What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-07-27 compared with 2023-04-26 · 516 added, 469 removed, 695 unchanged (59% of the section changed)

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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 2023 continue to be impacted by changes of the COVID-19 environment.

Additionally, our business and operations for 2023 continue to be impacted by changes in the status of 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 these changes on our business, financial condition and results of operations.

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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.

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

We 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 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.

As of June 30, 2023, we offered skilled nursing, senior living and rehabilitative care services through 290 skilled nursing and senior living 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 March 31, 2023:

The following table summarizes our affiliated facilities and operational skilled nursing beds and senior living units by ownership status as of June 30, 2023:

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

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Recent Activities

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.

Operational Update — On May 11, 2023, the United States Department of Health and Human Services (HHS) ended the public health emergency (PHE).

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.

Even with the 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.

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

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.

Our combined Same Facilities and Transitioning Facilities occupancy is 78.2%, which represents a 3.1% increase compared to the prior year quarter and is closer to our pre-pandemic occupancy levels, which was 80.1% in March 2020.

As the pandemic comes to an end, we anticipate the return of our seasonal occupancy and skilled mix.

Throughout most of our history, our seasonality trends for skilled nursing occupancy and skilled mix typically included the greatest growth during the first and fourth quarters and softening in the second and third quarters.

Nevertheless, 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 half of 2023.

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.

We use this funding, which reimburses the recipient, for healthcare and labor related patient care services and expenses that are attributable to the COVID-19 pandemic.

The end of the PHE resulted in the gradual phase down of the temporary increase in FMAP funding until it is phased out completely at the end of 2023.

State specific approaches have been developed including various states having increased their rates to account for the increase in expenses as a result of the pandemic.

During the three and six months ended June 30, 2023, we recognized $18.5 million and $44.8 million, respectively, of combined state relief funding as revenue.

During the three and six months ended June 30, 2022, we recognized $24.5 million and $42.1 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 March 31, 2023:

The following table sets forth the location of our operated and owned facilities by type as well as the number of beds and units located at operated and owned facilities as of June 30, 2023:

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

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4 3 5 1 1 — 1 — 2 2 7 — — 26

Number of operated beds/units

Operational skilled nursing beds 9,859 6,760 4,517 1,989 1,890 1,227 998 866 413 368 570 358 100 29,915

Senior living units 509 197 757 163 725 98 21 — 313 31 213 — — 3,027

Number of owned and operated facilities

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2 1 4 — — — — — — — 4 — — 11

Number of operated beds/units

Operational skilled nursing beds 9,859 6,763 4,517 1,989 1,890 1,227 999 866 413 368 570 358 100 29,919

Senior living units 509 197 757 163 723 98 21 — 313 31 213 — — 3,025

Number of owned and operated beds/units

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Owned Senior living units 443 42 356 — 459 — — — 274 — 129 — — 1,703

Number of owned and not operated facilities

Real estate properties leased to third party (2)

Senior living properties 6 2 1 — — — — — — — — 1 19 29

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

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.

(2) Excludes three subleases to third parties in California.

During the six months ended June 30, 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.

The Company also invested in new ancillary services that are complementary to its existing businesses.

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

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

Three Months Ended March 31,

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

2023 2022 2023 2022

Days 30.8 % 31.1 % 31.5 % 32.4 %

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

Three Months Ended March 31,

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

Occupancy for skilled services:

2023 2022 2023 2022

Operational beds at end of period 29,919 25,549 29,919 25,549

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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,

Three Months Ended June 30,

Skilled Services Other Service Revenue Total Service Revenue

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TOTAL SERVICE REVENUE $ 884,200 $ 702,478 $ 31,901 $ 25,869 $ 916,101 $ 728,347

Three Months Ended March 31,

Three Months Ended June 30,

Skilled Services Other Service Revenue Total Service Revenue

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

Six Months Ended June 30,

Skilled Services Other Service Revenue Total Service Revenue

2023 2022 2023 2022 2023 2022

$ 685,825 $ 549,414 $ 14,220 $ 11,062 $ 700,045 $ 560,476

Medicare 495,804 398,905 — — 495,804 398,905

Medicaid-skilled 119,942 95,712 — — 119,942 95,712

Subtotal 1,301,571 1,044,031 14,220 11,062 1,315,791 1,055,093

Managed care 317,764 256,373 — — 317,764 256,373

Private and other (2)

115,788 88,845 48,676 37,192 164,464 126,037

TOTAL SERVICE REVENUE $ 1,735,123 $ 1,389,249 $ 62,896 $ 48,254 $ 1,798,019 $ 1,437,503

Six Months Ended June 30,

Skilled Services Other Service Revenue Total Service Revenue

2023 2022 2023 2022 2023 2022

39.5 % 39.5 % 22.6 % 22.9 % 38.9 % 39.0 %

Medicare 28.6 28.7 — — 27.6 27.7

Medicaid-skilled 6.9 6.9 — — 6.7 6.7

Subtotal 75.0 75.1 22.6 22.9 73.2 73.4

Managed care 18.3 18.5 — — 17.7 17.8

Private and other (2)

6.7 6.4 77.4 77.1 9.1 8.8

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

(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

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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.

As of June 30, 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 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.

During the three and six months ended June 30, 2023, we generated rental revenues of $19.9 million and $39.6 million, respectively, of which $16.1 million and $32.1 million, respectively, was derived from affiliated wholly owned healthcare operators and therefore eliminated in consolidation.

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

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As a high-quality provider in lower cost settings, we believe we are well-positioned to benefit from this trend.

• Transition to Value-Based Payment Models — In response to rising healthcare spending in the United States, commercial, government and other payors are generally shifting away from fee-for-service payment models towards value-based models, including risk-based payment models that tie financial incentives to quality, efficiency and coordination of care.

• Transition to Value-Based Payment Models — In response to rising healthcare spending in the United States, commercial, government and other payors are generally shifting away from fee-for-service (FFS) payment models towards value-based models, including risk-based payment models that tie financial incentives to quality, efficiency and coordination of care.

We believe that patient-centered outcomes driven reimbursement models will continue to grow in prominence.

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

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

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

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

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Healthcare is an area of extensive and frequent regulatory change.

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

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

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

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

Such laws include the Anti-Kickback Statute (AKS), the federal False Claims Act (FCA), the Stark Law, the Health Care Emergency Temporary Standard and state corporate practice of medicine statutes.

Such laws include the Anti-Kickback Statute (AKS), the federal False Claims Act (FCA), the Stark Law and state corporate practice of medicine statutes.

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

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

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

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

In the ordinary course of business, federal or state regulatory authorities may issue notices to the operations alleging deficiencies in certain regulatory practices, which may require corrective action to regain and maintain compliance.

In some cases, federal or state regulators may impose other remedies including imposition of civil monetary penalties, temporary payment bans, loss of certification as a provider in the Medicare or Medicaid program, or revocation of a state operating license.

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

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

In response to the inquiries, investigations and audits, federal and state agencies continue to impose citations for regulatory deficiencies and other regulatory penalties, including demands for refund of overpayments, expanded civil monetary penalties that extend over long periods of time and date back to incidents prior to surveyor visits, Medicare and Medicaid payment bans and terminations from the Medicare and Medicaid programs, which may be temporary or permanent in nature.

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

In response to the inquiries, investigations and audits, federal and state agencies continue to impose citations for regulatory deficiencies and other regulatory penalties, including demands for refund of overpayments, expanded civil monetary penalties that extend over long periods of time and date back to incidents prior to surveyor visits, Medicare and Medicaid payment bans and terminations from those programs, which may be temporary or permanent in nature.

We vigorously contest each such regulatory outcome when appropriate;

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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.

The federal government, through CMS rulemaking, Presidential executive actions or Congressional legislation, and state and local governments have recently released the following proposed rulemaking or administrative actions that may have an impact on our independent operating SNFs or senior living facilities:

Biden-Harris Administration's Nursing Home Care Priorities — The Biden-Harris Administration is seeking reform changes around reimbursement, staffing levels, standards of care, 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 have already been published in 2023, including those highlighted below, and observers expect additional rules to be issued this year and in the future.

Final rules will follow publication of these proposed rules after 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:

The proposed rule would require disclosure to include 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;

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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.

A final rule concerning this subject has not yet been published.

This proposed rule is different from, and farther-reaching, than the disclosure of Medicare-collected nursing facility ownership that has been published on the Nursing Home Compare website since April of 2022.

Proposed Federal Legislation — On March 9, 2023, the home and community-based services (HCBS) Access Act was introduced to expand access to and resources available for HCBS.

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

This bill also provides 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.

As of the date of filing, 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.

For example, California has two proposals that may affect our business and SNFs operating within that state.

Specifically, one of the proposals would increase the minimum wage for workers.

This proposal was introduced to the California Senate and the Assembly and referred to its Committee on Labor and Employment and no action has been taken since then.

Another proposal would require healthcare facilities certified by CMS, including SNFs, to report all annual revenues to the State of California by June 30 of each year and certify that 85% of all non-Medicare revenues were used for direct patient-related services, including staffing and operational costs.

This proposal was introduced to the California Assembly and the Senate and referred to its Committee on Health.

No action has been taken since then.

A variation of the bill was introduced in the last legislative session, but was vetoed by California’s governor at that time.

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 proposed changes to the Medicare payment rates increase 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 proposed rule also suggests numerous changes to the SNF QRP that would take effect in 2025 and 2026 if finalized, requiring the reporting of more data that would be used by HHS and CMS to evaluate SNF performance.

Additionally, the proposed rule for the 2024 SNF PPS suggested changes to the SNF VBP Program, specifically, adopting four new quality measures concerning nursing staff turnover, the success of discharged patients, patients experiencing falls during their stay and readmissions of discharged patients.

Biden-Harris Administration Executive Order — In April of 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.

Proposed CMS Minimum Staffing Mandate — In April of 2022, CMS published a request for information that solicited public comments regarding SNF 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.

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, which are scheduled to expire on May 11, 2023.

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

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

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.

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.

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:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

and (9) the waiver of 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 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 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.

This came after the Centers for Disease Control and Prevention (CDC) stated that older adults are at a higher risk for serious illness from the coronavirus and issued updated testing guidelines for nursing homes.

Some of these states were also publicly reporting COVID-19 outbreaks in facilities.

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.

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 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 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 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.

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

CMS’s final rule, which is expected before the end of 2023, may vary significantly from the substance of the proposed rule.

In March of 2020, in an effort to promote efficient care delivery and to decrease the spread of COVID-19, federal, state and local regulators implemented new regulations and waived, (in some cases temporarily), certain existing regulations, including those discussed below.

These new regulations and waivers of the other regulations expired on May 11, 2023.

Temporary suspension of certain patient coverage criteria and documentation and care requirements — CMS issued a series of temporary waivers, rules, and guidance, suspending various Medicare patient coverage criteria as it related to the COVID-19 pandemic to ensure patients continued to have adequate access to care, notwithstanding the burdens placed on healthcare providers HHS also waived requirements specific to SNFs.

During this time, CMS also suspended and reduced the priority of standard audit activities in order to focus on patient care.

While all of these waivers expired with the termination of the PHE on May 11, 2023, others were terminated at various points in 2021 and 2022 during the PHE.

Certain rules, such as requirements for COVID-19 reporting, testing, and vaccination remained in place through the end of the PHE.

Resuming visitation and resident rights — CMS issued guidance to facilities regarding patients’ rights to visitation, initially severely restricting patient visitation and then gradually broadening the scope of permitted visitation throughout the pandemic to reflect the availability of vaccinations and changes in standards concerning the use of facemasks for staff and visitors.

While the PHE ended on May 11, 2023, CMS still intends for the guidance issued throughout the PHE to be influential on facilities and state regulators when managing general infection control measures.

During the PHE, CMS issued revised parameters for testing, requiring routine testing of only unvaccinated staff and then further revised its guidance in September of 2022 to specify only symptomatic individuals and their close contacts, (including staff and residents), should be tested for COVID-19.

On June 5, 2023, CMS published a final rule containing changes to COVID-19 vaccination, reporting, testing, and other requirements (Omnibus Final Rule), which takes effect 60 days after publication and ended the COVID-19 testing and reporting requirements for SNFs and senior living facilities imposed during the PHE.

All of the federal, state and local government vaccines mandates have been rescinded since the end of the PHE.

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.

The FFCRA also imposed conditions restricting the disenrollment and standards for re-enrolling Medicaid beneficiaries to promote continuous care of beneficiaries during the PHE.

The Consolidated Appropriations Act of 2023 ("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 remained elevated by 6.2%, but this amount will taper to 0% by the end of 2023.

The ultimate amount of Medicaid funding provided from each state will vary substantially based on each state's policies.

Under the CAA 2023, states are allowed to begin disenrolling Medicaid beneficiaries and resuming Medicaid eligibility determinations beginning on April 1, 2023 upon satisfying conditions that include reviewing Medicaid beneficiaries eligibility.

Medicare presently accounts for approximately 28.6% of our skilled nursing services revenue year-to-date, being our second-largest payor.

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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.

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

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

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

PDPM utilizes five case-mix adjusted payment components:

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

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

The structure of PDPM moves Medicare towards a more value-based, unified post-acute care payment system.

For example, PDPM adjusts Medicare payments based on each aspect of a resident’s care, thereby more accurately addressing costs associated with medically complex patients.

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

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

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

PDPM replaces the existing methodology, and is intended to achieve a more value-based, unified post-acute care payment system.

For example, PDPM adjusts Medicare payments based on each aspect of a resident’s care.

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

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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 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.

In addition, reporting-based reductions to the market basket increase factor will not be cumulative;

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 QRP reporting requirements.

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

If a SNF does not submit required quality data as required by the IMPACT Act, its payment rates are reduced by 2.0% for each such fiscal year, which may result in payment rates for a fiscal year being less than the preceding fiscal year.

The SNF QRP standardized patient assessment data elements.

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

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 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.

The elimination of this information will change how the TOH is used in calculating Patient-Post-Acute Care measurement, and may have an impact on our quality ratings and reimbursement from Medicare and Medicaid on a prospective basis.

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

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

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

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

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

These data elements are the subject of frequent change and adjustment.

CMS's rulemaking often identifies new data elements to be reported.

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

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

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These six measures will be measured on a quarterly basis.

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

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

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

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

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

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

These six new measures were included in the five-star rating in October 2022.

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.

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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.

SNFs began submitting this data on October 1, 2022.

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.

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

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

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

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

On December 27, 2020, the Consolidated Appropriations Act further suspended the 2.0% payment adjustment through March 31, 2021.

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

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

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

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

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.

Medicare FFS claims with dates of service or dates of discharge on or after April 1, 2013 incur a 2.0% reduction in Medicare payments through at least 2023, unless Congress takes further action.

Under the CARES Act, there was a temporary suspension of the 2.0% reduction of Medicare claim reimbursements as a result of the COVID-19 pandemic which lasted until June 2022.

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%.

The CAA 2023 also offset planned Medicare sequestrations that would have been as high as 4.0% and instead maintained fee schedule cuts of approximately 2%.

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

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

To fund the SNF-VBP Program incentive payment pool, CMS withheld 2% of Medicare payments and will redistribute 60% of the withheld payments back to SNFs through the program.

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

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 the 2023 program year.

CMS uses regulations to specify how it measures the performance for SNFs as well as the data that SNFs are to report to CMS.

The deadlines for baseline period quality measure quarterly reporting and performance periods and standards began 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.

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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 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.

On February 28, 2022, the Biden Administration published a fact sheet identifying the SNF-VBP Program as an area for change, specifically regarding staffing levels, retention and resident experience.

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 and the impact that rule changes may have on individual facility scoring.

Part B Rehabilitation Requirements

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

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

These amounts were previously associated with the financial limitation amounts.

The Bipartisan Budget Act of 2018 (BBA) repealed those caps while retaining and adding additional limitations to ensure appropriate therapy services.

This policy does not limit the amount of medically necessary Medicare Part B therapy services a beneficiary may receive.

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.

The Bipartisan Budget Act of 2018 (BBA) establishes coding modifier requirements to obtain payments beyond certain payment thresholds, discussed below and reaffirms the specific $3,000 claim audit threshold requirements for Medicare Administrative Contractors.

For PT and SLP combined the threshold for coding modifier requirements was $2,230 for CY 2023 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.

The KX modifier is 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.

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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.

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.

On November 1, 2022, CMS issued the calendar year 2023 PFS, resulting 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.

Additionally, 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.

The implementation of MPPR includes (1) facilities that provide Medicare Part B speech-language pathology, occupational therapy and physical therapy services and bill under the same provider number;

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 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.

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

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

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

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.

Through the end of coverage year 2024, certain of our Part B services provided through telehealth will still qualify for Medicare reimbursement based on flexibility first provided under the Emergency Waivers, which 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.

During the PHE, CMS added certain PT and OT services to the list of Medicare-covered telehealth services on a temporary basis, some of which were made permanent for use and new codes were added for PT, OT, or SLP telehealth services—including some “sometimes therapy” codes that were not subject to MPPR.

The CAA 2023 extended certain, but not all, telehealth flexibilities until December 31, 2024, allowing certain telehealth flexibilities to continue after the PHE's expiration.

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.

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

On July 13, 2023, CMS issued the proposed CY 2024 PFS.

Under this proposed rule, overall payment rates for Medicare Part B services are to be reduced by 1.25% compared to calendar year 2023.

Additionally, acts of Congress may affect the ultimate conversion factor and amounts paid under Medicare for the Company’s services, as the CY 2023 PFS final rule reimbursement rates were scheduled to be lower than those that took effect until Congress passed spending legislation that reduced the amount of spending cut from CY 2022 to CY 2023.

The proposed CY 2024 PFS contains provisions to make payments when physicians and certain non-physician practitioners, such as physician assistants, nurse practitioners, physical therapists, occupational therapists, and clinical psychologists, involve caregivers in implementing an individualized plan of treatment or therapy.

The purpose of this proposed provision is to incentivize the training of caregivers and provide additional funds to offset the costs of training these caregivers through participation in licensed healthcare providers’ course of care for patients and residents.

The proposed CY 2024 PFS also solicits information regarding changing the requirements for supervision of physical therapist assistants and occupational therapist assistants in private practice from “direct” supervision to broader “general” supervision.

The comments and data CMS receives from this request for information may affect the rate of reimbursement for PT and OT services in the future and may affect the desirability and utilization of physical therapy assistants and occupational therapy assistants for certain patient services.

Additionally, the proposed CY 2024 PFS would add certain health maintenance and well-being coaching services to the services for which Medicare will reimburse telehealth services through December 31, 2024.

This proposed rule also proposes adding risk assessments for social determinants of health to the list of telehealth services Medicare will reimburse on a permanent basis.

Programs of All-Inclusive Care for the Elderly

The requirements under the Programs of All-Inclusive Care for the Elderly (PACE) provide greater operational flexibility and update information under the Medicare and Medicaid programs.

Such flexibility includes:

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

The requirements under the Programs of All-Inclusive Care for the Elderly (PACE) provide greater operational flexibility and update information under the Medicare and Medicaid programs, including leniency in compliance with program requirements during and after a 3-year trial period and relieving restrictions placed on the team that assesses and provides for the needs of each PACE participant.

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

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Decisions Regarding Skilled Nursing Facility Payment

Medicare reimbursement rates and rules are subject to frequent change.

Historically, adjustments to reimbursement under Medicare have had a significant effect on our revenue.

Reimbursement rates and rules are subject to frequent change that historically, have had a significant effect on our revenue.

The federal government and state governments continue to focus on efforts to curb spending on healthcare programs such as Medicare and Medicaid.

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Efforts to impose reduced allowances, greater discounts and more stringent cost controls by government and other payors are expected to continue and could adversely affect our business, financial condition and results of operations.

These include statutory and regulatory changes, rate adjustments (including retroactive adjustments), administrative or executive orders and government funding restrictions, all of which may materially adversely affect the rates at which Medicare reimburses us for our services.

Budget pressures often lead the federal government to reduce or place limits on reimbursement rates under Medicare.

These include statutory and regulatory changes, rate adjustments (including retroactive adjustments), administrative or executive orders and government funding restrictions influenced by budgetary or political pressures, may materially adversely affect the rates at which Medicare reimburses us for our services.

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 II, 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 other 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

Various healthcare reform provisions became law upon enactment of the Patient Protection and Affordable Care Act and the Healthcare Education and Reconciliation Act (collectively, the ACA).

Various healthcare reform provisions became law upon enactment of the ACA.

The reforms contained in the ACA have affected our operating subsidiaries in some manner and are directed in large part at increased quality and cost reductions.

Several of the reforms are very significant and could ultimately change the nature of our services, the methods of payment for our services and the underlying regulatory environment.

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

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

In August of 2022, Congress passed and the Biden-Harris Administration signed into law the Inflation Reduction Act of 2022 (IRA), which continued and expanded certain provisions of the ACA.

Among other things, the IRA extended premium subsidies paid by the federal government, which were scheduled to expire at the end of 2022, until the end of 2024, resulting in subsidies being available to offset or reduce the costs of private health insurance policies for older persons on fixed incomes or with limited savings.

The Inflation Reduction Act of 2022 (IRA), which continued and expanded certain provisions of the ACA, extended the premium subsidies paid by the federal government, until the end of 2024, resulting in subsidies being available to offset or reduce the costs of private health insurance policies for qualifying individuals.

This may aid older patients in obtaining or keeping their health insurance in order to pay for long-term care services.

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.

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.

The CAA 2023 revised the funds available to fund Medicare in 2023 and deferred the PAYGO sequestration of Medicare expenses, resulting in the CY 2023 PFS increasing its conversion factor from $33.06 to more than $33.89.

The 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.

Requirements of Participation

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

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

Some of these requirements can be burdensome and costly.

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.

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

CMS has issued guidance and direction around arbitration that must be satisfied for any agreement to be enforceable and which may result in adverse consequences for our business if not followed.

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

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.

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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.

The guidance focuses on the following topics:

This guidance focuses on the following topics:

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

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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 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.

On July 29, 2022, CMS updated the Medicare Requirements of Participation for SNFs, which includes the modification of requirements associated with a facility's physical environment to minimize unnecessary renovation expenses in order to avoid closure of SNFs due to the related expense.

CMS "grandfathered" certain facilities and will allow SNFs 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.

CMS also updated the Requirements of Participation to revise existing qualification requirements for directors of food and nutrition services in SNFs, while "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 satisfying further educational requirements.

On February 17, 2023, CMS revised the survey resources that CMS and state surveyors use in evaluating SNFs’ 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.

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

These updates provided more information for state surveyors to utilize when evaluating SNFs’ 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.

Civil and Criminal Fraud and Abuse Laws and Enforcement

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Governmental agencies are devoting increasing attention and resources to such anti-fraud efforts.

The Health Insurance Portability and Accountability Act of 1996 (HIPAA) and the Balanced Budget Act of 1997 expanded the penalties for healthcare fraud.

Additionally, in connection with our involvement with federal healthcare reimbursement programs, the government or those acting on its behalf may bring an action under the FCA, alleging that a healthcare provider has defrauded the government by submitting a claim for items or services not rendered as claimed, which may include coding errors, billing for services not provided and submitting false or erroneous cost reports.

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

The Balanced Budget Act of 1997 expanded the penalties for healthcare fraud.

Additionally, the government or those acting on its behalf may bring an action under the FCA, alleging that a healthcare provider has defrauded the government by submitting a claim for items or services not rendered as claimed, which may include coding errors, billing for services not provided and submitting false or erroneous cost reports.

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 $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.

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

The Biden-Harris Administration has also signaled an increasing focus on nursing home performance and the reimbursement nursing homes receive from federal healthcare payment programs.

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

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

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

On February 28, 2022, the 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.

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

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

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

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

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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.

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

We cannot predict the extent to which the OIG's recommendations to CMS will be implemented and, what effect, if any, such proposals would have on us.

Our business model, like those of some other for-profit operators, is based in part on seeking out higher-acuity patients whom we believe are generally more profitable and over time our overall patient mix has consistently shifted to higher-acuity in most facilities we operate.

Our business model, like those of some other for-profit operators, is based in part on seeking out higher-acuity patients whom we believe are generally more profitable.

Over time our overall patient mix has consistently shifted to higher-acuity in most facilities we operate.

We also use specialized care-delivery software that assists our caregivers in more accurately capturing and recording services in order to, among other things, increase reimbursement to levels appropriate for the care actually delivered.

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

The Five-Star Quality reporting system for nursing homes is displayed on CMS's consumer-based Nursing Home Compare website.

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

In 2020, in response to the COVID-19 pandemic, CMS temporarily froze SNF Quality Reporting Program data, including data in the staffing and health inspection domains, on the Nursing Home Compare website to account for the then-suspended reporting and inspection obligations.

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

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

CMS resumed calculating nursing homes’ 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 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.

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

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

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.

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

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

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

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.

The Five-Star Quality reporting system for nursing homes is displayed on CMS's consumer-based Nursing Home Compare website, along with a consumer alert icon next to nursing homes that have been cited for incidents of abuse, neglect, or exploitation on the Nursing Home Compare website.

The Nursing Home Compare website is updated monthly with CMS’s refresh of survey inspection results on that website.

Additionally, in April of 2022, the Nursing Home Compare website began publishing the ownership information for Medicare-enrolled nursing facilities based on disclosures made to CMS from 2016 through 2022 due to mergers, acquisitions, or other changes in ownership, to allow for the identification of common ownership of nursing facilities.

In 2020, in response to the COVID-19 pandemic, CMS temporarily froze SNF QRP data, including data in the staffing and health inspection domains, on the Nursing Home Compare website to account for the then-suspended reporting and inspection obligations.

In January of 2021, the freeze on reporting and data updates ended and the Five-Star Quality ratings resumed as normal on the Nursing Home Compare website which included new and other data CMS has collected and required SNFs to report as discussed within this Government Regulation heading.

In January of 2022, the Nursing Home Compare website began reporting SNF weekend staffing as well as staff tenure and other collected staffing data, which would also be incorporated into its Five-Star Quality ratings.

This data was included in the October 2022 refresh of the Nursing Home Compare website.

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).

Additionally, CMS will not display citations that a facility has informally disputed on the Nursing Home Compare website, although the outcome of such citations will only be included in the calculation of a facility’s star rating once the dispute is completed and the underlying survey considered final.

In July 2023, CMS revised the nursing-home level exclusion criteria used on the administrator turnover measure, adding information regarding its calculation of the staff turnover measure and publishing an updated ratings table, which identifies the points needed for each nursing facility to obtain certain star ratings within its state.

Only 10% of nursing facilities can receive a five-star rating in the state where it operates.

State Legislation Concerning Nursing Home Supervision — California passed into law a bill 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 $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.

pain and suffering) available to plaintiffs suing healthcare providers in medical malpractice and professional negligence cases increased from $0.25 million to $0.35 million, and will then increase 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.

In wrongful death cases that arise from claims of medical malpractice and professional negligence, the cap on non-economic damages increased 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.

The caps are separate as to each claim, meaning that there is one cap for negligence and one cap for wrongful death.

The new limits on non-economic damages apply prospectively to lawsuits filed on and after January 1, 2023.

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.

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.

First, the law eliminates previous regulatory provisions that permitted SNFs to operate in advance of receiving their formal license from the State.

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 data includes, but is not limited to:

prior citations;

sanctions imposed by CMS;

legal proceedings commenced by other State or Federal authorities;

findings made regarding the applicant by agencies or courts;

and actions taken against other facilities owned, operated, or managed by the applicant.

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 $0.01 million, and other enforcement action as appropriate, upon applicants that fail to comply with the law’s requirements.

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

Expected to take effect on July 1, 2023, this law increases the oversight authority of the California Department of Public Health, and changes several provisions regarding SNF licensing in the State of California.

This includes eliminating previous regulatory provisions that permitted SNFs to operate in advance of receiving their formal license from the State.

This law also requires SNF license applicants to disclose additional information in connection with a license application and evaluates more data regarding the applicant’s prior operations, including prior citations, CMS sanctions and legal proceedings against the applicant or other facilities owned or managed by the applicant before issuing a license.

United States Supreme Court Decisions – On June 8, 2023, the United States Supreme Court issued its opinion in Health and Hospital Corporation of Marion County, Indiana (HHC) v.

Talevski, which pertained to claims of mistreatment in a nursing home.

The nursing home was publicly owned by the government county where it operated, rather than privately owned such as our facilities are through independent operating subsidiaries.

The question before the Supreme Court was whether the Nursing Home Reform Act (NHRA), passed as part of the Omnibus Budget Reconciliation Act of 1987 (OBRA), gave Talevski the right to sue HHC for a violation of his civil rights under 42 U.S.C.

§ 1983, a specific statute that allows for claims against persons who act for and on behalf of any government entity.

The Supreme Court held that Talevski’s civil rights claim against HHC could proceed.

While the facts of this case are of limited precedential value to our independent operating subsidiaries, which are not owned by and do not act on behalf of any government entity, this decision may draw wider public interest into claims against SNFs and senior living facilities generally.

Monitoring Compliance in Our Facilities

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

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

Governmental agencies and other authorities periodically inspect our independent operating facilities to assess compliance with various standards, rules and regulations, with potential fines, sanctions and other penalties for noncompliance.

Unannounced surveys or inspections generally occur at least annually and may also follow a government agency's receipt of a complaint about a facility.

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

Facilities with otherwise acceptable regulatory histories generally are normally given an opportunity to correct deficiencies and continue their participation in the Medicare and Medicaid programs by a certain date, usually within six months;

Facilities with otherwise acceptable regulatory histories generally are given an opportunity to correct deficiencies and continue their participation in the Medicare and Medicaid programs by a certain date, usually within six months of inspection;

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

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In addition, CMS has increased its focus on facilities with a history of serious or sustained quality of care problems through the special focus facility (SFF) initiative.

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

This information is also provided to the general public.

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

SFFs receive heightened scrutiny and more frequent regulatory surveys.

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

On October 21, 2022, CMS issued a Memorandum identifying the changes it intends to make in connection with the oversight of those facilities that fall under the SFF Program.

These proposed measures included increased penalties for SFFs that fail to improve their performance upon further inspection by CMS, increasing the standards SFFs must meet to graduate from the SFF program, maintaining heightened oversight of any SFF for a period of three years after it graduates and increasing the technical assistance CMS provides to SFFs.

The CMS Memorandum also identifies grants that will be available to aid in the hiring, training and education of personnel involved in resident care, including licensed practical nurses and registered nurses.

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 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.

On October 21, 2022, CMS issued a Memorandum identifying the changes it intends to make in connection with the oversight of those facilities that fall under the SFF Program, including increased penalties for SFFs that fail to improve their performance upon further inspection by CMS, increasing the standards SFFs must meet to graduate from the SFF program, maintaining heightened oversight of any SFF for a period of three years after it graduates and increasing the technical assistance CMS provides to SFFs.

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

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

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

This possibility sometimes leaves affected operators, including 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 revenue associated with Medicare and Medicaid patients admitted after the denial of payment date.

However, if they determine that the facility is not in compliance, the denial of payment goes into effect retroactive to the date given in the original notice, leaving operators with the task of deciding whether to continue accepting patients after the potential denial of payment date--risking the retroactive denial of revenue.

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.

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

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

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

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

The fact that a given business arrangement does not fall within one of these safe harbors, however, does not render the arrangement per se illegal.

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.

The fact that a given business arrangement does not fall within one of these safe harbors does not render the arrangement per se illegal.

Business arrangements of healthcare service providers that fail to satisfy the applicable safe harbor criteria, if investigated, will be evaluated on a case-by-case basis based upon all facts and circumstances and risk increased scrutiny and possible sanctions by enforcement authorities.

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

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

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

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

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

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.

Designated health services include, in relevant part, inpatient and outpatient hospital services, PT, OT, SLP, durable medical equipment, prosthetics, orthotics and supplies, diagnostic imaging, and home health services.

Under the Stark Law, a “financial relationship” is defined as an ownership or investment interest or a compensation arrangement.

If such a financial relationship exists and does not meet a Stark Law exception, the entity is prohibited from submitting or claiming payment under the Medicare or Medicaid programs or from collecting from the patient or other payor.

Many of the compensation arrangements exceptions permit referrals if, among other things, the arrangement is set forth in a written agreement signed by the parties, the compensation to be paid is set in advance, is consistent with fair market value and is not determined in a manner that takes into account the volume or value of any referrals or other business generated between the parties.

Exceptions may have other requirements.

Any funds collected for an item or service resulting from a referral that violates the Stark Law are not eligible for payment by federal healthcare programs and must be repaid to Medicare or Medicaid, any other third-party payor, and the patient.

If such a financial relationship exists and does not meet a Stark Law exception, the entity is disallowed from seeking payment under the Medicare or Medicaid programs or from collecting from the patient or other payor.

Statutory and regulatory exceptions and exemptions to this exist and have specific rules that must be followed to qualify for such exception or exemption.

Any funds collected for an item or service resulting from a referral that violates the Stark Law are not eligible for payment by federal healthcare programs and must be repaid.

Violations of the Stark Law may result in the imposition of civil monetary penalties, including, treble damages.

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Regulations Regarding Patient Record Confidentiality

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

Health care providers are also subject to laws and regulations enacted to protect the confidentiality of patient health information and patients' right to access such information.

For example, HHS has issued rules pursuant to HIPAA, including the Health Information Technology for Economic and Clinical Health (HITECH) Act which governs our use and disclosure of protected health information of patients.

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

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

The HIPAA privacy and security regulations have and will continue to impose significant costs on our independent operating subsidiaries in order to comply with these standards.

We and our independent operating subsidiaries have established policies and procedures to comply with HIPAA privacy and security requirements and our independent operating subsidiaries have adopted and implemented HIPAA compliance plans, which we believe comply with the HIPAA privacy and security regulations, which impose significant costs for ongoing compliance activities.

There are numerous other laws and legislative and regulatory initiatives at the federal and state levels addressing privacy and security concerns.

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

These laws vary and could impose additional penalties for privacy and security breaches.

Healthcare entities are also required to afford patients with certain rights of access to their health information under HIPAA and the 21st Century Cures Act (Cures Act).

The Office of Civil Rights, the agency responsible for HIPAA enforcement, has targeted investigative and enforcement efforts on violations of patients’ rights of access, including denial of access to medical records, imposing significant fines for violations largely initiated from patient complaints.

The Office of the National Coordinator for Health Information Technology can also investigate and impose separate penalties for information blocking violations under the Cures Act.

Antitrust Laws

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Enforcement of the antitrust laws against healthcare providers is common, and antitrust liability may arise in a wide variety of circumstances, including third party contracting, physician relations, joint venture, merger, affiliation and acquisition activities.

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.

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.

On February 3, 2023, the DOJ’s Antitrust Division withdrew its support for three policies that had been jointly created by the DOJ and the Federal Trade Commission in 1993, 1996, and 2011, announcing instead, without providing further alternative guidance, that the DOJ 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.

Similarly, on July 14, 2023, the Federal Trade Commission (“FTC”) withdrew two antitrust policy statements related to enforcement in healthcare markets.

Moving forward, the FTC will evaluate mergers and conduct in healthcare markets on a case-by-case basis using principles of antitrust enforcement and competition policy.

On July 19, 2023, the DOJ and FTC released a draft joint statement of antitrust policy that outlines 13 guidelines to be used when determining if a merger is unlawfully anticompetitive under antitrust laws.

These guidelines cover various aspects of antitrust enforcement relevant to SNF and senior living facilities, such as market concentration, competition between firms, risk of coordination, elimination of potential entrants, control of products or services, vertical mergers, dominant positions, trends toward concentration, series of multiple acquisitions, multi-sided platforms, competing buyers, partial ownership or minority interests, and overall impact on competition.

The draft joint statement also includes detailed sections on the application of the guidelines, defining relevant markets, and approaches to rebuttal evidence.

These proposed statements are not exhaustive, and the DOJ and FTC may focus on one or multiple guidelines depending on the specific circumstances of each merger.

These proposed general statements of antitrust policy, once finalized, may be a prelude to a new joint statement of healthcare antitrust policy of the DOJ and FTC, with the agencies’ finalized general statements providing insight into whether healthcare-specific statements will be issued.

This development and potential new guidance regarding DOJ and FTC antitrust policy increases risk and uncertainty regarding transactions that may be subject to criminal and civil enforcement by federal and state agencies, as well as by private litigants.

Americans with Disabilities Act

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

However, the following provides a brief overview of the regulatory framework applicable specifically to senior living.

A majority of states provide, or are approved to provide, Medicaid payments for personal care and medical services to some residents in licensed senior living communities under waivers granted by or under Medicaid state plans approved by CMS.

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

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

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

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

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

A majority of states provide, or are approved to provide, Medicaid payments for personal care and medical services to some residents in licensed senior living communities.

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

States that administer Medicaid programs for services in senior living communities are responsible for monitoring the participating communities and, as a result of the growth of senior living in recent years, these states have adopted licensing standards applicable to senior living communities.

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.

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

In addition to this changing regulatory environment, federal, state and local officials are increasingly focusing their efforts on the enforcement of these laws.

In order to operate our businesses, we must comply with federal, state and local laws relating to licensure, delivery and adequacy of medical care, distribution of pharmaceuticals, equipment, personnel, operating policies, fire prevention, rate-setting, billing and reimbursement, building codes and environmental protection.

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

The types of laws and statutes affecting the regulatory landscape of the post-acute industry continue to expand and the pressure to enforce those laws by federal and state authorities continues to grow as well.

In order to operate our businesses, we and our independent operating subsidiaries must comply with myriad federal, state and local laws from healthcare including provisions regarding patient safety, staffing, and prescription drugs to environmental issues.

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

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

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

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

RESULTS OF OPERATIONS

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

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.

Our total revenue for the three months ended June 30, 2023 increased $188.9 million, or 25.8%, while our diluted GAAP earnings per share grew by 10.9%, from $1.01 to $1.12, compared to the three months ended June 30, 2022.

Throughout 2023, we have continued to make progress on targeted initiatives related to increasing occupancy in our facilities and attracting and developing our people.

Our combined Same Facilities and Transitioning Facilities occupancy increased by 3.1% compared to the three months ended June 30, 2022.

As our census returns to pre-pandemic levels, we anticipate a return to our historical seasonality trends, which typically result in higher occupancy and skilled mix during the first and fourth quarters and softening in the second and third quarters.

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.

During the six months ended June 30, 2023, we added 19 new operations, which included 17 operations in California.

These California facilities include an amazing group of highly skilled team members who will further our mission of dignifying long term care.

We continue to work diligently with existing and recently acquired operations so that each can 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.

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

Three Months Ended March 31,

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

2023 2022 2023 2022

Service revenue 99.4 % 99.4 % 99.4 % 99.4 %

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Net income attributable to The Ensign Group, Inc.

Three Months Ended March 31,

6.9 % 7.9 % 6.8 % 7.5 %

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

2023 2022 2023 2022

SEGMENT INCOME (1)

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(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 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.

Included in segment income for Standard Bearer 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 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.

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• stock-based compensation expense;

• legal finding;

• legal adjustments;

• gain on business interruption of recoveries and sale of assets;

• write off deferred financing fees;

• acquisition related costs;

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

Three Months Ended March 31,

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

2023 2022 2023 2022

Consolidated statements of income data:

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Income before provision for income taxes $ 81,053 $ 72,957 $ 159,435 $ 139,183

Stock-based compensation 6,573 5,167

Legal finding (a)

Acquisition related costs (b)

Stock-based compensation expense

8,881 5,616 15,454 10,783

Legal adjustments (a)

(885) — (818) 3,626

Gain on business interruption recoveries and sale of assets (750) (2,567) (750) (2,567)

Write off deferred financing fees (b)

Acquisition related costs (c)

112 65 572 171

Costs incurred related to new systems implementation

Depreciation and amortization - patient base (c)

Depreciation and amortization - patient base (d)

$ 88,471 $ 76,712 $ 174,815 $ 151,958

(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.

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

(b) Represents the write off of deferred financing fees associated with the amendment of the credit facility.

(d) 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,

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

2023 2022 2023 2022

Consolidated statements of income data:

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net income (loss) attributable to noncontrolling interests

97 112 214 (140)

Other (income) expense, net

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EBITDA $ 95,373 $ 92,978 $ 187,243 $ 177,016

Stock-based compensation 6,573 5,167

Legal finding (a)

Stock-based compensation expense

8,881 5,616 15,454 10,783

Legal adjustments (a)

(885) — (818) 3,353

Gain on business interruption recoveries and sale of assets

(750) (2,567) (750) (2,567)

Acquisition related costs (b)

112 65 572 171

Costs incurred related to new systems implementation

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ADJUSTED EBITDAR

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

$ 152,551 $ 298,973

(a) Legal adjustments relate to findings attributable to 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

Three Months Ended June 30, 2023 Compared to the Three Months Ended June 30, 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 March 31, 2023

Three Months Ended June 30, 2023

Skilled services Standard Bearer All Other Eliminations Consolidated

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Segment income (loss) 117,008 7,133 (42,988) — 81,153

Loss on real estate insurance recoveries

— — — — — (100)

Income before provision for income taxes $ 81,053

Three Months Ended March 31, 2022

Three Months Ended June 30, 2022

Skilled services Standard Bearer All Other Eliminations Consolidated

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

Gain from sale of real estate

— — — — 2,467

Income before provision for income taxes $ 72,957

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.

Our total revenue increased by $188.9 million, or 25.8%, compared to the three months ended June 30, 2022.

The increase in revenue was driven by an increase in occupancy and patient days 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 July 1, 2022 increased our consolidated service revenue by $130.2 million during the three months ended June 30, 2023, when compared to the same period in 2022.

We recorded $18.5 million of state relief revenue in the second quarter of 2023 compared to $24.5 million in the same period in 2022.

All state relief revenue is included in Medicaid revenue.

Skilled Services

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

Three Months Ended March 31,

The following table presents the skilled services revenue and key performance metrics by category during the three months ended June 30, 2023 and 2022:

Three Months Ended June 30,

2023 2022 Change % Change

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Skilled mix by nursing revenue 50.7 % 50.9 % (0.2) %

Three Months Ended March 31,

Three Months Ended June 30,

2023 2022 Change % Change

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Skilled mix by nursing revenue 51.8 % 51.8 % — %

Three Months Ended March 31,

Three Months Ended June 30,

2023 2022 Change % Change

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Skilled mix by nursing revenue 38.7 % 39.8 % (1.1) %

Three Months Ended March 31,

Three Months Ended June 30,

2023 2022 Change % Change

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

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.

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

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

Skilled services revenue increased by $181.7 million, or 25.9%, compared to the three months ended June 30, 2022.

The increases in skilled services revenue were across all payer types including increases in Medicaid revenue of $76.8 million, or 22.8%, Medicare revenue of $57.6 million, or 30.2%, managed care revenue of $32.5 million, or 25.3%, and private revenue of $14.8 million, or 32.3%.

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.

The increase in skilled services revenue was primarily driven by strong performance across our skilled services operations as our occupancy continued to recover in the second quarter of 2023 and growth in skilled census.

Our consolidated occupancy increased by 2.8% during the three months ended June 30, 2023 compared to the same period in 2022.

Revenue in our Same Facilities increased by $49.6 million, or 7.8% due to increased occupancy and a shift to higher acuity patients.

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 8.7% and managed care revenue per patient day by 3.6%, resulting in an increase in managed care revenue of 13.0%.

In addition, Medicaid revenue increased by $20.1 million or 6.7%, mainly from the increase in days and Medicaid revenue per patient day.

Revenue generated by our Transitioning Facilities increased by $5.3 million, or 9.4%, primarily due to improved occupancy growth and an increase in revenue per patient day.

Our Medicaid days, private days and Medicare skilled days increased by 5.5%, 5.2% and 3.4%, respectively, demonstrating our ability to focus on increasing occupancy across various payer types.

Skilled services revenue generated by facilities purchased on or subsequent to January 1, 2022 (Recently Acquired Facilities) increased by $126.7 million compared to the three months ended June 30, 2022 .

We acquired 39 operations between July 1, 2022 and June 30, 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.

Included in our metrics for Recently Acquired Facilities are 17 facilities we acquired that are mature 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 March 31,

Three Months Ended June 30,

Same Facility Transitioning Acquisitions Total

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Medicare $ 713.25 $ 689.52 $ 688.93 $ 669.27 $ 779.52 $ 745.30 $ 724.65 $ 688.61

Managed care 518.22 505.14 528.34 497.72 526.01 449.63 519.43 504.23

529.37 511.11 514.98 491.90 554.92 469.14 531.37 509.64

Other skilled 598.17 572.30 552.95 545.25 491.76 439.37 583.35 560.62

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$ 381.35 $ 364.70 $ 337.67 $ 321.67 $ 368.72 $ 334.65 $ 376.00 $ 360.65

(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.

(1) These rates exclude state relief funding and for the three months ended June 30, 2022 include sequestration reversal of 1%.

Our Medicare daily rates at Same Facilities and Transitioning Facilities increased by 3.4% and 2.9%, respectively, compared to the three months ended June 30, 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 sequestration.

Medicare daily rate in the second quarter of 2022 included three months of sequestration suspension of 1%.

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

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

Three Months Ended March 31,

Three Months Ended June 30,

Same Facility Transitioning Acquisitions Total

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

Three Months Ended March 31,

Three Months Ended June 30,

Same Facility Transitioning Acquisitions Total

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

Three Months Ended March 31, Change

Three Months Ended June 30, Change

2023 2022 $ %

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Cost of services related to our skilled services segment increased by $152.4 million, or 28.0%.

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.

Cost of services as a percentage of revenue increased to 78.8% from 77.5% due to costs related to higher staffing expenses as a result of the labor shortage environment.

The increase in wages and benefits and additional overtime is offset by the decrease in contract labor usage as we made progress toward our staff hiring.

Standard Bearer

Three Months Ended March 31, Change

Three Months Ended June 30, Change

2023 2022 $ %

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$ 13,266 $ 12,054 $ 1,212 10.1 %

Rental revenue.

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.

Rental revenue — Our rental revenue, including revenue generated from our affiliated facilities, increased by $2.3 million, or 13.2%, to $19.9 million, compared to the three months ended June 30, 2022.

The increase in revenue is primarily attributable to eight real estate purchases, as well as annual rent increases since the three months ended June 30, 2022.

FFO — Our FFO increased by $1.2 million, or 10.1%, to $13.3 million, compared to the three months ended June 30, 2022.

The increase in rental revenue of $2.3 million is offset by increases in interest expense of $0.9 million as well as management fee expense of $0.1 million associated with the intercompany agreements between Standard Bearer and the Service Center.

All Other Revenue

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

Our other revenue increased by $7.7 million, or 25.3%, to $38.4 million, compared to the three months ended June 30, 2022.

Other revenue for 2023 includes senior living revenue of $19.0 million, revenue from other ancillary services of $16.6 million and sub-rental income of $2.8 million.

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Consolidated Financial Expenses

Rent — cost of services.

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.

Rent-cost of services — Our rent-cost of services as a percentage of total revenue increased by 0.3% to 5.4%, primarily due to lease obligations acquired as part of our operational expansions.

General and administrative expense — General and administrative expense increased $14.9 million or 38.7%, to $53.4 million.

General and administrative expense as a percentage of revenue increased by 0.5% to 5.8%.

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.

This increase was primarily due to increased headcounts due to acquisition activities and bonuses due to enhanced performance.

Depreciation and amortization — Depreciation and amortization expense increased $2.7 million, or 18.4%, to $17.6 million.

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Depreciation and amortization decreased 0.1%, 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 (expense), net — Other income (expense), net as a percentage of revenue increased by 1.0%.

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.

Additionally our deferred investment program may have gains or losses depending on market performance.

During the three months ended June 30, 2023, the deferred compensation investment program had a gain of $1.3 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.

During the three months ended June 30, 2022, the deferred compensation investment program had a loss of $3.3 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 23.5% for the three months ended March 31, 2023, compared to 24.4% for the same period in 2022.

Provision for income taxes — Our effective tax rate was 20.9% for the three months ended June 30, 2023, compared to 20.8% 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 14, Income Taxes , in the Notes to the Interim Financial Statements for further discussion.

Six Months Ended June 30, 2023 Compared to the Six Months Ended June 30, 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.

Six Months Ended June 30, 2023

Skilled Services Standard Bearer All Other Eliminations Consolidated

Total revenue $ 1,735,123 $ 39,631 $ 75,450 $ (42,018) $ 1,808,186

Total expenses, including other expense, net 1,504,770 25,279 160,620 (42,018) 1,648,651

Segment income (loss) 230,353 14,352 (85,170) — 159,535

Loss on real estate insurance recoveries

Income before provision for income taxes $ 159,435

Six Months Ended June 30, 2022

Skilled Services Standard Bearer All Other Eliminations Consolidated

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

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

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

Gain from sale of real estate

Income before provision for income taxes $ 139,183

Our total revenue increased $362.3 million, or 25.1%, compared to the six months ended June 30, 2022.

The increase in revenue was primarily driven by an increase in occupancy and patient days 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 July 1, 2022 increased our consolidated service revenue by $230.1 million during the six months ended June 30, 2023, when compared to the same period in 2022.

In addition, we recorded $44.8 million of state relief revenue during the six months ended June 30, 2023 compared to $42.1 million in 2022, which directly correlated to the additional COVID-19 related labor expenses incurred.

All state relief revenue is included in Medicaid revenue.

Skilled Services Segment

The following table presents the skilled services revenue and key performance metrics by category during the six months ended June 30, 2023 and 2022:

Six Months Ended June 30,

2023 2022 Change % Change

TOTAL FACILITY RESULTS:

(Dollars in thousands)

Skilled services revenue $ 1,735,123 1,389,249 $ 345,874 24.9 %

Number of facilities at period end 253 215 38 17.7 %

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

Actual patient days 4,172,567 3,440,991 731,576 21.3 %

Occupancy percentage — Operational beds 78.0 % 74.7 % 3.3 %

Skilled mix by nursing days 31.5 % 32.4 % (0.9) %

Skilled mix by nursing revenue 51.7 % 52.6 % (0.9) %

Six Months Ended June 30,

2023 2022 Change % Change

SAME FACILITY RESULTS:

(Dollars in thousands)

Skilled services revenue $ 1,366,034 $ 1,259,697 $ 106,337 8.4 %

Number of facilities at period end 189 189 — — %

Number of campuses at period end* 24 24 — — %

Actual patient days 3,234,621 3,083,226 151,395 4.9 %

Occupancy percentage — Operational beds 78.6 % 75.0 % 3.6 %

Skilled mix by nursing days 33.0 % 33.2 % (0.2) %

Skilled mix by nursing revenue 52.8 % 53.5 % (0.7) %

Six Months Ended June 30,

2023 2022 Change % Change

TRANSITIONING FACILITY RESULTS:

(Dollars in thousands)

Skilled services revenue $ 123,969 $ 111,655 $ 12,314 11.0 %

Number of facilities at period end 22 22 — — %

Number of campuses at period end* 1 1 — — %

Actual patient days 323,665 303,992 19,673 6.5 %

Occupancy percentage — Operational beds 75.8 % 71.5 % 4.3 %

Skilled mix by nursing days 22.7 % 23.5 % (0.8) %

Skilled mix by nursing revenue 40.3 % 42.6 % (2.3) %

Six Months Ended June 30,

2023 2022 Change % Change

RECENTLY ACQUIRED FACILITY RESULTS:

(Dollars in thousands)

Skilled services revenue $ 245,120 $ 17,897 $ 227,223 NM

Number of facilities at period end 42 4 38 NM

Number of campuses at period end* 1 — 1 NM

Actual patient days 614,281 53,773 560,508 NM

Occupancy percentage — Operational beds 75.9 % 75.9 % NM

Skilled mix by nursing days 28.3 % 37.2 % NM

Skilled mix by nursing revenue 51.4 % 55.7 % NM

* Campus represents a facility that offers both skilled nursing and senior living services.

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

(1) Same Facility results represent all facilities purchased prior to January 1, 2020.

(2) Transitioning Facility results represent all facilities purchased from January 1, 2020 to December 31, 2021.

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

Skilled services revenue increased $345.9 million, or 24.9%, compared to the six months ended June 30, 2022.

The increases in skilled services revenue were across all payer types including increases in M edicaid revenue of $160.6 million, or 24.9%, Medicare revenue of $96.9 million, or 24.3%, managed care revenue of $61.4 million, or 23.9%, and private revenue of $27.0 million, or 30.3%.

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

Our consolidated occupancy increased by 3.3% during the six months ended June 30, 2023 compared to the same period in 2022.

Revenue in our Same Facilities increased $106.3 million, or 8.4%, compared to the same period in 2022, due to increases in 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 managed care skilled revenue by $26.9 million, or 12.2%, mainly from the increase in managed care days and revenue per patient day.

In addition, Medicaid revenue increased by $56.6 million or 9.8%, mainly from the increases in Medicaid days and revenue per patient day.

Revenue generated by our Transitioning Facilities increased $12.3 million, or 11.0%, primarily due to improved occupancy growth and an increase in revenue per patient day.

Our private days, managed care skilled days and Medicaid days increased by 14.8%, 5.9% and 6.5%, 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 $227.2 million compared to the six months ended June 30, 2022.

The increases were primarily due to the expansion of 39 operations between July 1, 2022 and June 30, 2023 across six states.

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.

Included in our metrics for Recently Acquired Facilities are 17 facilities we acquired that are mature 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) :

Six Months Ended June 30,

Same Facility Transitioning Acquisitions Total

2023 2022 2023 2022 2023 2022 2023 2022

SKILLED NURSING AVERAGE DAILY REVENUE RATES

Medicare $ 713.29 $ 693.23 $ 683.91 $ 664.33 $ 764.02 $ 721.51 $ 720.06 $ 691.10

Managed care 523.72 508.09 521.97 494.79 541.34 459.28 525.35 506.90

Other skilled 600.24 572.70 523.75 543.70 489.03 430.25 584.16 561.53

Total skilled revenue 610.86 596.37 606.19 591.03 656.54 486.74 616.65 594.06

Medicaid 270.52 258.89 264.99 244.69 243.19 231.46 265.79 257.26

Private and other payors 263.10 249.01 255.27 252.19 256.27 183.55 261.44 249.02

Total skilled nursing revenue

$ 382.11 $ 369.78 $ 341.42 $ 327.01 $ 361.77 $ 325.14 $ 375.96 $ 365.45

(1) These rates exclude state relief funding and include sequestration reversal of 1% for the second quarter in 2022 and 2% for the first quarter of 2022.

Our Medicare daily rates at Same Facilities and Transitioning Facilities both increased by 2.9%, compared to the six months ended June 30, 2022.

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

In the first half of 2022, Medicare daily rates included three months of sequestration suspension of 1% and three months of sequestration suspension of 2%.

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

Our average Medicaid rates increased 3.3% due to state reimbursement increases and our participation in supplemental Medicaid payment programs and quality improvement programs in various states.

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

Payor Sources as a Percentage of Skilled Nursing Services — We use our skilled mix as a measure of the quality of reimbursements we receive at our affiliated skilled nursing facilities over various periods.

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

Six Months Ended June 30,

Same Facility Transitioning Acquisitions Total

2023 2022 2023 2022 2023 2022 2023 2022

PERCENTAGE OF SKILLED NURSING REVENUE

Medicare 24.2 % 26.3 % 23.6 % 25.6 % 32.9 % 14.2 % 25.4 % 26.1 %

Managed care 20.0 19.3 12.6 12.6 13.1 11.4 18.5 18.6

Other skilled 8.6 7.9 4.1 4.4 5.4 30.1 7.8 7.9

Skilled mix 52.8 53.5 40.3 42.6 51.4 55.7 51.7 52.6

Private and other payors 7.3 6.9 8.4 8.0 7.7 1.6 7.4 7.0

Medicaid 39.9 39.6 51.3 49.4 40.9 42.7 40.9 40.4

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

Six Months Ended June 30,

Same Facility Transitioning Acquisitions Total

2023 2022 2023 2022 2023 2022 2023 2022

PERCENTAGE OF SKILLED NURSING DAYS

Medicare 13.0 % 14.0 % 11.8 % 12.6 % 15.6 % 6.4 % 13.3 % 13.8 %

Managed care 14.6 14.0 8.3 8.3 8.8 8.1 13.2 13.4

Other skilled 5.4 5.2 2.6 2.6 3.9 22.7 5.0 5.2

Skilled mix 33.0 33.2 22.7 23.5 28.3 37.2 31.5 32.4

Private and other payors 10.6 10.3 11.2 10.4 10.9 2.8 10.7 10.2

Medicaid 56.4 56.5 66.1 66.1 60.8 60.0 57.8 57.4

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

Cost of Services

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

Six Months Ended June 30, Change

2023 2022 $ %

Cost of service $ 1,367,817 $ 1,078,925 $ 288,892 26.8 %

Revenue percentage 78.8 % 77.7 % 1.1 %

Cost of services related to our skilled services segment increased by $288.9 million, or 26.8%.

Cost of services as a percentage of revenue increased to 78.8% from 77.7%, due to costs related to new acquisitions and higher wage expenses as a result of the labor shortage environment, resulting in additional overtime, benefits and bonuses to our staff.

Standard Bearer

Six Months Ended June 30, Change

2023 2022 $ %

(Dollars in thousands)

Rental revenue generated from third-party tenants $ 7,572 $ 7,472 $ 100 1.3 %

Rental revenue generated from Ensign affiliated operations 32,059 27,319 4,740 17.4

TOTAL RENTAL REVENUE $ 39,631 $ 34,791 $ 4,840 13.9 %

Segment income 14,352 13,738 614 4.5

Depreciation and amortization 12,099 10,237 1,862 18.2

FFO $ 26,451 $ 23,975 $ 2,476 10.3 %

Rental revenue — Our rental revenue, including revenue generated from our affiliated facilities, increased by $4.8 million, or 13.9%, to $39.6 million, compared to the six months ended June 30, 2022.

The increase in revenue is primarily attributable to eight real estate purchases as well as annual rent increases since the six months ended June 30, 2022.

FFO — Our FFO increased by $2.5 million, or 10.3%, to $26.5 million, compared to the six months ended June 30, 2022.

The increase in rental revenue of $4.8 million is offset by increases in interest expense of $1.9 million as well as management fee expense of $0.3 million associated with the intercompany agreements between Standard Bearer and the Service Center.

All Other Revenue

Our other revenue increased by $17.5 million, or 30.2%, to $75.5 million, compared to the six months ended June 30, 2022.

Other revenue for 2023 includes senior living revenue of $37.5 million, revenue from other ancillary services of $32.6 million and sub-rental income of $5.4 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 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 $28.5 million or 37.2%, to $105.3 million.

General and administrative expense as a percentage of revenue increased by 0.4% to 5.8%.

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

Depreciation and amortization — Depreciation and amortization expense increased $5.2 million, or 17.5%, to $34.7 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 2.0%, as a percentage of revenue.

Other income (expense), net — Other income (expense), net as a percentage of revenue increased by 0.9%.

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

Additionally, our deferred investment program may have gains or losses depending on market performance.

During the six months ended June 30, 2023, the deferred compensation investment program had a gain of $2.5 million.

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

During the six months ended June 30, 2022, the deferred compensation investment program had a loss of $4.5 million.

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

Provision for income taxes — Our effective tax rate was 22.2% for the six months ended June 30, 2023, compared to 22.5% 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 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 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.

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.

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

Our liquidity as of June 30, 2023 is impacted by cash generated from strong operational performance and increased acquisition and share repurchase activities.

Internal Revenue Service and California have provided disaster-area tax relief for the deferral of federal and California estimated tax payments until the fourth quarter of 2023.

As of the second quarter of 2023, the Company has deferred approximately $50 million of 2023 federal and California estimated tax payments.

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

Cash paid to fund acquisitions was $1.6 million and $49.5 million for the six months ended June 30, 2023 and 2022, respectively.

Total capital expenditures for property and equipment were $51.6 million and $37.1 million for the six months ended June 30, 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 believe our current cash balances, our cash flow from operations and the amounts available for borrowing under our Credit Facility will be sufficient to cover our operating needs for at least the next 12 months.

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

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

Our cash and cash equivalents as of June 30, 2023 consisted of bank term deposits, money market funds and U.S.

Treasury bill related investments.

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.

In addition, as of June 30, 2023, we held investments of approximately $105.8 million.

We believe our investments that were in an unrealized loss position as of June 30, 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 source of cash is from our ongoing operations.

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

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

We currently anticipate that existing cash and total investments as of June 30, 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.

1 unchanged sentence

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.

We did not purchase any shares pursuant to this stock repurchase program during the six months ended June 30, 2023.

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

Three Months Ended March 31,

Six Months Ended June 30,

NET CASH PROVIDED BY/(USED IN):

3 unchanged sentences

Financing activities (1,943) (29,838)

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

Net increase in cash and cash equivalents 103,704 23,379

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 $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.

The $38.3 million increase in cash provided by operating activities for the six months ended June 30, 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 income tax payments offset by timing of accounts receivable collections.

Investing Activities

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

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.

The $14.2 million decrease in cash used in investing activities for the six months ended June 30, 2023 compared to the same period in 2022, was primarily due to a decrease in cash used for operational expansions of $47.9 million offset by an increase in cash used for investments of $11.8 million and an increase in cash used for the capital expenditures of $14.5 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 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.

The $27.9 million decrease in cash used in financing activities for the six months ended June 30, 2023 compared to the same period in 2022, was primarily due to $29.9 million of share repurchases as part of our stock repurchase program in 2022.

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 and we modified the reference rate from LIBOR to SOFR.

We maintain a revolving credit facility with Truist Securities (Truist) (the Credit Facility) with availability up to $600.0 million in aggregate principal amount.

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

Borrowings are supported by a lending consortium arranged by 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 that will range from 0.20% to 0.40% per annum, depending on the Consolidated Total Net Debt to Consolidated EBITDA ratio.

The interest rates applicable to loans under the 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 credit agreement).

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

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.

As of June 30, 2023, 23 of our subsidiaries have mortgage loans insured with HUD for an aggregate amount of $151.9 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.

4 unchanged sentences

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.

In addition to the HUD mortgage loans, 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 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.

As of June 30, 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.

15 unchanged sentences

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.

Additionally, we are aware of a claim filed by an individual related to this matter.

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.

11 unchanged sentences

There can be no assurance that we will be able to anticipate fully or otherwise respond to any future inflationary pressures.

Recent Accounting Pronouncements

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

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

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

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