What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-01 compared with 2022-04-28 · 562 added, 330 removed, 838 unchanged (52% of the section changed)

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

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

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

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

As of March 31, 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.

As of June 30, 2022, we offered skilled nursing, senior living and rehabilitative care services through 251 skilled nursing and senior living facilities.

Of the 251 facilities, we operated 180 facilities under long-term lease arrangements and have options to purchase 11.

Our real estate portfolio includes 100 owned real estate properties, which included 71 facilities operated and managed by us, 29 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 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:

Of the 29 real estate operations leased to Pennant, one senior living operation is located on the same real estate property as a skilled nursing facility 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 June 30, 2022:

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

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Recent Activities

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.

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

Pursuant to the Amended Credit Agreement, the Company transitioned from the London Interbank Offered Rate (LIBOR) to the Secured Overnight Financing Rate (SOFR) as the applicable reference rate for borrowings under the Revolving Credit Facility.

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.

The interest rates applicable to loans under the Revolving 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 Amended Credit Agreement).

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

As part of the entry into the Amended Credit Agreement, deferred financing costs of $0.6 million were written off and additional deferred financing costs of $3.2 million were capitalized during the three months ended June 30, 2022.

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

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Of the 95 owned real estate properties in Standard Bearer, 67 facilities are operated by Ensign operating subsidiaries and 29 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.

Of the 29 real estate operations leased to Pennant, one senior living operation is located on the same real estate property as a skilled nursing facility that we own and operate.

During six months ended June 30, 2022, we acquired the real estate of two skilled nursing facilities for a purchase price of $17.4 million and leased these facilities to certain of our operating subsidiaries through the Standard Bearer Master Leases.

Subsequent to June 30, 2022, we expanded our real estate portfolio with the addition of five skilled nursing properties and one campus property with an estimated total purchase price of $47.9 million.

As of June 30, 2022, 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.

In January 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 options 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%.

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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 $55.7 million.

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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.

During the three and six months ended June 30, 2022, the Service Center management fee was $1.1 million and $2.1 million, respectively, both of which represent 6% of total Standard Bearer rental revenue.

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.

The intercompany debt arrangements include mortgage loans and the Revolving Credit Facility to fund acquisitions and working capital needs.

As part of the Amended Credit Agreement discussed in Note 16, Debt , the interest rates applicable to loans under the Revolving Credit Facility were amended, such that the rates are, at the Company's 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.

As of June 30, 2022, there is $36.8 million outstanding under the intercompany credit revolver.

There is also an intercompany mortgage loan amount of $93.0 million which is subject to a fixed interest rate.

In addition, third party debt held by the Department of Housing and Urban Development (HUD) mortgage loans and promissory notes outstanding in an aggregate amount of $158.3 million, and are included in Standard Bearer.

During the three months ended June 30, 2022, Standard Bearer established shareholders of its preferred shares through contributions of cash of $0.1 million.

These preferred shares were fully vested at the time of the contributions by the shareholders.

In addition, as part of the formation of Standard Bearer in January of 2022, we established the Standard Bearer Healthcare REIT, Inc.

2022 Omnibus Incentive Plan (Standard Bearer Equity Plan).

During the three months ended June 30, 2022, Standard Bearer sold fully vested common shares from the Standard Bearer Equity Plan to shareholders for cash of $6.5 million.

We did not grant any stock options nor restricted shares during the three and six months ended June 30, 2022.

Coronavirus Update — We are continuing to closely monitor the impact of the global COVID-19 pandemic on our business.

In July 2022, the public health emergency (PHE) was extended through October 13, 2022.

Our primary focus continues to be 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.

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.

During the second quarter of 2022, our combined Same Facilities and Transitioning Facilities occupancy increased by 2.6% compared to second quarter of 2021 and 0.9% compared to the first quarter of 2022.

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.

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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.

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.

During the three and six months ended June 30, 2022, we received an additional $27.3 million and $44.7 million in state relief funding, respectively, and recognized $24.5 million and $42.1 million as revenue, respectively.

During the three and six months ended June 30, 2021, we received an additional $16.8 million and $32.4 million in state relief funding and recognized $16.7 million and $33.2 million, respectively, as revenue.

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.

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 paid by December 31, 2021 and the remaining 50% payable 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 was paid out in the fourth quarter of 2021 and the remaining liabilities will be paid in the fourth quarter of 2022.

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 follow October 29, 2021.

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.

Common Stock Repurchase Program — On February 9, 2022, the Board of Directors approved a stock repurchase program pursuant to which we could repurchase up to $20.0 million of our common stock under the program for a period of approximately 12 months from February 10, 2022.

During the three months ended June 30, 2022, we repurchased 0.3 million shares of our common stock for $20.0 million.

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

On July 28, 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 beginning August 2, 2022.

Facility Information

The following table sets forth the location of our operated and owned facilities by type as well as the number of beds and units located at operated and owned facilities as of March 31, 2022:

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 June 30, 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 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.

During the six months ended June 30, 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, Standard Bearer acquired the real estate of two of the stand-alone skilled nursing operations, which were leased back to Ensign affiliated entities.

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

These new operations added a total of 453 operational skilled nursing beds and 633 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.

Subsequent to June 30, 2022, we expanded our operations through a combination of long-term leases and real estate purchases, with the addition of seven stand-alone skilled nursing operations and one campus operation.

Of these additions, Standard Bearer acquired the real estate of three of these operations, which were leased back to Ensign affiliated entities.

These new operations added 1,100 operational skilled nursing beds and 61 operational senior living units to be operated by our affiliated operating subsidiaries.

In addition, we purchased the real estate of three skilled nursing properties which our affiliated operating subsidiaries already operated, further expanding our real estate portfolio.

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 .

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We manage the fiscal aspects of our business by monitoring key performance indicators that affect our financial performance.

Revenue associated with these metrics is generated based on contractually agreed-upon amounts or rate, excluding the estimates of variable consideration under the revenue recognition standard, ASC 606.

These indicators and their definitions include the following:

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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 March 31,

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

2022 2021 2022 2021

Days 31.1 % 30.9 % 32.4 % 32.6 %

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

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

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

This sometimes occurs due to the permanent dedication of bed space to alternative purposes, such as enhanced therapy treatment space or other desirable uses calculated to improve service offerings and/or operational efficiencies in a facility.

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

Three Months Ended March 31,

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

Occupancy for skilled services:

2022 2021 2022 2021

Operational beds at end of period 25,549 24,486 25,549 24,486

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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,

Three Months Ended June 30,

Skilled Services Other Service Revenue Total Service Revenue

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TOTAL SERVICE REVENUE $ 702,478 $ 612,882 $ 25,869 $ 21,727 $ 728,347 $ 634,609

Three Months Ended March 31,

Three Months Ended June 30,

Skilled Services Other Service Revenue Total Service Revenue

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

Six Months Ended June 30,

Skilled Services Other Total Service Revenue

2022 2021 2022 2021 2022 2021

$ 549,414 $ 475,412 $ 11,062 $ 7,401 $ 560,476 $ 482,813

Medicare 398,905 360,311 — — 398,905 360,311

Medicaid-skilled 95,712 82,733 — — 95,712 82,733

Subtotal 1,044,031 918,456 11,062 7,401 1,055,093 925,857

Managed care 256,373 221,308 — — 256,373 221,308

Private and other (2)

88,845 74,154 37,192 36,566 126,037 110,720

TOTAL SERVICE REVENUE $ 1,389,249 $ 1,213,918 $ 48,254 $ 43,967 $ 1,437,503 $ 1,257,885

Six Months Ended June 30,

Skilled Services Other Total Service Revenue

2022 2021 2022 2021 2022 2021

39.5 % 39.2 % 22.9 % 16.8 % 39.0 % 38.4 %

Medicare 28.7 29.7 — — 27.7 28.6

Medicaid-skilled 6.9 6.8 — — 6.7 6.6

Subtotal 75.1 75.7 22.9 16.8 73.4 73.6

Managed care 18.5 18.2 — — 17.8 17.6

Private and other (2)

6.4 6.1 77.1 83.2 8.8 8.8

TOTAL SERVICE REVENUE 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %

(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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We are participating in supplemental payment programs in various states that provide supplemental Medicaid payments for skilled nursing facilities that are licensed to non-state government-owned entities such as city and county hospital districts.

Several of our operating subsidiaries entered into transactions with several such hospital districts providing for the transfer of the licenses for those skilled nursing facilities to the hospital districts.

Numerous operating subsidiaries entered into transactions with various hospital districts providing for the transfer of the licenses for those skilled nursing facilities to the hospital districts.

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

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

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

As of June 30, 2022, our real estate portfolio within Standard Bearer is comprised of 95 real estate properties.

Of these properties, 67 are leased to affiliated skilled nursing facilities wholly-owned and managed by us and 29 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 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.

Of the 29 real estate operations leased to Pennant, one senior living operation is located on the same real estate property as a skilled nursing facility that we own and operate.

During the three and six months ended June 30, 2022, we generated rental revenues of $17.6 million and $34.8 million, respectively, of which $13.9 million and $27.3 million, respectively, 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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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 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.

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

Such laws include the Anti-Kickback Statute (AKS), 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 the skilled nursing facilities (SNFs), 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.

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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 PHE (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 PHE, CMS ended several Emergency Waivers effective May 10, 2021.

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 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;

(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 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 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.

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), and Recovery Audit Contractors (RAC).

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 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'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:

HHS also waived requirements specific to SNFs 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).

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

In addition, in March of 2020, CMS also downgraded the priority for scheduled program audits and contract-level Risk Adjustment Data Validation audits for Medicare Advantage organizations, Part D sponsors, Medicare-Medicaid Plans, and Programs of All-Inclusive Care for the Elderly organizations.

Reducing the priority of those standard or scheduled audit activities allows providers, CMS and other organizations to focus on patient care, including directing audit activities toward infection control.

CMS stated that this reprioritization of its audit activities would be time-limited and it would announce when normal activities would resume after the end of the PHE.

Beginning on May 7, 2021, CMS started to end certain Emergency Waivers related to the COVID-19 pandemic, beginning with waivers regarding data reporting and resident grouping, transfer, and discharge.

On April 7, 2022, CMS announced the expiration of additional Emergency Waivers in place for SNF and LTC facilities, with other Emergency Waivers for other residential facilities other than hospitals and critical access hospitals, that expired on June 6, 2022.

The first group of seven (7) Emergency Waivers that expired on May 7, 2022 were:

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

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(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;

(5) reducing LTC facilities’ requirements to develop, implement and maintain a Quality Assurance and Performance Improvement (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:

The Emergency Waivers that expired on June 6, 2022 were:

(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;

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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.

Select Emergency Waivers, including the three-day inpatient hospital qualifying stay, remain in effect.

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

There may be additional or other Emergency Waivers that will be terminated or allowed to expire, though;

this expiration may occur quickly and with little public notice.

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, as CMS has not announced the expiration of additional Emergency Waivers since its April 7, 2022 memorandum.

Examples of the Emergency Waivers still in effect as of July 1, 2022 include, but are not limited to the following:

(1) approving temporary transfer, discharge, and cohorting of patients to ensure that facilities can separate COVID-19 negative patients from those that are positive for or have been exposed to the virus;

(2) allowing SNFs to provide a skill-in-place program for Medicare beneficiaries who are residents of the SNFs that meet the skill-in-place criteria, foregoing the usual three-day qualifying hospital stay;

(3) 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 (4) temporarily waiving certain documentation and reporting requirements regarding patient admission, transfer, and discharge (e.g., Patients Over Paperwork).

Some 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 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.

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.

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 on March 10, 2022) that broadens visitation and provides guidance on visitation procedures.

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 LTC facilities.

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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.

Both CMS’s interim final rule (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 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.

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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 CMS's testing mandates, some states have imposed additional 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.

These vaccine mandates are largely aligned with the Omnibus COVID-19 Health Care Staff Vaccination IFR.

California 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;

Reporting requirements — Effective May 8, 2020, CMS published an IFR requiring SNFs 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.

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

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

This resident/family/representative notification is required to take place by 5:00 p.m.

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

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

On June 1, 2020 (and 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.

In February of 2022, CMS updated this tool to refocus its attention toward the traditional survey process while preventing the spread of COVID-19 variants, considering the IFR, and amending prior guidance to reflect patients and residents’ rights to receive visitors.

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

Medicare presently accounts for approximately 28.7% of our skilled nursing services revenue year-to-date, being our second-largest payor.

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

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

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

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

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

Finally, PDPM adjusts the skilled nursing facilities per diem payments to reflect varying costs throughout the stay, through the physician therapy, occupational therapy and non-therapy ancillary services components.

Finally, PDPM adjusts the SNFs' per diem payments to reflect varying costs throughout the stay, through the physician therapy, occupational therapy and non-therapy ancillary services components.

In addition, PDPM is intended to reduce paperwork requirements for performing patient assessments.

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

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

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.

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The Improving Medicare Post-Acute Care Transformation Act of 2014 (IMPACT Act) imposed new data reporting requirements for certain Post-Acute-Care (PAC) providers.

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

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

The IMPACT Act requires that each SNF submit their quality measures data.

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

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

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they will only apply for the fiscal year involved.

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.

A SNF'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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Specifically, the rule adopts a number of standardized patient assessment data elements.

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.

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

The additional data elements adopted in the 2020 SNF PPS Rule were retained through the 2022 SNF PPS Rule, although the collection and reporting of this data to CMS is delayed for at least two full fiscal years after the end of the PHE.

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

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

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

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

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

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.

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

In July of 2022, CMS announced revisions to calculating its five-star ratings for the Nursing Home Compare website.

Under this new calculation, points are assigned to a SNF based on its performance across six measures:

(1) case-mix adjusted total nurse staffing levels (including registered nurses, licensed practical nurses, and nursing aides), measured by hours per resident per day;

(2) case-mix adjusted registered nurse staffing levels, measured by hours per resident per day;

(3) case-mix adjusted total nurse staffing levels (including registered nurses, licensed practical nurses, and nursing aides), measured by hours per resident day on the weekend;

(4) total nurse turnover, defined as the percentage of nursing staff that left the nursing home over a 12-month period;

(5) registered nurse turnover, defined as the percentage of registered nursing staff that left the nursing home over a 12-month period;

and (6) administrator turnover, defined as the percentage of administrators that left the nursing home over a 12-month period.

These six measures will be measured on a quarterly basis.

Staff measurements are scored based on the points assigned to these six measures.

For case-mix adjusted total nurse staffing and case-mix adjusted registered nurse staffing, each measure is scored on a 100-point scale in 10-point increments.

For case-mix adjusted total nurse staffing on weekends, total nurse turnover, and total registered nurse turnover, each measure is scored on a 50-point scale in five-point increments.

The measure of administrator turnover is measured on a 30-point scale, with points assigned based on the number of administrator departures during the measurement period.

The result of these staffing measures will affect a SNF’s total five-star score reported on the Nursing Home Compare website.

These changes are in addition to those previously announced in the January 2022 and April 2022 revisions, and began with the July 2022 refresh of the Nursing Home Compare website.

On July 29, 2022, CMS announced the adoption of a process measure for influenza vaccination coverage among healthcare personnel within SNFs.

This measure will be determined by the percentage of SNF healthcare personnel who receive an influence vaccine any time from when it first became available through March 31 of the following year.

SNFs will begin submitting this data to CMS through the CDC National Healthcare Safety Network beginning on October 1, 2022 through March 31, 2023.

Additionally, CMS revised certain SNF data reporting requirements, including the transfer of health information measures and certain patient assessment data elements, including ethnicity, preferred language, health literacy, and social isolation, until October 1, 2023.

Medicare Annual Payment Rule

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

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

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

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

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

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

On July 29, 2021, CMS issued a final rule for fiscal year 2022 that updates the Medicare payment rates and the quality programs for skilled nursing facilities.

On July 29, 2021, CMS issued a final rule for fiscal year 2022 that updates the Medicare payment rates and the quality programs for SNFs.

Under the final rule, effective October 1, 2021, the aggregate net market basket rate increased by 1.2% for fiscal year 2022, compared to fiscal year 2021.

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 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.

On July 29, 2022, CMS issued a final rule for fiscal year 2023 that updates the Medicare payment rates to aggregate net market basket increased by 2.7%.

The increase is resulted from the 5.1% update to the payment rates, which is based on a 3.9% market basket increase plus a 1.5% point market basket error adjustment and less a 0.3% point productivity adjustment as well as a negative 2.3% as a result of the recalibrated parity adjustment.

The recalibrated parity adjustment is being phased in over two years.

Sequestration of Medicare Rates

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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.

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

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

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

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

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

Effective October 1, 2018, CMS began withholding 2.0% to fund the SNF-VBP 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.

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

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

Effective October 1, 2018, CMS began withholding 2.0% to fund the SNF-VBP Program incentive payment pool and will redistribute 60% of the withheld payments back to SNFs 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 SNFs during fiscal year 2020.

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

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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.

Following studies by CMS, proposed rules that may affect the SNF-VBP Program are expected by early 2023, with final rules to follow after a notice-and-comment period.

On July 29, 2022 final rule, CMS released the final rule electing to not apply the SNF 30-Day All-Cause Readmission Measure (SNFRM) as part of performance scoring for fiscal year 2023.

CMS will still publicly report the SNFRM, but it will not affect SNF payment.

The final rule for the fiscal year 2023 SNF PPS also provided for SNF-VBP program expansion beyond the use of its single, all-cause hospital readmission measure to determine payment, with the inclusion of measures in fiscal year 2026 for SNF healthcare associated infections requiring hospitalization (SNF HAI) and total nursing hours per resident day measures, and in fiscal year 2027 the discharge to community -post acute care measure for SNFs, which assesses the right of successful discharges to community from a SNF setting.

Part B Rehabilitation Requirements

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

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

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

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

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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.

The KX Modifier threshold is set at $2,150 for CY 2022 with the same threshold for OT services.

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

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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.

This conversion factor rate does not include the 2% sequester which was suspended until April 1, 2022 and then was 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.

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

Thereafter, FFS Medicare payments were 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.

On July 7, 2022, CMS issued a proposed rule for the calendar year 2023 PFS that would result in calendar year 2022’s 3% increase in physician fee schedule payments expiring for calendar year 2023.

As a result, the proposed calendar year 2023 PFS conversion factor is $33.08, a decrease of $1.53 from the calendar year 2022 PFS conversion factor of $34.6062.

A final rule setting the calendar year 2023 physician fee schedule is expected in the second half of 2022.

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

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

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.

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.

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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.

The PHE Waivers allow therapists to bill Telehealth therapy services up to the latter of, the end of calendar year 2023 or the end of the PHE.

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 were provided by a physician from an alternate location, effective March 6, 2020 and ending on May 7, 2022.

This Emergency Waiver for telehealth services was included within the Emergency Waivers CMS announced it was terminating within 30 days from April 7, 2022.

Our Facilities have thus ceased using these telemedicine Emergency Waivers upon their termination.

On July 7, 2022, CMS proposed the calendar year 2023 Physician Fee Schedule to include a 4.4% negative adjustment to the conversion fact or in addition to the 1% negative base rate for an aggregate negative adjustment of 5.4%.

Programs of All-Inclusive Care for the Elderly

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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

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

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

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

Decisions Regarding Skilled Nursing Facility Payment

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

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

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

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

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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.

On June 29, 2022, CMS announced updated guidance for Phase 2 and 3 of the Requirements of Participation.

These updates concern nursing home resident health and safety.

CMS distributed these updates to surveyors and state agencies in order to enhance responses to resident complaints and reported incidents.

This updated guidance arises directly from President Biden’s March 2022 State of the Union Address and accompanying fact sheet regarding nursing home areas of study and potential change.

The guidance focuses on the following topics:

(1) resident abuse and neglect (including reporting of abuse);

(2) admission, transfer, and discharge;

(3) mental health and substance abuse disorders;

(4) nurse staffing and reporting of payrolls to evaluate staffing sufficiency;

(5) residents’ rights (including visitation);

(6) potential inaccurate diagnoses or assessments;

(7) prescription and use of pharmaceuticals;

(8) infection control and prevention;

(9) arbitration of disputes between facilities and residents;

(10) psychosocial outcomes and their severity;

and (11) the timeliness and completion of state investigations to improve consistency in standards among various states.

On July 29, 2022, CMS updated the Medicare Requirements of Participation for LTC facilities, which includes the physical environment requirements to allow facilities to avoid unnecessary renovation expenses that could cause the closure of LTC facilities due to their expense;

specifically, CMS is grandfathering certain facilities and will allow LTC facilities that were participating in Medicare before July 5, 2016 and that previously used the Fire Safety Evaluation System (FSES) to continue using the 2001 FSES mandatory values when determining compliance with applicable standards.

In addition, CMS updated the Requirements of Participation to include revising existing qualification requirements for directors of food and nutrition services in LTC facilities, grandfathering directors with two or more years of experience and certain minimum training in food safety so that they may continue in that role without obtaining specific educational and certification requirements.

Civil and Criminal Fraud and Abuse Laws and Enforcement

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

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

The FCA clarifies that if an item or service is provided in violation of the AKS, 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 thousand to $23 thousand per violation and are adjusted annually for inflation.

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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.

Proposed rules based on these directives and studies are expected by early 2023, 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.

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

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

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

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

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.

These investigatory actions by OIG demonstrate its increased scrutiny into post-hospital SNF 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 SNFs, 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.

The OIG recognizes that there is a strong financial incentive for facilities to bill for higher levels of therapies, even when not needed by patients.

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Federal Healthcare Reform

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

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

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

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.

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

Five-Star Quality Reporting Metrics - 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 changed the way Medicare-participating providers are paid by implementing the Quality Payment Program (QPP).

QPP created new paths for payment based on the Merit-based Incentive Payment System (MIPS) or the use of Alternative Payment Models (APM), which relied on quality data CMS gathered and evaluated using the Five-Star Quality Rating system, which includes a rating of one to five in various categories.

These categories include (but are not limited to) the results of surveys conducted by state inspectors, other health inspection outcomes, staffing, spending, readmissions, and stay durations;

the data collected and its weighting in determining a rating on a scale of one to five stars is subject to periodic and ongoing revision, re-balancing, and adjustment by CMS to reflect market conditions and CMS’s priorities in patient care.

Since 2020, CMS’s measurement of the data reported by providers, including SNFs, has become more competitive and resulted in a reduction of four- and five-star rankings available under CMS’s Five-Star Quality Rating system.

Beginning in January 2020, CMS began displaying the ratings under this Five-Star Quality reporting system for nursing homes on its consumer-based Nursing Home Compare website.

CMS also displays a consumer alert icon next to nursing homes that have 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 2020, in response to the COVID-19 pandemic, CMS temporarily froze SNF Quality Reporting Program data, including data in the staffing and health inspection domains, on the Nursing Home Compare website to account for the then-suspended reporting and inspection obligations.

After suspending inspections in early 2020, CMS announced a new and targeted inspection plan in August 2020 to focus on urgent patient safety threats and infection control, which affected the number of nursing homes inspected and the substance of those inspections.

These safety inspections collected different information than traditional surveys, and as a result these survey results were not incorporated in CMS’s Five-Star Quality ratings for SNFs from March through December 2020.

CMS resumed calculating nursing homes’ s health inspection ratings on January 27, 2021 and has continued to include this measure in subsequent updates.

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’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’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.

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.

Senate and is intended to update federal nursing home policy to improve quality of care and oversight.

The proposed legislation reduces SNF payments by two percentage points beginning in fiscal year 2025 for inaccurate submission of certain data, provides federal funding of $50 million to carry out data validation tasks for SNF data and provides federal funding of $250 million to ensure accuracy of information on cost reports.

The Nursing Home Improvement Act also proposes to establish nurse staffing requirements, including the requirement for the use of a 24-hour registered professional nurse and other provisions intended to increase transparency and accuracy of reported data regarding nursing activities, improve accountability and enhance quality of care.

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

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

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.

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

The January 2021 Five-Star Quality rating calculation reflected SNF-provided quarterly updates of most quality measures for the period between June 2019 and June 2020, reflecting the time period in which the normal reporting and inspection obligations were frozen due to COVID-19.

CMS’s refreshes of the Nursing Home Compare website since January of 2021 have included these quality measures, and other new measures as discussed within this Government Regulation heading.

In January of 2022, CMS issued a bulletin stating that as of the same month, the Nursing Home Compare website would begin reporting SNF weekend staffing as well as staff tenure and other collected staffing data .

Beginning in July of 2022, CMS began disclosing weekend staffing of all nurses, as well as staff turnover data for all nurses and administrators, on the Nursing Home Compare website.

CMS also now incorporates this data into its Five-Star Quality ratings for SNFs and LTC facilities.

This data is adjusted based on a facility's case mixture and evaluated on a quarterly basis.

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

Senate and was intended to update federal nursing home policy to improve quality of care and oversight.

The proposed legislation would reduce SNF payments for inaccurate submission of certain data and provide federal funding to carry out SNF data validation and ensure accuracy of cost report information.

The Nursing Home Improvement Act also proposed staffing requirements for SNFs and other measures intended to improve transparency, accountability, and quality of care within nursing homes.

If passed in its current form the bill would provide participating states with funds for up to six years in order to fund demonstrated improvements in nursing home workforce and care delivery.

As of July 29, 2022, 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.

A similar bill introduced in the United States House of Representatives in January of 2021, Bill No.

H.R.598, was introduced and referred to the Ways and Means Committee’s Healthcare Subcommittee on February 2, 2021.

As of July 29, 2022, no further action has been taken on this bill.

Proposed and Anticipated Administrative Action - 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’s priorities, which are to be studied throughout 2022, include transparency and public disclosure for nursing home owners and operators, and an examination of the role of private equity investment, real estate investment trusts (REITs) and other investment interests in this sector.

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.

Additional enforcement authority and resources, including enhanced scrutiny of poorly performing facilities and tools for improving their performance, is another Administration priority.

The Administration also seeks to improve accessibility to nurse aide training, tie Medicaid payments to staff wages and benefits, and 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.

On April 11, 2022, CMS issued a proposed rule that could potentially lead to changes in the SNF-VBP Program, and setting SNF and LTC facility staffing levels.

On June 29, 2022, CMS published guidance to surveyors for consistently evaluating Phase 2 and 3 Requirements of Participation for LTC facilities, addressing topics including infection control, resident safety, arbitration of disputes, nurse staffing, and mental health disorders.

Monitoring Compliance in Our Facilities

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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.

These notices may require corrective action, may impose civil monetary penalties for noncompliance, and may threaten or impose other operating restrictions on SNFs 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.

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;

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

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This information is also provided to the general public.

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

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

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CMS is taking steps to focus more survey and enforcement efforts on facilities with findings of substandard care or repeat violations of Medicaid and Medicare standards, and to identify multi-facility providers with patterns of noncompliance.

In addition, HHS has adopted a rule that requires CMS to charge user fees to healthcare facilities cited during regular certification, recertification or substantiated complaint surveys for deficiencies, which require a revisit to assure that corrections have been made.

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.

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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.

On April 11, 2022, the CMS issued a proposed rule that requested information to be used for study and potential rulemaking.

Regulations Regarding Financial Arrangements

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.

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

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

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

In order to receive safe harbor protection, all of the requirements of a safe harbor must be met.

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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 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.

Violations of the AKS can result in criminal penalties of up to $112 thousand and ten years imprisonment.

Violations of the AKS can also result in civil monetary penalties of up to $112 thousand per violation and an assessment of up to three times the total amount of remuneration offered, paid, solicited, or received.

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

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

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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, including denial of access to medical records, imposing significant fines for violations largely initiated from patient complaints.

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

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

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

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

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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.

Proposed rules based on these directives are expected by early 2023, 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.

On June 29, 2022, CMS published guidance to surveyors for consistently evaluating Phase 2 and 3 Requirements of Participation for LTC facilities, as detailed under the Requirements of Participation heading, addressing topics including infection control, resident safety, arbitration of disputes, nurse staffing and mental health disorders.

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

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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.

Despite the emergence of COVID-19 variants in the first quarter of 2022, we continue to experience healthy growth in both revenue and operational earnings.

Our net revenue for the three months ended June 30, 2022 continues 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 SNF coverage without having to start a new benefit period for certain beneficiaries who recently exhausted their SNF benefits, remained in effect in the first half 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.

For the three and six months ended June 30, 2022, we recorded state relief revenue of $24.5 million and $42.1 million, respectively, which directly offset against COVID-19 related expenses we incurred in those states.

See Recent Activities for further information.

Our total revenue for the quarter increased $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.

Our total revenue for the quarter increased $94.0 million, or 14.7% while our diluted GAAP earning per share grew by 16.1%, from $0.87 to $1.01, compared to the second 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.

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Revenue from our skilled services collectively increased by 14.6%.

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

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

We have refocused on operational fundamentals including identifying non-clinical areas where we can manage spending.

These fundamentals coupled with the increase in occupancy and expansion to our operations resulted in a strong second 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 March 31,

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

2022 2021 2022 2021

Service revenue 99.4 % 99.4 % 99.4 % 99.4 %

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Net income attributable to The Ensign Group, Inc.

Three Months Ended March 31,

7.9 % 7.7 % 7.5 % 7.8 %

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

2022 2021 2022 2021

SEGMENT INCOME (1)

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Skilled services $ 102,266 $ 90,010 $ 200,522 $ 178,941

Real estate (2)

Standard Bearer (2)

$ 6,838 $ 7,906 $ 13,738 $ 15,619

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$ 12,054 $ 12,154 $ 23,975 $ 24,022

Valuation Metric

VALUATION METRICS

Adjusted EBITDAR $ 133,324 $ 261,815

(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.

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.

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

Included in segment income for Standard Bearer for the three and six months ended June 30, 2022 are expenses for intercompany management fees 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.

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• legal finding;

• acquisition related costs;

• costs incurred related to new systems implementation;

• acquisition related costs, costs incurred related to new systems implementation and other costs;

• results related to operations not at full capacity;

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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 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.

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 the sale 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 March 31,

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

2022 2021 2022 2021

Condensed consolidated statements of income data:

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Provision for income taxes

15,154 13,758 31,292 26,707

Depreciation and amortization 14,858 13,795 29,534 27,454

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Results related to operations not at full capacity — — — 584

Acquisition related costs(b) 106 36

Costs incurred related to new systems implementation 65 —

Acquisition related costs, new systems implementation costs and other costs(b)

69 399 240 435

Rent related to items above — — — 38

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

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

Results of Operations

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

(b) Costs incurred to acquire operations and system implementation costs that are not capitalizable.

Other costs includes legal, transactional and other costs

incurred related to the formation of Standard Bearer and other real estate related activities.

Three Months Ended June 30, 2022 Compared to the Three Months Ended June 30, 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 March 31, 2022

Three Months Ended June 30, 2022

Skilled services Standard Bearer All Other Eliminations Consolidated

Total Revenue

702,478 17,598 30,619 (18,209) $ 732,486

Total expenses, including other expense, net 600,212 10,760 69,233 (18,209) 661,996

Segment income (loss) 102,266 6,838 (38,614) — 70,490

Gain from sale of real estate

Income before provision for income taxes $ 72,957

Three Months Ended March 31, 2021

Three Months Ended June 30, 2021

Skilled services Standard Bearer All Other Eliminations Consolidated

Total Revenue

$ 612,882 $ 14,214 $ 25,245 $ (13,805) $ 638,536

Total expenses, including other expense, net 522,872 6,308 58,820 (13,805) 574,195

Segment income (loss) 90,010 7,906 (33,575) — 64,341

Loss from sale of real estate and impairment charges 440

Income before provision for income taxes $ 64,341

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, 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.

Our total revenue increased $94.0 million, or 14.7%, compared to the three months ended June 30, 2021.

The increase in revenue was primarily driven by an increase in 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, 2021 increased our consolidated revenue by $41.1 million during the three months ended June 30, 2022, when compared to the same period in 2021.

In addition, we recorded $24.5 million of state relief revenue in the second quarter of 2022 compared to $16.7 million in the same period in 2021, which directly correlated 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 March 31, 2022 and 2021:

Three Months Ended March 31,

The following table presents the skilled services revenue and key performance metrics by category during the three months ended June 30, 2022 and 2021:

Three Months Ended June 30,

2022 2021 Change % Change

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Skilled mix by nursing revenue 50.9 % 51.4 % (0.5) %

Three Months Ended March 31,

Three Months Ended June 30,

2022 2021 Change % Change

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Skilled mix by nursing revenue 52.6 % 52.9 % (0.3) %

Three Months Ended March 31,

Three Months Ended June 30,

2022 2021 Change % Change

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Skilled mix by nursing revenue 45.0 % 44.4 % 0.6 %

Three Months Ended March 31,

Three Months Ended June 30,

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 second quarter of 2022, we converted two skilled nursing facilities into campuses.

(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 $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 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.

Skilled services revenue increased $89.6 million, or 14.6%, compared to the three months ended June 30, 2021.

Of the $89.6 million increase, the primary changes were from increases in Medicaid revenue of $47.2 million, or 16.2%, managed care revenue of $15.6 million, or 13.8%, Medicare revenue of $20.5 million, or 12.0% and private revenue of $6.3 million or 16.0%.

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

Our consolidated occupancy increased by 2.5%.

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 revenue.

Revenue in our Same Facilities increased $39.6 million, or 7.7% due to increased occupancy and revenue per patient day.

Our diligent efforts to strengthen our partnership with various managed care organizations, hospitals and the local communities we operate in, increased our occupancy by 1.8% to 75.8%.

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

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.

Managed care and Medicare skilled days increased by 4.1% and 4.0%, respectively, resulting in an increase in Managed Care and Medicare revenue .

Revenue generated by our Transitioning Facilities increased $14.4 million , or 17.9% , primarily due to improved occupancy growth of 6.4% to 74.4% and an increase in total patient days and skilled mix days compared to the three months ended June 30, 2021, demonstrating our ability to transition these healthcare operations toward higher acuity patients.

This resulted in managed care days increasing by 26.0%, and Medicare days increasing by 8.9%.

Skilled services revenue generated by facilities purchased on or subsequent to January 1, 2021 (Recently Acquired Facilities) increased by approximately $35.6 million compared to the three months ended June 30, 2021 .

We acquired nine operations between July 1, 2021 and June 30, 2022 across four 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 March 31,

Three Months Ended June 30,

Same Facility Transitioning Acquisitions Total

2022 2021 2022 2021 2022 2021 2022 2021

Skilled Nursing Average Daily

Revenue Rates:

SKILLED NURSING AVERAGE DAILY REVENUE RATES:

Medicare $ 689.53 $ 685.30 $ 678.08 $ 670.99 $ 698.18 $ 717.04 $ 688.61 $ 684.33

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Total skilled nursing revenue

(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 0.6% and 1.2%, respectively, compared to the three months ended March 31, 2021.

$ 368.82 $ 355.86 $ 332.09 $ 314.18 $ 334.34 $ 329.34 $ 360.65 $ 349.00

(1) These rates exclude additional Federal Medical Assistance Percentage (FMAP) and include sequestration reversal of 1% in 2022 and 2% in 2021.

Our Medicare daily rates at Same Facilities and Transitioning Facilities increased by 0.6% and 1.1%, respectively, compared to the three months ended June 30, 2021.

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

This was offset by the sequestration reversal of 1% compared to 2% in 2021.

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

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

Three Months Ended March 31,

Three Months Ended June 30,

Same Facility Transitioning Acquisitions Total

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TOTAL SKILLED NURSING

Three Months Ended March 31,

100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %

Three Months Ended June 30,

Same Facility Transitioning Acquisitions Total

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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):

Three Months Ended March 31, Change

Three Months Ended June 30, Change

2022 2021 $ %

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Revenue percentage 77.5 % 77.0 % 0.5 %

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%.

Cost of services related to our Skilled services segment increased $72.5 million, or 15.4%, primarily due to additional costs related to new acquisitions, which accounted for $27.7 million of the increase to cost of services with additional increases due to higher staffing expenses, primarily agency.

Cost of services as a percentage of revenue increased to 77.5% from 77.0%.

Standard Bearer

Three Months Ended March 31, Change

Three Months Ended June 30, Change

2022 2021 $ %

(In thousands)

(Dollars in thousands)

Rental revenue generated from third-party tenants $ 3,704 $ 3,430 $ 274 8.0 %

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TOTAL RENTAL REVENUE

$ 17,598 $ 14,214 $ 3,384 23.8 %

Segment income 6,838 7,906 (1,068) (13.5)

Depreciation and amortization 5,216 4,248 968 22.8

FFO $ 11,921 $ 11,868 $ 53 0.4 %

$ 12,054 $ 12,154 $ (100) (0.8) %

Rental revenue.

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.

Our rental revenue, including revenue generated from our affiliated facilities, increased by $3.4 million, or 23.8%, to $17.6 million, compared to the three months ended June 30, 2021.

The increase in revenue is primarily attributable to seven real estate purchases as well as annual rent increases since the three months ended June 30, 2021.

Our FFO decreased $0.1 million, or 0.8% to $12.1 million, compared to the three months ended June 30, 2021.

The increase in rental revenue of $3.4 million is offset by interest expense of $1.9 million as well as management fee expense of $1.1 million associated with the intercompany agreements between Standard Bearer and the Service Center that started 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 the Revolving Credit Facility, and an intercompany management agreement with the formation of Standard Bearer in January of 2022.

The additional offsets to rental revenue include increases in interest expense related to new mortgage loans held by HUD, property taxes and other expenses related to the formation of Standard Bearer.

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.

Our other revenue increase by $5.4 million, or 21.3%, to $30.6 million, compared to the three months ended June 30, 2021.

Other revenue for 2022 includes senior living revenue of $17.3 million and revenue from other ancillary services of $11.5 million and rental income of $1.8 million.

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

The increase in other revenue is attributable to our senior living acquisitions as our senior living occupancy rate rebounds from the COVID-19 decreases.

Consolidated Financial Expenses

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Depreciation and amortization — Depreciation and amortization expense increased $1.1 million, or 7.7%, to $14.9 million.

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

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

Depreciation and amortization decreased 0.2%, to 2.0%, as a percentage of revenue.

Other expense, net — Other expense, net as a percentage of revenue increased by 0.6% to 0.7%.

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.

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

During the three months ended June 30, 2022, we recorded a loss on those investments of $3.3 million compared to a gain of $0.8 million during the three months ended June 30, 2021.

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

Provision for income taxes — Our effective tax rate was 20.8% for the three months ended June 30, 2022, compared to 21.4% 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 including non-deductible compensation.

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

Six Months Ended June 30, 2022 Compared to the Six Months Ended June 30, 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:

Six Months Ended June 30, 2022

Skilled services Standard Bearer All Other Eliminations Consolidated

Total revenue $ 1,389,249 $ 34,791 $ 57,949 $ (36,058) $ 1,445,931

Total expenses, including other expense, net 1,188,727 21,053 135,493 (36,058) 1,309,215

Segment income (loss) 200,522 13,738 (77,544) — 136,716

Gain from sale of real estate 2,467

Income before provision for income taxes $ 139,183

Six Months Ended June 30, 2021

Skilled services Standard Bearer All Other Eliminations Consolidated

Total revenue $ 1,213,918 $ 28,283 $ 50,974 $ (27,386) $ 1,265,789

Total expenses, including other expense, net 1,034,977 12,664 118,847 (27,386) 1,139,102

Segment income (loss) 178,941 15,619 (67,873) — 126,687

Loss from sale of real estate and impairment charges 440

Income before provision for income taxes $ 127,127

Our total revenue increased $180.1 million, or 14.2%, compared to the six months ended June 30, 2021.

The increase in revenue was primarily driven by an increase in 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, 2021 increased our consolidated revenue by $82.8 million during the six months ended June 30, 2022, when compared to the same period in 2021.

In addition, we recorded $42.1 million of state relief revenue during the six months ended in 2022 compared to $33.2 million in 2021, which directly correlated 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 six months ended June 30, 2022 and 2021:

Six Months Ended June 30,

2022 2021 Change % Change

TOTAL FACILITY RESULTS:

(Dollars in thousands)

Skilled services revenue $ 1,389,249 1,213,918 $ 175,331 14.4 %

Number of facilities at period end 215 206 9 4.4 %

Number of campuses at period end* 25 25 — — %

Actual patient days 3,440,991 3,109,307 331,684 10.7 %

Occupancy percentage — Operational beds 74.7 % 71.9 % 2.8 %

Skilled mix by nursing days 32.4 % 32.6 % (0.2) %

Skilled mix by nursing revenue 52.6 % 53.5 % (0.9) %

Six Months Ended June 30,

2022 2021 Change % Change

SAME FACILITY RESULTS:

(Dollars in thousands)

Skilled services revenue $ 1,096,733 $ 1,022,580 $ 74,153 7.3 %

Number of facilities at period end 167 167 — — %

Number of campuses at period end* 20 20 — — %

Actual patient days 2,669,934 2,584,029 85,905 3.3 %

Occupancy percentage — Operational beds 75.4 % 73.1 % 2.3 %

Skilled mix by nursing days 33.9 % 33.7 % 0.2 %

Skilled mix by nursing revenue 54.1 % 54.6 % (0.5) %

Six Months Ended June 30,

2022 2021 Change % Change

TRANSITIONING FACILITY RESULTS:

(Dollars in thousands)

Skilled services revenue $ 186,677 $ 160,887 $ 25,790 16.0 %

Number of facilities at period end 27 27 — — %

Number of campuses at period end* 5 5 — — %

Actual patient days 488,679 445,552 43,127 9.7 %

Occupancy percentage — Operational beds 73.5 % 67.2 % 6.3 %

Skilled mix by nursing days 27.8 % 26.8 % 1.0 %

Skilled mix by nursing revenue 47.7 % 47.1 % 0.6 %

Six Months Ended June 30,

2022 2021 Change % Change

RECENTLY ACQUIRED FACILITY RESULTS:

(Dollars in thousands)

Skilled services revenue $ 105,839 $ 30,451 $ 75,388 NM

Number of facilities at period end 21 12 9 NM

Number of campuses at period end* — — — NM

Actual patient days 282,378 79,726 202,652 NM

Occupancy percentage — Operational beds 70.2 % 64.4 % NM

Skilled mix by nursing days 26.2 % 26.7 % NM

Skilled mix by nursing revenue 45.7 % 49.1 % 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 2022, we converted three skilled nursing facilities into campuses.

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

(2) Transitioning Facility results represent all facilities purchased from January 1, 2019 to December 31, 2020.

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

S killed services revenue increased $175.3 million, or 14.4%, compared to the six months ended June 30, 2021.

Of the $175.3 million increase, the primary changes were from increases in M edicaid custodial revenue of $74.0 million, or 15.6%, managed care revenue of $35.0 million, or 15.8% and Medicare revenue of $38.6 million, or 10.7%.

The increase in revenue was primarily driven by our consolidated occupancy increasing by 2.8%, which includes operations acquired at lower occupancy, compared to the same period in the prior year.

As COVID-19 cases declined from the same period in the previous year, there was a shift in Medicare patients to LTC patients.

However, strong skilled mix days were maintained due to increase in managed care and other skilled days.

Revenue in our Same Facilities increased $74.2 million, or 7.3% due to increased occupancy and increase in skilled mix days.

Our diligent efforts to strengthen our partnership with various managed care organizations, hospitals, and the local communities we operate in, increased our occupancy by 2.3% to 75.4%.

Managed care skilled days increased by 6.8%, resulting in an increase in managed care revenue.

Revenue generated by our Transitioning Facilities increased $25.8 million, or 16.0%, primarily due to improved occupancy growth of 6.3% to 73.5% and an increase in our total patient days and skilled mix days compared to the six months ended June 30, 2021, demonstrating our ability to transition these healthcare operations toward higher acuity patients.

M anaged care and Medicare days increased by 22.0% and 7.0%, respectively, resulting in an increase in managed care and Medicare revenue.

Skilled services revenue generated by facilities purchased on or subsequent to January 1, 2021 (Recently Acquired Facilities) increased by approximately $75.4 million compared to the six months ended June 30, 2021.

We acquired nine operations between July 1, 2021 and June 30, 2022 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) :

Six Months Ended June 30,

Same Facility Transitioning Acquisitions Total

2022 2021 2022 2021 2022 2021 2022 2021

SKILLED NURSING AVERAGE DAILY REVENUE RATES

Medicare $ 691.85 $ 687.54 $ 687.25 $ 679.73 $ 690.41 $ 755.33 $ 691.10 $ 688.12

Managed care 511.59 505.69 473.98 459.08 509.64 523.55 506.90 500.60

Other skilled 579.17 540.72 462.30 403.54 490.07 541.48 561.53 531.74

Total skilled revenue 597.07 588.07 577.72 569.60 587.31 647.77 594.06 587.15

Medicaid 260.73 250.79 246.75 234.03 246.33 243.36 257.26 247.95

Private and other payors 252.02 239.22 231.51 235.10 254.79 263.40 249.02 238.98

Total skilled nursing revenue

$ 373.74 $ 363.44 $ 337.13 $ 324.03 $ 336.18 $ 352.74 $ 365.45 $ 357.51

(1) These rates exclude additional Federal Medical Assistance Percentage (FMAP) and include sequestration reversal of 1% for the second quarter in 2022 and 2% for the first quarter of 2022 and the six months ended June 30, 2021.

Our Medicare daily rates at Same Facilities and Transitioning Facilities increased by 0.6% and 1.1%, respectively, compared to the six months ended June 30, 2021.

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

Medicare daily rates in 2022 includes three months of sequestration reversal of 1% and three months of sequestration of reversal of 2% compared to six months of sequestration reversal of 2% in 2021.

Our average Medicaid rates increased 3.8% due to state reimbursement increases and our participation in supplemental Medicaid payment programs and quality improvement programs in various states.

Medicaid rates exclude the amount of 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:

Six Months Ended June 30,

Same Facility Transitioning Acquisitions Total

2022 2021 2022 2021 2022 2021 2022 2021

PERCENTAGE OF SKILLED NURSING REVENUE

Medicare 25.9 % 26.9 % 27.9 % 29.4 % 24.5 % 29.4 % 26.1 % 27.3 %

Managed care 19.7 19.4 16.2 14.7 11.7 7.4 18.6 18.5

Other skilled 8.5 8.3 3.6 3.0 9.5 12.3 7.9 7.7

Skilled mix 54.1 54.6 47.7 47.1 45.7 49.1 52.6 53.5

Private and other payors 6.9 6.5 7.6 7.5 6.0 4.6 7.0 6.5

Medicaid 39.0 38.9 44.7 45.4 48.3 46.3 40.4 40.0

TOTAL SKILLED NURSING 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %

Six Months Ended June 30,

Same Facility Transitioning Acquisitions Total

2022 2021 2022 2021 2022 2021 2022 2021

PERCENTAGE OF SKILLED NURSING DAYS

Medicare 14.0 % 14.2 % 13.7 % 14.0 % 11.9 % 13.7 % 13.8 % 14.2 %

Managed care 14.4 13.9 11.5 10.4 7.7 5.0 13.4 13.2

Other skilled 5.5 5.6 2.6 2.4 6.6 8.0 5.2 5.2

Skilled mix 33.9 33.7 27.8 26.8 26.2 26.7 32.4 32.6

Private and other payors 10.2 9.9 11.1 10.4 7.9 6.1 10.2 9.8

Medicaid 55.9 56.4 61.1 62.8 65.9 67.2 57.4 57.6

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):

Six Months Ended June 30, Change

2022 2021 $ %

Cost of service $ 1,078,925 $ 935,177 $ 143,748 15.4 %

Revenue percentage 77.7 % 77.0 % 0.7 %

Cost of services related to our skilled services segment increased by $143.7 million, or 15.4%, due primarily to additional costs at new acquisitions, which accounted for $59.6 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 77.7% from 77.0%.

Standard Bearer

Six Months Ended June 30, Change

2022 2021 $ %

(Dollars in thousands)

Rental revenue generated from third-party tenants $ 7,472 6,908 $ 564 8.2 %

Rental revenue generated from Ensign affiliated operations 27,319 21,375 5,944 27.8

TOTAL RENTAL REVENUE $ 34,791 $ 28,283 $ 6,508 23.0 %

Segment income 13,738 15,619 (1,881) (12.0)

Depreciation and amortization 10,237 8,403 1,834 21.8

FFO $ 23,975 $ 24,022 $ (47) (0.2) %

Rental revenue.

Our rental revenue, including revenue generated from our affiliated facilities, increased by $6.5 million, or 23.0% to $34.8 million, compared to the six months ended June 30, 2021.

The increase in revenue is primarily attributable to seven real estate purchases as well as annual rent increases since the six months ended June 30, 2021.

Our FFO remained consistent at $24.0 million, for both the six months ended June 30, 2022 and 2021.

The increase in rental revenue of $6.5 million is offset by interest expense of $3.8 million as well as management fee expense of $2.1 million associated with the intercompany agreements between Standard Bearer and the Service Center starting in January of 2022.

As noted in Item 2., Recent Activities , the Company, the real estate properties and Standard Bearer entered into intercompany debt arrangements, including mortgage loans and the Revolving Credit Facility, and an intercompany management agreement with the formation of Standard Bearer in January of 2022.

The additional offsets to rental revenue include increases in interest expense related to new mortgage loans held by HUD, and other expenses related to the formation of Standard Bearer.

All Other Revenue

Our other revenue increased by $7.0 million, or 13.7% to $57.9 million, compared to the six months ended June 30, 2021.

Other revenue for 2022 includes senior living revenue of $30.9 million and revenue from other ancillary services of $23.3 million and rental income of $3.7 million.

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

Consolidated Financial Expenses

Rent — cost of services.

Our rent — cost of services as a percentage of total revenue decreased by 0.4% to 5.0%, primarily due to the growth in revenue outpacing the increase in rent expense.

General and administrative expense.

General and administrative expense increased $5.6 million or 7.9%, to $76.8 million.

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 decreased by 0.1% to 5.4%.

Depreciation and amortization .

Depreciation and amortization expense increased $2.1 million, or 7.6%, to $29.5 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 2.0%, as a percentage of revenue.

Other expense, net.

Other expense, net as a percentage of revenue increased by 0.3%, to 0.5%.

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

During the six months ended June 30, 2022, we recorded a loss on those investments of $4.5 million compared to a gain of $1.1 million during the six months ended June 30, 2021.

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

Provision for income taxes.

Our effective tax rate was 22.5% for the six months ended June 30, 2022, compared to 21.0% 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.

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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 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 $15.8 million and $15.3 million for the three months ended March 31, 2022 and 2021, respectively.

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

Our liquidity as of June 30, 2022 is impacted by cash generated from strong operational performance and increased acquisition and share repurchase activities.

Historically, we have primarily financed the majority of our acquisitions through mortgages on our properties, our Revolving Credit Facility and cash generated from operations.

Total capital expenditures for property and equipment were $37.1 million and $33.8 million for the six months ended June 30, 2022 and 2021, respectively.

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

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

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

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

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

Our cash and cash equivalents as of June 30, 2022 consisted of bank term deposits, money market funds and U.S.

Treasury bill related investments.

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.

In addition, as of June 30, 2022, we held debt security investments of approximately $49.1 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 June 30, 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 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.

We currently anticipate that existing cash and total investments as of June 30, 2022, along with projected operating cash flows and available financing, will support our normal business operations for the foreseeable future.

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.

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

During the three months ended June 30, 2022, we repurchased approximately 0.3 million shares of our common stock for $20.0 million.

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

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:

Three Months Ended March 31,

Six Months Ended June 30,

NET CASH PROVIDED BY/(USED IN):

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Financing activities (29,838) (105,686)

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

Net increase/(decrease) in cash and cash equivalents 23,379 (38,151)

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 $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.

The $21.4 million increase in cash provided by operating activities for the six months ended June 30, 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 timing of collections of accounts receivable and payments 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 $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.

The $35.7 million increase in cash used in investing activities for the six months ended June 30, 2022 compared to the same period in 2021, was primarily due to an increase in cash used for expansions and capital expenditures of $41.6 million offset by cash proceeds from the sale of assets of $6.8 million.

Financing Activities

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.

The $75.8 million decrease in cash used in financing activities for the six months ended June 30, 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 $29.9 million of share repurchases as part of our stock repurchase program in 2022.

Additionally, we received proceeds of $6.7 million from the sale of preferred shares and common stock of Standard Bearer offset by payment of deferred financing fees of $3.2 million associated with the entry into the Amended Credit Agreement in April 2022.

Credit Facility with a Lending Consortium Arranged by Truist

We maintain the Credit Facility with a lending consortium arranged by Truist, which includes a revolving line of credit of up to $350.0 million in aggregate principal amount.

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

The interest rates applicable to loans under the Credit Facility are, at the Company's option, equal to either a base rate plus a margin ranging from 0.50% to 1.50% per annum or LIBOR plus a margin range from 1.50% to 2.50% per annum, based on the Consolidated Total Net Debt to Consolidated EBITDA ratio (as defined in the agreement).

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.

On April 8, 2022, we entered into the Amended Credit Agreement, which increased the amount of the revolving line of credit thereunder to $600.0 million in aggregate principal amount.

The maturity date of the Revolving 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

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.

As of June 30, 2022, 23 of our subsidiaries have mortgage loans insured with HUD for an aggregate amount of $155.1 million, which subjects these subsidiaries to HUD oversight and periodic inspections.

The mortgage loans bear effective interest rates at a range of 3.1% to 4.2%, including fixed interest rates at a range of 2.4% to 3.3% per annum.

Amounts borrowed under the mortgage loans may be prepaid, subject to prepayment fees of the principal balance on the date of prepayment.

For the majority of the loans, the prepayment fee is 10% during the first three years and is reduced by 3% in the fourth year of the loan, and reduced by 1% per year for years five through ten of the loan.

For the majority of the loans, the prepayment fee is 10% during the first three years and is reduced by 3% in the fourth year of the loan, and is reduced by 1% per year for years five through ten of the loan.

There is no prepayment penalty after year ten.

The term of the mortgage loans are 25 to 35 years.

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.

In addition to the HUD mortgage loans above, we have two promissory notes.

The notes bear fixed interest rates of 6.3% and 5.3% per annum and the term of the notes are 10 months and 12 years, respectively.

The 12 year note, which was used for an acquisition, is secured by the real property comprising the facility and the rent, issues and profits thereof, as well as all personal property used in the operation of the facility.

Operating Leases

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.

As of June 30, 2022, 180 of our facilities are under long-term lease arrangements, of which 96 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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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 Pronouncements

Except for rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws and a limited number of grandfathered standards, the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) is the sole source of authoritative GAAP literature recognized by the FASB and applicable to us.

Except for rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws and a limited number of grandfathered standards, the FASB ASC is the sole source of authoritative GAAP literature recognized by the FASB and applicable to us.

For any new pronouncements announced, we consider whether the new pronouncements could alter previous generally accepted accounting principles and determines whether any new or modified principles will have a material impact on our reported financial position or operations in the near term.

The applicability of any standard is subject to the formal review of our financial management and certain standards are under consideration.

Recent Accounting Standards Adopted by the Company

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

Recent Accounting Standards Adopted by the Company - 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) .

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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

In February 2020, the FASB issued ASU 2020-04 "Reference Rate Reform (Topic 848)" which provides temporary, optional practical expedients and exceptions to enable a smoother transition to reference rates which are expected to replace LIBOR reference rates.

Accounting Standards Recently Issued but Not Yet Adopted by the Company — In February 2020, the FASB issued ASU 2020-04 "Reference Rate Reform (Topic 848)" which provides temporary, optional practical expedients and exceptions to enable a smoother transition to reference rates which are expected to replace LIBOR reference rates.

Adoption of the provisions of ASU 2020-04 is optional.

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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.

On April 8, 2022, we entered into 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.

Pursuant to the Amended Credit Agreement, we transitioned from LIBOR to SOFR as the applicable reference rate for borrowings under the Revolving Credit Facility.

As part of the transition from LIBOR to SOFR reference rates, we determined there was no material impact on our condensed consolidated financial statements.

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