What changed in this filing

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Item 1A. Risk Factors

2024-07-25 compared with 2024-05-01 · 38 added, 26 removed, 784 unchanged (8% of the section changed)

22 unchanged sentences

• State efforts to regulate or deregulate the healthcare services industry or the construction or expansion of healthcare facilities could impair our ability to expand our operations, or could result in increased competition.

• Newly enacted legislation in the States where our independent subsidiaries are located may impact the volume of cases filed and the overall cost of those cases from a defense and indemnity standpoint.

• Newly enacted legislation in the States where our independent subsidiaries are located may impact the volume and severity of cases filed and the overall cost of those cases from a defense and indemnity standpoint.

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

34 unchanged sentences

The rules of Medicare and Medicaid, including reductions of reimbursement rates, changes to spending requirements, data reporting, measurement and evaluation standards could have a material, adverse effect on our revenues, financial condition and results of operations.

We derived 26.4% and 28.1% of our service revenue from the Medicare programs for the three months ended March 31, 2024 and 2023, respectively.

We derived 25.1% and 25.8% of our service revenue from the Medicare programs for the three and six months ended June 30, 2024, respectively, and 27.1% and 27.6% for the three and six months ended June 30, 2023, respectively.

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

11 unchanged sentences

• changes in methodology for patient assessment and/or determination of payment levels;

• changes in staff requirements (i.e., requiring all workers to be vaccinated against COVID-19 and receive booster injections for those vaccinations) as a condition of payment or eligibility for Medicare reimbursement (See also, Item 2., under Government Regulation );

• changes in staff requirements as a condition of payment or eligibility for Medicare reimbursement (See also, Item 2., under Government Regulation );

• the reduction or elimination of annual rate increases, or the end of the reduced payments deferment (See also, Item 2., under Government Regulation );

11 unchanged sentences

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

In fact, Medicaid is our largest source of revenue, accounting for 45.2% of our revenue for both the three months ended March 31, 2024 and 2023, respectively.

In fact, Medicaid is our largest source of revenue, accounting for 46.1% and 45.6% of our revenue for the three and six months ended June 30, 2024, respectively, and 46.0% and 45.6% for the three and six months ended June 30, 2023, respectively.

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

37 unchanged sentences

The breadth of disclosure required by this new rule may be adverse to our business interests and detrimental to our operations, revenue, and profitability and may have a chilling effect on investment due to the depth of the new reporting and transparency requirements.

Similarly, California passed a comparable law requiring the disclosure of certain ownership and financial information for SNFs in 2021.

On March 6, 2024, California’s regulations implementing this law took effect, which may invite further scrutiny and potential legal action, whether by the state agencies or private parties, within California based on the information disclosed as required by this law and its enabling regulations.

We cannot predict what effect future reforms to the U.S.

20 unchanged sentences

As discussed above, the Biden-Harris Administration has called for HHS and CMS to increase the level of scrutiny of SNF facilities and requested those agencies to adopt rules that would impose greater penalties upon non-compliant SNF operators.

SNF PPS FY 2025 Proposed Rule proposed increased penalties that surveyors may impose on SNFs for perceived non-compliance with CMS’s requirements for SNF participation in Medicare.

On October 26, 2023, CMS updated the survey resources that CMS and state surveyors use in evaluating our SNFs’ compliance with federal Requirements for Participation, incorporating recent changes to CMS’s methods for surveying infection control procedures.

19 unchanged sentences

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

As of March 31, 2024 and through the filing date of this report, 22 of our independent subsidiaries had reviews scheduled or in process, either pre- or post-payment.

As of June 30, 2024 and through the filing date of this report, 11 of our independent subsidiaries had reviews scheduled or in process, either pre- or post-payment.

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

4 unchanged sentences

and the medical necessity of rendered services.

For example, refer to the matter discussed in Item 3.

For example, refer to the matter discussed in Part II, Item 1.

Legal Proceedings .

24 unchanged sentences

As noted above, the Biden-Harris Administration has called upon HHS and CMS to study and propose new rules regarding staffing requirements and reimbursement for the nursing home industry, including tying reimbursement to staffing levels, salary, benefits, and retention.

CMS's recently finalized ownership transparency rule, discussed in Item 2., under Government Regulation , may provide an additional basis for further investigation, administrative action and ultimately fines, penalties, or sanctions if finalized, and may dissuade parties from working with us or our independent subsidiaries due to the reporting and disclosure obligations of being an Additional Disclosable Party under that final rule.

CMS's recently finalized ownership transparency rule, and similar state disclosure rules such as California’s (for which new regulations took effect in March of 2024), discussed in Item 2., under Government Regulation, may provide an additional basis for further investigation, administrative action and ultimately fines, penalties, or sanctions if finalized, and may dissuade parties from working with us or our independent subsidiaries due to the reporting and disclosure obligations of being an Additional Disclosable Party under that final rule.

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

38 unchanged sentences

As part of the revisions to the SFF program, a priority in revising the SFF program was to address “yo-yo” noncompliance of SNFs that would graduate from the SFF program only to later see their compliance and quality measures regress after graduation, potentially requiring readmission to the SFF program.

Among the measures implemented to avoid this issue of “yo-yo” noncompliance was a three-year lookback period for facilities that graduate from the SFF program to ensure that the quality and compliance improvements achieved through the SFF program were sustained.

Among the measures implemented to avoid this issue of “yo-yo” noncompliance was a three-year look-back period for facilities that graduate from the SFF program to ensure that the quality and compliance improvements achieved through the SFF program were sustained.

Facilities that graduate from the SFF program but continue to demonstrate poor compliance as evidenced by any SA’s survey, such as for actual harm, substandard quality of care, or immediate jeopardy deficiencies, may be subject to enhanced enforcement by CMS, up to and including termination from the Medicare and/or Medicaid programs.

This three-year lookback for sustained improvements by facilities that graduate the SFF program poses risk for our independent subsidiaries, specifically those that may be subject to the SFF program or that have been subject to the SFF program in the past.

As of March 31, 2024, we have three facilities graduated from the SFF program within the past three years.

This three-year look-back for sustained improvements by facilities that graduate the SFF program poses risk for our independent subsidiaries, specifically those that may be subject to the SFF program or that have been subject to the SFF program in the past.

As of June 30, 2024, we have three facilities graduated from the SFF program within the past three years.

First, for SNFs that are selected by CMS for participation in the SFF program, or which currently are in the SFF program, even graduation from the program is no longer an assurance that the SNF will be able to continue its operations.

Even one survey with a significant compliance deficiency, such as actual harm or an immediate jeopardy deficiency, may result in CMS—acting solely within its discretion—terminating the SNF’s Medicare or Medicaid participation, likely triggering the termination of other payor contracts and rendering the facility economically unviable.

Second, and relatedly, for SNFs that have graduated from the SFF program, they are subject to a three-year period of enhanced scrutiny where adverse findings by a SA and a single survey’s finding of poor compliance may result in CMS discretionarily terminating that facility’s Medicare and/or Medicaid participation, which would likely cause other payors to terminate their agreements with the facility as well.

Second, for SNFs that have graduated from the SFF program, they are subject to a three-year period of enhanced scrutiny where adverse findings by a SA and a single survey’s finding of poor compliance may result in CMS discretionally terminating that facility’s Medicare and/or Medicaid participation, which would likely cause other payors to terminate their agreements with the facility as well.

As a result, the financial and manpower resources needed for graduation from the SFF program may be for nothing if, in the three years following graduation from the SFF program, a SNF receives a poor survey result and permits CMS to impose fines and penalties up to the termination of the facility’s Medicare and Medicaid participation.

5 unchanged sentences

As discussed in more detail in Item 2., under Government Regulation , the Staffing Rule contains three primary staffing requirements which are phased in over the next several years.

Due to pending legislation in both the House of Representative and the Senate as well as the long phase in of the requirements, the exact effects of the Staffing Rule cannot be ascertained.

Due to pending legislation in both the House of Representatives and the Senate, industry litigation filed to dispute the Staffing Rule's validity and enforceability, as well as the long phase in of the requirements, the exact effects of the Staffing Rule cannot be ascertained.

However, we expect that the Staffing Rule in its current form will have adverse financial consequences upon our business.

We may be required to hire substantially more staff members, particularly nurse practitioners, registered nurses, licensed practical nurses and nursing aides than currently staffed.

We may be required to hire substantially more staff members, particularly nurse practitioners, registered nurses, and nursing aides than currently staffed.

Additionally, the Staffing Rule would place similar pressure on our competitors and result in sudden, expanded demand for nursing staff across the SNF industry.

33 unchanged sentences

Unauthorized parties may attempt to gain access to our systems or facilities, or those of third parties with whom we do business, through fraud or other forms of deception.

Additionally, the rapid ongoing evolution and increased adoption of emerging technologies such as artificial intelligence and machine learning may make it more difficult to anticipate and implement protective measures to recognize, detect and prevent the occurrence of cybersecurity breaches.

On occasion, we have acquired additional information systems through our business acquisitions, and these acquired systems may expose us to risk.

42 unchanged sentences

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

Of specific concern has been CMS efforts to lower Medicare Part B reimbursement rates for outpatient therapy services in 2021, 2022, 2023 and 2024.

Of specific concern has been CMS efforts to lower Medicare Part B reimbursement rates for outpatient therapy services.

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

35 unchanged sentences

As with the bill that increases the cap of non-economic damages for medical malpractice litigation, California’s influence on other states may result in this legislation becoming a model for other states and having similar, potentially adverse effects within those jurisdictions as well.

More recently, California’s legislature has proposed bills related to increasing the minimum wage for workers, spending requirements and increased disclosure.

In late 2023, California passed and its governor signed into law SB-525, which would increase the minimum wage for healthcare workers upon passage of a companion bill imposing minimum spending requirements upon SNFs.

As discussed in Item 2., Government Regulation, these proposed bills would create new and costly obligations on our independent subsidiaries if they became law and if enacted, would adversely affect our business, operations, and profitability.

34 unchanged sentences

We generally receive higher reimbursement rates for high acuity patients, and payors reimburse us at different rates.

For the three months ended March 31, 2024 and 2023, 71.6% and 73.3%, of our revenue was provided by government payors that reimburse us at predetermined rates, respectively.

For the three and six months ended June 30, 2024, 71.2% and 71.4%, of our revenue was provided by government payors that reimburse us at predetermined rates, respectively.

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

16 unchanged sentences

Additionally, increases to the frequency and/or severity of losses from such claims and suits may result in increased liability insurance premiums or a decline in available insurance coverage levels, which could materially and adversely affect our business, financial condition and results of operations.

In addition to carrying third-party liability insurance, our captive insurance subsidiary provides professional liability and general liability insurance to various independent subsidiaries.

See the risk factor titled “ Our self-insurance programs may expose us to significant and unexpected costs and losses.

We have in the past been subject to class action litigation involving claims of violations of various regulatory requirements and been able to settle these claims without an ongoing material adverse effect on our business.

7 unchanged sentences

For example, d espite 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 moved forward with the complaint in December 2020.

Refer to Item 3.

Refer to Part II, Item 1.

Legal Proceedings for additional information on this case.

10 unchanged sentences

If the other party to one or more of our contracts were to allege that we have violated the contract terms, we could be subject to civil liabilities which could have a material adverse effect on our financial condition and results of operations.

If litigation is instituted against one or more of our subsidiaries, a successful plaintiff might attempt to hold us or another subsidiary liable for the alleged wrongdoing of the subsidiary principally targeted by the litigation.

If litigation is instituted against one or more of our subsidiaries, a plaintiff might attempt to hold us or another subsidiary liable for the alleged wrongdoing of the subsidiary principally targeted by the litigation.

If a court in such litigation decided to disregard the corporate form, the resulting judgment could increase our liability and adversely affect our financial condition and results of operations.

42 unchanged sentences

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

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

During the six months ended June 30, 2024, we expanded our operations and real estate portfolio through a combination of long-term leases and real estate purchases, with the addition of 13 stand-alone skilled nursing operations and two campus operations.

This growth has placed and will continue to place significant demands on our current management resources.

31 unchanged sentences

Additionally, CMS's ownership transparency final rule, which requires the disclosure of SNF ownership and affiliated parties, will ultimately provide for the public disclosure of information reported to CMS under that rule.

This publicly available information may result in potential residents perceiving our highly rated facilities to be less desirable if they share ownership with lower rated facilities, even if the lower rated facility is a new acquisition or has a lower score for reasons beyond our control.

Other states, including Iowa and California, have adopted similar statutes and regulations requiring the disclosure of this information, with California’s most recent regulations addressing this topic taking effect in March of 2024.

The publicly available information disclosed as a result of these laws and rules may result in potential residents perceiving our highly rated facilities to be less desirable if they share ownership with lower rated facilities, even if the lower rated facility is a new acquisition or has a lower score for reasons beyond our control.

CMS continues to increase quality measure thresholds, which is regularly increased every six months, making it more difficult to achieve upward and five-star ratings.

8 unchanged sentences

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 data.

In April 2024, CMS announced that it is freezing four quality measures, with one short-stay measure to be replaced in October of 2024 and the other three measures to be unfrozen in January of 2025.

CMS will also be freezing three of its staffing level measures until July of 2024, although these frozen measures will not affect staff turnover measures.

Additionally, CMS announced that it is changing its staffing rating methodology to give the lowest possible score to and penalize providers that fail to provide staffing data or provide erroneous staffing data.

These changes risk our independent operating subsidiaries’ facilities being incorrectly awarded a lower star rating, or prevented from attaining a deserved higher ranking due to favorable data not being reflected in CMS’s five-star ratings due to the freeze or replacement of certain measures.

These lower ratings may cause potential residents to evaluate these independent operating subsidiaries’ facilities as less desirable, and result in fewer admissions and thus reduced revenue.

In July 2024, CMS will change the staffing case-mix adjustment methodology to a model based on PDPM.

3 unchanged sentences

We may be significantly affected if any of our independent subsidiaries fail to submit information for the MDS in 2024, or if CMS deems their MDS submissions to be erroneous.

In addition to the uncertainty created by coming changes to CMS’s five-star ratings that currently are unknown, the potential negative consequences of freezing unfavorable data may adversely affect our star rating and negatively impact our ability to attract residents.

In addition to the uncertainty created by future changes to CMS’s five-star ratings that currently are unknown, the potential negative consequences of freezing unfavorable data may adversely affect our star rating and negatively impact our ability to attract residents.

Providing quality patient care is the cornerstone of our business.

53 unchanged sentences

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

As of March 31, 2024, we leased 218 of our 302 independent subsidiaries.

As of June 30, 2024, we leased 222 of our 312 independent subsidiaries.

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

5 unchanged sentences

Our Credit Facility has a borrowing capacity of up to $600.0 million in aggregate principal amount.

As of March 31, 2024 and through the filing date of this report, we had no outstanding borrowings under our Credit Facility.

As of June 30, 2024 and through the filing date of this report, we had no outstanding borrowings under our Credit Facility.

Twenty-three of our subsidiaries have mortgage loans insured with the Department of Housing and Urban Development (HUD) for an aggregate amount of $148.6 million, which subjects these subsidiaries to HUD oversight and periodic inspections.

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

We also have one outstanding promissory note with an aggregate principal amount of approximately $2.0 million as of March 31, 2024.

We also have one outstanding promissory note with an aggregate principal amount of approximately $1.8 million as of June 30, 2024.

The term of the note is 12 years.

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

In addition, we had $2.8 billion of future operating lease obligations as of March 31, 2024.

In addition, we had $2.8 billion of future operating lease obligations as of June 30, 2024.

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

143 unchanged sentences

federal tax laws and interpretations thereof, whether under the TCJA or otherwise, could adversely affect an investment in our stock.

Additionally, REIT's that are related to our operation will likely be subject to the disclosure requirements of CMS's ownership transparency final rule, and may subject these REITs to additional public scrutiny.

Additionally, REIT's that are related to our operation will likely be subject to the disclosure requirements of CMS's ownership transparency final rule (and analogous state rules), and may subject these REITs to additional public scrutiny.

No prediction can be made regarding whether new legislation or regulation (including new tax measures) will be enacted by legislative bodies or governmental agencies, nor can we predict what consequences would result from this legislation or regulation.

39 unchanged sentences

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

What changed 10-Q

Item 1A. Risk Factors