What changed in this filing

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Item 1A. Risk Factors

2022-10-26 compared with 2022-08-01 · 101 added, 58 removed, 755 unchanged (17% of the section changed)

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Risks Related to our Business and Industry

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

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

• Changes to reimbursement rates and rules and other aspects of Medicare and Medicaid could have a material, adverse effect on our revenues, financial condition and results of operations, including the reductions to reimbursement proposed in the 2023 calendar year physician fee schedule and changes to data reporting and measurement standards.

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• Reforms to the U.S.

healthcare system, including the ACA, continue to impose new requirements upon us and may increase our costs or lower our reimbursements, which could materially impact our business.

healthcare system, including the ACA and its expansion under new laws such as the IRA and future legislation, continue to impose new requirements upon us and may increase our costs or lower our reimbursements, which could materially impact our business.

• Changes to the U.S.

healthcare system, including the Medicare program, may have unforeseen consequences for our business, including, but not limited to a loss of revenue, reduction of services covered by Medicare, limits on out-of-pocket expenses we may charge and other spending cuts that affect us in order to offset limitations on patient expenses for other medical services, such as the limitation on out-of-pocket expenses for prescription drugs.

• The recent U.S.

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

Presidential and Congressional elections and upcoming midterm elections in 2022, may result in significant changes to the regulatory framework, enforcements, and reimbursements.

• Changes to the ACA and related uncertainty could have material impacts on our business.

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

• Failure to comply with applicable laws and regulations, including state-specific mandates or proclamations regarding COVID-19, or if these laws and regulations change, could cause us to incur significant expenses and/or change our operations in order to bring our facilities and operations into compliance.

• Public and government calls for increased survey and enforcement efforts toward long-term care (LTC) facilities, potential rulemaking that may result in enhanced enforcement and penalties, and new guidance for surveyors regarding the review of LTC facilities and enforcement of their Requirements of Participation, could result in increased scrutiny by state and federal survey agencies.

• Public and government calls for increased survey and enforcement efforts toward LTC facilities, potential rulemaking that may result in enhanced enforcement and penalties, and new guidance for surveyors regarding the review of LTC facilities and enforcement of their Requirements of Participation, could result in increased scrutiny by state and federal survey agencies.

Potential sanctions and remedies based upon alleged regulatory deficiencies could negatively affect our financial condition and results of operations.

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• We may need additional capital to fund our operating subsidiaries and finance our growth, and we may not be able to obtain it on terms acceptable to us, or at all, which may limit our ability to grow.

• The condition of the financial markets, including recent and expected future increases to the federal funds rate, could limit the availability of debt and equity financing sources to fund the capital and liquidity requirements of our business, as well as negatively impact or impair the value of our current portfolio of cash, cash equivalents and investments.

• The condition of the financial markets, including recent and expected future increases to the federal funds rate and consumer price index, could limit the availability of debt and equity financing sources to fund the capital and liquidity requirements of our business, as well as negatively impact or impair the value of our current portfolio of cash, cash equivalents and investments.

• Delays in reimbursement may cause liquidity problems.

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The extent to which the COVID-19 PHE will continue impacting our operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, ongoing federal and state vaccination programs and requirements, additional or modified government actions, the severity of various variants, efficacy of vaccinations and the ongoing actions to contain the virus or treat its impact, among others.

Effective on July 15, 2022, HHS's PHE was extended through at least October 13, 2022.

HHS has reported it will provide at least sixty (60) days' advance notice prior to the end of the PHE.

Effective on October 13, 2022, HHS's PHE was extended through at least January 11, 2023.

HHS has reported it will provide at least sixty (60) days' advance notice prior to the end of the PHE, but has not yet provided any notice whether it would further renew the PHE on January 11, 2023, or allow the PHE to expire at that time.

Some of the risks of COVID-19 are being mitigated as a result of the federal vaccination program, including vaccinations and vaccine booster injections of nursing facility staff and residents, but there remains uncertainty as to when the PHE will end and what changes will be made to HHS’s emergency response to reflect the evolving and endemic nature of COVID-19, analogous to seasonal spikes in influenza cases.

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

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Other factors from the continuation of the COVID-19 pandemic that could have an adverse effect on our business, financial condition, liquidity, results of operations and prospects, include:

• potential for increased government regulations and restrictions to combat COVID-19;

• potential for permanent government regulations and restrictions to combat COVID-19;

• increased strain on employees and resources caused by different waves of COVID-19 variants with different infection and effects, affecting employee availability and capacity to work;

• significantly reduced occupancy as a result of concerns of residents and their families related to COVID-19 transmissibility within LTC settings, as well as due to government-imposed orders;

• increased costs and staffing requirements related to additional CDC protocols, federal and state workforce protection and related isolation procedures, including obligations to test patients and staff for COVID-19 vaccination mandates;

• reduced occupancy as a result of concerns of residents and their families related to COVID-19 transmissibility within LTC settings, as well as due to government-imposed orders;

• increased costs related to additional and changing CDC protocols, federal and state workforce protection and related isolation procedures, including obligations to test patients and staff for COVID-19 vaccination mandates;

• limitations on availability of staff due to COVID-19 related illness or exposure, or due to unwillingness to comply with vaccine mandates;

• disruptions to supply chains which could negatively impact consistent and reliable delivery of personal protective equipment, sanitizing supplies, food, pharmaceuticals, utilities and other goods to our affiliated facilities, resulting in our inability to obtain on reasonable terms, or at all, personal protective equipment, sanitizing supplies, food, pharmaceuticals, utilities and other goods;

• incurrence of additional expenditures to comply with COVID-19 isolation procedures, including temporary construction or purchase of additional equipment;

• increased scrutiny by regulators of infection control and prevention measures, including increased reporting requirements related to suspected and confirmed COVID-19 diagnoses of residents and staff, which may result in fines or other sanctions related to non-compliance;

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

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

• regulations that require all of our workers to be fully vaccinated, including receiving vaccination boosters, against COVID-19 as a condition of participating in the Medicare and Medicaid programs.

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

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

We derived 26.2% and 27.7% of our service revenue from the Medicare programs for the three and six months ended June 30, 2022, respectively, and 26.8% and 28.6% for the three and six months ended June 30, 2021, respectively.

We derived 27.6% and 27.7% of our service revenue from the Medicare programs for the three and nine months ended September 30, 2022, respectively, and 26.6% and 27.9% for the three and nine months ended September 30, 2021, respectively.

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

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

Medicare may rescind our certification and terminate its payor agreements if not all of our employees are fully vaccinated consistent with CMS's interim final rule (IFR) requiring vaccination of SNF employees, which the United States Supreme Court has allowed enforcement of as of January 13, 2022.

As of January 20, 2022, CMS’s IFR requiring vaccination of SNF employees took effect in the State of Texas, with SNF staff required to be fully vaccinated or to have exemptions granted by March 21, 2022.

There has been no further activity regarding this IFR since January of 2022 when CMS became empowered to enact and enforce it nationwide.

Failure to comply with the CMS IFR in all states by their applicable deadlines stated by CMS may result in fines and other sanctions imposed by CMS.

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

In fact, Medicaid is our largest source of revenue, accounting for 47.2% and 45.7% of our revenue for the three and six months ended June 30, 2022, respectively, and 46.3% and 45.0% for the three and six months ended June 30, 2021, respectively.

In fact, Medicaid is our largest source of revenue, accounting for 46.1% and 45.8% of our revenue for the three and nine months ended September 30, 2022, respectively, and 47.0% and 45.7% for the three and nine months ended September 30, 2021, respectively.

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

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Under provider tax arrangements, states collect taxes from healthcare providers and then use the revenue to pay the providers as a Medicaid expenditure, which allows the states to then claim additional federal matching funds on the additional reimbursements.

Current federal law provides for a cap on the maximum allowable provider tax as a percentage of the provider's total revenue.

Current federal law provides for a cap on the maximum allowable provider tax as a percentage of the providers' total revenue.

There can be no assurance that federal law will continue to provide matching federal funds on state Medicaid expenditures funded through provider taxes, or that the current caps on provider taxes will not be reduced.

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In addition, the Administration continues to study the nursing home industry and for HHS to issue proposed rules based on those studies, including changes to SNF-VBP Program, may also adversely affect our reimbursement.

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.

Based on surveyor guidance CMS issued on June 29, 2022, the Administration continues to act on the issues identified in its February 28, 2022 fact sheet and further regulation is expected regarding LTC and SNF reimbursement.

The Administration continues to act on the issues identified in its February 28, 2022 fact sheet and further regulation is expected regarding LTC and SNF reimbursement.

On July 29, 2022, CMS released the FY 2023 SNF PPS final rule, which elected to defer the SNF 30-Day All-Cause Readmission Measure (SNFRM) as part of performance scoring for fiscal year 2023, although the SNFRM will still be reported without affecting SNF payment.

This final rule also provided for the SNF-VBP program expansion beyond the use of its single, all-cause hospital readmission measure to determine payment, with the inclusion of measures beginning in fiscal year 2026 for SNF healthcare associated infections requiring hospitalization (SNF HAI) and total nursing hours per resident day measures.

Beginning in fiscal year 2027, the SNF-VBP program will also consider the discharge to community - post acute care measure for SNFs, which assesses the rate of successful discharges to the community from a SNF setting.

Reforms to the U.S.

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Courts continue to interpret and apply the ACA’s provisions.

With the passage of the IRA in August of 2022, Congress continues to expand and supplement the ACA, including through the continuation of federally funded insurance premium subsidies for health insurance coverage purchased on the ACA-created marketplace for individual health insurance.

This modification of the ACA by the IRA indicates that Congress may continue to change and expand the ACA in the future.

The efficacy of the ACA is the subject of much debate among members of Congress and the public.

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The results of recent U.S.

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

Presidential and Congressional elections and upcoming midterm elections in 2022 may result in significant changes to regulatory framework, enforcements and reimbursements.

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

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

Additionally, Congress’s passage of the IRA in August of 2022, which expanded upon and continued certain provisions of the ACA, indicates that additional legislative changes to the ACA may be forthcoming depending on the outcomes of the November 2022 mid-term elections.

Further, if proposed policies specific to nursing facilities are implemented, these may result in significant regulatory changes, increased survey frequency and scope, and increased penalties for non-compliance.

We continually monitor these developments in order to respond to the changing regulatory environment impacting our business.

While it is not possible to predict whether and when any such changes will occur, specific proposals discussed during and after the election, including a repeal or material amendment of the ACA, could harm our business, operating results and financial condition.

While it is not possible to predict whether and when any such changes will occur, specific proposals discussed during and after the election, including a repeal or material amendment of the ACA (whether to increase or decrease its scope), could harm our business, operating results and financial condition.

If we are slow or unable to adapt to any such changes, our business, operating results and financial condition could be adversely affected.

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Presidential and Congressional elections in the United States and the upcoming midterm elections of 2022 could result in significant changes to, and uncertainty with respect to, legislation, regulation, implementation or repeal of the ACA, and other federal health program policy that could significantly impact our business and the healthcare industry.

Congress’ passage of the IRA in August of 2022, which expanded upon and continued certain provisions of the ACA, indicates that additional legislative changes to the ACA may be forthcoming regardless of the outcome of the November 2022 mid-term elections.

In the event that legal challenges are successful or the ACA is repealed or materially amended, particularly any elements of the ACA that are beneficial to our business or that cause changes in the health insurance industry, including reimbursement and coverage by private, Medicare or Medicaid payers, our business, operating results and financial condition could be harmed.

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CMS’s new guidance could result in more aggressive and stringent surveys, and potential fines, penalties, sanctions, or administrative actions taken against our operating subsidiaries or affiliated facilities.

On September 22, 2022, CMS issued an IFR addressing nursing home visitation including the use of masks and face coverings in connection with visitations to combat the transmission of COVID-19 and testing of nursing home staff and residents regardless of COVID-19 vaccination status.

Private pay sources also reserve the right to conduct audits.

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

As of June 30, 2022 and since, 22 of our independent operating subsidiaries had reviews scheduled, on appeal, or in a dispute resolution process, either pre- or post-payment.

As of September 30, 2022 and since, 27 of our independent operating subsidiaries had reviews scheduled, on appeal, or in a dispute resolution process, either pre- or post-payment.

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

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This new guidance could result in enhanced scrutiny by state surveyors and a potential increase in fines, penalties, sanctions, or administrative actions against our independent operating subsidiaries or affiliated facilities.

We believe that such regulations may increase in the future and we cannot predict the ultimate content, timing or impact on us of any healthcare reform legislation.

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As CMS turns its attention to enhancing enforcement activities towards LTC facilities, as discussed in Item 2., under Government Regulation, state survey agencies will have more accountability for their survey and enforcement efforts.

The Administration’s fact sheet regarding enhanced penalties against SFFs, discussed in greater length within that section, represents further federal calls for oversight and penalties for low-ranked and underperforming LTC facilities.

This fact sheet precedes greater focus by CMS in obtaining oversight over SFFs, even after they improve, and subjecting them to more exacting and regular oversight.

The likely result may be more frequent surveys of our affiliated facilities, with more substantial penalties, fines and consequences if they do not perform well.

For low-performing facilities in the SFF program, the standards for successfully emerging from that program will be higher and measured over a longer period of time, prolonging the risks of monetary penalties, fines and potential suspension or exclusion from the Medicare and Medicaid programs.

As discussed in Item 2., under Government Regulation , from time to time in the ordinary course of business, we receive deficiency reports from state and federal regulatory bodies resulting from such inspections or surveys.

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There can be no assurance that third party payors will make timely payments for our services, or that we will continue to maintain our current payor or revenue mix.

Trade publications within the healthcare industry have reported on the trend of payors using the No Surprises Act as a means to force re-negotiation of reimbursement rates for providers and facilities, and this trend has led to ongoing litigation between these providers and/or facilities against payors.

Although the services provided in our business generally are outside the scope of the No Surprises Act, subsequent rulemaking and potentially aggressive behaviors by payors may pose a risk to our business.

We are continuing our efforts to develop our non-Medicare and non-Medicaid sources of revenue and any changes in payment levels from current or future third-party payors could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows.

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

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

There is additional upward pressure on wages from different industries and more generally due to the reported rate of inflation for the preceding 12 months.

Some of these industries compete with us for labor and others that do not, which makes it difficult to make significant hourly wage and salary increases due to the fixed nature of our reimbursement under insurance contracts as well as Medicare and Medicaid, in addition to our increasing variable costs.

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

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On June 29, 2022, CMS published guidance to surveyors addressing topics that specifically include nurse staffing and collection of payroll data to evaluate appropriate staffing levels.

On September 22, 2022, CMS issued an IFR addressing the use of masks and face coverings by staff and testing of nursing home staff and residents regardless of COVID-19 vaccination status.

These requirements may also increase our operating costs and require additional compensation to be paid to employees in the form of wages and benefits.

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These administrative mandates precede, may be more restrictive than and are not likely to be preempted by CMS's IFR.

As of July 14, 2022, Colorado’s Board of Health allowed its emergency rule requiring all healthcare workers be vaccinated against COVID-19 to expire, other than those working within Medicare and Medicaid-certified facilities.

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

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

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

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

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

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This may impact the SNF industry by motivating additional reviews and stricter compliance in the areas outlined in the recent reports, expending material time and resources.

Recent publications and statements by the Administration have also called for greater scrutiny of SNF and LTC facilities, and calling for more authorities to impose penalties and other remedies on facilities that violate federal laws and regulations.

Recent publications and statements by the Administration have also called for greater scrutiny of SNF and LTC facilities based on OIG's 2022 findings that these facilities did not implement appropriate infection control measures during the COVID-19 pandemic, and calling for more authorities to impose penalties and other remedies on facilities that violate federal laws and regulations.

Additionally, OIG reports published in 2010 and 2015 show the OIG’s concerns related to the billing practices of SNFs based on Medicare Part A claims and financial incentives for facilities to bill for higher levels of therapies, even when not needed by patients.

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In wrongful death cases, the cap increases from $250K to $500K on January 1, 2023, with incremental increases over the following 10 years until the cap reaches a maximum of $1M.

Due to the influence of California on other states, other jurisdictions where we operate may enact similar laws and increase their current limits on damages in medical malpractice litigation depending on the outcomes of upcoming elections.

Additionally, California’s adoption of AB 1502, discussed in Item 2., Government Regulation , imposes new requirements for obtaining licenses to operate SNFs.

These new requirements may delay the ability to obtain new SNF licenses within that state, whether through acquisition of existing facilities or opening a new facility.

The additional background research that California’s Department of Public Health is required to engage in may increase the costs of obtaining licensure, make applications more time-consuming and complex, and may result in civil penalties and other sanctions against our affiliated facilities in the event they are not compliant with these new licensure application requirements.

As a result, this new law may delay or impede growth within California.

As with AB 35, California’s influence on other states may result in this legislation becoming a model for other states and having similar, potentially adverse effects within those jurisdictions as well.

Changes to federal and state employment-related laws and regulations could increase our cost of doing business.

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

For both the three and six months ended June 30, 2022, 73.4% of our revenue was provided by government payors that reimburse us at predetermined rates.

For the three and nine months ended September 30, 2022, 73.7% and 73.5%, of our revenue was provided by government payors that reimburse us at predetermined rates, respectively.

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

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

Additionally, trade publications within the healthcare industry have reported on the recent trend of payors using the No Surprises Act as a means to force re-negotiation of reimbursement rates for providers and facilities.

This trend has led to ongoing litigation between these providers and/or facilities against payors and it may adversely affect us as well.

On November 5, 2021, CMS issued the IFR discussed under Item 2, Government Regulations , subheading Coronavirus requiring all eligible staff to be fully vaccinated against COVID-19.

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

On January 13, 2022, the United States Supreme Court entered an order allowing CMS’s enforcement of the IFR and its vaccination requirements by March 15, 2022 for our operating subsidiaries in Arizona, Idaho, Iowa, Kansas, Nebraska, South Carolina and Utah and by February 28, 2022 for all of our other operating subsidiaries except those in Texas.

Since January 20, 2022, CMS has been empowered to enforce the IFR in Texas and required compliance with its vaccination requirements by March 21, 2022.

The IFR and its enforcement by CMS may cause disruption to our affiliated facilities’ nursing staff and may further disrupt our operations if affected personnel decline to be vaccinated and replacement staff cannot be located.

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

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

CMS has been empowered to enforce the IFR nationwide and require compliance with its vaccination requirements by March 21, 2022.

In the event we or our affiliated facilities do not comply with the IFR, our Medicare and Medicaid agreements could be terminated and the termination of those agreements may lead to other payors terminating their agreements with us or our affiliated facilities and operating subsidiaries, which would materially and adversely affect our business, financial condition and results of operations.

In addition to the IFR, the Administration has requested HHS and CMS conduct studies about additional requirements pertaining to staffing, data reporting, employee compensation and retention, and resident experience that may result in a reduction of our revenue from Medicare and Medicaid.

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Plaintiffs' attorneys have become increasingly more aggressive in their pursuit of claims against healthcare providers, including skilled nursing providers, employing a wide variety of advertising and solicitation activities to generate more claims.

The increased caps on damages awarded in such actions, as discussed above, may trigger a larger number of these lawsuits against our independent operating subsidiaries in California and other states where we operate if they adopt similar legislation.

The defense of lawsuits has in the past, and may in the future, result in significant legal costs, regardless of the outcome.

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

CMS has identified these arbitration agreements as an area for further review and on June 29, 2022 issued guidance to state surveyors regarding arbitration agreements and their requirements under federal regulations.

If we are not able to secure pre-admission arbitration agreements, our litigation exposure and costs of defense in patient liability actions could increase, our liability insurance premiums could increase, and our business may be adversely affected.

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

During the six months ended June 30, 2022, we expanded our operations through a combination of long-term leases and real estate purchases, with the addition of four stand-alone skilled nursing operations.

During the nine months ended September 30, 2022, we expanded our operations through a combination of long-term leases and real estate purchases, with the addition of eleven stand-alone skilled nursing operations and one campus operation.

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.

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If we do not achieve or maintain competitive quality of care ratings from CMS or private organizations engaged in similar monitoring activities, our business may be negatively affected.

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

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

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

As discussed in Item 2., under Government Regulation, CMS, as well as certain private organizations engaged in similar monitoring activities, provides comparative public data, rating every SNF operating in each state based upon quality-of-care indicators.

CMS’s system is the Five-Star Quality Rating System, intended to compare nursing homes more easily.

The Five-Star Quality Rating System gives each nursing home a rating of between one and five stars in various categories, with five-star ratings harder to obtain over time.

The ratings are available on a consumer-facing website, Nursing Home Compare.

In cases of acquisitions, the previous operator's clinical ratings are included in our overall Five-Star Quality Rating.

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

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

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

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

This data is reflected on the Nursing Home Compare website based on the recalculation in January of 2022.

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

The Administration has indicated that it wishes to collect more data to be reported on the Nursing Home Compare website, and to make the reported data more readily accessible and understandable for consumers.

CMS guidance issued in June 2022 signaled extensive and scrutinizing enforcement of regulations by surveyor which may result in adverse findings that could reduce the Five Star Quality ratings of our facilities reported on the Nursing Home Compare website.

The enhanced collection and reporting of this data on the Nursing Home Compare website may lead to more scrutiny in the marketplace and may adversely affect our scoring depending on the data to be reported and the manner in which it is displayed on the Nursing Home Compare website.

For more information on these changes and proposed future alterations, see Item 2., under Government Regulation .

CMS continues to increase quality measure thresholds, making it more difficult to achieve upward ratings.

Based on CMS guidance issued in June of 2022, it is expected that more data will be collected by CMS and ultimately reported on the Nursing Home Compare website.

Similarly, due to CMS's June 2022 guidance, we expect CMS will seek to make the data reported on the Nursing Home Compare website more readily accessible and understandable for consumers.

CMS continues to increase quality measure thresholds, making it more difficult to achieve upward and five-star ratings.

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

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

As of June 30, 2022, we leased 180 of our 251 affiliated facilities.

As of September 30, 2022, we leased 182 of our 259 affiliated facilities.

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

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Our Amended Credit Agreement provides for a Revolving Credit Facility with borrowing capacity of up to $600.0 million in aggregate principal amount.

As of July 27, 2022, we have no outstanding borrowings under our Revolving Credit Facility.

As of October 24, 2022, we have no outstanding borrowings under our Revolving Credit Facility.

Twenty-three of our subsidiaries have mortgage loans insured with Department of Housing and Urban Development (HUD) for an aggregate amount of $154.3 million, which subjects these subsidiaries to HUD oversight and periodic inspections.

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

We also have two outstanding promissory notes with an aggregate principal amount of approximately $3.2 million as of June 30, 2022.

We also have two outstanding promissory notes with an aggregate principal amount of approximately $3.0 million as of September 30, 2022.

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

Because this mortgage loan is insured with HUD, our borrower subsidiary under the loan is subject to HUD oversight and periodic inspections.

In addition, we had $2.0 billion of future operating lease obligations as of June 30, 2022.

In addition, we had $2.1 billion of future operating lease obligations as of September 30, 2022.

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

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treasury securities.

As a result of the uncertain domestic and global political, credit and financial market conditions, including an increase in the Consumer Price Index of seven percent in 2021, which has continued at a comparable rate for the first six months of 2022 and is expected to continue for the foreseeable future in 2022, investments in these types of financial instruments pose risks arising from liquidity and credit concerns.

As a result of the uncertain domestic and global political, credit and financial market conditions, including the recent significant increase in the federal funds rate, an increase in the Consumer Price Index of seven percent in 2021, which has continued at a comparable or greater rate for the first nine months of 2022 and is expected to continue for the foreseeable future in 2022, investments in these types of financial instruments pose risks arising from liquidity and credit concerns.

Given that future deterioration in the U.S.

10 unchanged sentences

Delays in reimbursement may cause liquidity problems.

If we experience problems with our billing information systems or if issues arise with Medicare, Medicaid or other payors, we may encounter delays in our payment cycle.

If we experience problems with our billing information systems or if issues arise with Medicare, Medicaid or other payors, including attempts by commercial health insurance companies to renegotiate rates by reducing or withholding payment, we may encounter delays in our payment cycle.

From time to time, we have experienced such delays as a result of government payors instituting planned reimbursement delays for budget balancing purposes or as a result of prepayment reviews.

82 unchanged sentences

Any delay or prevention of a change of control transaction or changes in our Board of Directors could cause the market price of our common stock to decline.

EXHIBIT INDEX

Exhibit Description

Fifth Amended and Restated Certificate of Incorporation of The Ensign Group, Inc., filed with the Delaware Secretary of State on November 15, 2007 (attached as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q (File No.

001-33757) filed with the SEC on December 21, 2007)

Certificate of Amendment to the Fifth Amended and Restated Certificate of Incorporation of The Ensign Group, Inc., filed with the Delaware Secretary of State on February 4, 2020 (attached as Exhibit 3.2 to the Company’s Annual Report on Form 10-K (File No.

001-33757) filed with the SEC on February 5, 2020)

Amendment to the Amended and Restated Bylaws, dated August 5, 2014 (attached as Exhibit 3.2 to the Company’s Current Report on Form 8-K (File No.

001-33757) filed with the SEC on August 8, 2014)

Amended and Restated Bylaws of The Ensign Group, Inc.

(attached as Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q (File No.

001-33757) filed with the SEC on December 21, 2007)

Second Amendment to Third Amended and Restated Credit Agreement, dated as of April 8, 2022, by and among The Ensign Group, Inc.

and Truist Bank, as administrative agent, and the lenders party thereto (attached as Exhibit 10.1 to the Company's Current Report on Form 10-Q (File No.

001-33757) filed with the SEC on April 12, 2022).

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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101.SCH Inline XBRL Taxonomy Extension Schema Document

101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document

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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

THE ENSIGN GROUP, INC.

October 26, 2022 BY:

/s/ SUZANNE D.

Chief Financial Officer, Executive Vice President and Director (Principal Financial Officer and Accounting Officer and Duly Authorized Officer)

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

What changed 10-Q

Item 1A. Risk Factors