IFR 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;

the reported information is made publicly available on a dedicated website.

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

Effective May 21, 2021, CMS published an interim final ruling requiring long-term care facilities to report weekly COVID-19 vaccination data of both residents and staff to the CDC National Healthcare Safety Network.

Effective May 21, 2021, CMS published an IFR requiring LTC facilities to report weekly COVID-19 vaccination data of both residents and staff to the CDC National Healthcare Safety Network.

Facilities are also required to provide residents and staff with vaccine education and offer vaccines, when available, to residents and staff.

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The revised requirements provide additional information on the data elements that recipients are required to report as part of the post-payment reporting process, as well as the timing of such reporting.

Effective August 23, 2021, CMS published an interim final rule incorporating comments on its May 21, 2021 interim final rule.

This updated interim final rule expands on the interim final rule effective May 21, 2021, continuing the obligation for long-term care and intermediate care facilities to report COVID-19 vaccination data for both residents and staff to the CDC National Healthcare Safety Network.

This new interim final rule requires facilities to develop policies and procedures to ensure the availability of the COVID-19 vaccine to residents and staff, and to educate residents and staff concerning the benefits, risks, and potential side effects associated with the vaccine.

This interim final rule also addresses responses to vaccination refusal by residents and staff in compliance with EEOC guidance.

CMS may initiate enforcement activities and assess civil monetary penalties for not meeting any of these COVID-19 related reporting requirements under this interim final rule.

Effective August 23, 2021, CMS published an IFR incorporating comments on its May 21, 2021 IFR which continued the obligation for LTC and intermediate care facilities to report COVID-19 vaccination data for both residents and staff to the CDC National Healthcare Safety Network.

This new IFR requires facilities to develop policies and procedures to ensure the availability of the COVID-19 vaccine to residents and staff, and to educate residents and staff concerning the benefits, risks, and potential side effects associated with the vaccine.

This IFR also addresses responses to vaccination refusal by residents and staff in compliance with U.S.

Equal Employment Opportunity Commission guidance.

CMS may initiate enforcement activities and assess civil monetary penalties for not meeting any of these COVID-19 related reporting requirements under this IFR.

We do not believe these COVID-19 related 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 LTC 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 (and subsequently updated in January 2021), CMS introduced an enhanced enforcement program with respect to infection control deficiencies.

On June 1, 2020 (and most recently 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.

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

Vaccine distribution is now widespread in all 50 states.

On August 18, 2021, the Administration announced that CMS is developing an emergency regulation requiring all workers within Medicare and Medicaid-participating nursing homes to be vaccinated against COVID-19 as a condition of participation in the Medicare and Medicaid programs.

The Administration expanded the scope of this forthcoming emergency regulation on September 9, 2021, announcing that CMS is developing new regulations requiring workers within all Medicare and Medicaid-certified facilities to be fully vaccinated against COVID-19 as a condition of participating in the Medicare and Medicaid programs.

The Administration indicated that the interim final rule was expected to be issued in the fourth quarter of 2021.

Additionally, and separately, on September 9, 2021, the Administration announced that the U.S.

Department of Labor’s Occupational Safety and Health Administration (OSHA) would introduce a rule requiring employers with more than 100 employees to mandate that its employees be fully vaccinated against COVID-19 or submit to weekly testing for the virus.

The Administration likewise indicated that the interim final rule for this regulation was expected to be issued in the fourth quarter of 2021.

On August 23, 2021, the FDA approved the licensure of the Comirnaty vaccine, also known as the Pfizer-BioNTech vaccine.

On September 22, 2021, the FDA amended the EUA for the Pfizer-BioNTech vaccine to allow for use of a single booster dose to individuals meeting certain criteria.

On September 24, 2021, the Centers for Disease Control and Prevention recommended that the Pfizer-BioNTech booster dose be administrated to eligible residents and workers in long-term care facilities.

On October 20, 2021, the FDA amended the EUA for the Moderna and Johnson & Johnson vaccines to allow for use of a single booster to individuals meeting certain criteria.

On October 21, 2021, the CDC recommended that the Moderna and Johnson & Johnson vaccine dose be administrated to eligible residents and workers in long-term care facilities.

The FDA's amendment also allowed for the use of booster doses from manufacturers other than the one used in the primary vaccine series.

Medicare presently accounts for approximately 30.3% of our skilled nursing services revenue year-to-date, being our second-largest payor.

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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.

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

PDPM utilizes five case-mix adjusted payment components:

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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.

On August 4, 2021, CMS published the SNF PPS final rule for fiscal year 2022, which included a 1.2% net market basket increase in payment to SNFs, and reduced the negative impact of readmissions for providers with more than 25 stays by returning 60% of the 2% withheld by CMS regardless of that provider’s performance measures.

Providers with lower volume and fewer than 25 stays will not have any adjustments made to their payment.

Skilled Nursing Facility - Quality Reporting Program (SNF QRP)

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they will only apply for the fiscal year involved.

A skilled nursing facility will receive a notification letter from its Medicare administrator contractor if it was non-compliant with the Quality Reporting Program reporting requirements and is subject to the payment reduction.

A skilled nursing facility's MAC will issue the facility a notice of non-compliance if it does not satisfy its Quality Reporting Program reporting requirements.

Updated performance measures mandated for the SNF QRP for fiscal year 2020 were established in the final SNF PPS rule adopted on August 8, 2019 (fiscal year 2020 SNF PPS Rule).

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The SNF QRP applies to freestanding skilled nursing facilities, skilled nursing facilities affiliated with acute care facilities, and all non-critical access hospital swing-bed rural hospitals.

Under the SNF QRP, a skilled nursing facility’s annual market basket percentage is reduced by 2.0% if the skilled nursing facility does not submit quality measure data in accordance with thresholds set by the IMPACT Act.

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

On July 29, 2021, CMS issued a final rule for the SNF QRP that adopted two new reporting measures and updated the specifications for another measure.

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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

In January 2022, SNF ratings based on the resumed data reporting were recalculated for publication on the SNF Care Compare website.

SNF Care Compare website ratings based on SNF QRP data reporting were refreshed in April of 2022.

Medicare Annual Payment Rule

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

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This increase is attributable to a 2.7% market basket increase factor with a 0.8% point reduction for forecast error adjustment and a 0.7% 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.

On July 29, 2021, CMS’ final rule for fiscal year 2022 did not include this parity adjustment and indicated that this PDPM parity adjustment would be revisited in CMS’ proposed rule for the 2023 fiscal year.

The reimbursement change, if proposed and finalized in a future fiscal year, could adversely impact our reimbursement rates.

On April 11, 2022, CMS issued a proposed rule that would decrease the aggregate net payment by 0.7% which is comprised of a net market basket increase of 2.8% for fiscal year 2023 plus a 1.5% market basket forecast error adjustment for a 0.4% reduction for productivity adjustment, as well as a 4.6% decrease in the SNF PPS rates as a result of the proposed recalibrated parity adjustment.

Proposed Recalibration of the PDPM Parity Adjustment - Based on the prior year aggregate spending, CMS has conducted a data analysis to recalibrate the parity adjustment in order to achieve budget neutrality under PDPM.

CMS is proposing a PDPM parity adjustment using a combined methodology of a subset population that excludes those patients whose stays utilized a COVID-19 PHE-related waiver or who were diagnosed with COVID-19 and control period data using months with low COVID-19 prevalence from fiscal year 2020 and 2021.

As a result of this methodology, CMS is proposing a parity adjustment that would reduce SNF spending by 4.6%, or $1.7 billion, in fiscal year 2023 to achieve budget neutrality.

Sequestration of Medicare Rates

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

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

Medicare FFS claims with dates of service or dates of discharge on or after April 1, 2013 incur a 2.0% reduction in Medicare payments.

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

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

On December 10, 2021, President Biden signed into law a bill to postpone the 2.0% payment adjustment through April 1, 2022;

from April 1, 2022 through June 30, 2022, the 2.0% payment adjustment is reduced from 2.0% to 1.0%.

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

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

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

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

The fiscal year 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.

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

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

On July 29, 2021, CMS published its final rule for the fiscal year 2022 program in the Federal Register, adopting the proposed changes for measuring the performance period and amending the data to be reported to CMS, which impacted the SNF-VBP rate adjustment.

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

On February 28, 2022, the Administration published a fact sheet stating its priorities for making changes to senior care, including potential changes to regulations affecting LTCs and SNFs.

The SNF-VBP Program was identified as an area for change, with staffing levels, retention and resident experience affecting reimbursement.

Following studies by CMS, proposed rules that may affect the SNF-VBP Program are expected in approximately one year, with final rules to follow after a notice-and-comment period.

On April 11, 2022, CMS issued a proposed rule where VBP adjustments will not be applied.

Instead, all locations will have the same reduction, except for those locations that have a small population.

This proposed rule also requested information to evaluate potential changes to the VBP program, but those changes would not take effect in fiscal year 2023 and thus not apply to the annual reimbursement rates that take effect on October 1, 2022.

Part B Rehabilitation Requirements

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For PT and SLP combined the threshold for coding modifier requirements is $2,110 for 2021, compared to $2,080 for 2020.

The KX Modifier Threshold is set at $2,150 for CY 2022.

The threshold is the same for OT services.

Under CMS’ proposed physician fee schedule for 2022 published on July 13, 2021, CMS proposes an expiration of the 3.75% increase in payment amounts made in the 2021 coverage fiscal year and reduction of the conversion factor by 3.89%.

This may reduce the PT and SLP combined threshold for 2022 and affect our revenue derived from Medicare Part B.

A final rule setting the 2022 physician fee schedule is expected in the fourth quarter of 2021.

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 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 coding burden has been removed.

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 BBA, which requires a 15% payment reduction when a physical therapist assistant (PTA) or occupational therapy assistant (OTA) provides services “in whole or in part” on a given day.

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

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

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

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

Beginning in 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, removing a coding burden caused by requirements for additional documentation and claim modifier coding.

On December 1, 2020, CMS issued the calendar year 2021 Physician Fee Schedule (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 lowered 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.

These changes lowered the reimbursement rate for therapy Medicare Part B specialty providers by 9% for PT and OT and by 6% for SLP Codes.

These reductions were mitigated by the Consolidated Appropriations Act of 2021 (CAA, also referred to as The Omnibus Appropriations Law), which was signed into law on December 27, 2020.

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

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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 fiscal year 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.

On July 13, 2021, CMS issued the calendar year 2022 PFS proposed rule, which proposes to implement the portion of the BBA requiring the use of new modifiers to allow CMS to identify and make payments at 85% of the otherwise applicable Part B payment amount for PT and OT services furnished in whole or in part by PT and OT assistants.

Other changes in the proposed rule, including reducing the conversion factor by 3.89%, will have the effect of lowering the reimbursement rate for Part B therapy services if implemented.

The comment period for this proposed rule closed on September 13, 2021, and CMS’ final rule containing the 2022 physician fee schedule is anticipated in the fourth quarter of 2021.

While the 2021 PFS Final Rule reduced the fiscal year 2021 factor to $32.4085 (calendar year conversion factor was $36.0896), the CAA restored part of the reductions resulting in the final fiscal year 2021 conversion factor of $34.8931.

This conversion factor rate does not include the 2% sequester which has been suspended until April 1, 2022 and then will be implemented as a 1% sequestration until June 30, 2022.

On November 19, 2021, CMS published the 2022 PFS, which required the use of new modifiers (the CO modifier) to identify and make payments at 85% of the otherwise applicable Part B payment amount for PT and OT services furnished in whole, or in part by PT and OT assistants.

On December 10, 2021, President Biden signed the Protecting Medicare and American Farmers from Sequester Cuts Act into law, which restored funding for Medicare payments that was removed in the 2022 PFS.

Following passage of this law, CMS announced payment changes to the 2022 PFS on December 16, 2021, which would result in Medicare payments not being reduced from January 1, 2022 through March 31, 2022.

Thereafter, FFS Medicare payments would then be adjusted by 1% from April 1, 2022 through June 30, 2022, and further adjusted by a total of 2% from July 1, 2022 through December 31, 2022.

Under the recalculated 2022 PFS announced by CMS in December of 2021, the applicable conversion factor was reduced from the 2021 conversion factor of $34.8931 by 0.82% to $34.6062, a smaller reduction than the those found in the proposed rule or 2022 PFS.

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 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.

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.

Under the calendar year 2022 PFS proposed rule, these certain telehealth services would continue to be included on the Medicare telehealth services list until the end of calendar year 2023.

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 January 16, 2022.

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

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.

Subsequently, the calendar year 2021 and 2022 PFS Final Rules added certain of these PT and OT services to the list of Medicare telehealth services on a temporary basis through at least the end of calendar year 2023.

On December 31, 2020, CMS announced its 2021 update to the list of codes that describe Medicare Part B outpatient therapy services, making permanent existing and new codes introduced during the COVID-19 PHE for use under PT, OT, or SLP, including several telehealth codes as “sometimes therapy,” to permit physicians and certain non-physician practitioners to render these services outside a therapy plan of care when appropriate.

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

On November 19, 2021, CMS expanded these “sometimes therapy” codes further for the 2022 PFS, including five new codes for remote therapeutic monitoring treatment, which are broader than pre-existing monitoring codes and include measuring and evaluating adherence and response to medication and therapy.

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 and ending on May 7, 2022 as part of the Emergency Waivers CMS announced it was terminating within 30 days from April 7, 2022.

Our Facilities will cease using these telemedicine Emergency Waivers upon their termination.

Programs of All-Inclusive Care for the Elderly

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The regulation is intended to provide greater operational flexibility, remove redundancies and outdated information and codify existing programs.

Such flexibility includes, (i) more lenient standards applicable to the current requirement that the PACE organization be monitored for compliance with the PACE program requirements during and after a 3-year trial period and (ii) relieving certain restrictions placed upon the interdisciplinary team that comprehensively assesses and provides for the individual needs of each PACE participant by allowing one person to fill two roles and permitting secondary participation in the PACE program.

Such flexibility includes:

(i) more lenient standards applicable to the current requirement that the PACE organization be monitored for compliance with the PACE program requirements during and after a 3-year trial period and (ii) relieving certain restrictions placed upon the interdisciplinary team that comprehensively assesses and provides for the individual needs of each PACE participant by allowing one person to fill two roles and permitting secondary participation in the PACE program.

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

On October 21, 2021, CMS published an extension of the timeline to complete further final rulemaking for the PACE program until November 1, 2022, based on a proposed rule published on November 1, 2018, regarding policy and technical changes to Medicare Advantage, Medicare Prescription Drug Benefit, PACE, Medicaid FFS, and Medicaid managed care programs for 2020 and 2021.

Based on completed studies, public comments, and the intervening COVID-19 pandemic that required CMS’s focus, CMS extended the timeline to issue a final rule regarding new policy and technical changes to the PACE program until November of 2022.

The November 2018 proposed rule suggests changes to payment and appeals of disputes within the PACE program which may affect our business.

Preadmission Screening and Resident Review

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

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

Patient Protection and Affordable Care Act

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

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

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

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

The 2022 midterm 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.

Requirements of Participation

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

CMS has requirements that providers, including SNFs and other LTC facilities must meet in order to participate in the Medicare and Medicaid Programs.

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

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While legislative action is possible in the future, federal and state regulations remain our primary source of authority over the use of pre-dispute binding arbitration agreements.

As discussed under the “Coronavirus” heading above, on August 18, 2021, the Administration announced that CMS is developing an emergency regulation requiring all workers within all Medicare and Medicaid-participating nursing homes to be fully vaccinated against COVID-19 as a condition of participating in the Medicare and Medicaid programs.

The Administration expanded the scope of this forthcoming emergency regulation on September 9, 2021, requiring workers within all Medicare and Medicaid-certified facilities to be fully vaccinated against COVID-19 as a condition of participating in the Medicare and Medicaid programs.

The Interim Final Rule is expected to be issued in the fourth quarter of 2021.

As discussed under the “Coronavirus” heading above, the Administration announced that CMS and OSHA would implement emergency rules requiring all workers within all Medicare and Medicaid-participating nursing homes, and all employees of companies with more than 100 employees, to be fully vaccinated against COVID-19.

Significant litigation followed, including enforcement of both the CMS and OSHA vaccination mandates being halted by certain courts.

On January 13, 2022, the United States Supreme Court held that the OSHA vaccination mandate could not be enforced against large employers, but that the CMS vaccination mandate could be enforced upon Medicare- and Medicaid-participating facilities.

Those states except Texas where the CMS rule had been halted against enforcement then had to enforce the rule.

On January 20, 2022, the United States District Court for the Northern District of Texas dismissed the block of the CMS's vaccination IFR in Texas.

That same day, CMS became empowered to enforce the IFR in Texas and set a deadline of March 21, 2022 for full compliance with its vaccination requirements.

Since CMS became empowered to enforce the IFR in Texas, there has not been any administrative or legislative action to change the applicability or enforcement of this IFR.

Civil and Criminal Fraud and Abuse Laws and Enforcement

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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.

Civil monetary penalties 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 thousand to $23 thousand per violation and are adjusted annually 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.

Due to these whistleblower incentives, lawsuits have become more frequent.

Many states also have a false claim prohibition that mirrors or tracks the federal FCA.

Federal law also provides that OIG has the authority to exclude individuals and entities from federally funded health care programs on a number of grounds, including, but not limited to, certain types of criminal offenses, licensure revocations or suspensions, and exclusion from state or other federal healthcare programs.

And, CMS can recover overpayments from health care providers up to five years following the year in which payment was made.

Many states also have a false claim prohibition that mirrors or closely tracks the federal FCA.

Federal law also provides that the OIG has the authority to exclude individuals and entities from federally funded health care programs on a number of grounds, including, but not limited to, certain types of criminal offenses, licensure revocations or suspensions, and exclusion from state or other federal healthcare programs.

CMS can recover overpayments from health care providers up to five years following the year in which payment was made.

On February 28, 2022, the Administration published a fact sheet regarding nursing home care, which identified the Administration’s priorities of further funding for SNF and LTC facility inspections, enhancing civil penalties on poor-performing facilities and increasing the scrutiny of companies that operate more than one facility.

Proposed rules based on these directives and studies are expected in approximately one year, with final rules to follow after a notice-and-comment period.

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

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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.

In 2021, the OIG released the result of an audit finding that Medicare overpaid millions of dollars of chronic care management (CCM) services.

The OIG's 2021 report found that in calendar years 2017 and 2018, Medicare overpaid millions of dollars in CCM claims.

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

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

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Federal Healthcare Reform

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 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;

(ii) the addition of Payroll Based Journals (PBJ) data to calculate the staffing ratings in the Nursing Home Five Star Quality Rating System;

and (iii) the addition of two claims data measures:

Medicare spending per beneficiary and rate of successful return to home or community from a skilled nursing facility for quality measures.

In 2019, (i) the addition of separate ratings for short stay and long stay care;

(ii) changes in staffing thresholds;

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

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

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

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

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

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

However, CMS acknowledges that some facilities may see a decline in their overall five Star rating absent any new inspection information.

This change could further affect star ratings across the industry.

On April 27, 2016, CMS added six new quality measures to its consumer-based Nursing Home Compare website.

These quality measures include the rate of rehospitalization, emergency room use, community discharge, improvements in function, independent worsening of ability to move, and use antianxiety or hypnotic medication among nursing home residents.

Beginning in July 2016, CMS incorporated all these measures, except for the antianxiety/hypnotic medication measure, into the calculation of the Nursing Home Five-Star Quality Ratings.

In 2018, CMS added PBJ data to be used to calculate the staffing ratings in the Nursing Home Five Star Quality Rating System.

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

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

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

The approach includes the following pillars:

Strengthening Oversight, Enhancing Enforcement, Increasing Transparency, Improving Quality, and Putting Patients over Paperwork.

As part of the Transparency Pillar, beginning on October 23, 2019 on the Nursing Home Compare website, CMS began displaying a consumer alert icon next to nursing homes that have been cited for incidents of abuse, neglect, or exploitation.

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

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, which created new paths for payment based on the Merit-based Incentive Payment System (MIPS) or the use of Alternative Payment Models (APM).

A measure to ascertain provider quality is the Five-Star Quality Rating system, which includes a rating of one to five in various categories.

In 2018 and 2019, these calculations changed to reflect new and additional data that affected rankings, including freezing information regarding health inspection information, and including data to reflect the ranking of staffing (including emphasizing the level of registered nurse staffing), stay durations, spending, discharge outcomes and readmissions.

As of January 1, 2020, CMS assigned ratings to SNFs under its Five Star Quality reporting system and displayed those ratings on its consumer-based Nursing Home Compare website.

CMS’s assignment of ratings under its Five Star Quality for a SNF measure is based upon numerous quality measures, which as of January 1, 2020 included staffing levels (and staffing composition, focusing on the use of registered nurses), the use of antipsychotic medications, rate of hospitalization, emergency department use, community discharge, improvements in function, independently worsened and anxiety or hypnotic medication use, payroll based journals, and Medicare spending by beneficiary.

Additionally, this data is segregated and rated separately for short-term and long-term stays in the SNF.

These measures were subject to thresholds for stars assigned based on both staffing and quality components, with standards for score assignment that restricted the number of 4- and 5-star ratings that could be given.

This resulted in a reduction in the number of 4- and 5-star facilities compared to their prior ranking, including certain of our own facilities.

CMS also displays a consumer alert icon next to nursing homes that had been cited for incidents of abuse, neglect, or exploitation on the Nursing Home Compare website, which is updated monthly with CMS’s refresh of survey inspection results on that website.

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

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The information reported to CMS and used in these quality calculations changed over the period of 2020.

Beginning in August of 2020, responding to the COVID-19 pandemic, CMS announced a new, targeted inspection plan to focus on urgent patient safety threats and infection control, therefore causing a shift in the number of nursing homes inspected and how the inspections are conducted.

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

Beginning in August of 2020, and in response 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 the manner in which the inspections are conducted.

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

By December of 2020, CMS and state surveyors had resumed inspections of nursing homes to include inspection data, including surveys that occurred on March 4, 2020 and afterward, in its star rankings calculated for January 2021.

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Similarly, although staff reporting requirements were waived for the first and second quarters of 2020, this waiver ended on June 25, 2020.

Thereafter, nursing homes were required to report staffing data to CMS, which was incorporated into CMS’ Five Star Quality rating for those nursing homes beginning in January 2021.

Thereafter, nursing homes were required to report staffing data to CMS, which was incorporated into CMS’s Five Star Quality rating for those nursing homes beginning in January 2021.

The January 2021 calculation of Five Star Quality ratings for nursing homes reflected nursing home-provided quarterly updates of most quality measures for the period beginning June 2019 and ending June 2020 due to interruptions in data collection.

The quality measures that are specific to SNFs but not included in CMS’ Five Star Quality ratings for January 2021 were the measures for percentages of new or worsening pressure injuries, and the rate of residents who successfully return to home from a SNF.

The quality measures that are specific to SNFs but not included in CMS’s Five Star Quality ratings for January 2021 were the measures for percentages of new or worsening pressure injuries, and the rate of residents who successfully return to home from a SNF.

These measures may be included in future Five Star Quality ratings and the delay may not reveal improvements in previously low-rated facilities, or declines in performance within highly rated facilities.

Another impact of the COVID-19 pandemic to the Nursing Home Five-Star Quality Rating System is CMS’ 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.

When the anticipated January 2022 refresh of Five Star Quality ratings occurs, SNF quality reporting measures will be calculated based on the data reported from July 1, 2020 through March 31, 2021, due to the ongoing COVID-19 PHE.

When these Five Star Quality ratings are updated, they may not contain or reflect the latest or most accurate data regarding our facilities, including improvements in previously low-rated facilities, or declines in performance within higher-rated facilities.

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 reflected in the minimum data set assessment-based data in its quality measure ratings in January 2021.

On August 10, 2021, the Nursing Home Improvement and Accountability Act of 2021 (Nursing Home Improvement Act) was introduced in the U.S.

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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.

As of September 30, 2021, no action has been taken on this bill since its introduction to the Senate on August 10, 2021.

As of December 31, 2021, no action has been taken on this bill since its introduction to the Senate on August 10, 2021 and referral to the Senate Finance Committee that same day.

In January of 2022, CMS issued a bulletin stating that the Nursing Home Compare website would begin reporting nursing home weekend staffing that same month, as nursing homes previously had been required to submit this information to CMS.

Within the same bulletin, CMS announced that it would begin reporting information about nursing home staff tenure and other staffing data reported to CMS beginning in January of 2022.

By July of 2022, CMS will not only disclose weekend staffing and staff turnover data on the Nursing Home Compare website, but also begin incorporating it into CMS’s Five Star Quality ratings for nursing homes, including SNFs and LTC facilities.

On February 28, 2022, the Administration published a fact sheet stating its priorities for making changes to senior care, including potential changes to regulations affecting LTC and SNF facilities.

The Administration identified three core aims of its proposed changes:

(1) providing adequate staffing with appropriate training to deliver care;

(2) holding poorly performing facilities accountable by requiring improvement as a condition of receiving federal funds;

and (3) providing the public with more information about facility conditions and operations.

Specifically, the Administration expressed its desires to study the appropriate levels of staffing required for SNF and LTC facilities and issue proposed rules within one year of its study.

The SNF-VBP Program was also identified as an area for change, with staffing levels, retention and resident experience affecting reimbursement.

The Administration’s priorities also include transparency and public disclosure for nursing home owners and operators, with information to be made more readily available to the public, including through the Nursing Home Care Compare website that will report new measures with regard to staffing, retention and data to be collected in the future.

The President’s priorities also include a proposed examination of the role private equity investment, real estate investment trusts (REITs) and other investment interests play in the nursing home sector, and their relation to the best interests of residents.

Additional enforcement authority and resources, including enhanced scrutiny of poorly performing facilities, is another Administration priority, along with providing enhanced tools for facilities to use in improving their performance.

The Administration also seeks to improve accessibility to nurse aide training, tie Medicaid payments to staff wages and benefits, and to enhance the recruitment and career paths for care workers.

Finally, the Administration wishes to incorporate the lessons learned from the COVID-19 pandemic to impose new requirements for infection control, emergency preparedness and safety.

Proposed rules are expected to be issued within one year, with final rules to follow after a notice-and-comment period required by federal law.

Based on the Administration’s fact sheet and calls for studies regarding certain topics, it is expected that these changes will be enacted through proposed rules and later-enacted final rules following a notice-and-comment period, rather than through immediately effective interim final rules.

On April 11, 2022, the CMS issued a proposed rule that requested information to be used in potentially changing the SNF-VBP Program, setting SNF and LTC facility staffing levels, and creating new measures relevant to reimbursement consistent with the Administration’s February 28, 2022 fact sheet.

Monitoring Compliance in Our Facilities

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

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

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

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 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.

These notices may require us to take corrective action, may impose civil monetary penalties for noncompliance, and may threaten or impose other operating restrictions on skilled nursing facilities such as admission holds, provisional skilled nursing license or increased staffing requirements.

If our facilities fail to comply with these directives or otherwise fail to comply substantially with licensure and certification laws, rules and regulations, we could lose our certification as a Medicare or Medicaid provider, or lose our state licenses to operate the facilities.

Facilities with otherwise acceptable regulatory histories generally are normally given an opportunity to correct deficiencies and continue their participation in the Medicare and Medicaid programs by a certain date, usually within nine months, although where denial of payment remedies are asserted, such interim remedies go into effect much sooner.

Facilities with deficiencies that immediately jeopardize patient health and safety and those that are classified as poor performing facilities, however, are not generally given an opportunity to correct their deficiencies prior to the imposition of remedies and other enforcement actions.

Facilities must pass these inspections to maintain 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 provider contracts with managed care clients at many facilities.

From time to time, our independent operating subsidiaries, like others in the healthcare industry, may receive notices from federal and state regulatory agencies of an alleged failure to substantially comply with applicable standards, rules or regulations.

These notices may require corrective action, may impose civil monetary penalties for noncompliance, and may threaten or impose other operating restrictions on skilled nursing facilities such as admission holds, provisional skilled nursing license, or increased staffing requirements.

If our independent operating subsidiaries fail to comply with these directives or otherwise fail to comply substantially with licensure and certification laws, rules and regulations, the facility could lose its certification as a Medicare or Medicaid provider, or lose its license permitting operation in the State.

however, although where denial of payment remedies are asserted, such interim remedies go into effect much sooner.

Facilities with deficiencies that immediately jeopardize patient health and safety and those that are classified as poor performing facilities, however, may not be given an opportunity to correct their deficiencies prior to the imposition of remedies and other enforcement actions.

Moreover, facilities with poor regulatory histories continue to be classified by CMS as poor performing facilities notwithstanding any intervening change in ownership, unless the new owner obtains a new Medicare provider agreement instead of assuming the facility's existing agreement.

However, new owners (including us, historically) nearly always assume the existing Medicare provider agreement due to the difficulty and time delays generally associated with obtaining new Medicare certifications, especially in previously certified locations with sub-par operating histories.

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 (SFF) initiative.

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

However, new owners nearly always assume the existing Medicare provider agreement due to the difficulty and time delays generally associated with obtaining new Medicare certifications, especially in previously certified locations with sub-par operating histories.

Accordingly, facilities that have poor regulatory histories before acquisition by our independent operating subsidiaries and that develop new deficiencies after acquisition 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 or sustained 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 SFF.

This information is also provided to the general public.

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

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

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

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

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

Generally, if the surveyors confirm that the facility is in compliance upon their return, the sanctions never take effect.

However, if they determine that the facility is not in compliance, the denial of payment goes into effect retroactive to the date given in the original notice.

This possibility sometimes leaves affected operators, including us, with the difficult task of deciding whether to continue accepting patients after the potential denial of payment date, thus risking the retroactive denial of revenue associated with those patients' care if the operators are later found to be out of compliance, or simply refusing admissions from the potential denial of payment date until the facility is actually found to be in compliance.

In the past and from time to time, some of our affiliated facilities have been or will be in denial of payment status due to findings of continued regulatory deficiencies, resulting in an actual loss of the revenue associated with the Medicare and Medicaid patients admitted after the denial of payment date.

Additional sanctions could ensue and, if imposed, these sanctions, entailing various remedies up to and including decertification.

This possibility sometimes leaves affected operators, including our independent subsidiaries, with the difficult task of deciding whether to continue accepting patients after the potential denial of payment date, thus risking the retroactive denial of revenue associated with those patients' care if the operators are later found to be out of compliance, or simply refusing admissions from the potential denial of payment date until the facility is actually found to be in compliance.

In the past and from time to time, some of our independent operating subsidiaries have been or will be in denial of payment status due to findings of continued regulatory deficiencies, resulting in an actual loss of the revenue associated with the Medicare and Medicaid patients admitted after the denial of payment date.

Additional sanctions could ensue and, if imposed, could include various remedies up to and including decertification.

CMS has undertaken several initiatives to increase or intensify Medicaid and Medicare survey and enforcement activities, including federal oversight of state actions.

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CMS is also increasing its oversight of state survey agencies and requiring state agencies to use enforcement sanctions and remedies more promptly when substandard care or repeat violations are identified, to investigate complaints more promptly, and to survey facilities more consistently.

On February 28, 2022, the Administration published a fact sheet regarding nursing home care, which identified the Administration’s priorities of further funding for SNF and LTC facility inspections, as well as enhanced penalties and other tools to use against non-compliant facilities.

Proposed rules based on these directives and studies are expected in approximately one year, with final rules to follow a notice-and-comment period required by law.

On April 11, 2022, the CMS issued a proposed rule that requested information to be used for study and potential rulemaking consistent with the Administration’s February 28, 2022 fact sheet.

Regulations Regarding Financial Arrangements

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.

We are also subject to federal and state laws that regulate financial arrangement by and between 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 (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.

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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 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.

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

Violations of the Anti-Kickback Statute can also result in civil monetary penalties of up to $100 thousand 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.

Many states in which we operate have adopted or are considering similar legislative proposals, some of which extend beyond the Medicaid program, to prohibit the payment or receipt of remuneration for the referral of patients regardless of the source of payment for the care.

Many states in which our independent operating subsidiaries operate have adopted or are considering similar legislative proposals, some of which extend beyond the Medicaid program, to prohibit the payment or receipt of remuneration for the referral of patients regardless of the source of payment for the care.

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.

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Regulations Regarding Patient Record Confidentiality

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

Health care providers 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, 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 and security regulations have and will continue to impose significant costs on our facilities in order to comply with these standards.

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

Our independent operating subsidiaries have adopted and implemented HIPAA compliance plans, which we believe comply with the HIPAA privacy and security regulations.

The HIPAA privacy and security regulations have and will continue to impose significant costs on our independent operating subsidiaries 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.

Our operations are also subject to any federal or state privacy-related laws that are more restrictive than the privacy regulations issued under HIPAA.

Our independent operating subsidiaries are also subject to any federal or state privacy-related laws that are more restrictive than the privacy regulations issued under HIPAA.

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.

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, including denial of access to medical records, 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.

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Americans with Disabilities Act

Our facilities must also comply with the Americans with Disabilities Act (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.

Our independent operating subsidiaries must also comply with the ADA, and similar state and local laws to the extent that the 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 the independent operating subsidiaries continue to assess their facilities relative to ADA compliance and make appropriate modifications as needed.

REGULATIONS SPECIFIC TO SENIOR LIVING COMMUNITIES

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

As a result of the growth of senior living in recent years, states have adopted licensing standards applicable to assisted living communities.

As a result of the growth of senior living in recent years, states have adopted licensing standards applicable to senior living communities.

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

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.

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 through Medicaid waiver 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.

As noted above, the Administration issued a fact sheet regarding nursing home care priorities and reforms that it intends to seek in the coming year.

The Administration’s desired changes are multi-faceted, concerning payment to facilities, staffing level requirements, training and retention of staff, standards of care offered to residents, increased transparency and public disclosure of ownership, and enhanced civil remedies and other authority to exercise upon facilities that do not satisfy CMS’s standards.

Proposed rules based on these directives are expected in approximately one year, with final rules to follow a notice-and-comment period required by law.

On April 11, 2022, the CMS issued a proposed rule that requested information to be used for study and potential rulemaking consistent with the Administration’s February 28, 2022 fact sheet.

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, the ADA, and safety and health standards set by the Occupational Safety and Health Administration.

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

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

Our operating subsidiaries are also subject to various regulations and licensing requirements promulgated by state and local health and social service agencies and other regulatory authorities.

Our independent operating subsidiaries are also subject to various regulations and licensing requirements promulgated by state and local health and social service agencies and other regulatory authorities.

Requirements vary from state to state and these requirements can affect, among other things, personnel education and training, patient and personnel records, services, staffing levels, monitoring of patient wellness, patient furnishings, housekeeping services, dietary requirements, emergency plans and procedures, certification and licensing of staff prior to beginning employment, and patient rights.

These laws and regulations could limit our ability to expand into new markets and to expand our services and facilities in existing markets.

These laws and regulations could limit our ability to expand into new markets and to expand the services provided by independent operating subsidiaries in existing markets.

Results of Operations

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

As vaccines become available and COVID-19 cases are declining in the communities we serve, we began to see a recovery in our census during the first quarter of 2021 and our improved occupancy levels continued into the second and third quarter of 2021.

As a result, we continue to experience healthy growth in both revenue and operational earnings.

Our total revenue for the quarter increased $69.3 million, or 11.6% while our diluted GAAP earning per share grew by 7.8%, from $0.77 to $0.83, compared to the third quarter in 2020.

Revenue from our skilled services collectively increased by 12.6%.

We saw a recovery in our census starting in the first quarter of 2021 and has continued into 2022.

Despite the emergence of COVID-19 variants in the first quarter of 2022, which has led to spikes in COVID-19 caseloads and slowed down our census recoveries, we continue to experience healthy growth in both revenue and operational earnings.

Our net revenue for the three months ended March 31, 2022 continued to be impacted by COVID-19.

The Emergency Waivers 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, remained in effect in the first quarter of 2022.

In addition, we continued to receive state relief funding in selected states, which has been designed to enhance reimbursement to provide additional funding to cover COVID-19 related expenses.

For the three months ended March 31, 2022, we recorded state relief revenue of $17.6 million which directly offset against COVID-19 related expenses we incurred in those states.

See Recent Activities for further information.

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

Our total revenue for the quarter increased $86.2 million, or 13.7% while our diluted GAAP earning per share grew by 3.5%, from $0.86 to $0.89, compared to the first quarter in 2021.

We have continued to make progress on targeted initiatives, 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.

Revenue from our skilled services collectively increased by 14.3%.

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

These operational fundamentals have continued to drive our overall success.

These operational fundamentals coupled with the increase in occupancy, expansion to our operations and cash generated from strong first 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,

2021 2020 2021 2020

Three Months Ended March 31,

Service revenue 99.4 % 99.4 %

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Interest expense (0.3) (0.3)

Other income (expense), net — 0.1 0.1 0.1

Other (expense) income (0.1) 0.1

Other expense, net (0.4) (0.2)

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Net income attributable to The Ensign Group, Inc.

7.1 % 7.2 % 7.5 % 7.0 %

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

2021 2020 2021 2020

Three Months Ended March 31,

Segment Income (1)

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Adjusted EBITDA $ 92,729 $ 80,879

FFO for real estate segment $ 13,846 $ 12,996 $ 41,035 $ 36,217

FFO for Standard Bearer

$ 11,921 $ 11,868

Valuation Metric

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(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.

Included in segment income for Standard Bearer for the three months ended March 31, 2022 are expenses for intercompany management fee between Standard Bearer and the Service Center and intercompany interest expense.

Segment income is reconciled to the Condensed Consolidated Statement of Income in Note 8, Business Segments in Notes to Unaudited Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

(2) Standard Bearer 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).

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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 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 other 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.

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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.

These measures are useful in this regard because they do not include such costs as other 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.

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• they do not reflect changes in, or cash requirements for, our working capital needs;

• they do not reflect the net interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

• they do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

• they do not reflect rent expenses, which are necessary to operate our leased operations, in the case of Adjusted EBITDAR;

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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 condensed consolidated financial statements in their entirety and to not rely on any single financial measure.

Management strongly encourages investors to review our 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 condensed 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 unaudited 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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We believe EBITDA is useful to investors in evaluating our operating performance because it helps investors evaluate and compare the results of our operations from period to period by removing the impact of our asset base (depreciation and amortization expense) from our operating results.

We calculate EBITDA as net income, adjusted for net losses attributable to noncontrolling interest, before (a) interest expense, net, (b) provision for income taxes, and (c) depreciation and amortization.

We calculate EBITDA as net income, adjusted for net losses attributable to noncontrolling interest, before (a) other expense, net, (b) provision for income taxes, and (c) depreciation and amortization.

Adjusted EBITDA

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Adjusted EBITDA is EBITDA adjusted for non-core business items, which for the reported periods includes, to the extent applicable:

• results related to operations not at full capacity;

• stock-based compensation expense;

• costs incurred related to real estate due diligence;

• legal finding;

• acquisition related costs;

• costs incurred related to new systems implementation;

• results related to operations not at full capacity;

• gain on sale of assets.

• acquisition related costs.

Funds from Operations (FFO)

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

We consider FFO to be a useful supplemental measure of the operating performance of Standard Bearer.

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

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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 earnings.

We define (in accordance with the definition used by NAREIT) FFO to consist of Standard Bearer segment income, excluding depreciation and amortization related to real estate, gains or losses from sales of real estate, insurance recoveries related to real estate and impairment of depreciable real estate assets.

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,

2021 2020 2021 2020

Consolidated statements of income data:

Three Months Ended March 31,

Condensed consolidated statements of income data:

(In thousands)

Net income $ 50,088 $ 49,837

net income attributable to noncontrolling interests 1,063 253 2,852 1,045

Interest expense, net 1,461 890 2,867 5,068

net (loss) income attributable to noncontrolling interests (252) 631

Other expense, net 2,884 893

Provision for income taxes 16,138 12,949

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Stock-based compensation 5,167 4,054

Results related to operations not at full capacity(a) — 81 584 620

Legal finding(a) 3,353 —

Gain on sale of assets — (540)

Costs incurred related to real estate due diligence 287 — 458 —

Results related to operations not at full capacity — 584

Acquisition related costs(b) 106 36

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Adjusted EBITDAR $ 128,491

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

(a) Legal finding against our non-emergent transportation subsidiary.

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

Three Months Ended September 30, 2021 Compared to the Three Months Ended September 30, 2020

Results of Operations

Three Months Ended March 31, 2022 Compared to the Three Months Ended March 31, 2021

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 September 30, 2021

Skilled services Real estate All Other Eliminations Consolidated

Three Months Ended March 31, 2022

Skilled services Standard Bearer All Other Eliminations Consolidated

Total revenue 686,771 17,193 27,330 (17,849) $ 713,445

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Income before provision for income taxes $ 66,226

Three Months Ended September 30, 2020

Skilled services Real estate All Other Eliminations Consolidated

Three Months Ended March 31, 2021

Skilled services Standard Bearer All Other Eliminations Consolidated

Total revenue $ 601,036 $ 14,069 $ 25,729 $ (13,581) $ 627,253

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Income before provision for income taxes $ 62,786

Our total revenue increased $69.3 million, or 11.6%, compared to the three months ended September 30, 2020.

Our total revenue increased $86.2 million, or 13.7%, compared to the three months ended March 31, 2021.

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

Total revenue from operations acquired on or subsequent to January 1, 2020 increased our consolidated revenue by $37.6 million during the three months ended September 30, 2021, when compared to the same period in 2020.

In addition, we recorded $19.2 million of state relief revenue in the third quarter of 2021 compared to $11.7 million in the same period in 2020, which correlated directly to the additional COVID-19 related expenses incurred.

Total revenue from operations acquired on or subsequent to January 1, 2021 increased our consolidated revenue by $41.6 million during the three months ended March 31, 2022, when compared to the same period in 2021.

In addition, we recorded $17.6 million of state relief revenue in the first quarter of 2022 compared to $16.5 million in the same period in 2021, which correlated directly to the additional COVID-19 related expenses incurred.

All state relief revenue is included in Medicaid revenue.

Skilled Services

The following table presents the skilled services revenue and key performance metrics by category during the three months ended September 30, 2021 and 2020:

Three Months Ended September 30,

The following table presents the skilled services revenue and key performance metrics by category during the three months ended March 31, 2022 and 2021:

Three Months Ended March 31,

2022 2021 Change % Change

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Skilled mix by nursing revenue 54.3 % 55.6 % (1.3) %

Three Months Ended September 30,

Three Months Ended March 31,

2022 2021 Change % Change

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Skilled mix by nursing revenue 55.6 % 56.3 % (0.7) %

Three Months Ended September 30,

Three Months Ended March 31,

2022 2021 Change % Change

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Skilled mix by nursing revenue 50.3 % 49.7 % 0.6 %

Three Months Ended September 30,

Three Months Ended March 31,

2022 2021 Change % Change

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

In the first half of 2021, we converted two campuses into two skilled nursing facilities.

(1) Same Facility results represent all facilities purchased prior to January 1, 2019.

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(3) Recently Acquired Facility (Acquisitions) results represent all facilities purchased on or subsequent to January 1, 2021.

Skilled services revenue increased $71.8 million, or 12.6%, compared to the three months ended September 30, 2020.

Of the $71.8 million increase, the primary changes were from an increase in Medicaid custodial revenue of $44.2 million, or 20.2%, and an increase in managed care revenue $27.3 million, or 31.1%.

This is partially offset by the decreases in Medicare revenue of $12.6 million , or 6.6%.

The increase in revenue was primarily driven by strong performance across our skilled services operations as our census continued to recover in the third quarter of 2021.

Skilled services revenue increased $85.7 million, or 14.3%, compared to the three months ended March 31, 2021.

Of the $85.7 million increase, the primary changes were from an increase in Medicaid revenue of $39.8 million , or 14.9%, an increase in managed care revenue $19.4 million, or 17.9%, an increase in Medicare revenue of $18.1 million , or 9.5% and an increase in private revenue of $8.4 million or 24.2%.

The increase in revenue was primarily driven by strong performance across our skilled services operations as our census continued to recover in the first quarter of 2022.

Our consolidated occupancy increased by 3.1%, which includes operations acquired at lower occupancy compared to the same period in the prior year.

As COVID-19 cases declined from the previous year, there has been a shift in Medicare patients to long-term care patients, resulting to a decline in skilled mix days and skilled mix revenue.

As COVID-19 cases declined from the same period in the previous year, there was a shift in Medicare patients to LTC patients, resulting in a decline in skilled mix days and skilled mix revenue.

Revenue in our Same Facilities increased $34.5 million, or 6.8% due to increased occupancy and total patient days.

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Managed care skilled days increased by 9.6%, resulting in an increase in Managed Care revenue of $9.2 million.

Skilled days and Medicare census days decreased due to the shift of high acuity patients to long-term patients and the return of long-term patients to the facilities as COVID-19 cases decreased from prior year.

Revenue generated by our Transitioning Facilities increased $8.4 million , or 9.8% , primarily due to improved occupancy growth of 4.4% to 70.4% and increase in our total patient days compared to the three months ended September 30, 2020, demonstrating our ability to transition these healthcare operations toward higher acuity patients.

Skilled services revenue generated by facilities purchased on or subsequent to January 1, 2020 (Recently Acquired Facilities) increased by approximately $36.5 million compared to the three months ended September 30, 2020 .

We acquired sixteen operations between October 1, 2020 and September 30, 2021 across four states.

Revenue generated by our Transitioning Facilities increased $11.4 million , or 14.2% , primarily due to improved occupancy growth of 6.2% to 72.6% and an increase in our total patient days and skilled mix days compared to the three months ended March 31, 2021, demonstrating our ability to transition these healthcare operations toward higher acuity patients.

Skilled services revenue generated by facilities purchased on or subsequent to January 1, 2021 (Recently Acquired Facilities) increased by approximately $39.8 million compared to the three months ended March 31, 2021 .

We acquired seventeen operations between April 1, 2021 and March 31, 2022 across six 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.

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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

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(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 3.5% and 5.4%, respectively, compared to the three months ended September 30, 2020.

Our Medicare daily rates at Same Facilities and Transitioning Facilities increased by 0.6% and 1.2%, respectively, compared to the three months ended March 31, 2021.

The increase is attributable to the 1.2% net market basket increase that became effective in October 2021.

Included in revenue for the three months ended September 30, 2021 and 2020 is the result of the temporary suspension of the 2% Medicare sequestration, which started on May 1, 2020 and was extended through December 31, 2021.

Our average Medicaid rates increased 2.6% due to state reimbursement increases and our participation in supplemental Medicaid payment programs and quality improvement programs in various states.

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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

2022 2021 2022 2021 2022 2021 2022 2021

Percentage of Skilled

Nursing Revenue:

Percentage of Skilled Nursing Revenue:

Medicare 27.6 % 29.1 % 31.1 % 32.7 % 26.3 % 40.8 % 27.9 % 29.7 %

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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

2022 2021 2022 2021 2022 2021 2022 2021

Percentage of Skilled

Nursing Days:

Percentage of Skilled Nursing Days:

Medicare 15.1 % 15.6 % 15.3 % 15.9 % 13.0 % 20.9 % 14.9 % 15.8 %

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

Three Months Ended September 30, Change

Three Months Ended March 31, Change

2022 2021 $ %

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Revenue percentage 77.8 % 77.0 % 0.8 %

Cost of services related to our Skilled services segment increased $57.6 million, or 13.1%, primarily due to additional costs related to new acquisitions, which accounted for $29.3 million of the increase to cost of services.

Cost of services related to our Skilled services segment increased $71.2 million, or 15.4%, primarily due to additional costs related to new acquisitions, which accounted for $32.0 million of the increase to cost of services with additional increases mainly due to higher staffing expenses.

Cost of services as a percentage of revenue increased to 77.8% from 77.0%, an increase of 0.8%.

The increase is mainly due to higher staffing expenses.

Real Estate Segment

Three Months Ended September 30, Change

Standard Bearer

Three Months Ended March 31, Change

2022 2021 $ %

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Rental revenue.

Our rental revenue, including revenue generated from our affiliated facilities, increased by $0.7 million, or 4.7%, to $16.3 million, compared to the three months ended September 30, 2020.

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

Our FFO increased $0.9 million, or 6.5% to $13.8 million, compared to the three months ended September 30, 2020.

The increase in FFO is primarily related to the increase in rental revenue.

All Other Service Revenue

Our other revenue decreased by $2.5 million, or 10.1%, to $22.5 million, compared to the three months ended September 30, 2020.

Other revenue for 2021 includes senior living revenue of $12.3 million and revenue from other ancillary services of $10.2 million.

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

Our rental revenue, including revenue generated from our affiliated facilities, increased by $3.1 million, or 22.2%, to $17.2 million, compared to the three months ended March 31, 2021.

The increase in revenue is primarily attributable to eight real estate purchases as well as annual rent increases since the three months ended March 31, 2021.

Our FFO increased $0.1 million, or 0.4% to $11.9 million, compared to the three months ended March 31, 2021.

The increase in expenses are offset against the increase in rental revenue of $3.1 million.

Included in FFO for the three months ended March 31, 2022 is interest expense of $1.9 million as well as management fee expense of $1.0 million associated with the intercompany agreements between Standard Bearer and the Service Center starting in January of 2022.

As noted in Item 2., under Recent Activities , Ensign Group, Inc., the real estate properties and Standard Bearer entered into intercompany debt arrangements including mortgage loans and a credit revolver with the formation of Standard Bearer in January of 2022.

All Other Revenue

Our other revenue increase by $1.6 million, or 6.2%, to $27.3 million, compared to the three months ended March 31, 2021.

Other revenue for 2022 includes senior living revenue of $13.6 million and revenue from other ancillary services of $11.8 million and rental income of $1.9 million.

The increase in other revenue is attributable to our senior living acquisitions as our senior living occupancy recovers from COVID-19.

Consolidated Financial Expenses

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

General and administrative expense as a percentage of revenue increased by 0.3% to 5.8%.

General and administrative expense as a percentage of revenue decreased by 0.2% to 5.3%.

Depreciation and amortization — Depreciation and amortization expense increased $1.0 million, or 7.4%, to $14.7 million.

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Depreciation and amortization decreased 0.1%, to 2.1%, as a percentage of revenue.

Other expense, net — Other expense, net as a percentage of revenue remained flat.

Other expense primarily includes interest expense related to debt.

Provision for income taxes — Our effective tax rate was 25.5% for the three months ended September 30, 2021, compared to 20.1% for the same period in 2020.

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

Other expense primarily includes interest expense related to new debt and gain or loss on the investments mirrored to our deferred compensation program.

During the three months ended March 31, 2022, we recorded a loss of $1.2 million compared to a gain of $306 during the three months ended March 31, 2021.

There is an offsetting income and offsetting expense split between cost of services and general and administrative expenses for both periods.

Provision for income taxes — Our effective tax rate was 24.4% for the three months ended March 31, 2022, compared to 20.6% for the same period in 2021.

The effective tax rate for both periods is driven by the impact of excess tax benefits from stock-based compensation, partially offset by non-deductible expenses.

The higher effective tax rate reflects a decrease in tax benefit from stock-based payment awards.

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

Nine Months Ended September 30, 2021 Compared to the Nine Months Ended September 30, 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:

Nine Months Ended September 30, 2021

Skilled services Real estate All Other Eliminations Consolidated

Total revenue $ 1,855,993 $ 48,181 $ 66,489 $ (36,344) $ 1,934,319

Total expenses, including other expense, net 1,582,623 21,559 174,937 (36,344) 1,742,775

Segment income (loss) 273,370 26,622 (108,448) — 191,544

Gain from sale of real estate (1)

Income before provision for income taxes $ 191,984

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

Nine Months Ended September 30, 2020

Skilled services Real estate All Other Eliminations Consolidated

Total revenue $ 1,685,263 $ 45,489 $ 77,108 $ (34,293) $ 1,773,567

Total expenses, including other expense, net 1,441,623 22,896 178,360 (34,293) 1,608,586

Segment income (loss) 243,640 22,593 (101,252) — 164,981

Loss from sale of real estate and impairment charges (2,753)

Income before provision for income taxes $ 162,228

Our total revenue increased $160.8 million, or 9.1%, compared to the nine months ended September 30, 2020.

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

Total revenue from operations acquired on or subsequent to January 1, 2020 increased our consolidated revenue by $84.6 million during the nine months ended September 30, 2021, when compared to the same period in 2020.

In addition, we recorded $52.4 million of state relief revenue during the nine months ended in 2021 compared to $24.8 million in 2020, which correlated directly to the additional COVID-19 related expenses incurred.

All state relief revenue is included in Medicaid revenue.

Skilled Services Segment

The following table presents the skilled services revenue and key performance metrics by category during the nine months ended September 30, 2021 and 2020:

Nine Months Ended September 30,

2021 2020 Change % Change

Total Facility Results:

(Dollars in thousands)

Skilled services revenue $ 1,855,993 1,685,263 $ 170,730 10.1 %

Number of facilities at period end 211 195 16 8.2 %

Number of campuses at period end* 22 22 — — %

Actual patient days 4,775,274 4,668,961 106,313 2.3 %

Occupancy percentage — Operational beds 72.5 % 74.5 % (2.0) %

Skilled mix by nursing days 31.8 % 30.6 % 1.2 %

Skilled mix by nursing revenue 52.5 % 51.8 % 0.7 %

Nine Months Ended September 30,

2021 2020 Change % Change

Same Facility Results(1):

(Dollars in thousands)

Skilled services revenue $ 1,488,708 $ 1,422,453 $ 66,255 4.7 %

Number of facilities at period end 165 165 — — %

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

Actual patient days 3,770,536 3,871,433 (100,897) (2.6) %

Occupancy percentage — Operational beds 73.5 % 75.3 % (1.8) %

Skilled mix by nursing days 33.3 % 32.0 % 1.3 %

Skilled mix by nursing revenue 54.2 % 53.4 % 0.8 %

Nine Months Ended September 30,

2021 2020 Change % Change

Transitioning Facility Results(2):

(Dollars in thousands)

Skilled services revenue $ 272,085 $ 248,396 $ 23,689 9.5 %

Number of facilities at period end 27 27 — — %

Number of campuses at period end* 6 6 — — %

Actual patient days 733,034 751,396 (18,362) (2.4) %

Occupancy percentage — Operational beds 68.6 % 70.5 % (1.9) %

Skilled mix by nursing days 28.0 % 24.1 % 3.9 %

Skilled mix by nursing revenue 47.8 % 44.1 % 3.7 %

Nine Months Ended September 30,

2021 2020 Change % Change

Recently Acquired Facility Results(3):

(Dollars in thousands)

Skilled services revenue $ 95,200 $ 14,414 $ 80,786 NM

Number of facilities at period end 19 3 16 NM

Number of campuses at period end* 1 1 — NM

Actual patient days 271,704 46,132 225,572 NM

Occupancy percentage — Operational beds 69.0 % 77.1 % NM

Skilled mix by nursing days 21.3 % 15.5 % NM

Skilled mix by nursing revenue 39.4 % 27.7 % 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.

In the first half of 2021, we converted two campuses into two skilled nursing facilities.

(1) Same Facility results represent all facilities purchased prior to January 1, 2018.

(2) Transitioning Facility results represent all facilities purchased from January 1, 2018 to December 31, 2019.

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

S killed services revenue increased $170.7 million, or 10.1%, compared to the nine months ended September 30, 2020.

Of the $170.7 million increase, the primary changes were from increases in managed care revenue of $64.2 million, or 23.6%, Medicare revenue of $17.1 million, or 3.3%, and Medicaid custodial revenue of $75.8 million , or 11.4%.

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

The impact of COVID-19 on our census started in March 2020 and continued into the first quarter of 2021.

Census began to recover in the second quarter of 2021.

Our consolidated occupancy decreased by 2.0%, which includes operations acquired at lower occupancy, compared to the same period in the prior year.

The impact of the decline in occupancy was offset by the increase in skilled mix days due to a shift toward high acuity patients.

Revenue in our Same Facilities increased $66.3 million, or 4.7% due to higher patient acuity and skilled days, offset by the decrease in occupancy of 1.8%, which primarily declined in the three months ended March 31, 2021 and has increased in the three months ended June 30, 2021 and September 30, 2021.

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

Total revenue for Same Facilities included $41.5 million and $20.4 million of Medicaid revenue related to state relief funding for the nine months ended September 30, 2021 and 2020, respectively.

Managed care revenue increased by $45.4 million or 19.2%, driven by increases in managed care days as our partnership with various managed care organizations, hospitals and the local communities strengthened.

Revenue generated by our Transitioning Facilities increased $23.7 million, or 9.5%, primarily due to increases in our daily rate and skilled mix days compared to the nine months ended September 30, 2020 , demonstrating our ability to transition these healthcare operations that were acquired two and three years ago.

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

Our skilled days increased by 13.3% , coupled with an increase from our skilled mix revenue daily rate of 1.5%.

Skilled services revenue generated by facilities purchased on or subsequent to January 1, 2020 (Recently Acquired Facilities) increased by approximately $80.8 million compared to the nine months ended September 30, 2020.

We acquired sixteen operations between October 1, 2020 and September 30, 2021 across four states.

In the future, if we acquire additional facilities that are underperforming and need to be turned around or invest in 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 and 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

2021 2020 2021 2020 2021 2020 2021 2020

Skilled Nursing Average Daily

Revenue Rates:

Medicare $ 687.73 $ 663.07 $ 676.05 $ 637.77 $ 683.72 $ 554.63 $ 685.78 $ 658.38

Managed care 503.74 488.29 480.30 466.78 462.47 427.07 499.44 485.33

Other skilled 542.82 535.05 422.31 352.17 514.89 294.75 531.21 526.54

Total skilled revenue 586.70 577.62 567.57 559.42 588.80 515.22 584.19 574.99

Medicaid 249.95 237.63 241.93 226.81 243.23 250.04 248.20 235.88

Private and other payors 237.82 233.47 235.69 218.56 250.98 237.08 238.26 230.81

Total skilled nursing revenue $ 361.04 $ 345.88 $ 332.56 $ 306.08 $ 317.48 $ 289.04 $ 354.19 $ 338.91

(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 3.7% and 6.0%, respectively, compared to the nine months ended September 30, 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 nine months ended September 30, 2021 is nine months impact of the temporary suspension of the 2% Medicare sequestration, which started on May 1, 2020 and was extended through December 31, 2021.

Revenue for the nine months ended September 30, 2020 included five months of impact from the temporary suspension of the 2% Medicare sequestration.

Our average Medicaid rates increased 5.2% 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 state relief revenue we recorded.

Payor Sources as a Percentage of Skilled Nursing Services.

We use our skilled mix as a measure 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

2021 2020 2021 2020 2021 2020 2021 2020

Percentage of Skilled Nursing Revenue:

Medicare 26.3 % 28.5 % 27.2 % 29.1 % 23.9 % 21.6 % 26.3 % 28.6 %

Managed care 19.2 16.5 17.0 13.5 8.4 5.7 18.4 15.9

Other skilled 8.7 8.4 3.6 1.5 7.1 0.4 7.8 7.3

Skilled mix 54.2 53.4 47.8 44.1 39.4 27.7 52.5 51.8

Private and other payors 6.6 7.3 7.6 9.1 8.3 14.1 6.8 7.7

Medicaid 39.2 39.3 44.6 46.8 52.3 58.2 40.7 40.5

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

2021 2020 2021 2020 2021 2020 2021 2020

Percentage of Skilled Nursing Days:

Medicare 13.8 % 14.9 % 13.4 % 14.0 % 11.1 % 11.2 % 13.6 % 14.7 %

Managed care 13.8 11.7 11.8 8.9 5.8 3.8 13.0 11.1

Other skilled 5.7 5.4 2.8 1.2 4.4 0.5 5.2 4.8

Skilled mix 33.3 32.0 28.0 24.1 21.3 15.5 31.8 30.6

Private and other payors 10.0 10.8 10.6 12.7 10.4 17.2 10.1 11.1

Medicaid 56.7 57.2 61.4 63.2 68.3 67.3 58.1 58.3

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

Cost of Services

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

Nine Months Ended September 30, Change

2021 2020 $ %

Cost of service $ 1,430,718 $ 1,299,566 $ 131,152 10.1 %

Revenue percentage 77.1 % 77.1 % — %

Cost of services related to our skilled services segment increased $131.2 million, or 10.1%, due primarily to additional costs at new acquisitions, which accounted for $63.4 million of the increase.

Cost of services as a percentage of revenue remained consistent at 77.1%.

Real Estate Segment

Nine Months Ended September 30, Change

2021 2020 $ %

Rental revenue generated from third-party tenants $ 11,837 $ 11,196 $ 641 5.7 %

Rental revenue generated from Ensign affiliated operations 36,344 34,293 2,051 6.0

Total rental revenue $ 48,181 $ 45,489 $ 2,692 5.9 %

Segment income 26,622 22,593 4,029 17.8

Depreciation and amortization 14,413 13,624 789 5.8

FFO $ 41,035 $ 36,217 $ 4,818 13.3 %

Rental revenue.

Our rental revenue, including revenue generated from our affiliated facilities, increased by $2.7 million, or 5.9% to $48.2 million, compared to the nine months ended September 30, 2020.

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

Our FFO increased $4.8 million, or 13.3% to $41.0 million, compared to the nine months ended September 30, 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 $10.6 million, or 13.8% to $66.5 million, compared to the nine months ended September 30, 2020.

Other revenue for 2021 includes senior living revenue of $36.1 million and revenue from other ancillary services of $30.4 million.

The decrease in 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 0.1% to 5.4%, primarily due to the growth in revenue outpacing the increase in rent expense.

General and administrative expense.

General and administrative expense increased $13.2 million or 13.7%, to $109.7 million.

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

General and administrative expense increased by 0.3% to 5.7%, as a percentage of revenue.

Depreciation and amortization .

Depreciation and amortization expense increased $0.3 million, or 0.7%, to $41.4 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 0.2%, to 2.1%, as a percentage of revenue.

Other expense, net.

Other expense, net as a percentage of revenue decreased by 0.1%, to 0.2%.

Other expense primarily includes interest expense related to borrowings under mortgage debt.

As there was no outstanding debt under the Credit Facility, interest expense decreased.

Provision for income taxes.

Our effective tax rate was 22.5% for the nine months ended September 30, 2021, compared to 22.8% for the same period in 2020.

The effective tax rate for both periods is driven by the impact of excess tax benefits from stock-based compensation, partially offset by non-deductible expenses.

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

See Note 15, Income Taxes , in the Notes to the Unaudited 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 Credit Facility.

Our liquidity as of September 30, 2021 is impacted by cash generated from strong operational performance and the repayment of Medicare Accelerated and Advance Payment Program funds.

Our liquidity as of March 31, 2022 is impacted by cash generated from strong operational performance and the repayment of Medicare Accelerated and Advance Payment Program funds and deferral of the employer portion of social security taxes.

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 $50.1 million and $37.8 million for the nine months ended September 30, 2021 and 2020, respectively.

Total capital expenditures for property and equipment were $15.8 million and $15.3 million for the three months ended March 31, 2022 and 2021, respectively.

We currently have approximately $70.0 million budgeted for renovation projects for 2022.

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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, 2021 consisted of bank term deposits, money market funds and U.S.

Our cash and cash equivalents as of March 31, 2022 consisted of bank term deposits, money market funds and U.S.

Treasury bill related investments.

In addition, as of September 30, 2021, we held debt security investments of approximately $48.0 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 September 30, 2021 were not other-than-temporarily impaired, nor has any event occurred subsequent to that date that would indicate any other-than-temporary impairment.

In addition, as of March 31, 2022, we held debt security investments of approximately $50.1 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, 2022 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, 2021, along with projected operating cash flows and available financing, will support our normal business operations for the foreseeable future.

We currently anticipate that existing cash and total investments as of March 31, 2022, along with projected operating cash flows and available financing, will support our normal business operations for the foreseeable future.

On October 21, 2021, the Board of Directors approved a stock repurchase program pursuant to which we may repurchase up to $20.0 million of our common stock under the program for a period of approximately 12 months that follow October 29, 2021.

During the three months ended March 31, 2022, we repurchased approximately 0.1 million shares of our common stock for $9.9 million.

This repurchase program expired upon the repurchase of the full authorized amount under the plan.

During the three months ended March 31, 2022, we did not purchase any shares pursuant to this stock repurchase program.

The share repurchase programs do not obligate us to acquire any specific number of shares.

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

Nine Months Ended September 30,

Three Months Ended March 31,

Net cash provided by/(used in):

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Financing activities (11,289) (103,117)

Net increase in cash and cash equivalents 68,058 116,205

Net decrease in cash and cash equivalents (13,655) (81,035)

Cash and cash equivalents beginning of period 262,201 236,562

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

The $77.7 million decrease in cash provided by operating activities for the nine months ended September 30, 2021 compared to the same period in 2020, w as primarily due to changes in working capital partially offset by higher net income.

Changes in working capital was driven by the deferred payment of the employer portion of social security taxes, which will be paid out in December 2021 and December 2022, timing of accounts receivable collections and payments of expenses.

The $11.6 million increase in cash provided by operating activities for the three months ended March 31, 2022 compared to the same period in 2021, w as primarily due to higher net income and changes in working capital.

Changes in working capital were driven by a decrease in accrued wages and related liabilities and prepaid income taxes as a result of timing, partially offset by the timing of accounts payable and other accrued liabilities.

Investing Activities

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

The $9.4 million increase in cash used in investing activities for the nine months ended September 30, 2021, compared to the same period in 2020, was primarily due to an increase in cash used for capital expenditures of $12.3 million, which is partially offset by an increase in cash from insurance proceeds of $6.7 million.

The $36.0 million increase in cash used in investing activities for the three months ended March 31, 2022, compared to the same period in 2021, was primarily due to an increase in cash used for expansions and capital expenditures of $34.1 million.

Financing Activities

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 $39.0 million decrease in cash used in financing activities for the nine months ended September 30, 2021, compared to the same period in 2020, was primarily due to the proceeds and repayment of the Medicare Accelerated and Advance Payment Program funds offset by repayment and proceeds from borrowings.

Financing cash flows consist primarily of payment of dividends to stockholders, issuance and repayment of short-term and long-term debt, payment for share repurchases, repayment of the Medicare Accelerated and Advance Payment Program funds and sale of shares of common stock through employee equity incentive plans.

The $91.8 million decrease in cash used in financing activities for the three months ended March 31, 2022, compared to the same period in 2021, was primarily due to the $102.0 million of net proceeds and repayment of the Medicare Accelerated and Advance Payment Program funds in 2021, offset by $9.9 million of share repurchases as part of our stock repurchase program in 2022.

Credit Facility with a Lending Consortium Arranged by Truist

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In addition, we pay a commitment fee on the unused portion of the commitments that ranges from 0.25% to 0.45% per annum, depending on the Consolidated Total Net Debt to Consolidated EBITDA ratio.

Subsequent to March 31, 2022, on April 8, 2022, we entered into the Amended Credit Facility, with a revolving line of credit of up to $600.0 million in aggregate principal.

The maturity date of the Amended Credit Facility is April 8, 2027.

Borrowings are supported by a lending consortium arranged by Truist.

The interest rates applicable to loans under the Amended Credit Facility are, at our option, equal to either a base rate plus a margin ranging from 0.25% to 1.25% per annum or SOFR plus a margin range from 1.25% to 2.25% per annum, based on the Consolidated Total Net Debt to Consolidated EBITDA ratio (as defined in the agreement).

Mortgage Loans and Promissory Notes

During September 30, 2021, three of our subsidiaries entered into HUD mortgage loans in the aggregate amount of $31.4 million.

As a result, 22 of our subsidiaries have mortgage loans insured with HUD for an aggregate amount of $143.8 million, as of September 30, 2021, which subjects these subsidiaries to HUD oversight and periodic inspections.

As of March 31, 2022, 23 of our subsidiaries have mortgage loans insured with HUD for an aggregate amount of $155.9 million, which subjects these subsidiaries to HUD oversight and periodic inspections.

The mortgage loans bear effective interest rates range of 3.1% to 4.2%, including fixed interest rates range of 2.4% to 3.3% 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 5.0% and 5.3% per annum and the term of the notes are ten months and 12 years, respectively.

In addition to the HUD mortgage loans above, we have a promissory note that was put in place 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 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.

Operating Leases

During the fiscal year of 2021, 166 of our facilities are under long-term lease arrangements, of which 94 of the operations are under nine triple-net Master Leases and one stand-alone lease with CareTrust REIT, Inc.

As of March 31, 2022, 179 of our facilities are under long-term lease arrangements, of which 95 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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Additionally, four of the 96 facilities leased from CareTrust include an option to purchase that we can exercise starting on December 1, 2024.

In the second quarter of 2021, the Company added four operations and extended the term for one of the Master Leases for an additional 15 years.

In the third quarter of 2021, we also added two operations and extended the term for one of the Master Leases for an additional 17 years.

As a result, the total lease liabilities and right-of-use assets increased by $54.7 million and $63.4 million, respectively, to reflect the new lease obligations.

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-three 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-four of our affiliated facilities, excluding the facilities that are operated under the Master Leases from CareTrust, are operated under eight 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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With an indivisible lease, it is difficult to restructure the composition of the portfolio or economic terms of the lease without the consent of the landlord.

Department of Justice Civil Investigative Demand

On May 31, 2018, we received a Civil Investigative Demand (CID) from the U.S.

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 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 and promptly responded to its requests for information;

in April 2020, we were advised that the U.S.

Department of Justice declined to intervene in any subsequent action based on or related to the subject matter of this investigation.

We have historically derived a substantial portion of our revenue from the Medicare program.

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Recent Accounting Standards Adopted by the Company

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.

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.

33-10786, “ Amendments to Financial Disclosures about Acquired and Disposed Businesses ” (“SEC Rule 33-10786”), which amends the disclosure requirements applicable to acquisitions and dispositions of businesses.

Amendments within SEC Rule 33-10786 primarily impact (1) the tests and thresholds used to determine the significance of acquisitions and dispositions;

(2) the form and content of pro forma information required to be disclosed in connection with significant acquisitions and dispositions;

(3) acquiree financial statement requirements;

and (4) thresholds used to determine the significance of acquisitions and dispositions of real estate operations, and related financial statement requirements, among others.

We adopted this standard on January 1, 2021 and determined there was no material impact on our condensed consolidated financial statements.

In November 2021, the FASB issued ASU 2021-10 “ Government Assistance (Topic 832):

Disclosures by Business Entities about Government Assistance, ” which created FASB ASC Topic 832, Government Assistance (ASC 832) .

ASC 832 requires business entities to disclose information about certain government assistance they receive.

We adopted this standard on January 1, 2022 and determined there was no material impact on the our condensed consolidated financial statements.

Accounting Standards Recently Issued but Not Yet Adopted by the Company

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An entity may elect to apply the amendments prospectively through December 31, 2022.

Subsequent to March 31, 2022, we entered into the Second Amendment to Third Amended and Restated Credit Agreement (Amended Credit Facility), which increased the revolving credit facility by $250,000 to an aggregate principal amount of up to $600,000.

The amendment modifies the reference rate from LIBOR to SOFR.

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 and annual 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 reports.

In July 2021, the FASB issued ASU 2021-05 “ Lessors—Certain Leases with Variable Lease Payments (Topic 842), ” which amends the lessor classification guidance to introduce additional criteria when classifying leases with variable lease payments that do not depend on a reference index or a rate.

This guidance is effective for annual periods beginning after December 15, 2021, which will be our fiscal year 2022, with early adoption permitted.

We have not yet determined the effect of the ASU on our results of operations, financial condition or cash flows.

Off-Balance Sheet Arrangements

As of September 30, 2021, we had approximately $6.5 million on our Credit Facility of borrowing capacity pledged as collateral to secure outstanding letters of credit, which is a reduction of $1.0 million from the second quarter.

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