What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-01 compared with 2023-10-25 · 319 added, 565 removed, 736 unchanged (55% of the section changed)

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

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

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

We urge you to carefully review and consider the various disclosures made by us in this Quarterly Report and in our other reports filed with the Securities and Exchange Commission (SEC), including our Annual Report on Form 10-K for the year ended December 31, 2023 (Annual Report), which discusses our business and related risks in greater detail, as well as subsequent reports we may file from time to time on Form 10-Q and Form 8-K, for additional information.

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

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

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

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 September 30, 2023, we offered skilled nursing, senior living and rehabilitative care services through 295 skilled nursing and senior living facilities.

We engage in the operation, ownership, acquisition, development and leasing of skilled nursing, senior living and other healthcare related properties and ancillary businesses located in Arizona, California, Colorado, Idaho, Iowa, Kansas, Nebraska, Nevada, South Carolina, Tennessee, Texas, Utah, Washington and Wisconsin.

Our independent subsidiaries, each of which strive to be the operation of choice in the community they serve, provide a broad spectrum of services.

As of March 31, 2024, we offered skilled nursing, senior living and rehabilitative care services through 302 skilled nursing and senior living facilities.

Our real estate portfolio includes 114 owned real estate properties, which includes 84 facilities operated and managed by us, 30 operations leased to and operated by third-party operators and the Service Center location.

Of the 30 real estate operations leased to third party operators, one senior living facility is located on the same real estate property as a skilled nursing facility that we own and operate.

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

Of the 30 third-party operations, one senior living facility is located on the same real estate property as a skilled nursing facility that we own and operate.

The following table summarizes our independent subsidiaries and operational skilled nursing beds and senior living units by ownership status as of March 31, 2024:

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

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Percentage of total 57.8 % 5.7 % 36.5 % 100.0 %

Ensign is a holding company with no direct operating assets, employees or revenues.

Our operating subsidiaries are operated by separate, independent entities, each of which has its own management, employees and assets.

In addition, certain of our wholly owned subsidiaries, referred to collectively as the Service Center, provide centralized accounting, payroll, human resources, information technology, legal, risk management and other centralized services to the other operating subsidiaries through contractual relationships with such subsidiaries.

We also have a wholly owned captive insurance subsidiary that provides some claims-made coverage to our operating subsidiaries for general and professional liability, as well as coverage for certain workers’ compensation insurance liabilities and our captive real estate trust owns and operates our real estate portfolio.

The Ensign Group, Inc.

is a holding company with no direct operating assets, employees or revenues.

Our subsidiaries are operated by separate, independent entities, each of which has its own management, employees and assets.

In addition, certain of our wholly-owned subsidiaries including Ensign Services, Inc.

and Cornet Limited, Inc., referred to collectively as the Service Center, provide centralized accounting, payroll, human resources, information technology, legal, risk management and other centralized services to the other independent subsidiaries through contractual relationships with such subsidiaries.

We also have a wholly-owned captive insurance subsidiary that provides some claims-made coverage to our independent subsidiaries for general and professional liability, as well as coverage for certain workers’ compensation insurance liabilities and our captive real estate trust owns and operates our real estate portfolio.

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

References herein to the consolidated “Company” and “its” assets and activities, as well as the use of the terms “we,” “us,” “our” and similar terms in this Quarterly Report, are not meant to imply, nor should they be construed as meaning that The Ensign Group, Inc.

has direct operating assets, employees or revenue, or that any of the subsidiaries are operated by The Ensign Group.

has direct operating assets, employees or revenue, or that any of the subsidiaries are operated by The Ensign Group, Inc.

Recent Activities

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 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 79.2%, which represents a 2.9% increase compared to the prior year quarter and is closer to our pre-pandemic occupancy levels, which was 80.1% in March 2020.

As we shift to an endemic, 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.

The seasonal impact coupled with certain Emergency Waivers expiring have contributed to shift our acuity towards pre-pandemic levels.

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 our cultural and operational fundamentals resulted in a strong third quarter.

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

We use this funding, 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 created a gradual phase down of the temporary increase in FMAP funding until it is completely phased out at the end of 2023.

State specific approaches have been developed including various states having increased their base rates to account for increases in expenses in the post-pandemic environment.

During the three and nine months ended September 30, 2023, we recognized $10.3 million and $55.1 million, respectively, of combined state relief funding as revenue.

During the three and nine months ended September 30, 2022, we recognized $21.4 million and $63.5 million, respectively, of combined state relief funding as revenue.

Common Stock Repurchase Program — On August 29, 2023, 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 September 1, 2023.

We did not repurchase any shares during the third quarter of 2023.

We believe we exist to dignify and transform post-acute care.

We set out a strategy to achieve our goal of ensuring our patients are receiving the best possible care through our ability to acquire, integrate and improve our operations.

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

Our dedication to our cultural and operational fundamentals coupled with key initiatives refined through the pandemic resulted in strong first quarter results.

Refer to Results of Operations for further discussion.

Operational Expansions — During the three months ended March 31, 2024, we expanded our operations and real estate portfolio through a combination of long-term leases and a real estate purchase, with the addition of five stand-alone skilled nursing operations.

Of these additions, Standard Bearer acquired the real estate of one of the stand-alone skilled nursing operations, which was leased back to one of our independent subsidiaries.

These new operations added a total of 591 operational skilled nursing beds to be operated by our independent subsidiaries.

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

Subsequent to March 31, 2024, we expanded our operations with the addition of five stand-alone skilled nursing operations, one long-term acute care hospital and two campus operations.

These new operations added 625 operational skilled nursing beds, 43 long-term acute care beds and 202 operational senior living units operated by our independent subsidiaries.

Expansion into a New State — In the first quarter of 2024 and subsequently, we expanded our operations into the state of Tennessee with the addition of three stand-alone skilled nursing operation.

These expansions are part of our strategic vision to further strengthen our growing national presence in both existing and new attractive markets.

Facility Information

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

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

The following table sets forth the location of our operated and owned facilities by type as well as the number of beds and units located at operated and owned facilities as of March 31, 2024:

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

Number of operated facilities

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

During the nine months ended September 30, 2023, we expanded our operations through long-term leases, with the addition of 24 stand-alone skilled nursing operations.

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

These new operations added a total of 2,340 operational skilled nursing beds to be operated by our affiliated operating subsidiaries.

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

Additionally, Standard Bearer acquired the real estate of one campus operation, which is leased to a third party operator.

Subsequent to September 30, 2023, we expanded our operations through a long-term lease, with the addition of one stand-alone skilled nursing operation.

This new operation added 45 operational skilled nursing beds to be operated by our affiliated operating subsidiaries.

For further discussion of our real estate properties and expansions, see Note 6 and 7, Standard Bearer and Operation Expansions in the Notes to the Interim Financial Statements .

Key Performance Indicators

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

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

2023 2022 2023 2022

Three Months Ended March 31,

Days 31.0 % 32.3 %

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

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

Three Months Ended March 31,

Occupancy for skilled services:

2023 2022 2023 2022

Operational beds at end of period 31,169 29,915

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We have two reportable segments:

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

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

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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 September 30,

Skilled Services All Other (3)

Total Service Revenue

2023 2022 2023 2022 2023 2022

$ 367,079 $ 295,927 $ 7,759 $ 6,688 $ 374,838 $ 302,615

Medicare 237,531 211,104 — — 237,531 211,104

Medicaid-skilled 62,452 50,643 — — 62,452 50,643

Subtotal 667,062 557,674 7,759 6,688 674,821 564,362

Managed care 170,747 132,663 — — 170,747 132,663

Private and other (2)

65,158 48,981 24,598 19,877 89,756 68,858

TOTAL SERVICE REVENUE $ 902,967 $ 739,318 $ 32,357 $ 26,565 $ 935,324 $ 765,883

Three Months Ended September 30,

Skilled Services All Other (3)

Total Service Revenue

2023 2022 2023 2022 2023 2022

40.7 % 40.0 % 24.0 % 25.2 % 40.1 % 39.5 %

Medicare 26.3 28.6 — — 25.4 27.6

Medicaid-skilled 6.9 6.8 — — 6.6 6.6

Subtotal 73.9 75.4 24.0 25.2 72.1 73.7

Managed care 18.9 17.9 — — 18.3 17.3

Private and other (2)

7.2 6.7 76.0 74.8 9.6 9.0

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.

(3) All Other incorporates intercompany eliminations.

Nine Months Ended September 30,

Three Months Ended March 31,

Skilled Services All Other (3)

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TOTAL SERVICE REVENUE $ 969,602 $ 850,923 $ 34,883 $ 30,995 $ 1,004,485 $ 881,918

Nine Months Ended September 30,

Three Months Ended March 31,

Skilled Services All Other (3)

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(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.

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

(3) All Other incorporates intercompany eliminations.

Skilled Services

Within our skilled nursing operations, we generate revenue from Medicaid, private pay, managed care and Medicare payors.

Skilled Services — Within our skilled nursing operations, we generate revenue from Medicaid, private pay, managed care and Medicare payors.

We believe that our skilled mix, which we define as the number of days Medicare, managed care and other skilled patients are receiving services at our skilled nursing operations divided by the total number of days patients are receiving services at our skilled nursing operations, from all payor sources (less days from senior living services) for any given period, is an important indicator of our success in attracting high-acuity patients because it represents the percentage of our patients who are reimbursed by Medicare, managed care and other skilled payors, for whom we receive higher reimbursement rates

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

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

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

Standard Bearer

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 September 30, 2023, our real estate portfolio within Standard Bearer is comprised of 107 real estate properties.

Of these properties, 78 are leased to affiliated skilled nursing facilities wholly owned and managed by us and 30 are leased to facilities wholly owned and managed by third party operators.

During the three and nine months ended September 30, 2023, we generated rental revenues of $21.0 million and $60.6 million, respectively, of which $17.0 million and $49.0 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.

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

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

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

Standard Bearer — We generate rental revenue primarily by leasing post-acute care properties that we acquired to healthcare operators under triple-net lease arrangements, whereby the tenants are 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, 2024, our real estate portfolio within Standard Bearer is comprised of 109 real estate properties.

Of these properties, 80 are leased to our independent subsidiaries and 30 are leased to facilities wholly-owned and managed by third-party operators.

Of those 30 operations, one senior living facility is located on the same real estate property as a skilled nursing facility that an independent subsidiary owns and operates.

During the three months ended March 31, 2024, we generated rental revenues of $22.2 million, of which $18.0 million, was derived from our independent subsidiaries' operators and therefore eliminated in consolidation.

Other — 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.

In addition, we hold majority membership interests in certain of our other ancillary operations.

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

See Item 2., Management’s Discussion and Analysis of Financial Condition and Results of Operations , in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 for further discussion of critical accounting estimates.

See Item 7., Management’s Discussion and Analysis of Financial Condition and Results of Operations , in our Annual Report for further discussion of critical accounting estimates.

There were no material changes to our critical accounting policies with which the estimates are developed since December 31, 2023.

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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 (FFS) payment models towards value-based models, including risk-based payment models that tie financial incentives to quality, efficiency and coordination of care.

• Value-based Care and Reimbursement Reform — 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.

Many of our operations already receive value-based payments, and as valued-based payment systems continue to increase in prominence, it is our view that our strong clinical outcomes will be increasingly rewarded.

• Accountable Care Organizations and Reimbursement Reform — A significant goal of U.S.

federal health care reform is to transform the delivery of health care by changing reimbursement to reflect and support the quality and safety of care that providers deliver, increase efficiency and reduce growth in spending.

Reimbursement models that provide financial incentives to encourage efficiency, affordability and high-quality care have been developed and implemented by government and commercial third-party payers.

The most prolific of these models, the Accountable Care Organization (ACO) model, incentivizes groups of providers to share in savings that are achieved through the coordination of care and chronic disease management of an assigned patient population.

A significant goal of U.S.

federal health care reform is to transform the delivery of health care by changing reimbursement to reflect and support a focus on equity, payment for value, and efficacious delivery of person-centered care.

Reimbursement models and demonstrations that increase accountability and provide financial incentives to encourage efficiency, affordability, and high-quality care, have been developed and implemented by government and commercial third-party payers.

Special focus is placed on increasing the number of beneficiaries in care relationships with accountability for quality and total cost of care, improvements in care coordination, reducing inequities at the population level, and supporting care innovation to close care gaps and increase access.

The most prominent value-based models designed to accomplish these aims include Accountable Care Models (e.g., MSSP ACOs, ACO REACH) and Disease-Specific & Episode-Based Models (e.g., BPCI Advanced, GUIDE Model, CJR).

These models, alongside State & Community, Statutory, and Health Plan Models, are aimed at alignment across payers and care settings, leveraging effective clinical tools, outcomes-focused payment approaches and stakeholder-led policy development.

Reimbursement methodology reform includes Value-Based Purchasing (VBP), in which a portion of provider reimbursement is redistributed based on relative performance, or improvement on designated economic, clinical quality and patient satisfaction metrics.

In addition, the Centers for Medicare and Medicaid Services (CMS) has implemented Episode-based demonstration, voluntary and mandatory payment initiatives that bundle acute care and post-acute care reimbursement.

These bundled payment models incentivize cross-continuum care coordination and include financial and performance accountability for episodes of care.

These reimbursement methodologies and similar programs are likely to continue and expand, both in government and commercial health plans.

Many of our operations already participate in ACOs.

Many of our operations already participate in value-based initiatives and models.

With our focus on quality care and strong clinical outcomes, Ensign is well-positioned to benefit from these outcome-based payment models.

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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.

Our business is affected by seasonal fluctuations in occupancy and acuity, which are most prominent when comparing the summer and winter months of the calendar year.

GOVERNMENT REGULATION

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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.

Our independent 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 (but are not limited to) 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 the outpatient rehabilitation agencies of our independent operating subsidiaries to verify continued compliance with applicable regulations and standards.

Governmental and other authorities periodically inspect our independent subsidiaries to verify continued compliance with applicable regulations and standards.

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

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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.

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

We believe that the regulatory environment surrounding the healthcare industry subjects providers to intense scrutiny.

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Proposed, Anticipated and Recently Issued Rulemaking and Administrative Actions

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 assisted living facilities:

Biden-Harris Administration's Nursing Home Care Priorities — The Biden-Harris Administration is seeking reform around reimbursement, staffing levels, standards of care, increased transparency and public disclosure of ownership, and enhanced civil remedies as a means of enforcement against those 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.

The SNF PPS FY 2025 Proposed Rule also includes proposals for CMS to have greater sanctioning authority for ongoing or persistent deficiencies in Medicare-participating SNFs.

If CMS adopts this proposal after notice and comment, these increased sanctioning authorities will take effect as soon as the 2025 fiscal year, beginning in late 2024.

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.

The proposed rule would require disclosure to include the identity of any person or legal entity that:

Ownership Transparency Final Rule — On November 15, 2023, CMS published its final rule requiring SNFs to publicly disclose certain additional information regarding their ownership and managerial relationships.

The final rule requires disclosures 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.

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.

The rule also expands ownership and control interest disclosures to include information about each member of the facilities governing body, individuals or entities serving as officers, directors, members, partners or managing employees, and a comprehensive breakdown of the organizational structure of any additional disclosable party that is not a natural person along with a description of their relationships with the facility.

Certain states have adopted laws reflecting their concerns regarding ownership transparency.

For example, in July 2023, Iowa adopted laws requiring disclosure of ownership information not previously required for licensure to promote transparency.

Additionally, in July of 2023, the California Department of Health Care Access and Information of the California Health and Human Services Agency issued a notice of proposed rulemaking containing regulations that would implement financial and ownership transparency requirements for California-licensed SNFs that are required by California law passed in 2021.

Additionally, in July 2023, the California Department of Health Care Access and Information of the California Health and Human Services Agency issued a notice of proposed rulemaking containing regulations that would implement financial and ownership transparency requirements for California-licensed SNFs that are required by California law passed in 2021.

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.

The Access Act ensures that Medicaid funding is made available 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.

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

In the past, California had proposed a law on direct care spending requirements that may have affected our business and SNFs operating within that state.

These proposals had included requirements for 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 a stated percentage of all non-Medicare revenues should be used for direct patient-related services, including staffing and operational costs.

On October 13, 2023, the California Governor signed into law a bill which impacts the minimum wages of healthcare workers.

Effective June 1, 2024, the law raises the minimum wage for California healthcare employees and sets a new salary threshold for those who are considered exempt healthcare employees.

As of the date of filing, no further action has been taken on the HCBS Access Act since its introduction and referral to the House of Representatives committees.

On October 24, 2023, the HCBS Relief Act was introduced to provide additional funds to states to stabilize their HCBS service delivery networks, recruit and retain HCBS direct care workers, and meet long-term service and support needs of people eligible for Medicaid home and community-based services.

Under the HCBS Relief act, states would receive a temporary 10% increase in the applicable Federal Medical Assistance Percentage (FMAP) under Medicaid for certain approved home and community-based services that are provided during FY 2024 through FY 2025.

To qualify for the enhanced rate, a state much commit to initiatives aimed at improving the provision of services.

This includes offering additional advantages to home health aides and assisting individuals in transition from nursing facilities back to their homes.

As of the date of this filing, no action has been taken on the HCBS Relief Act since its introduction and referral to the Senate Committee on Finance.

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

In the past, California had discussed issuing proposed regulations on direct care spending requirements that may have affected our business and SNFs operating within that state.

These proposals have included requirements for healthcare facilities certified by CMS, including SNFs, to report all annual revenues to the State of California and certify that a stated percentage of all non-Medicare revenues should be used for direct patient-related services, including staffing and operational costs.

On October 13, 2023, the California Governor signed into law a bill that impacts the minimum wages of healthcare workers.

Effective June 1, 2024, the law raises the minimum wage for California healthcare employees and sets a new wage threshold for those who are considered exempt healthcare employees.

The bill only becomes effective for SNFs if a patient care minimum spending requirement bill is also passed.

We anticipate that a minimum spending bill will be proposed in the near future.

We anticipate that a minimum spending bill will be proposed in the future.

Final Rule Fiscal Year 2024 Skilled Nursing Facility Prospective Payment System (SNF PPS) — On July 31, 2023, CMS published its final rule updating the Medicare payment rates within the SNF PPS for FY 2024 (SNF PPS FY 2024 Final Rule).

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It starts with a baseline quarter and the first two quarters of the performance period to identify eligible employees.

Then, it uses the next four quarters to find the number of employment spells that ended in turnover.

Finally, it checks data from the sixth quarter to identify gaps in days worked that began in the last 60 days of the fifth quarter used for the measure.

Then, it uses the next four quarters to find the number of employment cycles that ended in turnover.

Finally, the data from the sixth quarter is validated to identify gaps in days worked that began in the last 60 days of the fifth quarter used for the measure.

The measure score is then calculated by comparing the total number of eligible employees with 60-day gaps in working during the specified periods.

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.

Proposed CMS Minimum Staffing Mandate — On September 1, 2023, CMS issued its proposed rule that would establish minimum staffing standards for long-term care facilities.

As a proposed rule, the comment period for this regulation is open for 60 days from the date of this proposed rule’s publication.

This proposed rule contains three primary staffing proposals:

1) minimum staffing standards of 0.55 hours per resident per day (HPRD) for registered nurses (RNs) and 2.45 HPRD for nurse aids (NAs);

2) a requirement to have a RN on-site 24 hours per day, seven days per week;

and 3) requirements for enhanced facility assessments.

The proposed rule features a staggered implementation of these requirements, including a possible hardship exemption for select facilities.

As this is a proposed rule, CMS has requested and received stakeholder feedback on all components of this regulation so that these comments may be considered prior to CMS's publication of a final rule.

Additionally, the proposed rule would increase the reporting and transparency of Medicaid payments made to a facility for its direct care, including state-level reporting requirements and provisions for states and CMS to make public information about payments made to long-term care facilities.

Facility self-assessments would also be enhanced under this proposed rule.

CMS proposes that the facility self-assessment be updated on the issue of staffing to contain or clarify:

1) that facilities must use evidence-based methods when planning for resident care, including accommodation of behavioral health needs;

2) requiring facilities to use the self-assessment to assess the specific needs of each resident, with adjustments made for changes in the resident population;

3) requiring that facilities include the input of staff, including leadership, management, nurse staff and other direct care providers who render other services to residents;

4) requiring that the staffing plan maximize recruitment and retention of staff in a manner consistent with the President’s April 2023 Executive Order on increasing access to high-quality care and supporting caregivers.

A hardship exemption for CMS’s proposed minimum staffing standards is also set forth in the proposed rule.

Long-term care facilities could qualify for a temporary hardship exemption from new minimum staffing ratios upon meeting specific criteria that demonstrate:

1) workforce unavailability based on an absence of providers relative to individuals in the age group of recipients within a specific geographic location;

2) a facility’s good faith efforts to hire and retain staff through a recruitment and retention plan;

and 3) a financial commitment to staffing by documenting the total annual amount spent on direct care staff.

A survey would be required to assess the residents’ health and safety before CMS would consider granting such a hardship exemption.

Any facility that received a hardship exemption from the minimum staffing requirement would have this exemption noted on the Care Compare website rating skilled nursing facilities.

Further, facilities would not be eligible to receive an exemption if they:

1) failed to submit their data to the payroll-based journal system;

2) have been identified as a special focus facility;

or 3) have been identified at any time within the preceding 12 months as having insufficient staffing that was either at a widespread or pattern level with resulting actual harm to residents, or receiving an immediate jeopardy citation regarding insufficient staffing.

Even after receiving an exemption, a facility would still be required to maintain sufficient staff around-the-clock to provide care and monitor resident health.

If finalized, this proposed rule would have a staggered and phased implementation over a period of three years, with the phases differentiated between rural and non-rural facilities.

For facilities in urban areas, the final rule’s facility assessment requirements would become effective within 60 days of the final rule’s publication, with the proposed rule’s round-the-clock on-site RN requirement becoming effective two years after the final rule’s publication;

and the above-referenced minimum staffing of 0.55 HPRD for RNs and 2.45 HPRD for NAs would take effect three years after the final rule’s publication.

For rural facilities, the final rule’s facility assessment requirements would still become effective within 60 days of the final rule’s publication but the proposed rule’s round-the-clock on-site RN requirement would become effective three years after the final rule’s publication, and the above-referenced minimum staffing of 0.55 HPRD for RNs and 2.45 HPRD for NAs would take effect five years after the final rule’s publication.

This minimum staffing proposed rule also seeks further information from stakeholders regarding alternative policies for establishing minimum nurse staffing standards.

In particular, CMS seeks comment on an alternative total nurse staffing standard of 3.48 HPRD (among other alternatives), which would include minimum individual standards of 0.55 HPRD for RNs and 2.45 HPRD for NAs, in addition to other nurse staffing as needed to attain a total of 3.48 HPRD across all nurse types.

CMS also seeks stakeholder comments regarding the benefits and trade-offs of using different standards, evidence, or methodologies used by states that have adopted minimum nursing standards to inform its own standard-setting.

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.

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 SNFs and assisted living facilities based on guidance from the Centers for Disease Control and Prevention (CDC).

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 assisted 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.

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 decreased to 5% for April through June 2023, 2.5% for July through September 2023, and 1.5% for October through December 2023 before tapering 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 were 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 and have begun doing so.

On August 30, 2023, CMS advised all 50 states in a letter to their respective Medicaid administrators to observe federal Medicaid regulations in making these redeterminations, including requirements to make eligibility determinations on an individual basis rather than a per-household basis.

CMS has worked with 12 states regarding their respective redetermination and disenrollment processes, and previously paused policy in six states.

As a result of this activity, the redetermination and disenrollment period that began on April 1, 2023 has not proceeded as rapidly as some may have expected.

Proposed Rule Fiscal Year 2025 Skilled Nursing Facility Prospective Payment System (SNF PPS) — On March 28, 2024, CMS released the proposed rule for the SNF PPS for FY 2025, which, if approved, will result in a 4.1% increase based on the proposed SNF market basket of 2.8%, plus a 1.7% market basket forecast error adjustment, and a negative 0.4% productivity adjustment.

This increase does not include the SNF VBP reductions for certain SNFs subject to the net reduction in payments under the SNF VBP;

those adjustments are estimated to total $196.5 million in FY 2025.

CMS also plans to revise the SNF market basket base year from the 2018 base year to the current 2022 base year and to update the payment rates used under the SNF PPS based on the FY 2025 market basket increase factor, which is adjusted by both the productivity adjustment and forecast error correction.

Within this proposed rule, CMS also proposes to update the SNF PPS wage index using core-based statistical areas (CBSAs) to reflect more accurate regional wage costs.

The proposed rule also includes significant enhancements to its enforcement capabilities within nursing homes, aiming to reinforce the safety and quality of care.

The proposed rule seeks to broaden CMS’s ability to levy financial penalties as a means to ensure sustained remediation of health and safety infractions, thereby motivating facilities to quickly and permanently comply with CMS regulations.

The proposed rule aims to eliminate the restrictions of per instance (PI) for isolated violations or per day (PD) for ongoing non-compliance restrictions, allowing for more flexible imposition of both PD and PI penalties, which would not exceed statutory daily limits.

This change is intended to provide CMS with enhanced tools to address violations more effectively and reflect the severity of the impact on residents’ health and safety.

CMS is seeking public feedback on how to utilize this increased flexibility to better enforce standards in nursing homes.

CMS Minimum Staffing Standards Final Rule — On April 22, 2024, CMS issued its final rule establishing minimum staffing standards for skilled nursing facilities (Staffing Rule).

The Staffing Rule contains three primary staffing requirements and provides for a staggered and phase implementation over the next several years following the Staffing Rule’s publication.

The initial phase, effective 90 days from the Staffing Rule's publication, which is August 8, 2024, requires facility self-assessment, which enhances the current assessment that all SNFs must perform and document annually and on an as-needed basis.

The Staffing Rule’s requirement for enhanced self-assessments requires the following:

1) facilities must use evidence-based methods when planning for resident care, including accommodation of behavioral health needs;

2) facilities to use their self-assessment to assess the specific needs of each resident, with adjustments made for changes in the resident population;

3) facilities include the input of staff, including leadership, management, nurse staff and other direct care providers who render other services to residents;

and 4) the facility’s staffing plan maximizes recruitment and retention of staff in a manner consistent with the President’s April 2023 Executive Order on increasing access to high-quality care and supporting caregivers.

The second phase, effective within two years of the Staffing Rule's publication, which is May 2026 for non-rural facilities, requires that all SNFs have a registered nurse (RN) available to provide direct resident care onsite 24 hours per day, seven days per weeks (24/7).

The rule states that administrative nurses may satisfy this requirement, provided that the nurse is available to provide direct resident care.

In addition to the 24/7 RN, the Staffing Rule requires facilities to provide a minimum of 3.48 hours per resident per day (HPRD) of direct nursing care to residents.

The third phase, effective within three years of the Staffing Rule's publication, which is May 2027 for non-rural facilities, requires that the HPRD are satisfied through RNs providing 0.55 HPRD, nurse aides (NAs) providing 2.45 HPRD, and any combination of RNs, licensed practical nurses (LPNs), licensed vocational nurses (LVNs), or NAs to account for the final 0.48 HPRD.

The Staffing Rule finalized the hardship exemption for the HPRD requirements.

A facility can qualify for a temporary hardship exemption from the new minimum staffing ratios and 24/7 RN onsite staffing requirement (the self-assessment standards must still be satisfied) if it is located in an area where the supply of RN, NA, or total nursing staff is insufficient to meet the needs of that area.

This exemption is based on the provider-to-population ratio for the nursing workforce, which must be at least 20% below the national average as calculated by CMS.

Additionally, the Staffing Rule provides a one year extension of deadlines to rural facilities on Phases 2 and 3.

The Staffing Rule also enhances transparency for the use of Medicaid payments for facility services, referenced as Medicaid Institutional Payment Transparency Reporting provisions (MIPTR).

The MIPTR provisions within the Staffing Rule require States to report to CMS the percentage of Medicaid payments for nursing facility services spent on direct care workers and support staff, regardless of whether such payments are made under a fee-for-service or managed care model.

Prior to the issuance of the Staffing Rule, there have been two bills under the names Protecting America’s Seniors’ Access to Care Act and Protecting Rural Seniors’ Access to Care Act (one in the House and a companion bill in the Senate), that were intended to block the rule from taking effect.

The Senate bill has garnered broad bi-partisan support and is endorsed by over 90 organizations.

These bills reason that the minimum staffing standard would endanger rural nursing facilities, subjecting them to potential fines and closures for failure to comply and might require them to discharge residents or limit the number of residents they accept in an effort to meeting the requirements of the bill.

It is uncertain if any of these bills or other legislative action will pass as well as their potential impact on the Staffing Rule.

Medicare presently accounts for approximately 27.4% of our skilled nursing services revenue year-to-date, being our second-largest payor.

The Medicare program and its reimbursement rates and rules are subject to frequent change.

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.

These include statutory and regulatory changes, rate 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.

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.

Patient-Driven Payment Model (PDPM)

The SNF PPS Rule became effective October 1, 2019.

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 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:

Patient-Driven Payment Model (PDPM) — The SNF PPS Rule included a case mix model called PDPM that focuses on the patient’s condition (clinically relevant factors) and resulting care needs to determine Medicare reimbursement.

PDPM utilizes clinically relevant factors for determining Medicare payment by using diagnosis codes and other patient characteristics as the basis for patient classification.

PDPM makes effective use of five case-mix adjusted payment components:

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

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

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

PDPM 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.

Skilled Nursing Facility - Quality Reporting Program (SNF QRP)

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

Skilled Nursing Facility - Quality Reporting Program (SNF QRP) — The Improving Medicare Post-Acute Care Transformation Act of 2014 (IMPACT Act) provided data reporting requirements for certain Post-Acute-Care (PAC) providers.

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.

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

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:

CMS revised the calculation of its five-star ratings for the Nursing Home Compare website.

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

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

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

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

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

In 2022, CMS adopted a process measure for influenza vaccination coverage among healthcare personnel within SNFs.

This measure is 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.

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This metric highlights the number of patient stays in which SNF patients received the COVID-19 vaccine.

The SNF PPS FY 2024 Final Rule also modifies the SNF QRP’s Healthcare Professional (HCP) Covid Vaccine Measure.

The SNF PPS FY 2024 Final Rule also modified the SNF QRP’s Healthcare Professional (HCP) Covid Vaccine Measure.

The measure will track the proportion of healthcare staff vaccinated for COVID-19 and have kept their vaccination status current per the CDC recommendations.

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and second, the DC Function measure aligns more closely with the preferred functional outcomes for residents.

Medicare Annual Payment Rule

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

On July 31, 2023, CMS issued the SNF PPS FY 2024 Final Rule, which will result in a net increase of 4.0% in Medicare payments to SNFs in fiscal year 2024.

CMS’s SNF PPS FY 2025 Proposed Rule includes several updates to the SNF QRP aimed at enhancing the integration of social determinants of health (SDOH) into patient assessments and ensuring the accuracy of reported data.

Starting in fiscal year 2027, CMS plans to introduce four new SDOH items related to living situation, food security, and utility access, and modify an existing item on transportation availability in the minimum data set.

Additionally, CMS proposes that SNFs participating in the SNF QRP undergo a data validation process similar to that already implemented in the SNF VBP Program.

This process, mandated by recent legislation, aims to verify the accuracy of the data submitted through the minimum data set.

CMS plans to require this validation because SNFs that fail to meet the SNF QRP reporting requirements face a 2% reduction in their annual payment update.

CMS is also seeking public input through a request for information regarding future quality measure concepts for the SNF QRP.

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

On March 28, 2024, CMS issued a proposed rule that would increase the Medicare payment rates to SNFs in fiscal year 2025 by 4.1%, which is based on a market basket of 2.8% plus a 1.7% market basket forecast error adjustment, and a negative 0.4% productivity adjustment.

On July 31, 2023, CMS issued the SNF PPS FY 2024 Final Rule that increased Medicare payment rates by 4.0% to SNFs in fiscal year 2024.

This increase results from the 6.4% net market basket update to the payment rates, which is based on a 3.0% SNF market basket increase plus a 3.6% market basket forecast error adjustment, less a 0.2% productivity adjustment and a negative 2.3% adjustment as a result of the recalibrated parity adjustment.

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The recalibrated parity adjustment is being phased in at a rate of 2.3% per year on both the SNF PPS FY 2024 and FY 2023 Final Rules.

Sequestration of Medicare Rates

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

Sequestration of Medicare Rates — 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 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.

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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

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

Skilled Nursing Facility Value-Based Purchasing (SNF-VBP) Program — The SNF-VBP Program rewards SNFs with incentive payments based on the quality of care they provide to Medicare beneficiaries, as measured by a hospital readmissions measure.

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

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

The SNF PPS FY 2024 Final Rule elected to replace the SNFRM measure with the SNF WS PPR measure beginning in the FY 2028 program year.

The potentially preventable readmission (PPR) measure assesses the risk-standardized rate of unplanned and potentially avoidable readmissions during SNF stays for Medicare fee-for-service beneficiaries.

The SNF PPS FY 2024 Final Rule elected to replace the SNFRM measure with the SNF within-stay (WS) potentially preventable readmission (PPR) measure beginning in the FY 2028 program year.

The PPR measure assesses the risk-standardized rate of unplanned and potentially avoidable readmissions during SNF stays for Medicare fee-for-service beneficiaries.

The new SNF WS PPR measure refines the original Skilled Nursing Facility 30-Day Potentially Preventable Readmission (SNFPPR) measure, which followed the requirements of the Protecting Access to Medicare Act (PAMA) of 2014.

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Additionally, the SNF WS PPR measure's calculations use two years of Medicare claims data to generate a provider-specific risk-standardized readmission rate.

Part B Rehabilitation Requirements

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

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

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

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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.

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.

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.

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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.

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 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.

On March 9, 2024, President Biden signed the Consolidated Appropriations Act, 2024, which included a 2.93 percent update to the CY 2024 Physician Fee Schedule (PFS) Conversion Factor (CF) for dates of service March 9, 2024 through December 31, 2024.

This replaces the 1.25 percent update provided by the Consolidated Appropriations Act, 2023.

On November 2, 2023, CMS published the CY 2024 Physician Fee Schedule (2024 PFS Final Rule), which changes Medicare payments under the PFS and other Medicare Part B components.

The CY 2024 PFS Final Rule contains a conversion factor of $32.74, which is a decrease of $1.15 from the CY 2023 PFS conversion factor of $33.89.

This CY 2024 conversion factor is 3.4% lower than the CY 2023 conversion factor.

The CY 2024 PFS Final Rule 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.

These provisions 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.

For PT and SLP combined, the threshold for coding modifier requirements increases to $2,330 for CY 2024 with the same threshold for OT services.

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.

A new Caregiver Education Code has been made available to therapists providing face-to-face education to patient caregivers.

The CY 2024 PFS Final Rule will allow for general supervision of therapy assistants by PTs and OTs for remote therapeutic monitoring (RTM) services.

This change 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 CY 2024 PFS Final rule adds certain health and well-being coaching services that Medicare will reimburse on a temporary basis for CY 2024.

The final rule also adds 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

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

On January 26, 2024, CMS issued a memorandum to PACE organizations informing them that they will be subject to new prescription drug event (PDE) reporting requirements to receive manufacturer discounts for drugs provided through Medicare Part D as provided for in the Inflation Reduction Act of 2022 (IRA).

On March 8, 2024, CMS issued a further memorandum to PACE organizations providing the additional PDE information that they must submit beginning January 1, 2025.

Decisions Regarding Skilled Nursing Facility Payment

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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.

The reforms contained in the ACA have affected our independent 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.

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.

The 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.

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 CAA 2023 revised the funds available to fund Medicare in 2023 and deferred the PAYGO sequestration of Medicare expenses.

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.

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

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

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

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

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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 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.

In 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" in directors with two or more years of experience and certain minimum training in food safety so 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.

In 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’ focused infection control survey item, which CMS had removed in favor of standard infection control survey measures.

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In 2023, representatives of the DOJ speaking at certain industry events, including the American Health Law Association’s Fraud and Compliance Forum, have indicated that its healthcare enforcement trends would emphasize opioid prescribing, Medicare Advantage and managed care plan fraud, and COVID-19 related fraud, including under various relief programs available during and in conjunction with the pandemic.

In November of 2023, OIG added to its work plan an audit of nursing homes' nurse staffing hours reported in CMS's payroll-based journal, for which OIG expects to issue a report in FY 2025.

In addition, the OIG identified the following areas as its "key goals" for oversight:

(1) protecting residents from fraud, abuse, neglect, and promoting quality of care;

(2) promoting emergency preparedness and emergency response efforts:

(3) strengthening frontline oversight;

and (4) supporting federal monitoring of nursing homes to mitigate risks to residents.

In February of 2024, the OIG added to its work plan a study regarding the use of the National ackground Check Program (NBCP) in conducting background checks of prospective long-term care provider employees.

The purpose of this study will be to prepare a report regarding the cost of background checks, number of applicants who received background checks, and disqualification of employees during and after NBCP participation.

This report will also include information regarding the cost of background checks and any unintended consequences experienced as a result of using this program.

In April of 2024, the OIG updated its work plan to study and determine whether and how states used Medicaid supplemental payments for use in satisfying the state’s obligations to pay nursing facilities any amounts due under the state’s nursing facility upper payment limit

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.

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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.

Additionally, in 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 addition, the Five Star Quality Ratings incorporated staffing data such as staff tenure and SNF weekend staffing beginning with 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.

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.

Based on the Nursing Home Five-Star Quality Rating System’s Technical Users’ Guide updated in 2023, 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.

Additionally, the outcome of citations that a facility has informally disputed will only be included in the calculation of a facility’s star rating once the dispute is completed and the underlying survey considered final.

CMS also 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.

Importantly, under the new guidelines, only 10% of nursing facilities can receive a five-star rating in the state where it operates, with the bottom 20% receiving a one-star rating and the remaining 70% receiving a distribution of two-, three-, and four-star ratings (with approximately 23.3% of facilities receiving such ratings).

In September 2023, CMS announced that it will update the staffing level case-mix adjustment methodology and freeze four of the quality measures used in the Nursing Home Five-Star Quality Rating System beginning with the April 2024 refresh of the Nursing Home Compare website’s data.

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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 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.

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 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.

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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 the Skilled Nursing Facility Ownership and Management Reform Act of 2022.

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

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.

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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 assisted living facilities generally.

While the facts of this case are of limited precedential value to our independent 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 ALFs 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, with potential fines, sanctions and other penalties for noncompliance.

Governmental agencies and other authorities periodically inspect our independent subsidiaries 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.

Facilities must pass these inspections to maintain licensure under state law, to obtain or maintain certification under the Medicare and Medicaid programs, to continue participation in the Veterans Administration program at some facilities, and to comply with provider contracts with managed care clients at many facilities.

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

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

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

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

If our independent 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 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;

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

Accordingly, facilities that have poor regulatory histories before acquisition by our independent operating subsidiaries and that develop new deficiencies after acquisition are more likely to have sanctions imposed upon them by CMS or state regulators.

Accordingly, facilities that have poor regulatory histories before acquisition by our independent subsidiaries and that develop new deficiencies after acquisition are more likely to have sanctions imposed upon them by CMS or state regulators.

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

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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 patients admitted after the denial of payment date.

Some of our independent 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 patients admitted after the denial of payment date.

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

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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 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.

Many states in which our independent subsidiaries operate have adopted or are considering similar legislative proposals, some of which extend beyond that state's 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.

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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 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.

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

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

On January 17, 2024, CMS published the CMS Interoperability and Prior Authorization Final Rule (Interoperability Final Rule), which affects the data standards and application programming interfaces (APIs) used by entities that are payors for our services, including but not limited to Medicare Advantage organizations, Medicaid fee-for-service providers, and managed care organizations.

This new rule requires these payor entities to adopt new patient access APIs beginning January 1, 2026, and to complete implementation of both patient and provider access APIs by January 1, 2027, to facilitate the sharing of payor information with payors and providers.

While the purpose of this final rule is predominantly oriented to sharing information in the clinical setting and expediting the exchange of prior authorization data, this new rule may have implications for our business and how information is shared among our independent subsidiaries that participate in these programs, the payors, residents, and residents’ families involved in their care.

Antitrust Laws

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Americans with Disabilities Act

Our independent operating subsidiaries must also comply with the ADA, and similar state and local laws to the extent that the facilities are "public accommodations" as defined in those laws.

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

Our independent subsidiaries must also comply with the ADA, and similar state and local laws to the extent that the facilities are "public accommodations" as defined in those laws.

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

On January 25, 2024, the Office for Civil Rights (OCR) for HHS issued guidance to hospitals and long-term care facilities, emphasizing their obligation under CMS regulations to ensure non-discriminatory visitation policies, especially during public health emergencies.

This guidance, part of the U.S.

National Strategy to Counter Antisemitism, clarifies that these facilities cannot discriminate based on religion or other classes or characteristics protected against discrimination under federal civil rights laws.

The guidance includes examples where non-compliance occurred, such as unequal treatment based on religious affiliation or dietary restrictions, and stricter screening processes for certain religious groups.

OCR offers assistance to facilities to obtain compliance with these standards and encourages residents and other affected individuals to file complaints with OCR for potential administrative or civil action in cases of civil rights violations.

Real Estate Investment Trust (REIT) Qualification

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

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

federal income tax purposes.

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

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

REGULATIONS SPECIFIC TO SENIOR LIVING COMMUNITIES

REGULATIONS SPECIFIC TO SENIOR LIVING COMMUNITIES AND ANCILLARY SERVICES

As previously mentioned, senior living services revenue (approximately 2.0% of total revenue) is primarily derived from private pay residents, with a small portion of senior living revenue derived from Medicaid funds.

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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.

In order to operate our businesses, we and our independent subsidiaries must comply with 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.

RESULTS OF OPERATIONS

We believe we exist to dignify and transform post-acute care.

We set out a strategy to achieve our goal of ensuring our patients are receiving the best possible care through our ability to acquire, integrate and improve our operations.

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 September 30, 2023 increased $170.8 million, or 22.2%, while our diluted GAAP earnings per share grew by 12.1%, from $0.99 to $1.11, compared to the three months ended September 30, 2022.

Throughout 2023, we have continued to make progress on targeted initiatives related to increasing occupancy in our facilities, attracting and developing our people and acquiring new skilled nursing operations and integrating them with our proven cultural and operational principals.

Our combined Same Facilities and Transitioning Facilities occupancy increased by 2.9% compared to the three months ended September 30, 2022.

As our census continues to return 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 nine months ended September 30, 2023, we added 24 new operations, which included 17 operations in California.

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

We continue to execute on key initiatives to rebuild occupancy lost due to the pandemic as our overall same store skilled nursing occupancy was 81.0% for the first quarter of 2024, marking the first quarter where we have surpassed pre-pandemic occupancy.

Further, our combined Same Facilities and Transitioning Facilities occupancy increased by 2.2% to 79.8% compared to the same period in 2023, once again demonstrating our ability to gain additional market share even at our more mature operations.

Throughout most of our history, our business has been affected by seasonal fluctuations including occupancy and acuity.

For skilled nursing occupancy and skilled mix, we typically experience stronger occupancy and acuity during the first and fourth quarters and softening in the second and third quarters.

Additionally, we historically have acquired operations with lower occupancy and skilled mix.

As these operations become "operations of choice" in each of their respective healthcare markets, we typically see both occupancy and skilled mix increase.

Our total revenue for the three months ended March 31, 2024 increased $123.3 million, or 13.9%, compared to the three months ended March 31, 2023, while our diluted GAAP earnings per share grew by 13.3%, from $1.05 to $1.19, compared to the three months ended March 31, 2023.

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

We continue to experience healthy growth in both revenue and overall results.

During the three months ended March 31, 2024, we added five new operations.

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 adjust to the needs of their local medical communities, including methods for attracting new healthcare professionals into our workforce and retaining and developing existing staff.

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

Despite continued labor pressures, there are positive trends on both turnover and agency usage across our operations.

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

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

2023 2022 2023 2022

Three Months Ended March 31,

Service revenue 99.4 % 99.4 %

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Interest expense (0.2) (0.2)

Other income (expense) 0.4 — 0.5 (0.2)

Other income (expense), net 0.2 (0.2) 0.3 (0.5)

Other income 0.9 0.6

Other income, net 0.7 0.4

Income before provision for income taxes 8.8 8.8

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Net income attributable to The Ensign Group, Inc.

6.8 % 7.3 % 6.8 % 7.4 %

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

2023 2022 2023 2022

Three Months Ended March 31,

SEGMENT INCOME (1)

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Standard Bearer (2)

7,165 6,941 21,517 20,679

NON-GAAP FINANCIAL MEASURES:

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Adjusted EBT 100,678 86,344

EBITDA 98,133 90,165 285,376 267,181

101,750 91,870

Adjusted EBITDA 112,791 99,785

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Segment income is reconciled to the Condensed Consolidated Statement of Income in Note 8, 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.

(2) Standard Bearer segment income includes rental revenue and expenses from our independent subsidiaries.

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

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

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

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

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

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PERFORMANCE MEASURES

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

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

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• stock-based compensation expense;

• legal costs and adjustments;

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

• write-off of deferred financing fees;

• litigation;

• impairment of long-lived assets;

• acquisition related costs;

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

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

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

Adjusted EBITDA

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

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

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

Funds from Operations (FFO)

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In response, the National Association of Real Estate Investment Trusts (NAREIT) created FFO as a supplemental measure of operating performance for REITs, which excludes historical cost depreciation from net income.

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

VALUATION MEASURE

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

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

2023 2022 2023 2022

Three Months Ended March 31,

Consolidated statements of income data:

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Stock-based compensation expense

7,237 5,898 22,691 16,681

Legal costs and adjustments (a)

2,783 859 1,965 4,485

Gain on business interruption recoveries and sale of assets (259) (900) (1,009) (3,467)

Write-off of deferred financing fees (b)

Acquisition related costs (c)

150 245 722 416

Litigation (a)

Impairment of long-lived assets

Acquisition related costs (b)

Costs incurred related to new systems implementation

— 321 875 390

Depreciation and amortization - patient base (d)

135 86 182 213

Depreciation and amortization - patient base (c)

$ 100,678 $ 86,344

(a) Legal costs incurred in connection with the medical directors related matter.

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.

(a) Litigation relates to specific proceedings arising outside of the ordinary course of business.

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

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

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

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

2023 2022 2023 2022

Three Months Ended March 31,

Consolidated statements of income data:

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Net income $ 68,960 $ 59,969

net income (loss) attributable to noncontrolling interests

105 63 319 (77)

Other (income) expense, net

(2,253) 1,832 (8,939) 9,991

Net income attributable to noncontrolling interests

Other income, net

Provision for income taxes

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Depreciation and amortization

19,657 17,112

EBITDA $ 101,750 $ 91,870

Adjustments to EBITDA:

Stock-based compensation expense 8,238 6,573

7,237 5,898 22,691 16,681

Legal costs and adjustments (a)

2,783 859 1,965 4,212

Gain on business interruption recoveries and sale of assets

(259) (900) (1,009) (3,467)

Litigation (a)

Impairment of long-lived assets

Acquisition related costs (b)

150 245 722 416

Costs incurred related to new systems implementation 76 815

— 321 875 390

ADJUSTED EBITDA

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ADJUSTED EBITDAR

$ 158,401 $ 457,374

(a) Legal costs incurred in connection with the medical directors related matter.

Legal adjustments relate to findings attributable to our ancillary services subsidiary, which excludes the portion attributable to non-controlling interests.

(a) Litigation relates to specific proceedings arising outside of the ordinary course of business.

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

Three Months Ended September 30, 2023 Compared to the Three Months Ended September 30, 2022

Three Months Ended March 31, 2024 Compared to the Three Months Ended March 31, 2023

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

Three Months Ended September 30, 2023

Three Months Ended March 31, 2024

Skilled services Standard Bearer All Other Eliminations Consolidated

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Segment income (loss) 126,809 7,258 (42,620) — 91,447

Impairment of long-lived assets — — — — (1,849)

Income before provision for income taxes $ 89,598

Three Months Ended September 30, 2022

Three Months Ended March 31, 2023

Skilled services Standard Bearer All Other Eliminations Consolidated

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

Gain on sale of assets, net

Income before provision for income taxes $ 78,382

Our total revenue increased by $170.8 million, or 22.2%, compared to the three months ended September 30, 2022.

The increase in revenue was driven by an increase in occupancy from Medicaid non-skilled services as well as the impact of acquisitions.

Total revenue from operations acquired on or subsequent to October 1, 2022 increased our consolidated service revenue by $117.3 million during the three months ended September 30, 2023, when compared to the same period in 2022.

These increases were offset by a decline in state relief funds.

We recorded $10.3 million of state relief revenue in the third quarter of 2023 compared to $21.4 million in the same period in 2022.

All state relief revenue is included in Medicaid revenue.

Our total revenue increased by $123.3 million, or 13.9%, compared to the three months ended March 31, 2023.

The increase in revenue was primarily driven by an increase in occupancy of 2.1% and 2.2% from our skilled services Same Facilities and Transitioning Facilities, respectively, coupled with increasing daily revenue rates and the impact of acquisitions.

Additionally, our skilled services Recently Acquired Facilities increased total revenue by $62.2 million, when compared to the same period in 2023.

Skilled Services

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

Three Months Ended September 30,

The following table presents the skilled services revenue and key performance metrics by category during the three months ended March 31, 2024 and 2023:

Three Months Ended March 31,

2024 2023 Change % Change

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Number of campuses at period end (1)

27 26 1 3.8 %

Actual patient days 2,255,531 2,047,705 207,826 10.1 %

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Skilled mix by nursing revenue 49.9 % 52.7 % (2.8) %

Three Months Ended September 30,

Three Months Ended March 31,

2024 2023 Change % Change

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Skilled mix by nursing revenue 50.9 % 53.6 % (2.7) %

Three Months Ended September 30,

Three Months Ended March 31,

2024 2023 Change % Change

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Skilled mix by nursing revenue 37.9 % 42.0 % (4.1) %

Three Months Ended September 30,

Three Months Ended March 31,

2024 2023 Change % Change

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Number of facilities at period end 30 19 11 NM

Number of campuses at period end* 1 1 — NM

Number of campuses at period end (1)

Actual patient days 216,720 81,848 134,872 NM

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(4) Recently Acquired Facility (Acquisitions) results represent all facilities purchased on or subsequent to January 1, 2023.

Skilled services revenue increased by $163.6 million, or 22.1%, compared to the three months ended September 30, 2022.

Skilled services revenue increased by $118.7 million, or 13.9%, compared to the three months ended March 31, 2023.

The increases in skilled services revenue were across all payer types including increases in Medicaid revenue of $54.1 million, or 13.8%, Medicare revenue of $17.9 million, or 7.2%, managed care revenue of $31.4 million, or 20.1% and private revenue of $15.3 million, or 27.8%.

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 third quarter of 2023, as well as the favorable impact of skilled census from our recent acquisitions.

Our consolidated occupancy increased by 3.2% during the three months ended September 30, 2023 compared to the same period in 2022.

See Recent Activities for our operational update.

Revenue in our Same Facilities increased by $42.6 million, or 6.6% due to increased occupancy and a shift to higher Medicaid and private census.

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 6.9% and managed care revenue per patient day by 6.6%, resulting in an increase in managed care revenue of 15.9%.

In addition, Medicaid revenue increased by $30.7 million or 10.3%, mainly from the increase in days and Medicaid revenue per patient day.

With the ending of the PHE, we experienced a decrease in acuity due to the return of seasonal trends.

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

Our consolidated occupancy increased by 2.2% to 80.1%, during the three months ended March 31, 2024 compared to the same period in 2023.

During the first quarter of 2023 with the Public Health Emergency still in place, we had strong skilled mix and acuity driven by large volumes of COVID cases.

Comparatively, in the first quarter of 2024, we experienced strong skilled mix driven by steady growth in our managed care and other skilled patients.

Revenue in our Same Facilities increased by $47.4 million, or 6.8%, compared to the same period in 2023, due to increased occupancy and revenue per patient day.

Our Same Facilities occupancy for the first quarter of 2024 has surpassed pre-pandemic levels.

Our diligent efforts to strengthen our partnerships with various managed care organizations, hospitals and the local communities we operate in, increased our managed care revenue by 13.4%, mainly due to an increase in managed care days of 4.8% and managed care revenue per patient day of 6.1%.

We continued to see a shift in our patient population from Medicare to managed care as Medicare Advantage enrollment accounted for a larger portion of the overall population.

In addition, Medicaid revenue increased by $24.3 million or 7.6%, mainly from the increase in Medicaid days and revenue per patient day.

Revenue generated by our Transitioning Facilities increased by $9.0 million, or 7.9%, primarily due to improved occupancy growth and an increase in revenue per patient day.

Our Medicaid days and private days increased by 9.0% and 5.6%, respectively, demonstrating our ability to focus on increasing occupancy across various payer types.

We experienced a decrease in Medicare revenue and skilled days as our normal seasonality returns in the post-pandemic environment.

Skilled services revenue generated by Recently Acquired Facilities increased by $117.9 million compared to the three months ended September 30, 2022 .

We acquired 36 operations between October 1, 2022 and September 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.

Our Managed Care revenue increased by 38.7%;

Medicaid revenue increased by 6.0%;

and private and other revenue increased by 35.6%;

demonstrating our ability to focus on increasing occupancy across payer types.

Skilled services revenue generated by Recently Acquired Facilities increased by $62.2 million compared to the three months ended March 31, 2023 .

The increase was primarily due to 12 operational expansions between April 1, 2023 and March 31, 2024 across seven states.

In addition, we acquired 17 operations in February 2023 that contribute to the year over year increase.

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 higher skilled mix revenue than our typical acquisitions.

Included in our metrics for Recently Acquired Facilities are 17 facilities we acquired in California that were mature and had higher occupancy rates, higher skilled mix days and higher skilled mix revenue than our typical acquisitions.

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

Three Months Ended September 30,

Three Months Ended March 31,

Same Facility Transitioning Acquisitions Total

9 unchanged sentences

$ 401.81 $ 381.27 $ 338.23 $ 322.06 $ 459.18 $ 476.10 $ 398.06 $ 375.92

(1) These rates exclude state relief funding .

Our Medicare daily rates at Same Facilities and Transitioning Facilities increased by 5.4% and 4.5%, respectively, compared to the three months ended September 30, 2022.

(1) The rates are based on contractually agreed-upon amounts or rates, excluding the estimates of variable consideration under the revenue recognition standard, Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 606 and state relief funding.

Our Medicare daily rates at Same Facilities and Transitioning Facilities increased by 4.7% and 4.0%, respectively, compared to the three months ended March 31, 2023.

The increase is attributable to the 4.0% net market basket increase that became effective in October 2023.

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

Our average Medicaid rates increased 6.8% due to state reimbursement increases and our participation in supplemental Medicaid payment programs and quality improvement programs in various states.

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

Our average Medicaid rates increased 10.3% due to state reimbursement increases, our participation in supplemental Medicaid payment programs and quality improvement programs in various states and change in Medicaid mix.

For example, we continue to have an increase in Medicaid days in states with higher rates such as California.

Payor Sources as a Percentage of Skilled Nursing Services.

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

Three Months Ended September 30,

Three Months Ended March 31,

Same Facility Transitioning Acquisitions Total

9 unchanged sentences

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

Three Months Ended September 30,

Three Months Ended March 31,

Same Facility Transitioning Acquisitions Total

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

Three Months Ended September 30, Change

Three Months Ended March 31, Change

2024 2023 $ %

1 unchanged sentence

Revenue percentage 79.2 % 78.8 % 0.4 %

Cost of services related to our skilled services segment increased by $134.1 million, or 23.2%.

Cost of services as a percentage of revenue increased to 79.0% from 78.3% due to costs related to new acquisitions, increase in professional liabilities reserves and higher staffing expenses as a result of the challenging labor environment.

The increase in wages and benefits is offset by the decrease in contract labor usage as we made progress on retention and hiring.

Cost of services related to our skilled services segment increased by $97.3 million, or 14.5% from the same period in 2023.

Cost of services as a percentage of revenue increased to 79.2% from 78.8% due to the increase in labor cost as a result of new acquisitions with higher expenses in the turnaround stage, as well as an increase related to general and professional liability reserves.

In addition, included in cost of services during the three months ended March 31, 2024 and 2023 are expenses related to our deferred compensation plan of $1.2 million and $0.6 million, respectively.

We continue to make progress in reducing contracted labor by driving up retention and hiring.

Our cost of services as a percentage of revenue varies depending on the volume of acquisitions during the period, which typically have higher costs during the transitioning period.

Standard Bearer

Three Months Ended September 30, Change

Three Months Ended March 31, Change

2024 2023 $ %

1 unchanged sentence

Rental revenue generated from third-party tenants $ 4,195 $ 3,786 $ 409 10.8 %

Rental revenue generated from Ensign affiliated operations 16,976 15,024 1,952 13.0

Rental revenue generated from Ensign's independent subsidiaries

18,006 15,931 2,075 13.0

TOTAL RENTAL REVENUE

3 unchanged sentences

$ 14,087 $ 13,185 $ 902 6.8 %

Rental revenue — Our rental revenue, including revenue generated from our affiliated facilities, increased by $2.2 million, or 12.0%, to $21.0 million, compared to the three months ended September 30, 2022.

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

FFO — Our FFO increased by $1.1 million, or 8.7%, to $13.6 million, compared to the three months ended September 30, 2022.

The increase in rental revenue of $2.2 million is offset by increases in interest expense of $1.1 million associated with the intercompany agreements between Standard Bearer and the Service Center.

Rental revenue — Our rental revenue, including revenue generated from our independent subsidiaries, increased by $2.5 million, or 12.6%, to $22.2 million, compared to the three months ended March 31, 2023.

The increase in revenue is primarily attributable to five real estate purchases, as well as annual rent increases since the three months ended March 31, 2023.

FFO — Our FFO increased by $0.9 million, or 6.8%, to $14.1 million, compared to the three months ended March 31, 2023.

The increase in rental revenue of $2.5 million is offset by increases in interest expense of $1.4 million associated with the intercompany agreements as we continue to grow our real estate portfolio.

All Other Revenue

Our other revenue increased by $7.3 million, or 22.9%, to $39.1 million, compared to the three months ended September 30, 2022.

Other revenue for 2023 includes senior living revenue of $18.9 million, revenue from other ancillary services of $17.3 million and rental income of $2.9 million.

Our other revenue increased by $5.5 million, or 14.8%, to $42.6 million, compared to the three months ended March 31, 2023.

Other revenue includes senior living revenue of $20.3 million, revenue from other ancillary services of $19.3 million and rental income of $2.9 million.

The increase in other revenue is primarily attributable to our other ancillary services.

Consolidated Financial Expenses

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 31 operational expansions with long-term leases since the three months ended September 30, 2022.

Rent-cost of services — Our rent-cost of services as a percentage of total revenue decreased by 0.1% to 5.2%, primarily due to the growth in revenue outpacing the increase in rent expense and as our operational expansions include the acquisition of the related real estate properties.

General and administrative expense — General and administrative expense increased $5.3 million or 10.2%, to $57.2 million.

General and administrative expense as a percentage of revenue increased by 0.3% to 5.4%.

This increase was primarily due to increased legal costs and headcount due to acquisition activities.

Excluding the legal costs, general and administrative expense as a percentage of revenue remained consistent at 5.1%.

This increase was primarily driven by additional headcount due to acquisition activity.

General and administrative expense as a percentage of revenue decreased by 0.2% to 5.7%.

Depreciation and amortization — Depreciation and amortization expense increased $2.5 million, or 14.9%, to $19.7 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 decreased 0.2%, to 1.9%, as a percentage of revenue.

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

Depreciation and amortization expense remained consistent at 1.9%, as a percentage of revenue.

Other income, net — Other income, net as a percentage of revenue increased by 0.3%.

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

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

During the three months ended September 30, 2023 and 2022, the deferred compensation investment program had a loss of $1.4 million and $1.1 million, respectively.

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

Provision for income taxes — Our effective tax rate was 22.0% for the three months ended September 30, 2023, compared to 22.4% for the same period in 2022.

The increase is related to an increase in interest income from our investments and gains in our deferred compensation plan which incurs gains or losses depending on market performance.

During the three months ended March 31, 2024 and 2023, the deferred compensation plan had gains of $2.4 million and $1.2 million, respectively, with an offsetting expense allocated between cost of services and general and administrative expenses.

Provision for income taxes — Our effective tax rate was 23.0% for the three months ended March 31, 2024, compared to 23.5% for the same period in 2023.

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.

Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 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.

Nine Months Ended September 30, 2023

Skilled Services Standard Bearer All Other Eliminations Consolidated

Total revenue $ 2,638,090 $ 60,611 $ 114,574 $ (64,298) $ 2,748,977

Total expenses, including other expense, net 2,289,921 39,094 242,680 (64,298) 2,507,397

Segment income (loss) 348,169 21,517 (128,106) — 241,580

Loss on real estate insurance recoveries

Income before provision for income taxes $ 241,480

Nine Months Ended September 30, 2022

Skilled Services Standard Bearer All Other Eliminations Consolidated

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

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

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

Gain from sale of real estate

Income before provision for income taxes $ 211,638

Our total revenue increased $533.0 million, or 24.1%, compared to the nine months ended September 30, 2022.

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

Total revenue from operations acquired on or subsequent to October 1, 2022 increased our consolidated service revenue by $300.1 million during the nine months ended September 30, 2023, when compared to the same period in 2022.

In addition, we recorded $55.1 million of state relief revenue during the nine months ended September 30, 2023 compared to $63.5 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 nine months ended September 30, 2023 and 2022:

Nine Months Ended September 30,

2023 2022 Change % Change

TOTAL FACILITY RESULTS:

(Dollars in thousands)

Skilled services revenue $ 2,638,090 2,128,567 $ 509,523 23.9 %

Number of facilities at period end 258 222 36 16.2 %

Number of campuses at period end* 26 26 — — %

Actual patient days 6,363,107 5,287,690 1,075,417 20.3 %

Occupancy percentage — Operational beds 78.3 % 75.0 % 3.3 %

Skilled mix by nursing days 30.7 % 32.1 % (1.4) %

Skilled mix by nursing revenue 50.6 % 52.3 % (1.7) %

Nine Months Ended September 30,

2023 2022 Change % Change

SAME FACILITY RESULTS:

(Dollars in thousands)

Skilled services revenue $ 2,058,291 $ 1,909,387 $ 148,904 7.8 %

Number of facilities at period end 189 189 — — %

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

Actual patient days 4,895,304 4,680,168 215,136 4.6 %

Occupancy percentage — Operational beds 78.9 % 75.5 % 3.4 %

Skilled mix by nursing days 32.2 % 33.1 % (0.9) %

Skilled mix by nursing revenue 51.8 % 53.4 % (1.6) %

Nine Months Ended September 30,

2023 2022 Change % Change

TRANSITIONING FACILITY RESULTS:

(Dollars in thousands)

Skilled services revenue $ 186,948 $ 171,428 $ 15,520 9.1 %

Number of facilities at period end 22 22 — — %

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

Actual patient days 489,310 462,848 26,462 5.7 %

Occupancy percentage — Operational beds 76.0 % 72.1 % 3.9 %

Skilled mix by nursing days 21.8 % 23.4 % (1.6) %

Skilled mix by nursing revenue 38.9 % 41.8 % (2.9) %

Nine Months Ended September 30,

2023 2022 Change % Change

RECENTLY ACQUIRED FACILITY RESULTS:

(Dollars in thousands)

Skilled services revenue $ 392,851 $ 47,752 $ 345,099 NM

Number of facilities at period end 47 11 36 NM

Number of campuses at period end* 1 1 — NM

Actual patient days 978,493 144,674 833,819 NM

Occupancy percentage — Operational beds 76.4 % 69.1 % NM

Skilled mix by nursing days 27.5 % 28.0 % NM

Skilled mix by nursing revenue 49.7 % 45.8 % 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 $509.5 million, or 23.9%, compared to the nine months ended September 30, 2022.

The increases in skilled services revenue were across all payer types including increases in M edicaid revenue of $243.6 million, or 24.6%, Medicare revenue of $123.3 million, or 20.2%, managed care revenue of $99.5 million, or 25.6% and private revenue of $43.1 million, or 31.3%.

The increase in skilled services revenue was primarily driven by strong performance across our existing skilled services operations as our census continued to recover during the first nine months of 2023, continued growth in skilled census and the impact of acquisitions.

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

Revenue in our Same Facilities increased $148.9 million, or 7.8%, 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 revenue by $49.5 million, or 13.6%, mainly due to increases in managed care days of 8.2% and revenue per patient day of 4.2%.

In addition, Medicaid revenue increased by $87.3 million or 10.0%, mainly from the increases in Medicaid days and revenue per patient day.

Revenue generated by our Transitioning Facilities increased $15.5 million, or 9.1%, primarily due to improved occupancy growth and an increase in revenue per patient day.

Our private days, Medicaid days and managed care skilled days increased by 11.4%, 7.3% and 4.2%, respectively, demonstrating our ability to focus on increasing occupancy across payer types.

Skilled services revenue generated by Recently Acquired Facilities increased by approximately $345.1 million compared to the nine months ended September 30, 2022.

The increases were primarily due to the expansion of 36 operations between October 1, 2022 and September 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.

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

Nine Months Ended September 30,

Same Facility Transitioning Acquisitions Total

2023 2022 2023 2022 2023 2022 2023 2022

SKILLED NURSING AVERAGE DAILY REVENUE RATES

Medicare $ 715.73 $ 690.28 $ 688.45 $ 666.01 $ 776.42 $ 673.95 $ 724.85 $ 688.09

Managed care 530.73 509.18 527.77 492.19 548.39 439.40 532.41 507.32

Other skilled 594.85 570.37 522.06 533.80 468.14 428.56 576.60 558.30

Total skilled revenue 612.20 595.47 608.25 589.74 659.01 498.57 618.43 592.79

Medicaid 273.04 258.77 268.26 250.64 251.06 234.47 269.05 257.20

Private and other payors 263.13 249.86 253.81 249.37 260.58 181.23 261.99 248.66

Total skilled nursing revenue

$ 381.33 $ 369.26 $ 340.74 $ 329.84 $ 364.26 $ 305.09 $ 375.58 $ 364.06

(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 increased by 3.7% and 3.4%, respectively, compared to the nine months ended September 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.

During the nine months ended September 30, 2022, Medicare daily rates included three months of sequestration suspension of 1%, three months of sequestration suspension of 2% and three months of no sequestration suspension.

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

Our average Medicaid rates increased 4.6% due to state reimbursement increases and our participation in supplemental Medicaid payment programs and quality improvement programs in various states.

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

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

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

Nine Months Ended September 30,

Same Facility Transitioning Acquisitions Total

2023 2022 2023 2022 2023 2022 2023 2022

PERCENTAGE OF SKILLED NURSING REVENUE

Medicare 23.0 % 26.2 % 22.3 % 25.3 % 31.4 % 17.0 % 24.2 % 25.9 %

Managed care 20.1 19.2 12.7 12.4 13.1 9.3 18.5 18.4

Other skilled 8.7 8.0 3.9 4.1 5.2 19.5 7.9 8.0

Skilled mix 51.8 53.4 38.9 41.8 49.7 45.8 50.6 52.3

Private and other payors 7.5 7.0 8.5 8.2 7.9 3.8 7.6 7.0

Medicaid 40.7 39.6 52.6 50.0 42.4 50.4 41.8 40.7

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

Nine Months Ended September 30,

Same Facility Transitioning Acquisitions Total

2023 2022 2023 2022 2023 2022 2023 2022

PERCENTAGE OF SKILLED NURSING DAYS

Medicare 12.3 % 14.0 % 11.0 % 12.5 % 14.8 % 7.7 % 12.6 % 13.7 %

Managed care 14.4 13.9 8.2 8.3 8.7 6.5 13.1 13.2

Other skilled 5.5 5.2 2.6 2.6 4.0 13.8 5.0 5.2

Skilled mix 32.2 33.1 21.8 23.4 27.5 28.0 30.7 32.1

Private and other payors 10.9 10.4 11.4 10.8 11.0 6.4 10.9 10.3

Medicaid 56.9 56.5 66.8 65.8 61.5 65.6 58.4 57.6

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

Cost of Services

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

Nine Months Ended September 30, Change

2023 2022 $ %

Cost of service $ 2,081,107 $ 1,658,124 $ 422,983 25.5 %

Revenue percentage 78.9 % 77.9 % 1.0 %

Cost of services related to our skilled services segment increased by $423.0 million, or 25.5%.

Cost of services as a percentage of revenue increased to 78.9% from 77.9%, due to costs related to new acquisitions, increase in professional liabilities reserves and higher wage expenses as a result of the labor shortage environment, resulting in additional overtime, benefits and bonuses to our staff.

Standard Bearer

Nine Months Ended September 30, Change

2023 2022 $ %

(Dollars in thousands)

Rental revenue generated from third-party tenants $ 11,576 $ 11,180 $ 396 3.5 %

Rental revenue generated from Ensign affiliated operations 49,035 42,343 6,692 15.8

TOTAL RENTAL REVENUE $ 60,611 $ 53,523 $ 7,088 13.2 %

Segment income 21,517 20,679 838 4.1

Depreciation and amortization 18,528 15,798 2,730 17.3

FFO $ 40,045 $ 36,477 $ 3,568 9.8 %

Rental revenue — Our rental revenue, including revenue generated from our affiliated facilities, increased by $7.1 million, or 13.2%, to $60.6 million, compared to the nine months ended September 30, 2022.

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

FFO — Our FFO increased by $3.6 million, or 9.8%, to $40.0 million, compared to the nine months ended September 30, 2022.

The increase in rental revenue of $7.1 million is offset by increases in interest expense of $3.0 million associated with the intercompany agreements between Standard Bearer and the Service Center.

All Other Revenue

Our other revenue increased by $24.8 million, or 27.6%, to $114.6 million, compared to the nine months ended September 30, 2022.

Other revenue for 2023 includes senior living revenue of $56.4 million, revenue from other ancillary services of $49.9 million and rental income of $8.3 million.

The increase in other revenue is primarily attributable to our other ancillary services as well as senior living operations' starting to rebound 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 31 operational expansions with long-term leases since the nine months ended September 30, 2022.

General and administrative expense — General and administrative expense increased $40.4 million or 34.8%, to $156.4 million.

General and administrative expense as a percentage of revenue increased by 0.5% to 5.7%.

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

Excluding the legal costs, general and administrative expense as a percentage of revenue decreased 0.1%.

Depreciation and amortization — Depreciation and amortization expense increased $7.7 million, or 16.9%, to $53.2 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 decreased 0.2%, to 1.9%, as a percentage of revenue.

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

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

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

During the nine months ended September 30, 2023, the deferred compensation investment program had a gain of $1.1 million.

During the nine months ended September 30, 2022, the deferred compensation investment program had a loss of $5.7 million.

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

Provision for income taxes — Our effective tax rate was 22.1% for the nine months ended September 30, 2023, compared to 22.4% for the same period in 2022.

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

See Note 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 Credit Facility.

Our liquidity as of September 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 third quarter of 2023, the Company has deferred approximately $50.0 million of 2023 federal and California estimated tax payments.

The Company subsequently made an estimated tax payment of $69.4 million in October of 2023 for federal and California taxes that had been incurred through the third quarter of 2023.

Our liquidity as of March 31, 2024 is impacted by cash generated from strong operational performance offset by investments made for our operational expansions and ancillary businesses as well as capital expenditures to improve the quality of care at our existing operations.

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 $54.0 million and $90.4 million for the nine months ended September 30, 2023 and 2022, respectively.

Total capital expenditures for property and equipment were $77.4 million and $59.7 million for the nine months ended September 30, 2023 and 2022, respectively.

Cash paid to fund acquisitions was $2.9 million for the three months ended March 31, 2024 compared to no cash paid for the three months ended March 31, 2023.

Total capital expenditures for property and equipment were $29.4 million and $26.7 million for the three months ended March 31, 2024 and 2023, respectively.

We currently have approximately $110.0 million budgeted for renovation projects in 2024.

1 unchanged sentence

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

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

Our cash and cash equivalents as of March 31, 2024 consisted of bank term deposits, money market funds and U.S.

Treasury bill related investments.

In addition, as of September 30, 2023, we held investments of approximately $103.3 million.

We believe our investments that were in an unrealized loss position as of September 30, 2023 do not require an allowance for expected credit losses, nor has any event occurred subsequent to that date that would indicate so.

In addition, as of March 31, 2024, we held investments of approximately $122.1 million.

We believe our investments that were in an unrealized loss position as of March 31, 2024 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 September 30, 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 March 31, 2024, along with projected operating cash flows and available financing, will support our normal business operations for the foreseeable future.

On August 29, 2023, 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 September 1, 2023.

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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 September 30, 2023.

We did not purchase any shares pursuant to this stock repurchase program during the three months ended March 31, 2024.

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

Nine Months Ended September 30,

Three Months Ended March 31,

NET CASH PROVIDED BY/(USED IN):

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

The $69.1 million increase in cash provided by operating activities for the nine months ended September 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 deferral of income tax payments of $55.5 million and accrued wages offset by timing of accounts receivable collections.

The $13.0 million decrease in cash provided by operating activities for the three months ended March 31, 2024 compared to the same period in 2023 w as due to the timing of payments and wages and benefits o ffset by an increase in operational performance.

Investing Activities

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

The $6.0 million decrease in cash used in investing activities for the nine months ended September 30, 2023 compared to the same period in 2022, was primarily due to a decrease in cash used for operational expansions of $36.4 million offset by an increase in cash used for capital expenditures of $17.6 million and investments of $4.8 million.

In addition, in the prior year, we had cash proceeds from the sale of fixed assets and insurance proceeds of $8.6 million that did not recur in current year.

The $1.3 million decrease in cash used in investing activities for the three months ended March 31, 2024 compared to the same period in 2023 was primarily due to an increase investment maturities, offset by cash used for operational expansions and capital expenditures.

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 $29.9 million decrease in cash used in financing activities for the nine months ended September 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.

The $3.2 million increase in cash provided by financing activities for the three months ended March 31, 2024 compared to the same period in 2023, was primarily due to stock option exercises.

Credit Facility with a Lending Consortium Arranged by Truist

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Borrowings are supported by a lending consortium arranged by Truist.

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).

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 ranging from 1.25% to 2.25% per annum, based on the Consolidated Total Net Debt to Consolidated EBITDA ratio (as defined in the Credit Facility).

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 September 30, 2023, 23 of our subsidiaries have mortgage loans insured with HUD for an aggregate amount of $151.1 million, which subjects these subsidiaries to HUD oversight and periodic inspections.

As of March 31, 2024, 23 of our subsidiaries have mortgage loans insured with HUD for an aggregate amount of $149.4 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.

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Operating Leases

As of September 30, 2023, 213 of our facilities are under long-term lease arrangements, of which 96 of the operations are under nine triple-net Master Leases and one stand-alone lease with CareTrust REIT, Inc.

As of March 31, 2024, 218 of our facilities are under long-term lease arrangements, of which 98 of the operations are under nine triple-net Master Leases and one stand-alone lease with CareTrust REIT, Inc.

The Master Leases consist of multiple leases, each with its own pool of properties, that have varying maturities and diversity in property geography.

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Additionally, four of the 99 facilities leased from CareTrust include an option to purchase that we can exercise starting on December 1, 2024.

We also lease certain affiliated facilities and our administrative offices under non-cancelable operating leases, most of which have initial lease terms ranging from five to 20 years and is subject to annual escalation equal to the percentage change in the Consumer Price Index with a stated cap percentage.

We also lease certain facilities and our administrative offices under non-cancelable operating leases, most of which have initial lease terms ranging from five to 20 years and is subject to annual escalation equal to the percentage change in the Consumer Price Index with a stated cap percentage.

In addition, we lease certain of our equipment under non-cancelable operating leases with initial terms ranging from three to five years.

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

Eighty of our affiliated facilities, excluding the facilities that are operated under the Master Leases from CareTrust, are operated under 13 separate master lease arrangements.

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

Eighty-two of our independent subsidiaries, excluding the subsidiaries that are operated under the Master Leases from CareTrust, are operated under 13 separate master lease arrangements.

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

Failure to comply with Medicare and Medicaid provider requirements is a default under several of our leases, master lease agreements and debt financing instruments.

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With an indivisible lease, it is difficult to restructure the composition of the portfolio or economic terms of the lease without the consent of the landlord.

Department of Justice Civil Investigative Demand

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

Department of Justice (DOJ) stating that it was investigating whether there had been a violation of the FCA and/or the AKS with respect to the relationships between certain of our independently operated skilled nursing facilities and persons who serve or have served as medical directors.

We have fully cooperated with the DOJ and promptly responded to its requests for information.

In April 2020, we were advised that the DOJ declined to intervene in any subsequent action filed in connection with the subject matter of this investigation.

Despite the decision of the DOJ to decline to participate in litigation based on the subject matter of its previously issued CID, the involved qui tam relator has moved forward with the lawsuit.

We are vigorously defending this lawsuit, but expects the costs of defense to be significant given the nature of the allegations and the date range contemplated by the complaint.

As a general matter, our independent operating entities have established and maintain policies and procedures to promote compliance with the FCA, the AKS, and other applicable regulatory requirements.

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

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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