What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-04-26 compared with 2022-10-26 · 384 added, 611 removed, 780 unchanged (56% of the section changed)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

The following discussion should be read in conjunction with the Interim Financial Statements and accompanying notes, which appear elsewhere in this Quarterly Report on Form 10-Q.

We urge you to carefully review and consider the various disclosures made by us in this Quarterly Report and in our other reports filed with the Securities and Exchange Commission (SEC), including our Annual Report on Form 10-K for the year ended December 31, 2022 (Annual Report), which discusses our business and related risks in greater detail, as well as subsequent reports we may file from time to time on Form 10-Q and Form 8-K, for additional information.

4 unchanged sentences

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

Additionally, our business and operations for 2022 continue to be impacted by the COVID-19 pandemic.

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

Additionally, our business and operations for 2023 continue to be impacted by changes of the COVID-19 environment.

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

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

6 unchanged sentences

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

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

We are a provider of health care services across the post-acute care continuum, 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.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our Interim Financial Statements included in this Quarterly Report.

We are a provider of health care services across the post-acute care continuum and engage 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 September 30, 2022, we offered skilled nursing, senior living and rehabilitative care services through 259 skilled nursing and senior living facilities.

Of the 259 facilities, we operated 182 facilities under long-term lease arrangements and have options to purchase 11.

Our real estate portfolio includes 106 owned real estate properties, which included 77 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.

As of March 31, 2023, we offered skilled nursing, senior living and rehabilitative care services through 290 skilled nursing and senior living facilities.

Of the 290 facilities, we operated 211 facilities under long-term lease arrangements and have options to purchase 11 of those facilities.

Our real estate portfolio includes 108 owned real estate properties, which included 79 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, and the Service Center location.

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 September 30, 2022:

The following table summarizes our affiliated facilities and operational skilled nursing beds and senior living units by ownership status as of March 31, 2023:

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

13 unchanged sentences

Recent Activities

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

or Standard Bearer, a captive REIT.

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

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

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

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

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

During the nine months ended September 30, 2022, we acquired the real estate of eight skilled nursing facilities, all of which were leased to certain of our operating subsidiaries through the Standard Bearer Master Leases for a purchase price of $65.6 million.

Of the eight, three were previously operated and managed by us.

The resulting real estate portfolio in Standard Bearer consists of a select 101 of our 106 owned real estate properties.

Of the 101 owned real estate properties in Standard Bearer, 73 facilities are operated by Ensign operating subsidiaries and 29 facilities are leased to and operated by Pennant.

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.

Subsequent to September 30, 2022, we expanded our real estate portfolio with the addition of one skilled nursing property with an estimated total purchase price of $8.0 million.

As of September 30, 2022, the fair value of Standard Bearer's real estate portfolio is approximately $1.1 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 73 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%.

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

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

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

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

(4) all facility maintenance and repair costs;

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

Total annual rental income under the Standard Bearer Master Lease is approximately $60.1 million.

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

Standard Bearer has no employees.

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

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

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

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

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

During the three and nine months ended September 30, 2022, the Service Center management fee was $1.1 million and $3.2 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 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 September 30, 2022, there is $44.8 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 $157.3 million, and are included in Standard Bearer.

In the second quarter of 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).

In the second quarter of 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 nine months ended September 30, 2022.

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 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 nine months ended September 30, 2022.

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

In October 2022, the public health emergency (PHE) was extended through January 11, 2023.

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.

Operational Update — On January 30, 2023, the Biden-Harris Administration announced its plan to extend the public health emergency (PHE) for a final time to May 11, 2023.

Our primary focus has always been and continues to be the health and safety of our patients, residents, employees and their respective families.

Even with the anticipated end of the PHE, we continue to implement new measures and maintain existing ones 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 third quarter of 2022, our combined Same Facilities and Transitioning Facilities occupancy increased by 2.9% compared to the third quarter of 2021 and 1.1% compared to the second 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.

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

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

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

During the three and nine months ended September 30, 2022, we received an additional $20.3 million and $65.0 million in state relief funding, respectively, and recognized $21.4 million and $63.5 million as revenue, respectively.

During the three and nine months ended September 30, 2021, we received $17.8 million and $50.3 million in state relief funding and recognized $19.2 million and $52.4 million, respectively, as revenue.

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.

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

Common Stock Repurchase Program — On July 28, 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 August 2, 2022.

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.

In the second quarter of 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.

We did not repurchase any shares during the third quarter of 2022.

Our combined Same Facilities and Transitioning Facilities occupancy is 78.5%, which represents a 4.3% increase compared to the prior year quarter, and is closer to our pre-pandemic occupancy levels, which was at 80.1% in March 2020.

The innovative approaches and strategic partnerships developed during the pandemic have supported our occupancy improvements and continue to enable us to gain additional market share.

These key initiatives together with our dedication to operational fundamentals resulted in a strong first quarter.

We receive state relief funding from various states, including healthcare relief funding under the American Rescue Plan Act (ARPA), increases in the Federal Medical Assistance Percentage (FMAP) under the Families First Coronavirus Response Act (FFCRA) and other state specific relief programs.

We use this funding to reimburse the recipient for healthcare and labor related expenses that are attributable to the COVID-19 pandemic or are associated with providing patient care.

The Consolidated Appropriations Act of 2023 (CAA 2023) and the end of the PHE will result in the gradual phase down of the temporary increase in FMAP funding.

During the three months ended March 31, 2023, the temporary increase to FMAP remained unchanged at 6.2%.

It is expected that the increase will decline to 5% in the second quarter, 2.5% in the third quarter and 1.5% in the fourth quarter.

Additionally, in some states, we will continue to receive state relief funding through the ARPA and other state relief programs through the end of 2023.

During the three months ended March 31, 2023 and 2022, we recognized $26.4 million and $17.6 million, respectively, of combined state relief funding as revenue.

Facility Information

The following table sets forth the location of our operated and owned facilities by type as well as the number of beds and units located at operated and owned facilities as of September 30, 2022:

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

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, 2023:

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

Number of operated facilities

15 unchanged sentences

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

During the nine months ended September 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 11 stand-alone skilled nursing operations.

Of these additions, Standard Bearer acquired the real estate of five of the stand-alone skilled nursing operations, which were leased back to Ensign affiliated entities.

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.

We also 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 1,553 operational skilled nursing beds and 674 operational senior living units to be operated by our affiliated operating subsidiaries.

Additionally, we invested in new ancillary services that are complementary to our existing businesses.

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

Of these additions, Standard Bearer acquired the real estate of one of these operations, which was leased back to an Ensign affiliated entity.

These new operations added 1,115 operational skilled nursing beds to be operated by our affiliated operating subsidiaries.

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 .

During the three months ended March 31, 2023, we expanded our operations through long-term leases, with the addition of 19 stand-alone skilled nursing operations.

These new operations added a total of 1,764 operational skilled nursing beds to be operated by our affiliated operating subsidiaries.

For further discussion of our expansions, see Note 8, Operation Expansions in the Notes to the Interim Financial Statements .

Key Performance Indicators

12 unchanged sentences

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

These rates exclude additional state relief funding, which includes payments we recognized as part of The Family First Coronavirus Response Act.

These rates exclude additional state relief funding, which includes payments we recognized as part of the ARPA, FFCRA and other state relief programs.

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

6 unchanged sentences

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

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

2022 2021 2022 2021

Three Months Ended March 31,

Days 32.3 % 33.7 %

7 unchanged sentences

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

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

Three Months Ended March 31,

Occupancy for skilled services:

2022 2021 2022 2021

Operational beds at end of period 29,915 25,513

3 unchanged sentences

We have two reportable segments:

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

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

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

2 unchanged sentences

Revenue Sources

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 September 30,

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

Three Months Ended March 31,

Skilled Services Other Service Revenue Total Service Revenue

8 unchanged sentences

TOTAL SERVICE REVENUE $ 850,923 $ 686,771 $ 30,995 $ 22,385 $ 881,918 $ 709,156

Three Months Ended September 30,

Three Months Ended March 31,

Skilled Services Other Service Revenue Total Service Revenue

8 unchanged sentences

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 and other COVID-19 related state funding.

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

Nine Months Ended September 30,

Skilled Services Other Total Service Revenue

2022 2021 2022 2021 2022 2021

$ 845,341 $ 738,484 $ 17,750 $ 11,337 $ 863,091 $ 749,821

Medicare 610,009 536,971 — — 610,009 536,971

Medicaid-skilled 146,355 128,041 — — 146,355 128,041

Subtotal 1,601,705 1,403,496 17,750 11,337 1,619,455 1,414,833

Managed care 389,036 336,225 — — 389,036 336,225

Private and other (2)

137,826 116,272 57,069 55,152 194,895 171,424

TOTAL SERVICE REVENUE $ 2,128,567 $ 1,855,993 $ 74,819 $ 66,489 $ 2,203,386 $ 1,922,482

Nine Months Ended September 30,

Skilled Services Other Total Service Revenue

2022 2021 2022 2021 2022 2021

39.7 % 39.8 % 23.7 % 17.1 % 39.2 % 39.0 %

Medicare 28.7 28.9 — — 27.7 27.9

Medicaid-skilled 6.8 6.9 — — 6.6 6.7

Subtotal 75.2 75.6 23.7 17.1 73.5 73.6

Managed care 18.3 18.1 — — 17.7 17.5

Private and other (2)

6.5 6.3 76.3 82.9 8.8 8.9

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 and other COVID-19 related state funding.

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

(1) Medicaid payor includes revenue for senior living operations and revenue related to state relief funding.

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

Skilled Services

5 unchanged sentences

Standard Bearer

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

As of September 30, 2022, our real estate portfolio within Standard Bearer is comprised of 101 real estate properties.

We generate rental revenue primarily by leasing post-acute care properties that 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, 2023, our real estate portfolio within Standard Bearer is comprised of 103 real estate properties.

Of these properties, 75 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 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 nine months ended September 30, 2022, we generated rental revenues of $18.7 million and $53.5 million, respectively, of which $15.0 million and $42.3 million, respectively, was derived from affiliated wholly-owned healthcare operators, and therefore eliminated in consolidation.

During the three months ended March 31, 2023, we generated rental revenues of $19.7 million, of which $15.9 million was derived from affiliated wholly-owned healthcare operators, and therefore eliminated in consolidation.

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

3 unchanged sentences

Critical Accounting Estimates

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

Our Interim Financial Statements included in this report have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S.

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

55 unchanged sentences

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

In an effort to promote efficient care delivery and to decrease the spread of COVID-19, federal, state and local regulators have implemented new regulations and waived (in some cases, temporarily) certain existing regulations, including those set forth below.

Proposed and Anticipated Rulemaking and Administrative Actions

The federal government, through CMS rulemaking, Presidential executive actions or Congressional legislation, and the state and local governments have recently released the following proposed rulemaking or administrative actions that may have an impact on our independent operating skilled nursing facilities (SNF) or long-term care (LTC) facilities:

Biden-Harris Administration's Nursing Home Care Priorities — On February 28, 2022, the Biden-Harris Administration issued a fact sheet regarding nursing home care priorities and reforms that it intends to seek in the coming year.

The Biden-Harris 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 2023, including those highlighted below, with final rules to follow a notice-and-comment period required by law.

Proposed Rule over Ownership Transparency — On February 13, 2023, CMS issued a proposed rule that, if finalized and implemented, would require SNFs to disclose certain information regarding their ownership and managerial relationships.

Consistent with the announcements by the Biden-Harris Administration in February 2022, CMS’s proposed rule sought to enact Section 6101 of the ACA and require SNF disclosure of information to CMS that includes the identity of any person or legal entity that:

(1) exercises financial, operational, or managerial control over any facility or part of a facility, or provides services to a facility that include its policies and procedures or cash management services;

(2) leases or subleases real property to the facility, or owns 5% or more of the real property’s total value;

and (3) provides any management or administrative services (or consults regarding the same), or provides accounting or financial services to the SNF.

Under the proposed rule, this information would be required upon initial enrollment (including a change of ownership) and during revalidation of Medicare participation.

This proposed rule also would require a SNF to disclose its organizational structure and identities of employees and up to corporate officers and directors, to Medicare and state Medicaid agencies.

Proposed Federal Legislation — On March 9, 2023, Rep.

Debbie Dingell introduced bill H.R.

1493, the HCBS Access Act, which seeks to expand access to and resources available for home and community based services (HCBS).

The purpose of this bill is to provide Medicaid funding to individuals who provide direct home- and community-based care to adults over the age of 60 or people who have disabilities.

In addition to providing Medicaid funding for their services, this bill also seeks to provide financial resources for the training of these direct care providers, who are intended to provide services to the elderly or disabled that range from advocacy and community integration to transportation and daily assistance tasks ranging from bathing and laundry to meal preparation and housekeeping.

This bill was introduced on March 9, 2023 and referred to the Committee on Energy and Commerce, Committee on Education and the Workforce, and Committee on Oversight and Accountability, that same day.

No further action has been taken on the HCBS Access Act since its introduction and referral to the aforementioned committees.

Proposed State Legislation — Many states in which our independent operating subsidiaries operate have introduced legislation that would create or change laws and regulations related to our business and industry.

For example, several states are considering legislation that would require skilled nursing facility expenses be maintained at a specified ratio of reimbursement from governmental programs, thereby limiting the facility’s profit or revenue.

We continually monitor these introduced bills and other legislative developments so we can respond to the changing regulatory environment impacting our business.

Proposed Fiscal Year 2024 Skilled Nursing Facility Prospective Payment System (SNF PPS) — On April 4, 2023, CMS issued its proposed rule for the fiscal year 2024 SNF PPS, which included proposed changes for Medicare payment rates, the SNF Quality Reporting Program (QRP) and the SNF Value-Based Purchasing (VBP) Program.

The proposed changes to the Medicare payment rates is an increase in the aggregate net market basket by 3.7%.

The increase includes a 6.1% update to the market basket, which is based on a 2.7% current year market basket increase plus a 3.6% market basket error adjustment, less a 0.2% productivity adjustment and a negative 2.3% adjustment as a result of the second phase of the recalibrated parity adjustment.

The proposed changes to the SNF QRP, which may be altered significantly if adopted in final rulemaking, include:

(1) beginning in fiscal year 2025, adopting the discharge function score measure, which assesses the SNF residents who meet or exceed an expected discharge function score;

(2) beginning in fiscal year 2026, adopting the “CoreQ” measure of short stay discharge to determine the percentage of residents discharged from a SNF within 100 days of admission and their satisfaction with the SNF’s performance during the patient’s residency;

(3) beginning in fiscal year 2026, tracking the percentage of patients and residents up-to-date with COVID-19 vaccinations recommended based on the CDC’s most recent guidelines;

and (4) beginning in fiscal year 2025, measuring the percentage of SNF healthcare personnel who are considered up-to-date with recommended COVID-19 vaccination requirements identified by the CDC’s most recent guidance.

Further, in fiscal year 2025, CMS proposes removing scoring of SNFs for change in self-care and change in mobility for medical rehabilitation patients.

CMS also proposes the public reporting of SNFs’ transfer of health information to both other providers and patients as a measure of calculating and reporting the skill of any SNF on CMS’s nursing home compare website.

The proposed changes to the SNF VBP Program seeks the adoption of four new quality measures which include (1) nursing staff turnover measure in fiscal years 2024 and 2026;

(2) the discharge function score measure in fiscal years 2025 and 2027, to determine the percentage of discharged SNF residents who meet or exceed expected discharge function scores;

adoption of the long stay hospitalization measure per 100 patients to evaluate the hospitalization rate of long-stay SNF residents;

(3) the percentage of residents experiencing falls to be reported in fiscal years 2025 and 2027;

and (4) replacing the SNF 30-day all-cause readmission measure with the skilled nursing facility within stay potentially reasonable readmissions in fiscal year 2025.

Biden-Harris Administration Executive Order — On April 18, 2023, President Biden signed an executive order seeking to increase access to affordable, high-quality long-term care for adults who are older or disabled.

This executive order articulated the Biden-Harris Administration’s policy to enable families to have access to affordable, high-quality care for older or disabled family members, and to support the workforce of individuals who would provide such care, including through adequate wages and the ability to unionize.

This executive order directed HHS and CMS to take steps to use existing funding and resources to connect home- and community-based workers with education and training opportunities and to create greater opportunities for workers in those fields to obtain health insurance and retirement benefits.

Consistent with the Biden-Harris Administration’s February 2022 guidance discussed above, this executive order stated its priorities for HHS and CMS to investigate resources and methods to provide greater resources and training to caregivers, including family caregivers, and for the Department of Labor to provide resources and guidance to aid in the development and protection of a caregiving-focused workforce.

Proposed CMS Minimum Staffing Mandate — Consistent with announcements by the Biden-Harris Administration in February 2022, CMS launched a nursing home staffing study focused on minimum level and staffing type required at nursing homes.

The proposed rule for the fiscal year 2023 SNF PPS released in April of 2022 contained a request for information that solicited public comments regarding SNF and LTC facility staffing requirements.

CMS received more than 3,000 comments in response to this request for information, which CMS evaluated along with other data in a mixed-methods study it conducted in August of 2022.

Certain organizations, including the American Health Care Association, have predicted that the mandatory minimum staffing mandate may be as high as 4.1 hours per patient day across nursing aides, licensed practical nurses and registered nurses involved in resident care.

The information CMS has gathered and studied since 2022 will serve as the basis for proposed minimum staffing requirements in SNFs beginning this spring.

CMS’s final rule, once issued, may vary significantly from the substance of the proposed rule.

Temporary suspension of certain patient coverage criteria and documentation and care requirements — The Coronavirus Aid, Relief and Economic Security Act of 2020 (the CARES Act) and a series of temporary waivers and guidance issued by CMS suspended various Medicare patient coverage criteria to ensure patients continue to have adequate access to care, notwithstanding the burdens placed on healthcare providers as related to the COVID-19 pandemic.

Many of these regulatory waivers were issued pursuant to Section 1135 of the Social Security Act, which authorizes the HHS Secretary to temporarily waive or modify Medicare and Medicaid requirements for affected health care providers and facilities following the declaration of a PHE (Section 1135 Waivers).

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.

HHS also waived requirements specific to SNFs.

While these waivers remained in effect during the quarter immediately ending before this report, all of these waivers are scheduled and expected to end with the PHE's expiration on May 11, 2023.

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

In addition, 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 normal activities began to occur in 2022.

The reprioritization of its audit activities were time-limited and normal activities resumed in 2022.

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 expiration of additional Emergency Waivers in place for SNF and LTC facilities, along with the expiration of other Emergency Waivers for other residential facilities other than hospitals and critical access hospitals occurred on June 6, 2022.

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

15 unchanged sentences

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

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

The Emergency Waivers that did not expire on June 6, 2022, 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.

CMS may terminate other Emergency Waivers affecting SNF and other LTC facilities in the future and these terminations may occur quickly and with little public notice.

Due to the prevalence of waves of COVID-19 variants, it is unclear when the remaining Emergency Waivers will expire.

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

and (9) the waiver of a 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.

Examples of the Emergency Waivers still in effect as of March 31, 2023 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;

and (3) 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.

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

and (3) temporarily waiving certain documentation and reporting requirements regarding patient admission, transfer and discharge.

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

On September 23, 2022, CMS updated its guidance regarding visitation to nursing homes, requiring the use of masks or face coverings when the county where the facility is located has a high rate of COVID-19 transmission, encouraged the use of masks or face coverings regardless of COVID-19 transmission status, but allowed residents and visitors to choose not to wear masks or face coverings when alone in the resident's room or in a dedicated visitation area.

This guidance also clarified CMS's guidance for isolation of known or suspected positive cases, exposure to positive cases and encouraged distancing during large group gatherings within the facility.

While the CMS guidance issued in March 2020 directed facilities to severely restrict visitation, CMS subsequently provided and updated guidance through the course of the pandemic that broadens visitation and provides guidance on visitation procedures.

On September 23, 2022, CMS updated its visitation guidance to recommend the use of masks or face coverings when the county where the facility is located has a high rate of COVID-19 transmission, encouraged the use of masks or face coverings regardless of COVID-19 transmission status and allowed residents and visitors to choose not to wear masks or face coverings when alone in the resident's room or in a dedicated visitation area.

This most recent CMS guidance also included updated advice related to isolation of known or suspected positive COVID-19 cases or those exposed to positive COVID-19 cases.

The guidance also encouraged distancing during large group gatherings within the facility.

Absent further rulemaking or superseding direction, this guidance regarding visitation and resident rights will expire and cease effect as of the PHE’s anticipated expiration on May 11, 2023.

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.

2 unchanged sentences

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

CMS's interim final rule (IFR) released on September 23, 2022 regarding COVID-19 testing stated that routine testing of staff for COVID-19 is no longer generally recommended without exposure to COVID-19.

Thereafter, CMS's interim final rule (IFR) regarding COVID-19 testing of staff, released on September 23, 2022 stated that routine testing of asymptomatic staff for COVID-19 is no longer generally recommended without exposure to COVID-19, but may be performed at the discretion of the LTC facility.

This guidance clarified that individuals who show symptoms of COVID-19, regardless of vaccination status, should be tested for COVID-19 as soon as possible.

Additionally, this IFR called for testing of residents and staff and investigation of an outbreak when there is a single positive COVID-19 case among residents or staff of the LTC facility.

Additionally, this IFR called for testing of residents and staff that came into close contact with a COVID-19 positive resident or staff, regardless of vaccination status, or test all resident and staff if close contact cannot be identified and investigation of an outbreak when there is a single positive COVID-19 case among residents or staff of the LTC facility.

Absent further rulemaking or superseding direction, this IFR will expire and cease effect as of the PHE’s anticipated expiration on May 11, 2023.

Federal and state COVID-19 vaccination requirements — As the Pfizer, Moderna, Johnson & Johnson and Novavax vaccines received FDA approval, CMS developed an IFR 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.

In addition, OSHA introduced 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.

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.

These vaccine mandates are largely aligned with CMS's requirements.

For example, California issued an order 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.

The order was expanded 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.

Both CMS’s IFR and OSHA’s emergency temporary standard (ETS) for vaccination were challenged in court and halted from enforcement in certain states, but the United States Supreme Court allowed CMS to enforce its vaccine mandate nationwide.

In addition to the IFR mandating vaccinations for health facility workers, several states where our independent operating facilities are located had issued vaccine mandates that largely aligned with CMS's requirements, however these mandates have since been rescinded.

On October 23, 2022, CMS issued further guidance unifying its recommendations for all facilities under its oversight, including SNFs and LTC facilities, reaffirming CMS's activities to verify vaccination of all SNF and LTC facility staff, and where necessary, to pursue corrective action for facilities found deficient in this requirement.

Although the PHE will not automatically terminate CMS’s IFR regarding staff vaccination, this IFR may likely expire during the fall of 2024 unless made permanent through formal rulemaking.

Reporting requirements — In accordance with CMS reporting guidance, SNFs are required to report to the CDC National Health Safety Network certain information related to COVID-19 cases on a weekly basis.

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

The IFR published on August 23, 2021 requires facilities to develop policies and procedures to ensure the availability of the COVID-19 vaccine to residents and staff and to educate residents and staff concerning the benefits, risks and potential side effects associated with the vaccine.

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

We do not believe these COVID-19 related requirements will have a material impact on our condensed consolidated financial statements.

The IFR published on August 23, 2021 requires facilities to develop policies and procedures to ensure the availability of the COVID-19 vaccine to residents and staff and to educate them concerning the benefits, risks and potential side effects associated with the vaccine.

CMS may initiate enforcement activities and assess civil monetary penalties for not meeting any of these COVID-19 related reporting requirements under this IFR and reaffirmed its intent to seek corrective action against SNFs and LTC facilities that do not satisfy these requirements.

We do not believe these COVID-19 related requirements will have a material impact on our Interim Financial Statements.

Survey Activity and Enforcement — In response to the COVID-19 pandemic environment, CMS included infection controls as part of its survey process along with updating its patients' and residents' rights to receive visitor guidance.

The spectrum of remedies available to CMS for imposition includes increased monetary fines, shortened time periods to return to compliance and other administrative penalties for deficiencies.

In advance of the PHE’s anticipated expiration, CMS’s surveyors had resumed using standard survey processes to continue assessing infection prevention and control under extant standards, rather than the COVID-19 specific focused infection tool that CMS used in 2021 and 2022.

Changes to Medicaid Reimbursement — In March of 2020, the Families First Coronavirus Relief Act (FFCRA) provided a 6.2% increase to the Federal Medicaid Assistance Percentage (FMAP) during the PHE.

In addition to this funding increase, the FFCRA imposed conditions restricting the disenrollment and standards for re-enrolling Medicaid beneficiaries to promote continuous care of beneficiaries during the PHE.

The CAA 2023 amended these Medicaid enrollment protections and increased FMAP funding provided in the FFCRA.

In the first quarter of 2023, the FMAP increase CMS provides to the states will remain elevated by 6.2%, but will decline for the remaining quarters in 2023, subject to further reductions noted below:

for the second quarter, April through June 2023, this increase will be reduced to 5%;

in the third quarter, from July through September, the FMAP increase will be reduced to 2.5%, and in October through December, the FMAP increase will be reduced to 1.5%.

Previously, the FMAP funding was dependent on the termination of the PHE.

The ultimate amount of funding from each state will vary substantially based on that states’ policies.

CMS’s provision of these increased FMAP funds to states is conditioned upon states reporting to CMS certain Medicaid-related information, including data pertaining to Medicaid renewals, termination of Medicaid coverage, beneficiary customer service information, and other eligibility and renewal information that may be identified in regulations or by the HHS Secretary.

States that do not report required data to CMS beginning in July of 2023 will be penalized 0.25 percentage points, up to a total of one percentage point, for each quarter the state does not report data to CMS.

The CAA 2023 also grants CMS authority to impose fines, penalties, and other sanctions upon states that do not comply with this law’s requirements for the unwinding of increased FMAP payments.

Under the CAA 2023, states may begin disenrolling Medicaid beneficiaries beginning on April 1, 2023 after a full review of such beneficiaries' eligibility.

The FFCRA contemplated continuous Medicaid enrollment until the end of the PHE and provided funding for enrollment during that duration.

The CAA 2023 winds down this Medicaid spending for continuous enrollment in phases, ultimately reducing CMS’s contribution to state-administered Medicaid programs.

CMS guidance permits states up to 14 months to initiate and process traditional Medicaid renewals, including the eligibility and enrollment process.

Medicare presently accounts for approximately 29.1% of our skilled nursing services revenue year-to-date, being our second-largest payor.

4 unchanged sentences

Patient-Driven Payment Model (PDPM)

The Skilled Nursing Facility Prospective Payment System (SNF PPS) Rule became effective October 1, 2019.

The SNF PPS Rule became effective October 1, 2019.

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

12 unchanged sentences

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

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

If a SNF 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 its quality measures data.

If a SNF does not submit required quality data, its 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.

1 unchanged sentence

they will only apply for the fiscal year involved.

A SNF's Medicare Administrative Contractor will issue the facility a notice of non-compliance if it does not satisfy its Quality Reporting Program (QPR) reporting requirements.

A SNF's Medicare Administrative Contractor will issue the facility a notice of non-compliance if it does not satisfy its QRP reporting requirements.

The SNF QRP standardized a number of standardized patient assessment data elements.

1 unchanged sentence

On July 29, 2021, two new reporting measures were required under the SNF QRP.

Starting with the FY 2023 SNF QRP, SNFs are required for the first time to report the SNF Healthcare-Associated Infections (HAI) measure, which tracks the number of infections requiring hospitalization following a medical intervention, and the COVID-19 Vaccination Coverage among Healthcare Personnel (HCP) measure, which tracks vaccination of staff in order to assess whether SNFs are taking steps to limit the spread of COVID-19.

Starting with the FY 2023 SNF QRP, SNFs are required for the first time to report the SNF Healthcare-Associated Infections (HAI) measure, which tracks the number of infections requiring hospitalization following a medical intervention, and the COVID-19 Vaccination Coverage among Healthcare Personnel (HCP) measure, which tracks COVID-19 vaccination of staff in order to assess whether SNFs are taking steps to limit the spread of COVID-19.

The Transfer of Healthcare (TOH) information data SNFs must report, which is included in the Patient-Post-Acute Care measurement, will be changed to exclude SNF patients discharged to their homes under the care of either a home health service or hospice.

3 unchanged sentences

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 2022.

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

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

12 unchanged sentences

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.

These six new measures were included in the five-star rating in October 2022 in addition to other changes.

In addition, CMS also implemented a planned increase to the quality measure reporting thresholds, increasing each threshold by one-half of the average improvement of quality measure scores since CMS last set quality measure thresholds.

Going forward, CMS plans to implement similar rating threshold increases every six months.

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 influenza 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.

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

SNFs began submitting this data 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.

On January 25, 2023, CMS announced that the most recently reported QRP data was incorporated in the January 2023 refresh of the information available through the SNF Care Compare website.

On February 14, 2023, CMS released a draft of the latest minimum data set (MDS) specifications for information to be collected and reported to CMS by SNFs under the QRP.

CMS anticipates releasing the final MDS specifications in May of 2023, with these specifications and reporting requirements implemented on 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 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 net 2.2% market basket increase factor.

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%.

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

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

The recalibrated parity adjustment is being phased in at a rate of 2.3% per year over two years.

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.

Sequestration of Medicare Rates

9 unchanged sentences

As of July 1, 2022, Medicare's sequestration cuts have reverted to 2%, which was the sequestration rate in effect before the COVID-19 PHE commenced.

Under the CAA 2023, a further 4% cut to Medicare spending that would have been required under the Statutory Pay-As-You-Go Act of 2010 (PAYGO) was waived for fiscal years 2023 and 2024.

Instead, the CAA 2023 deferred any further Medicare sequestration under PAYGO until fiscal year 2025.

The CAA 2023 also offset planned Medicare sequestrations that were as high as 4%, and instead maintained fee schedule cuts of approximately 2%.

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

4 unchanged sentences

On July 29, 2021, CMS finalized its changes for measuring the performance period and amending the data to be reported to CMS, which impacted the SNF-VBP Program rate adjustment to account for COVID-19 impacting readmission rates and SNF admissions during the performance periods of fiscal year 2020.

The deadlines for baseline period quality measure quarterly reporting and performance periods and standards will start in 2023 program year.

The deadlines for baseline period quality measure quarterly reporting and performance periods and standards will start in the 2023 program year.

On July 29, 2022, 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.

1 unchanged sentence

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 rate of successful discharges to the community from a SNF setting.

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

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

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

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

In March of 2023, CMS updated its FAQ for the SNF-VBP program to incorporate information and details from the fiscal year 2023 SNF PPS final rule.

This FAQ contained information regarding scoring policies for the fiscal year 2023 SNF PPS final rule, based on the SNF readmission measure not being counted for 2023 due to the potential effects of the COVID-19 PHE in calculating that score and information about technical updates for the measurement of SNF readmissions.

Part B Rehabilitation Requirements

6 unchanged sentences

The BBA establishes coding modifier requirements to obtain payments beyond the updated KX modifier thresholds, discussed below, and reaffirms the specific $3,000 claim audit threshold requirements for the Medicare Administrative Contractors.

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

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

For PT and SLP combined the threshold for coding modifier requirements was $2,150 for CY 2022 with the same threshold for OT services.

For CY 2023, the KX modifier threshold has been increased by 3.8%, to $2,230 for PT and SLP, with the same threshold for OT services as well.

The KX modifier is a modifier added to medical claims to indicate the providing clinician attests that the services corresponding to that claim were medically necessary and that the justification for those services is contained within the patient’s medical records.

This modifier is intended for use where the services will exceed the threshold for those services set by the BBA and updated by annual fee schedule rules, yet are still appropriate and medically necessary, and thus should be compensated by Medicare.

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

Beginning in 2021, CMS rescinded 21 problematic National Correct Coding Initiative edits impacting outpatient therapy services, including services furnished under Medicare Part B primarily related to PT and OT services, removing a coding burden caused by requirements for additional documentation and claim modifier coding.

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

the number by which CMS determine all current procedural terminology code payments) by 10.2%.

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

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

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

First, the CAA incorporates a rate relief of approximately 3.75% for fiscal year 2021.

Additionally, the CAA incorporates a freeze to the payment for the physician add-on code for three years which would effectively create relief on the initial cuts through 2023.

Finally, the relief calls for the 2% sequester to not be applied to the Medicare Part B program for the first quarter of 2021.

CMS incorporated the first and second components of the CAA relief into the fiscal year 2021 PFS files which were published on January 5, 2021.

While the 2021 PFS Final Rule reduced the fiscal year 2021 factor to $32.41 (calendar year conversion factor was $36.09), the CAA restored part of the reductions resulting in the final fiscal year 2021 conversion factor of $34.89.

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.

As of July 1, 2022, Medicare's sequestration cuts have reverted to 2%, which was the sequestration rate in effect before the COVID-19 PHE commenced.

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 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 $34.89 by 0.82% to $34.61, 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.

Additionally, the proposed 2023 PFS includes a 4.4% negative adjustment to the conversion factor in addition to the 1.0% negative base rate for an aggregate negative adjustment of 5.4%.

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 $34.61.

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

The calendar year 2022 PFS (2022 PFS) required the use of new modifiers 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.

The 2022 PFS resulted in FFS Medicare payments adjusted by a sequester of 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.

On November 1, 2022, CMS issued the calendar year 2023 PFS resulted in a PFS conversion factor of $33.06, a decrease of $1.55 from the calendar year 2022 PFS conversion factor of $34.61.

This is a 4.45% cut to the conversion factor for calendar year 2023.

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.

1 unchanged sentence

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 SNF.

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

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.

2 unchanged sentences

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.

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.

The Emergency Waivers allow therapists to bill Telehealth therapy services up to 151 days after the end of the PHE.

The CAA 2023 also extended certain, but not all, telehealth flexibilities until December 31, 2024, ensuring that those select telehealth flexibilities would not expire with the PHE upon its anticipated expiration date of May 11, 2023.

The CAA 2023 extended the use of certain codes for Telehealth Services beyond the PHE Extension and through the end of CY 2024.

On February 13, 2023, CMS extended the use of these codes for telehealth through the end of CY 2023.

Pursuant to the Emergency Waivers, CMS allowed for the facility to bill an originating site fee to CMS for telehealth services provided to Medicare Part B beneficiary residents of the facility when the services were provided by a physician from an alternate location, effective March 6, 2020 and ending on May 7, 2022.

5 unchanged sentences

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

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

On February 1, 2023, CMS issued its final rule, which takes effect on April 3, 2023, requiring the collection of data by Medicare Advantage organizations and their service providers and the submission of data to CMS for risk adjustment data validation (RADV) audits.

The purpose of these RADV audits is to maintain the accuracy of risk-adjusted payments made to Medicare Advantage organizations.

Decisions Regarding Skilled Nursing Facility Payment

8 unchanged sentences

Implementation of these and other types of measures has in the past, and could in the future, result in substantial reductions in our revenue and operating margins.

For a discussion of historic adjustments and recent changes to the Medicare program and related reimbursement rates, see Part I, Item 1A Risk Factors under the headings Risks Related to Our Business and Industry.

For a discussion of historic adjustments and recent changes to the Medicare program and related reimbursement rates, see Part II, Item 1A Risk Factors under the headings Risks Related to Our Business and Industry.

Patient Protection and Affordable Care Act

8 unchanged sentences

Other healthcare-related provisions of the IRA include phased-in provisions for Medicare to negotiate the prices of certain prescription drugs, limiting the out-of-pocket cost of prescribed drugs to Medicare Part D recipients to $2,000 per year (in addition to a monthly cap on out-of-pocket prescription drug expenses) and limiting the monthly cost of insulin to $35.

The 2022 midterm elections may significantly alter the current regulatory framework and impact our business and the health care industry, including any further extensions or expansions of certain ACA provisions.

At the end of 2022, Congress passed and the Biden-Harris Administration signed into law the CAA 2023, which revised the funds available to fund Medicare in 2023 and deferred the PAYGO sequestration of Medicare expenses, resulting in the calendar year 2023 PFS increasing its conversion factor from $33.06 to more than $33.89.

The results of the 2022 midterm elections, which led to a change in control of the House of Representatives and the eventual 2024 presidential election may significantly alter the current regulatory framework and impact our business and the health care industry, including any further extensions or expansions of certain ACA provisions, namely recent rulemaking activity regarding ACA Section 1557's anti-discrimination provisions.

We continually monitor these developments so we can respond to the changing regulatory environment impacting our business.

2 unchanged sentences

Some of these requirements can be burdensome and costly.

As part of participating in the Medicare and Medicaid programs, there are specific requirements on the use of pre-dispute, binding arbitration agreements by LTC facilities, including requiring the use of plain language in drafting;

that facilities post a notice in plain language that describes the policy on the use of agreements for binding arbitration in an area that is visible to residents and visitors;

that admission to the facility not be conditioned on the signing of an arbitration agreement;

and that the facility expressly inform the resident or his/her representative of the right not to sign the agreement as a condition of admission.

One such requirement of participation in the Medicare and Medicaid programs involves limitations around the use of pre-dispute, binding arbitration agreements by LTC facilities.

CMS has issued guidance and direction around arbitration, to include:

the facility must not require signing of an arbitration agreement as a condition of admission or a requirement to continue to receive care at the facility, and the agreement must expressly contain language to this effect;

the facility must inform the resident or the resident's representative of the right not to sign the agreement;

the facility must confirm that the agreement is explained in a manner that can be understood and that the resident or their representative acknowledges their understanding of the agreement;

the agreement must provide for the right to rescind the agreement within 30 calendar days of signing;

and the agreement may not contain language that prohibits or discourages communications with federal, state, or local officials, including federal and state surveyors, other federal or state health department employees, and representatives of the Office of the State Long-Term Care Ombudsperson.

Congress has routinely introduced, but not passed, legislation addressing the issue of arbitration agreements used by LTC facilities.

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

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

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.

CMS distributed these updates to surveyors and state agencies in order to, among other things, 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.

3 unchanged sentences

(3) mental health and substance abuse disorders;

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

(4) nurse staffing and reporting of payroll 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;

(7) prescription and use of pharmaceuticals, including psychotropics and drugs that act like psychotropics;

(8) infection prevention and control;

(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;

(10) psychosocial outcomes and related severity;

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

On July 29, 2022, CMS updated the Medicare Requirements of Participation for LTC facilities, which includes the modification of requirements associated with a facility's physical environment to minimize unnecessary renovation expenses that could result in the closure of LTC facilities because of the related 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.

On September 26 and 27, 2022, CMS updated its survey resources for LTC facilities, including with respect to staff vaccine measurements.

These included updating the survey pathway for infection prevention control and immunization and the focused infection control survey folder for infection prevention control and immunization, focusing on updated COVID-19 testing protocols.

These updates provided more information for state surveyors to evaluate LTC facilities’ compliance with the Medicare Requirements of Participation, as well as guidance for facilities on compliance with these requirements based on how surveyors would measure and evaluate their performance.

On September 27, 2022, CMS also provided a summary of its major software enhancements, describing the tools updated and used by CMS to measure and evaluate LTC facilities’ compliance with the Medicare Requirements of Participation.

In addition, CMS updated the Requirements of Participation to include revising existing qualification requirements for directors of food and nutrition services in LTC facilities while "grandfathering" in 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 more specific educational and certification requirements.

On February 17, 2023, CMS further revised the survey resources that CMS and state surveyors use in evaluating LTC facilities’ compliance with federal Requirements for Participation.

This revision incorporated the recent changes to CMS’s focused infection control survey item, which CMS had removed in favor of standard infection control survey measures.

CMS published these updated survey resources on its website along with annotations to Appendix PP of the Medicare State Operations Manual.

These changes were made to the most recent revision of LTC facility survey documents that CMS had last revised in October of 2022.

In October 2022, CMS had published the survey resources CMS and state surveyors would be using to evaluate LTC facilities' compliance with vaccination and reporting requirements, which CMS updated in November of 2022.

These updates provided more information for state surveyors to utilize when evaluating LTC facilities’ compliance with the Medicare Requirements of Participation, as well as included guidance for facilities on operationalizing compliance with these requirements based on how surveyors would measure and evaluate facility performance.

On September 27, 2022, CMS also provided a summary of its major software enhancements, describing the tools updated and used by CMS to measure and evaluate LTC facility compliance with the Medicare Requirements of Participation.

Civil and Criminal Fraud and Abuse Laws and Enforcement

5 unchanged sentences

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 to $23 thousand per violation and are adjusted annually for inflation.

Civil monetary penalties under the FCA range from approximately $0.01 to $0.03 million per violation and are adjusted annually for inflation.

Under the qui tam or “whistleblower” provisions of the FCA, a private individual with knowledge of fraud may bring a claim on behalf of the federal government and receive a percentage of the federal government’s recovery.

3 unchanged sentences

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

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

Proposed rules based on these directives and studies are expected by early 2023, with final rules to follow after a notice-and-comment period.

On February 28, 2022, the Biden-Harris 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 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.

3 unchanged sentences

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

In 2022, the OIG released an audit revealing that CMS had not collected $226 million, or 45%, of identified overpayments within that period, potentially affecting SNFs.

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.

Most recently, on January 19, 2023, the OIG released a report finding that more than 1,000 nursing homes had COVID-19 infection rates of 75% or more during the first year of the pandemic.

The OIG’s conclusion from this study is that better protections are needed for future emergencies.

Based on this study’s findings, the OIG recommended the following:

(1) more scrutiny of existing nursing staff requirements;

(2) improving how surveys can identify infection control risks and improve on nursing home responses to those risks;

and (3) targeting nursing homes in need of infection control intervention for enhanced oversight and assistance.

The OIG study further noted that CMS agreed with its first and third recommendations for corrective action.

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.

16 unchanged sentences

CMS resumed calculating nursing homes’ 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.

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

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

1 unchanged sentence

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.

CMS’s last refresh of the Nursing Home Compare website occurred in January of 2023.

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.

2 unchanged sentences

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

Proposed Federal 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 September 30, 2022, no further action has been taken on this bill.

Proposed State Legislation Concerning Nursing Home Supervision - California passed into law AB 35, which changes the limitations, or “caps,” on non-economic damages that can be awarded in medical negligence cases filed against healthcare providers (including skilled nursing and long-term care facilities).

This data was included in the October 2022 refresh of the Nursing Home Care Compare website as well, in addition to increasing the thresholds for quality measures reported on the Nursing Home Care Compare website based on average improvement over prior quality measures.

In January of 2023, CMS updated the Nursing Home Five-Star Quality Rating System’s Technical Users’ Guide.

As explained in the latest update to this guide, CMS will be auditing schizophrenia coding within the MDS reported to CMS, with adjustments to quality ratings based on any inaccuracies in this schizophrenia-related data captured in the MDS.

These scoring adjustments for inaccurate schizophrenia-related data reporting include:

(1) downgrading the overall quality measure and long-stay quality measure ratings to one star for a period of six months (thus lowering the facility’s total star rating by one entire star);

(2) suppressing the short-stay quality measure rating for six months;

and (3) suppressing the long-stay antipsychotic quality measure for a period of 12 months.

Additionally, CMS will not display citations that a facility has informally disputed on the Nursing Home Care Compare website.

The outcome of such citations will not be included in the calculation of a facility’s star rating until the dispute is completed and the underlying survey considered final.

CMS also published the star rating cut point table in January of 2023 for that month’s refresh of the Nursing Home Care Compare website data, disclosing the points needed for each star rating within every state.

State Legislation Concerning Nursing Home Supervision — California passed into law Assembly Bill (AB) 35, which changes the limitations, or “caps,” on non-economic damages that can be awarded in medical negligence cases filed against healthcare providers (including skilled nursing and long-term care facilities).

Beginning on January 1, 2023, non-economic damages (i.e.

pain and suffering) available to plaintiffs suing healthcare providers in medical malpractice and professional negligence cases will be increased from $250,000 to $350,000, and will then increase by $40,000 per year over the following ten years up to a $750,000 cap.

Once the limit reaches $750,000, a 2% annual inflationary adjustment will all attach beginning on January 1.

In wrongful death cases that arise from claims of medical malpractice and professional negligence, the cap on non-economic damages will increase from $250,000 to $500,000 on January 1, 2023, and increase every year thereafter for ten years until the cap on non-economic damages in such cases is $1 million;

pain and suffering) available to plaintiffs suing healthcare providers in medical malpractice and professional negligence cases will be increased from $0.25 million to $0.35 million, and will then increase by $0.04 million per year over the following ten years up to a $0.75 million cap.

Once the limit reaches $0.75 million, a 2% annual inflationary adjustment will attach beginning on January 1, 2034.

In wrongful death cases that arise from claims of medical malpractice and professional negligence, the cap on non-economic damages will increase from $0.25 million to $0.50 million on January 1, 2023, and increase every year thereafter for ten years until the cap on non-economic damages in such cases is $1.0 million;

thereafter, this cap will also be subject to an annual 2% increase to reflect changes in the cost of living.

2 unchanged sentences

On September 27, 2022, California’s Governor signed into law AB 1502, also known as the Skilled Nursing Facility Ownership and Management Reform Act of 2022.

This law will affect new license applications for SNFs, and is expected to effect on July 1, 2023.

Expected to take effect on July 1, 2023, this law will affect new license applications for SNFs.

AB 1502 increases the oversight authority of the California Department of Public Health, and changes several provisions regarding SNF licensing in the State of California.

1 unchanged sentence

AB 1502 also requires SNF license applicants to disclose additional information to the Department of Public Health in connection with a license application and requires the Department of Public Health to consider more data regarding the applicant’s prior operations before issuing it a license.

This date includes but is not limited to:

This data includes, but is not limited to:

prior citations;

4 unchanged sentences

The same analysis described above is intended to apply to applications for a change in ownership or a change in management of a skilled nursing facility.

AB 1502 authorizes the Department of Public Health to impose civil penalties of up to $10,000, and other enforcement action as appropriate, upon applicants that fail to comply with the law’s requirements.

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.

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.

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.

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

AB 1502 authorizes the Department of Public Health to impose civil penalties of up to $0.01 million, and other enforcement action as appropriate, upon applicants that fail to comply with the law’s requirements.

Monitoring Compliance in Our Facilities

23 unchanged sentences

In addition to the communication from CMS, the White House also issued a fact sheet covering these same issues on October 21, 2022.

The fact sheet further identified measures the Administration is taking to increase staffing requirements, halt illegal or improper debt collection activities, increase transparency in facility ownership and operation (including SNF performance), and tie reimbursement to the quality of performance.

The fact sheet further identified measures the Biden-Harris Administration is taking to increase staffing requirements, halt illegal or improper debt collection activities, increase transparency in facility ownership and operation (including SNF performance), and tie reimbursement to the quality of performance.

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

2 unchanged sentences

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

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

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

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

2 unchanged sentences

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

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

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

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 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.

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 Social Security Act.

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

1 unchanged sentence

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 AKS can result in criminal penalties of up to $0.1 million and ten years imprisonment.

Violations of the AKS can also result in civil monetary penalties of up to $0.1 million 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.

Violations of the Social Security Act can result in inflation-adjusted criminal penalties of more than $0.1 million and ten years imprisonment.

It can also result in inflation-adjusted civil monetary penalties of more than $0.1 million per violation and an assessment of up to three times the total amount of remuneration offered, paid, solicited, or received.

It 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.

1 unchanged sentence

We believe that business practices of providers and financial relationships between providers have become subject to increased scrutiny as healthcare reform efforts continue on the federal and state levels.

Additionally, Section 1877 of the Social Security Act, commonly known as the “Stark Law,” provides that a physician may not refer a Medicare or Medicaid patient for a “designated health service” to an entity with which the physician or an immediate family member has a financial relationship unless the financial arrangement meets an exception under the Stark Law or its regulations.

Additionally, the "Stark Law" of the Social Security Act provides that a physician may not refer a Medicare or Medicaid patient for a “designated health service” to an entity with which the physician or an immediate family member has a financial relationship unless the financial arrangement meets an exception under the Stark Law or its regulations.

Designated health services include inpatient and outpatient hospital services, PT, OT, SLP, durable medical equipment, prosthetics, orthotics and supplies, diagnostic imaging, enteral and parenteral feeding and supplies and home health services.

23 unchanged sentences

In some respects, the application of federal and state antitrust laws to healthcare is still evolving, and enforcement activity by federal and state agencies appears to be increasing.

At various times, healthcare providers and insurance and managed care organizations may be subject to an investigation by a governmental agency charged with the enforcement of antitrust laws, or may be subject to administrative or judicial action by a federal or state agency or a private party.

On February 3, 2023, the DOJ’s Antitrust Division withdrew its support from three policies that had been jointly created by the DOJ and the Federal Trade Commission in 1993, 1996, and 2011 which previously created longstanding “antitrust safety zones” for the healthcare industry.

After withdrawing its support from the policies, the DOJ announced it would take a case-by-case enforcement approach to evaluate conduct in the healthcare industry, citing that the previous policies were outdated and overly permissive.

With no further guidance provided by the DOJ, during this uncertainty, healthcare providers and insurance and managed care organizations may be subject to an investigation by a governmental agency charged with the enforcement of antitrust laws, or may be subject to administrative or judicial action by a federal or state agency or a private party.

Violators of the antitrust laws could be subject to criminal and civil enforcement by federal and state agencies, as well as by private litigants.

2 unchanged sentences

The obligation to comply with the ADA and other similar laws is an ongoing obligation, and the independent operating subsidiaries continue to assess their facilities relative to ADA compliance and make appropriate modifications as needed.

Real Estate Investment Trust (REIT) Qualification

We are electing for Standard Bearer to be taxed as a REIT for U.S.

federal income tax purposes beginning with its taxable year ended December 31, 2022.

Standard Bearer's qualification as a REIT will depend upon its ability to meet, on a continuing basis, various complex requirements under the Internal Revenue Code, relating to, among other things, the sources of its gross income, the composition and value of its assets, distribution levels to its shareholders and the concentration of ownership of its capital stock.

We believe that Standard Bearer is organized in conformity with the requirements for qualification and taxation as a REIT under the Code and that its manner of operation has and will enable it to continue to meet the requirements for qualification and taxation as a REIT.

REGULATIONS SPECIFIC TO SENIOR LIVING COMMUNITIES

As previously mentioned, senior living services revenue is primarily derived from private pay residents, with a small portion of senior living revenue (approximately 2.2% of total revenue) derived from Medicaid funds.

As previously mentioned, senior living services revenue (approximately 2.1% of total revenue) is primarily derived from private pay residents, with a small portion of senior living revenue derived from Medicaid funds.

Thus, some of the regulations discussed above applicable to Medicaid providers, also apply to senior living.

6 unchanged sentences

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

Since 2003, CMS has commenced a series of actions to increase its oversight of state quality assurance programs for senior living communities, and has provided guidance and technical assistance to states to improve their ability to monitor and improve the quality of services paid through Medicaid waiver programs.

CMS has continued to commence a series of actions to increase its oversight of state quality assurance programs for senior living communities and has provided guidance and technical assistance to states to improve their ability to monitor and improve the quality of services paid through Medicaid waiver programs.

CMS is encouraging state Medicaid programs to expand their use of home and community-based services as alternatives to facility-based services, pursuant to provisions of the ACA, and other authorities, through the use of several programs.

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

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

Proposed rules based on these directives are expected 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.

10 unchanged sentences

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

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

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

Our net revenue for the three months ended September 30, 2022 continues to be impacted by COVID-19, with the emergence of COVID-19 subvariants beginning in July 2022.

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 and nine months ended September 30, 2022, we recorded state relief revenue of $21.4 million and $63.5 million, respectively, which directly offset against COVID-19 related expenses we incurred in those states.

See Recent Activities for further information.

In addition, the Emergency Waivers issued by CMS, including a waiver for the requirement to have a three-day stay in a hospital to receive 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 through the current quarter.

Our total revenue for the quarter increased $101.5 million, or 15.2% while our diluted GAAP earning per share grew by 19.3%, from $0.83 to $0.99, compared to the third quarter in 2021.

We have continued to make progress on targeted initiatives, including our foundational structure of local operations that are the centers of excellence in the communities they serve.

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

Additionally, we continue to seek out opportunities to expand our operations and real estate, adding 17 new operations and eight real estate properties, three of which we previously operated, during the nine months ended September 30, 2022.

These expansions coupled with our refocused operational fundamentals and increase in occupancy resulted in a strong third quarter.

Our total revenue for the three months ended March 31, 2023 increased $173.4 million, or 24.3%, while our diluted GAAP earnings per share grew by 18.0%, from $0.89 to $1.05, compared to the three months ended March 31, 2022.

Over the quarter, we have continued to make progress on targeted initiatives related to increasing occupancy in our mature facilities, acquiring new skilled nursing operations and integrating them with our proven cultural and operational principles and most importantly, attracting and developing our people.

Our combined Same Facilities and Transitioning Facilities occupancy increased by 4.3% compared to the same period in 2022.

We saw a recovery in our census starting in the first quarter of 2021, which has continued through the first quarter of 2023.

See Recent Activities for our operational update.

During the three months ended March 31, 2023, we added 19 new operations.

We are excited to be adding new operations in several geographies including 17 new operations in California.

As part of these California facilities, we inherited a solid operational foundation, including an amazing group of highly skilled team members who will continue to have an impact on our culture and organization for years to come.

We look forward to working together to help each operation reach its full clinical and financial potential.

Our strength remains in our operating model, which empowers each operator to form their own market-specific strategy and to adjust to the needs of their local medical communities, including methods for attracting new healthcare professionals into our workforce and retaining and developing existing staff.

Despite continued labor pressures, there are positive trends on both turnover and agency usage in some of our markets.

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

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

2022 2021 2022 2021

Three Months Ended March 31,

Service revenue 99.4 % 99.4 %

10 unchanged sentences

Other income (expense) 0.6 (0.1)

Other expense, net (0.2) (0.2) (0.5) (0.2)

Other income (expense), net 0.4 (0.4)

Income before provision for income taxes 8.8 9.3

3 unchanged sentences

Net income attributable to The Ensign Group, Inc.

7.3 % 7.1 % 7.4 % 7.5 %

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

2022 2021 2022 2021

Three Months Ended March 31,

SEGMENT INCOME (1)

5 unchanged sentences

PERFORMANCE METRICS

Adjusted EBT $ 86,344 $ 75,246

EBITDA $ 91,870 $ 84,038

5 unchanged sentences

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

Included in segment income for Standard Bearer for the three and nine months ended September 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.

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

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

Included in segment income for Standard Bearer for the three months ended March 31, 2023 are expenses for intercompany management fees between Standard Bearer and the Service Center and intercompany interest expense.

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

(2) Standard Bearer segment income includes rental revenue from Ensign affiliated tenants and expenses.

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

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

3 unchanged sentences

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

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

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

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

23 unchanged sentences

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

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

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

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

PERFORMANCE MEASURES

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

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

Adjusted EBITDA

We adjust EBITDA when evaluating our performance because we believe that the exclusion of certain additional items described below provides useful supplemental information to investors regarding our ongoing operating performance, in the case of Adjusted EBITDA.

We believe that the presentation of Adjusted EBITDA, when combined with EBITDA and GAAP net income attributable to The Ensign Group, Inc., is beneficial to an investor’s complete understanding of our operating performance.

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

We adjust income before provision for income taxes (Adjusted EBT) when evaluating our performance because we believe that the exclusion of certain additional items described below provides useful supplemental information to investors regarding our ongoing operating performance, in the case of Adjusted EBT.

We believe that the presentation of Adjusted EBT, when combined with income before provision for income taxes and GAAP net income attributable to The Ensign Group, Inc., is beneficial to an investor’s complete understanding of our operating performance.

We use this performance measure as an indicator of business performance, as well as for operational planning, decision-making purposes and to determine compensation in our executive compensation plan.

Adjusted EBT is income before provision for income taxes adjusted for non-core business items, which for the reported periods includes, to the extent applicable:

• stock-based compensation expense;

• real estate transactions and other related costs;

• legal finding;

1 unchanged sentence

• costs incurred related to new systems implementation;

• results related to operations not at full capacity;

• gain on sale of assets.

• depreciation and amortization of patient base intangible assets.

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

Adjusted EBITDA

Adjusted EBITDA is EBITDA adjusted for the same non-core business items as listed in Adjusted EBT, except for depreciation and amortization of patient base intangible assets.

Funds from Operations (FFO)

10 unchanged sentences

Adjusted EBITDAR is a financial valuation measure that is not specified in GAAP.

This measure is not displayed as a performance measure as it excludes rent expense, which is a normal and recurring operating expense.

This measure is not displayed as a performance measure as it excludes rent expense, which is a normal and recurring operating expense, and is therefore presented only for the current period.

The adjustments made and previously described in the computation of Adjusted EBITDA are also made when computing Adjusted EBITDAR.

2 unchanged sentences

A significant portion of capital lease expenditures are recorded in interest, whereas operating lease expenditures are recorded in rent expense.

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

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

The table below reconciles income before provision for income taxes to Adjusted EBT for the periods presented:

Three Months Ended March 31,

Consolidated statements of income data:

(In thousands)

Income before provision for income taxes $ 78,382 $ 66,226

Stock-based compensation 6,573 5,167

Legal finding (a)

Acquisition related costs (b)

Costs incurred related to new systems implementation

Depreciation and amortization - patient base (c)

$ 86,344 $ 75,246

Condensed consolidated statements of income data:

(a) Legal finding against our ancillary services subsidiary, which includes the portion attributable to non-controlling interests.

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

(c) Included in depreciation and amortization are amortization expenses related to patient base intangible assets at newly acquired skilled nursing and senior living facilities.

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

Three Months Ended March 31,

Consolidated statements of income data:

(In thousands)

1 unchanged sentence

net income (loss) attributable to noncontrolling interests

Other (income) expense, net

(3,507) 2,884

Other expense, net 1,832 1,461 9,991 2,867

Provision for income taxes

3 unchanged sentences

Stock-based compensation 6,573 5,167

Real estate transactions and other related costs(a)

Legal finding(b)

859 — 4,212 —

Gain on sale of assets (900) — (3,467) (540)

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

Acquisition related costs(c)

245 145 416 333

Legal finding (a)

Acquisition related costs (b)

Costs incurred related to new systems implementation

321 41 390 117

Rent related to items above — — — 38

ADJUSTED EBITDA

$ 99,785 $ 92,729

Rent—cost of services 46,637 35,762

rent related to items above — — — (38)

Adjusted rent 38,907 35,623 111,897 103,496

ADJUSTED EBITDAR

(a) Real estate transactions and other related costs include costs incurred related to the formation of Standard Bearer and other real estate related activities.

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

Three Months Ended September 30, 2022 Compared to the Three Months Ended September 30, 2021

(a) Legal finding against our ancillary services subsidiary, which excludes the portion attributable to non-controlling interests.

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

Three Months Ended March 31, 2023 Compared to the Three Months Ended March 31, 2022

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

Three Months Ended September 30, 2022

Three Months Ended March 31, 2023

Skilled services Standard Bearer All Other Eliminations Consolidated

1 unchanged sentence

$ 850,923 $ 19,717 $ 37,096 $ (20,895) $ 886,841

Total expenses, including other expense, net 637,568 11,791 68,880 (19,889) 698,350

Total expenses, including other income, net

737,578 12,498 79,278 (20,895) 808,459

Segment income (loss) 113,345 7,219 (42,182) — 78,382

Gain from sale of real estate

Income before provision for income taxes $ 78,382

Three Months Ended September 30, 2021

Three Months Ended March 31, 2022

Skilled services Standard Bearer All Other Eliminations Consolidated

1 unchanged sentence

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

Total expenses, including other expense, net 547,646 6,491 63,571 (14,035) 603,673

Total expenses, including other income, net

588,515 10,293 66,260 (17,849) 647,219

Segment income (loss) 98,256 6,900 (38,930) — 66,226

Income before provision for income taxes $ 66,226

Our total revenue increased $101.5 million, or 15.2%, compared to the three months ended September 30, 2021.

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

Total revenue from operations acquired on or subsequent to October 1, 2021 increased our consolidated revenue by $41.5 million during the three months ended September 30, 2022, when compared to the same period in 2021.

In addition, we recorded $21.4 million of state relief revenue in the third quarter of 2022 compared to $19.2 million in the same period in 2021, which directly correlated to the additional COVID-19 related expenses incurred.

Our total revenue increased by $173.4 million, or 24.3%, compared to the three months ended March 31, 2022.

The increase in revenue was driven by an increase in occupancy from our skilled services operations, growth in skilled average daily census and the impact of acquisitions.

Total revenue from operations acquired on or subsequent to April 1, 2022 increased our consolidated revenue by $102.5 million during the three months ended March 31, 2023, when compared to the same period in 2022.

In addition, we recorded $26.4 million of state relief revenue in the first quarter of 2023 compared to $17.6 million in the same period in 2022, which directly correlated to the additional COVID-19 and related labor expenses incurred.

All state relief revenue is included in Medicaid revenue.

Skilled Services

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

Three Months Ended September 30,

The following table presents the skilled services revenue and key performance metrics by category during the three months ended March 31, 2023 and 2022:

Three Months Ended March 31,

2023 2022 Change % Change

8 unchanged sentences

Skilled mix by nursing revenue 52.7 % 54.3 % (1.6) %

Three Months Ended September 30,

Three Months Ended March 31,

2023 2022 Change % Change

8 unchanged sentences

Skilled mix by nursing revenue 53.8 % 55.1 % (1.3) %

Three Months Ended September 30,

Three Months Ended March 31,

2023 2022 Change % Change

8 unchanged sentences

Skilled mix by nursing revenue 41.9 % 45.3 % (3.4) %

Three Months Ended September 30,

Three Months Ended March 31,

2023 2022 Change % Change

10 unchanged sentences

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

Since the third quarter of 2021, we converted three skilled nursing facilities into campuses.

Since 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, 2020.

1 unchanged sentence

(3) Recently Acquired Facility (Acquisitions) results represent all facilities purchased on or subsequent to January 1, 2022.

Skilled services revenue increased $97.2 million, or 15.1%, compared to the three months ended September 30, 2021.

Skilled services revenue increased by $164.2 million, or 23.9%, compared to the three months ended March 31, 2022.

The increases in skilled services revenue were across all payer types including increases in Medicaid revenue of $83.8 million, or 27.3%, Medicare revenue of $39.3 million, or 18.9%, managed care revenue of $28.9 million, or 22.6% and private revenue of $12.2 million or 28.4%.

The increase in skilled services revenue was primarily driven by strong performance across our skilled services operations as our census continued to recover in the third quarter of 2022, coupled with increases in skilled mix revenue.

Our consolidated occupancy increased by 2.2% and skilled mix revenue increased by 0.9%, driven by higher acuity.

Revenue in our Same Facilities increased $41.7 million, or 8.0% 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 2.4%.

Medicare and Managed care skilled days increased by 13.5% and 6.4%, respectively, resulting in an increase in Managed Care and Medicare revenue .

Revenue generated by our Transitioning Facilities increased $10.1 million , or 11.7% , primarily due to improved occupancy growth of 5.3% and an increase in skilled mix days of 2.5% compared to the three months ended September 30, 2021.

Managed care and Medicare days increased by 25.6% and 17.6%, respectively, 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 $45.4 million compared to the three months ended September 30, 2021 .

We acquired fifteen operations between October 1, 2021 and September 30, 2022 across five states.

The increase in skilled services revenue was primarily driven by strong performance across our skilled services operations as our census continued to recover in the first quarter of 2023, growth in skilled census, state specific relief programs and acquisitions.

Our consolidated occupancy increased by 3.7% during the three months ended March 31, 2023 compared to the same period in 2022.

Revenue in our Same Facilities increased by $56.7 million, or 9.1% due to increased occupancy and revenue per patient day.

Our diligent efforts to strengthen our partnerships with various managed care organizations, hospitals and the local communities we operate in increased our managed care days by 9.0%, resulting in an increase in managed care revenue of 11.9%.

Revenue generated by our Transitioning Facilities increased by $7.0 million, or 12.7%, primarily due to improved occupancy growth and increase in revenue per patient day.

Our private days, managed care skilled days and Medicaid days increased by 26.0%, 11.6% and 7.5%, respectively, demonstrating our ability to focus on increasing occupancy across payer types.

Skilled services revenue generated by facilities purchased on or subsequent to January 1, 2022 (Recently Acquired Facilities) increased by approximately $100.5 million compared to the three months ended March 31, 2022 .

We acquired 39 operations between April 1, 2022 and March 31, 2023 across six states.

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

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

Included in our metrics for Recently Acquired Facilities are 17 facilities we acquired that are matured and have higher occupancy rates, higher skilled mix days and skilled mix revenue.

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

Three Months Ended September 30,

Three Months Ended March 31,

Same Facility Transitioning Acquisitions Total

9 unchanged sentences

$ 382.89 $ 374.97 $ 345.19 $ 332.53 $ 353.22 $ 311.54 $ 375.92 $ 370.39

(1) These rates exclude additional FMAP and other state relief funding and include sequestration reversal of 2% in 2021.

Our Medicare daily rates at Same Facilities and Transitioning Facilities increased by 0.4% and 0.6%, respectively, compared to the three months ended September 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 reinstatement of the 2% sequestration in the third quarter of 2022, effectively creating a 2% reduction in the Medicare rates.

(1) These rates exclude state relief funding and include sequestration reversal of 2% in the three months ended March 31, 2022.

Our Medicare daily rates at Same Facilities and Transitioning Facilities increased by 2.4% and 2.9%, respectively, compared to the three months ended March 31, 2022.

The increase is attributable to the 2.7% net market basket increase that became effective in October 2022, offset by the reinstatement of the 2% sequestration starting in the third quarter of 2022.

In addition, we have seen a shift to higher acuity patients.

Our average Medicaid rates increased 2.7% due to state reimbursement increases and our participation in supplemental Medicaid payment programs and quality improvement programs in various states.

3 unchanged sentences

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

Three Months Ended September 30,

Three Months Ended March 31,

Same Facility Transitioning Acquisitions Total

9 unchanged sentences

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

Three Months Ended September 30,

Three Months Ended March 31,

Same Facility Transitioning Acquisitions Total

11 unchanged sentences

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

Three Months Ended September 30, Change

Three Months Ended March 31, Change

2023 2022 $ %

1 unchanged sentence

Revenue percentage 78.8 % 77.8 % 1.0 %

Cost of services related to our Skilled services segment increased $83.7 million, or 16.9%, due to costs related to new acquisitions, which accounted for $36.4 million of the increase, with additional increases due to higher staffing expenses.

As the result of COVID-19 variants, our operations experienced staffing constraints due to isolation requirements and COVID-19 exposure, which resulted in additional overtime, benefits and bonuses to our staff and higher use of contracted labor.

The increase in labor costs is offset by cost management in non-clinical expenses.

Cost of services as a percentage of revenue increased to 78.3% from 77.2%.

Cost of services related to our skilled services segment increased by $136.5 million, or 25.6%.

Cost of services as a percentage of revenue increased to 78.8% from 77.8% due to costs related to new acquisitions, specifically agency costs, with additional impact from delayed collections.

As a result of the labor environment, our operations experienced staff hiring and retention constraints, which resulted in additional overtime, benefits and bonuses to our staff and higher use of contracted labor.

Standard Bearer

Three Months Ended September 30, Change

Three Months Ended March 31, Change

2023 2022 $ %

8 unchanged sentences

Rental revenue.

Our rental revenue, including revenue generated from our affiliated facilities, increased by $4.3 million, or 29.8%, to $18.7 million, compared to the three months ended September 30, 2021.

The increase in revenue is primarily attributable to 13 real estate purchases as well as annual rent increases since the three months ended September 30, 2021.

Our FFO increased $0.2 million, or 1.4% to $12.5 million, compared to the three months ended September 30, 2021.

The increase in rental revenue of $4.3 million is offset by interest expense of $2.3 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.

Our rental revenue, including revenue generated from our affiliated facilities, increased by $2.5 million, or 14.7%, to $19.7 million, compared to the three months ended March 31, 2022.

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, 2022.

Our FFO increased by $1.3 million, or 10.6% to $13.2 million, compared to the three months ended March 31, 2022.

The increase in rental revenue of $2.5 million is offset by increases in interest expense of $1.0 million as well as management fee expense of $0.2 million associated with the intercompany agreements between Standard Bearer and the Service Center.

All Other Revenue

Our other revenue increased by $5.8 million, or 22.2%, to $31.8 million, compared to the three months ended September 30, 2021.

Other revenue for 2022 includes senior living revenue of $18.1 million and revenue from other ancillary services of $11.9 million and rental income of $1.8 million.

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

Our other revenue increased by $9.8 million, or 35.7%, to $37.1 million, compared to the three months ended March 31, 2022.

Other revenue for 2023 includes senior living revenue of $18.5 million, revenue from other ancillary services of $16.0 million and sub-rental income of $2.6 million.

The increase in other revenue is primarily attributable to our senior living operations' occupancy rates rebounding from COVID-19.

Consolidated Financial Expenses

Rent — cost of services.

Our rent — cost of services as a percentage of total revenue decreased by 0.2% to 5.1%, primarily due to growth in revenue outpacing the increase in rent expense and as our operation expansions include the acquisition of the related real estate properties.

Our rent — cost of services as a percentage of total revenue increased by 0.3% to 5.3%, primarily due to lease obligations acquired as part of our operational expansions.

General and administrative expense — General and administrative expense increased $13.6 million or 35.6%, to $51.9 million.

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

General and administrative expense as a percentage of revenue decreased by 0.7% to 5.1%, which demonstrates our refocused efforts on non-clinical spend management.

General and administrative expense as a percentage of revenue increased by 0.6% to 5.9%.

This increase was primarily due to increases in system implementation costs, bonuses due to enhanced performance, our annual leadership conference and headcount due to acquisition activity.

Depreciation and amortization — Depreciation and amortization expense increased $2.4 million, or 16.6%, to $17.1 million.

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 remained consistent at 2.1%, as a percentage of revenue.

Other expense, net — Other expense, net as a percentage of revenue remained consistent at 0.2%.

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 September 30, 2022, we recorded a loss on those investments of $1.1 million.

Depreciation and amortization decreased 0.2%, to 1.9%, as a percentage of revenue.

Other income (expense), net — Other income (expense), net as a percentage of revenue increased by 0.8% to 0.4%.

Other income primarily includes interest income from our investments offset by interest expense related to our debt.

During the three months ended March 31, 2023, the deferred compensation investment program had a gain of $1.2 million.

There is an offsetting expense allocated between cost of services and general and administrative expenses.

During the three months ended March 31, 2022, the deferred compensation investment program had a loss of $1.2 million.

There is an offsetting reduction in expense allocated between cost of services and general and administrative expenses.

Provision for income taxes — Our effective tax rate was 22.4% for the three months ended September 30, 2022, compared to 25.5% for the same period in 2021.

Provision for income taxes — Our effective tax rate was 23.5% for the three months ended March 31, 2023, compared to 24.4% for the same period in 2022.

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.

Nine Months Ended September 30, 2022 Compared to the Nine Months Ended September 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:

Nine Months Ended September 30, 2022

Skilled services Standard Bearer All Other Eliminations Consolidated

Total revenue $ 2,128,567 $ 53,523 $ 89,793 $ (55,947) $ 2,215,936

Total expenses, including other expense, net 1,826,295 32,844 204,373 (55,947) 2,007,565

Segment income (loss) 302,272 20,679 (114,580) — 208,371

Gain from sale of real estate 3,267

Income before provision for income taxes $ 211,638

Nine Months Ended September 30, 2021

Skilled services Standard Bearer All Other Eliminations Consolidated

Total revenue $ 1,855,993 $ 42,714 $ 77,033 $ (41,421) $ 1,934,319

Total expenses, including other expense, net 1,582,623 19,155 182,418 (41,421) 1,742,775

Segment income (loss) 273,370 23,559 (105,385) — 191,544

Loss from sale of real estate and impairment charges 440

Income before provision for income taxes $ 191,984

Our total revenue increased $281.6 million, or 14.6%, compared to the nine months ended September 30, 2021.

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

Total revenue from operations acquired on or subsequent to October 1, 2021 increased our consolidated revenue by $77.1 million during the nine months ended September 30, 2022, when compared to the same period in 2021.

In addition, we recorded $63.5 million of state relief revenue during the nine months ended in 2022 compared to $52.4 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 nine months ended September 30, 2022 and 2021:

Nine Months Ended September 30,

2022 2021 Change % Change

TOTAL FACILITY RESULTS:

(Dollars in thousands)

Skilled services revenue $ 2,128,567 1,855,993 $ 272,574 14.7 %

Number of facilities at period end 222 208 14 6.7 %

Number of campuses at period end* 26 25 1 4.0 %

Actual patient days 5,287,690 4,775,274 512,416 10.7 %

Occupancy percentage — Operational beds 75.0 % 72.5 % 2.5 %

Skilled mix by nursing days 32.1 % 31.8 % 0.3 %

Skilled mix by nursing revenue 52.3 % 52.5 % (0.2) %

Nine Months Ended September 30,

2022 2021 Change % Change

SAME FACILITY RESULTS:

(Dollars in thousands)

Skilled services revenue $ 1,662,310 $ 1,546,468 $ 115,842 7.5 %

Number of facilities at period end 167 167 — — %

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

Actual patient days 4,050,302 3,922,904 127,398 3.2 %

Occupancy percentage — Operational beds 75.9 % 73.5 % 2.4 %

Skilled mix by nursing days 33.8 % 33.2 % 0.6 %

Skilled mix by nursing revenue 54.0 % 53.8 % 0.2 %

Nine Months Ended September 30,

2022 2021 Change % Change

TRANSITIONING FACILITY RESULTS:

(Dollars in thousands)

Skilled services revenue $ 283,388 $ 247,486 $ 35,902 14.5 %

Number of facilities at period end 27 27 — — %

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

Actual patient days 744,013 684,166 59,847 8.7 %

Occupancy percentage — Operational beds 74.3 % 68.4 % 5.9 %

Skilled mix by nursing days 27.7 % 26.2 % 1.5 %

Skilled mix by nursing revenue 47.7 % 46.3 % 1.4 %

Nine Months Ended September 30,

2022 2021 Change % Change

RECENTLY ACQUIRED FACILITY RESULTS:

(Dollars in thousands)

Skilled services revenue $ 182,869 $ 62,039 $ 120,830 NM

Number of facilities at period end 28 14 14 NM

Number of campuses at period end* 1 — 1 NM

Actual patient days 493,375 168,204 325,171 NM

Occupancy percentage — Operational beds 69.5 % 66.1 % NM

Skilled mix by nursing days 24.7 % 23.7 % NM

Skilled mix by nursing revenue 43.5 % 44.0 % 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 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 $272.6 million, or 14.7%, compared to the nine months ended September 30, 2021.

Of the $272.6 million increase, the primary changes were from increases in M edicaid custodial revenue of $106.9 million, or 14.5%, Medicare revenue of $73.0 million, or 13.6%, managed care revenue of $52.8 million, or 15.7%, private revenue of $21.6 million, or 18.5% and Medicaid skilled revenue of $18.3 million, or 14.3%.

The increase in revenue was primarily driven by our consolidated occupancy and skilled mix days increasing by 2.5% and 0.3%, respectively, compared to the same period in the prior year.

Revenue in our Same Facilities increased $115.8 million, or 7.5% 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, as well as higher acuity, increased our occupancy by 2.4% to 75.9%.

Managed care and Medicare skilled days increased by 6.7% and 5.6%, respectively, resulting in an increase in skilled mix revenue.

Revenue generated by our Transitioning Facilities increased $35.9 million, or 14.5%, primarily due to improved occupancy growth of 5.9% and an increase in skilled mix days of 1.5%, compared to the nine months ended September 30, 2021, demonstrating our ability to transition these healthcare operations toward higher acuity patients.

Skilled mix revenue increased by 1.4%, mainly from the increases in M anaged care and Medicare days of 23.2% and 10.4%, respectively.

Skilled services revenue generated by facilities purchased on or subsequent to January 1, 2021 (Recently Acquired Facilities) increased by approximately $120.8 million compared to the nine months ended September 30, 2021.

We acquired fifteen operations between October 1, 2021 and September 30, 2022 across five states.

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

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

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

Nine Months Ended September 30,

Same Facility Transitioning Acquisitions Total

2022 2021 2022 2021 2022 2021 2022 2021

SKILLED NURSING AVERAGE DAILY REVENUE RATES

Medicare $ 688.98 $ 685.48 $ 685.51 $ 679.22 $ 683.90 $ 722.82 $ 688.09 $ 685.78

Managed care 512.81 503.76 474.63 464.37 497.06 511.26 507.32 499.44

Other skilled 576.80 539.70 456.18 411.75 481.71 549.32 558.30 531.21

Total skilled revenue 596.16 584.80 576.75 569.56 582.05 630.29 592.79 584.19

Medicaid 260.92 250.81 244.67 235.08 248.85 246.91 257.20 248.20

Private and other payors 253.16 238.92 229.62 230.58 242.38 262.57 248.66 238.26

Total skilled nursing revenue

$ 373.44 $ 360.42 $ 335.08 $ 322.23 $ 330.74 $ 338.85 $ 364.06 $ 354.19

(1) These rates exclude additional FMAP and other state relief funding and include sequestration reversal of 1% for the second quarter in 2022 and 2% for the first quarter of 2022 and the nine months ended September 30, 2021.

Our Medicare daily rates at Same Facilities and Transitioning Facilities increased by 0.5% and 0.9%, respectively, compared to the nine months ended September 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 suspension of 1% and three months of sequestration of suspension of 2% compared to nine months of sequestration suspension of 2% in 2021.

Our average Medicaid rates increased 3.6% due to state reimbursement increases and our participation in supplemental Medicaid payment programs and quality improvement programs in various states.

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

Payor Sources as a Percentage of Skilled Nursing Services.

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

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

Nine Months Ended September 30,

Same Facility Transitioning Acquisitions Total

2022 2021 2022 2021 2022 2021 2022 2021

PERCENTAGE OF SKILLED NURSING REVENUE

Medicare 25.8 % 26.0 % 27.9 % 28.3 % 24.3 % 26.1 % 25.9 % 26.3 %

Managed care 19.6 19.3 16.4 14.7 10.6 8.3 18.4 18.4

Other skilled 8.6 8.5 3.4 3.3 8.6 9.6 8.0 7.8

Skilled mix 54.0 53.8 47.7 46.3 43.5 44.0 52.3 52.5

Private and other payors 7.0 6.7 7.8 7.7 6.3 5.8 7.0 6.8

Medicaid 39.0 39.5 44.5 46.0 50.2 50.2 40.7 40.7

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

Nine Months Ended September 30,

Same Facility Transitioning Acquisitions Total

2022 2021 2022 2021 2022 2021 2022 2021

PERCENTAGE OF SKILLED NURSING DAYS

Medicare 14.0 % 13.7 % 13.7 % 13.4 % 11.7 % 12.3 % 13.7 % 13.6 %

Managed care 14.3 13.8 11.6 10.2 7.1 5.5 13.2 13.0

Other skilled 5.5 5.7 2.4 2.6 5.9 5.9 5.2 5.2

Skilled mix 33.8 33.2 27.7 26.2 24.7 23.7 32.1 31.8

Private and other payors 10.3 10.1 11.4 10.7 8.6 7.3 10.3 10.1

Medicaid 55.9 56.7 60.9 63.1 66.7 69.0 57.6 58.1

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

Cost of Services

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

Nine Months Ended September 30, Change

2022 2021 $ %

Cost of service $ 1,658,124 $ 1,430,718 $ 227,406 15.9 %

Revenue percentage 77.9 % 77.1 % 0.8 %

Cost of services related to our skilled services segment increased by $227.4 million, or 15.9%, due to additional costs at new acquisitions, which accounted for $96.1 million of the increase to cost of services, with additional increases mainly due to higher staffing expenses.

The increase in labor costs is offset by cost management in non-clinical expenses.

The increase is offset by cost management in non-clinical expenses.

Cost of services as a percentage of revenue increased to 77.9% from 77.1%.

Standard Bearer

Nine Months Ended September 30, Change

2022 2021 $ %

(Dollars in thousands)

Rental revenue generated from third-party tenants $ 11,180 10,329 $ 851 8.2 %

Rental revenue generated from Ensign affiliated operations 42,343 32,385 9,958 30.7

TOTAL RENTAL REVENUE $ 53,523 $ 42,714 $ 10,809 25.3 %

Segment income 20,679 23,559 (2,880) (12.2)

Depreciation and amortization 15,798 12,792 3,006 23.5

FFO $ 36,477 $ 36,351 $ 126 0.3 %

Rental revenue.

Our rental revenue, including revenue generated from our affiliated facilities, increased by $10.8 million, or 25.3% to $53.5 million, compared to the nine months ended September 30, 2021.

The increase in revenue is primarily attributable to 13 real estate purchases as well as annual rent increases since the nine months ended September 30, 2021.

Our FFO increased by 0.3% to $36.5 million, for the nine months ended September 30, 2022 compared to the same period in 2021.

The increase in rental revenue of $10.8 million is offset by interest expense of $6.1 million as well as management fee expense of $3.2 million associated with the intercompany agreements between Standard Bearer and the Service Center starting in January of 2022.

All Other Revenue

Our other revenue increased by $12.8 million, or 16.6% to $89.8 million, compared to the nine months ended September 30, 2021.

Other revenue for 2022 includes senior living revenue of $48.9 million and revenue from other ancillary services of $35.4 million and rental income of $5.5 million.

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

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 and as our operation expansions include the acquisition of the related real estate properties.

General and administrative expense.

General and administrative expense increased $6.3 million or 5.7%, to $116.0 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 0.5% to 5.2%, which demonstrates our refocused efforts on non-clinical spend management.

Depreciation and amortization .

Depreciation and amortization expense increased $4.1 million, or 9.9%, to $45.5 million.

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

Depreciation and amortization remained consistent at 2.1%, 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 nine months ended September 30, 2022, we recorded a loss on those investments of $5.7 million compared to a gain of $0.9 million during the nine months ended September 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 22.4% for the nine months ended September 30, 2022, compared to 22.5% 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.

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

See Note 14, Income Taxes , in the Interim Financial Statements for further discussion.

Liquidity and Capital Resources

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

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

Our liquidity as of March 31, 2023 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 $59.7 million and $50.1 million for the nine months ended September 30, 2022 and 2021, respectively.

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

Cash paid to fund acquisitions was $33.8 million for the three months ended March 31, 2022, and no cash was paid for the three months ended March 31, 2023.

Total capital expenditures for property and equipment were $26.7 million and $15.8 million for the three months ended March 31, 2023 and 2022, respectively.

We currently have approximately $80.0 million budgeted for renovation projects in 2023.

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 September 30, 2022 consisted of bank term deposits, money market funds and U.S.

Our cash and cash equivalents as of March 31, 2023 consisted of bank term deposits, money market funds and U.S.

Treasury bill related investments.

In addition, as of September 30, 2022, we held debt security investments of approximately $53.9 million, which were primarily split between AA, A and BBB rated securities.

We believe our debt security investments that were in an unrealized loss position as of September 30, 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 March 31, 2023, we held investments of approximately $102.2 million.

We believe our investments that were in an unrealized loss position as of March 31, 2023 do not require an allowance for expected credit losses, nor has any event occurred subsequent to that date that would indicate so.

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

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

We currently anticipate that existing cash and total investments as of September 30, 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 from October 29, 2021.

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

This repurchase program expired upon the repurchase of the fully 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 from February 10, 2022.

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.

We currently anticipate that existing cash and total investments as of March 31, 2023, along with projected operating cash flows and available financing, will support our normal business operations for the foreseeable future.

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 from August 2, 2022.

Under this program, we are authorized to repurchase its issued and outstanding common shares from time to time in open-market and privately negotiated transactions and block trades in accordance with federal securities laws.

The Company did not purchase any shares pursuant to this stock repurchase program.

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

Under this program, we are authorized to repurchase our issued and outstanding common shares from time to time in open-market and privately negotiated transactions and block trades in accordance with federal securities laws.

The share repurchase program does not obligate us to acquire any specific number of shares.

We did not purchase any shares pursuant to this stock repurchase program during the three months ended March 31, 2023.

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

Nine Months Ended September 30,

Three Months Ended March 31,

NET CASH PROVIDED BY/(USED IN):

3 unchanged sentences

Financing activities (1,674) (11,289)

Net increase in cash and cash equivalents 46,663 68,058

Net increase/(decrease) in cash and cash equivalents 10,699 (13,655)

Cash and cash equivalents beginning of period 316,270 262,201

2 unchanged sentences

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

The $17.8 million increase in cash provided by operating activities for the nine months ended September 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 other accrued liabilities offset by timing of collections of accounts receivable and payments of income taxes.

The $2.5 million increase in cash provided by operating activities for the three months ended March 31, 2023 compared to the same period in 2022 w as primarily due to higher net income offset by changes in working capital.

Changes in working capital were driven by timing of collections of accounts receivable.

Investing Activities

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

The $85.9 million increase in cash used in investing activities for the nine months ended September 30, 2022 compared to the same period in 2021, was primarily due to an increase in cash used for expansions and capital expenditures of $88.9 million offset by sale of assets.

The $12.3 million decrease in cash used in investing activities for the three months ended March 31, 2023 compared to the same period in 2022, was primarily due to a decrease in cash used for expansions and capital expenditures of $23.0 million offset by an increase in cash used for investments of $9.2 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 subsidiary shares.

The $46.7 million decrease in cash used in financing activities for the nine months ended September 30, 2022 compared to the same period in 2021, was primarily due to $102.0 million of net proceeds and repayment of the Medicare Accelerated and Advance Payment Program funds in 2021 and $6.7 million receipt of proceeds from the sale of preferred shares and common stock of Standard Bearer in 2022.

This is offset by $29.9 million of share repurchases as part of our stock repurchase program in 2022 and $31.4 million proceeds from HUD borrowings in the same period in 2021, that did not recur in 2022.

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 and sale of subsidiary shares.

The $9.6 million decrease in cash used in financing activities for the three months ended March 31, 2023 compared to the same period in 2022, was primarily due to $9.9 million of share repurchases as part of our stock repurchase program in 2022, offset by an increase in dividends paid of $0.2 million.

Credit Facility with a Lending Consortium Arranged by Truist

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.

The maturity date of the Revolving Credit Facility is April 8, 2027 and we modified the reference rate from LIBOR to SOFR.

Borrowings are supported by a lending consortium arranged by Truist.

1 unchanged sentence

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.

Mortgage Loans and Promissory Notes

As of September 30, 2022, 23 of our subsidiaries have mortgage loans insured with HUD for an aggregate amount of $154.3 million, which subjects these subsidiaries to HUD oversight and periodic inspections.

Mortgage Loans and Promissory Note

As of March 31, 2023, 23 of our subsidiaries have mortgage loans insured with HUD for an aggregate amount of $152.7 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.

In addition to the interest rate, we incur other fees for HUD placement, including but not limited to audit fees.

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 is reduced by 1% per year for years five through ten of the loan.

For the majority of the loans, during the first three years, the prepayment fee is 10.0% and is reduced by 3.0% in the fourth year of the loan, and reduced by 1.0% 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 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.

The terms for all the mortgage loans are 25 to 35 years.

In addition to the HUD mortgage loans above, one of our subsidiaries has a promissory note that bears a fixed interest rate of 5.3% per annum and has a term of 12 years.

The 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 September 30, 2022, 182 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.

As of March 31, 2023, 211 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.

7 unchanged sentences

Most of these leases contain renewal options, certain of which involve rent increases.

Forty-eight of our affiliated facilities, excluding the facilities that are operated under the Master Leases from CareTrust, are operated under eight separate master lease arrangements.

Seventy-eight of our affiliated facilities, excluding the facilities that are operated under the Master Leases from CareTrust, are operated under 12 separate master lease arrangements.

Under these master leases, a breach at a single facility could subject one or more of the other affiliated facilities covered by the same master lease to the same default risk.

4 unchanged sentences

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.

Department of Justice stating that it was investigating to determine whether there had been a violation of 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 serve or have served as medical directors, advisory board participants or other referral sources.

As a general matter, our operating entities have established and 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.

6 unchanged sentences

These adjustments may not continue in the future, and even if received, such adjustments may not reflect the actual increase in our costs for providing healthcare services.

Labor and supply expenses make up a substantial portion of our cost of services.

Labor, supply expenses and capital expenditures make up a substantial portion of our cost of services.

Those expenses can be subject to increase in periods of rising inflation and when labor shortages occur in the marketplace.

5 unchanged sentences

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):

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

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

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

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

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

The amendments are effective for all entities from the beginning of the interim period that includes the issuance date of the ASU.

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

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