ENSIGN GROUP, INC – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the condensed
consolidated financial statements and accompanying notes, which appear elsewhere
in this Quarterly Report on Form 10-Q. 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, 2020 (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. The section entitled "Risk Factors" contained
in Part II, Item 1A of this Quarterly Report on Form 10-Q, and similar
discussions in our other SEC filings, also describe some of the important risk
factors that may affect our business, financial condition, results of operations
and/or liquidity. You should carefully consider those risks, in addition to the
other information in this Quarterly Report on Form 10-Q and in our other filings
with the SEC, before deciding to purchase, hold or sell our common stock.
This Quarterly Report on Form 10-Q contains "forward-looking statements," within
the meaning of the Private Securities Litigation Reform Act of 1995, which
include, but are not limited to our expected future financial position, results
of operations, cash flows, financing plans, business strategy, budgets, capital
expenditures, competitive positions, growth opportunities, and plans and
objectives of management. Forward-looking statements can often be identified by
words such as "anticipates," "expects," "intends," "plans," "predicts,"
"believes," "seeks," "estimates," "may," "will," "should," "would," "could,"
"potential," "continue," "ongoing," similar expressions, and variations or
negatives of these words. These statements are not guarantees of future
performance and are subject to risks, uncertainties and assumptions that are
difficult to predict. Additionally, our business and operations for 2021
continue to be impacted by the COVID-19 pandemic. Because of the unprecedented
nature of the pandemic, we are unable to predict the full extent and duration of
the financial impact of COVID-19 on our business, financial condition and
results of operations. Our actual results could differ materially from those
expressed in any forward-looking statements as a result of various factors, some
of which are listed under the section "Risk Factors" contained in Part II, Item
1A of this Quarterly Report on Form 10-Q. These forward-looking statements speak
only as of the date of this Quarterly Report on Form 10-Q, and are based on our
current expectations, estimates and projections about our industry and business,
management's beliefs, and certain assumptions made by us, all of which are
subject to change. We undertake no obligation to revise or update publicly any
forward-looking statement for any reason, except as otherwise required by law.

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As used in this Management's Discussion and Analysis of Financial Condition and
Results of Operations, the words, "Ensign," "Company," "we," "our" and "us"
refer to The Ensign Group, Inc. and its consolidated subsidiaries. All of our
affiliated operations, the Service Center and the Captive are operated by
separate, wholly-owned, independent subsidiaries that have their own management,
employees and assets. 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 or the Captive are
operated by the same entity. This Management's Discussion and Analysis of
Financial Condition and Results of Operations should be read in conjunction with
our consolidated financial statements and related notes included the Annual
Report.

Overview

We are a provider of health care services across the post-acute care continuum,
engaged in the 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, 2021, we offered
skilled nursing, senior living and rehabilitative care services through 242
skilled nursing and senior living facilities. Of the 242 facilities, we operated
177 facilities under long-term lease arrangements, and have options to purchase
11 of those 177 facilities. Our real estate portfolio includes 95 owned real
estate properties, which included 65 facilities operated and managed by us, 31
senior living operations leased to and operated by The Pennant Group, Inc., or
Pennant, as part of the spin-off transaction that occurred in October 2019
(Spin-Off), and the Service Center location. Of the 31 real estate operations
leased to Pennant, two senior living operations are located on the same real
estate properties as skilled nursing facilities that the Company owns and
operates.

The following table summarizes our affiliated facilities and operational skilled
nursing beds and senior living units by ownership status as of September 30,
2021:
                                                                                                Leased (without            Total for
                                                     Owned and            Leased (with a           a Purchase              Facilities
                                                      Operated           Purchase Option)           Option)                 Operated
Number of facilities                                         65                     11                    166                      242
Percentage of total                                        26.9  %                 4.5  %                68.6  %                 100.0  %
Operational skilled nursing beds                          6,417                  1,145                 17,174                   24,736
Percentage of total                                        26.0  %                 4.6  %                69.4  %                 100.0  %
Senior living units                                       1,445                    178                    603                    2,226
Percentage of total                                        64.9  %                 8.0  %                27.1  %                 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 (or the
Captive) 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. 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 Annual 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.
Recent Activities
Coronavirus Update - We are continuing to closely monitor the impact of the
global COVID-19 pandemic on our business and are taking proactive steps designed
to protect the health and safety of our residents and employees and to maintain
business continuity. As the vaccines became accessible in all 50 states, we
began to see a significant decline in COVID-19 cases in our affiliated
operations as we worked diligently to vaccinate all of our willing residents and
staff. Our primary focus throughout the COVID-19 pandemic has remained ensuring
the health and safety of our patients, residents, employees, and their
respective families. We continue to implement measures necessary to provide the
safest possible environment within our sites of service, taking into
consideration the vulnerable nature of our patients and the unique exposure
risks of our staff.
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As the vaccine distribution commenced and infection rates began to decline, our
occupancy rates started to recover in the first quarter of 2021 and continued
throughout the second and third quarter of 2021. The improvements in occupancy
were due to our operations developing innovative approaches to confront the
occupancy declines, including strategic partnerships with upstream and
downstream continuum partners and increasing clinical competencies to treat
high-acuity patients, including those that are COVID-19 positive. Additionally,
we have seen increases in hospital volumes for surgeries. Some operations added
COVID-19 wings, while others became COVID-19 dedicated facilities, enabling an
important offloading of strained hospital capacity. Even with COVID-19 demands
waning, the partnerships developed during the pandemic will continue to benefit
us into the future. As a result of our local, one operation at a time approach,
our Same Facilities and Transitioning Facilities occupancy rebounded by 2.6% and
5.1%, respectively, during the third quarter of 2021 compared to the fourth
quarter of 2020, and 0.5% and 2.0%, respectively, compared to the second quarter
of 2021. By strengthening existing partnerships, creating new partnerships and
most importantly, demonstrating clinical capabilities and favorable outcomes,
our census has continued to stabilize. We believe our operations are primed to
rebuild occupancies and continue to gain additional market share as a result of
relationships with acute care providers and other health care partners.
The nationwide spread of the Delta variant has caused some moderation in our
recent occupancy growth rate as many states and areas in which our communities
are located are experiencing new COVID-19 caseloads. Our monthly occupancy for
Same Facilities and Transitioning Facilities grew 17 basis points from August to
September after growth had accelerated sequentially in the prior five months to
324 basis points from January to June. The Company expects sequential monthly
occupancy to again grow for October 2021, but at a slightly more moderated rate.
During the three and nine months ended September 30, 2021, we received
approximately $0.1 million and $11.6 million, respectively, in provider relief
fund distributions (Provider Relief Fund) from the Coronavirus Aid, Relief and
Economic Security Act of 2020 (the CARES Act) from the federal government. To
date, we have returned all Provider Relief Funds that we received. Further, in
March 2021, we repaid the remaining $102.0 million of Medicare Accelerated and
Advance Payment Program funds. On September 10, 2021, HHS made an additional
round of $17 billion in Provider Relief Fund available to support
healthcare-related expenses or lost revenue attributable to COVID-19. We have
not received any funding related to the additional round of Provider Relief Fund
distributions.
During the three and nine months ended September 30, 2021, we received an
additional $17.8 million and $50.3 million, respectively, in state relief
funding and recognized $19.2 million and $52.4 million, respectively, as
revenue, of which $4.4 million and $6.5 million were classified as unapplied
state funding included in our liabilities as of September 30, 2021 and December
31, 2020, respectively. See Note 3, COVID-19 Update in the Notes to the
Condensed Consolidated Financial Statements.
The CARES Act also provides for deferred payment of the employer portion of
social security taxes through the end of 2020, with 50% of the deferred amount
due by December 31, 2021 and the remaining 50% due by December 31, 2022. We
recorded $48.3 million of deferred payments of social security taxes as a
liability in 2020, of which $24.2 million will be paid out in the fourth quarter
of 2021 and the remaining liabilities in 2022.
Until the COVID-19 pandemic has been resolved as a public health crisis, it has
the potential to cause further and more severe disruption of the global and
national economies. Despite these challenges, we believe we are well-positioned
to operate effectively in the current environment. Our forecasted metrics may be
modified as the pace of the recovery in our volumes and related activity become
clearer over the coming months.
We continue to focus on navigating the challenges presented by COVID-19 through
utilizing the infrastructure of our local operational approach. Each location is
partnering with its local leaders and community outreach to ensure the
operations are well equipped to deliver quality care. Consistent with previous
hurdles, our local leaders are adjusting their operation to meet the clinical
and financial challenges, including utilizing the expertise of our Service
Center resources to implement best practices.
Department of Housing and Urban Development (HUD) Mortgage Loans - During nine
months ended September 30, 2021, three of our subsidiaries entered into the
Department of Housing and Urban Development (HUD) mortgage loans in the
aggregate amount of $31.4 million. The mortgage loans are insured with HUD,
which subjects these subsidiaries to HUD oversight and periodic inspections.
Loan proceeds were used to fund acquisitions, to renovate and upgrade existing
and future facilities, to cover working capital needs and for other business
purposes.
Common Stock Repurchase Program - On October 21, 2021, the Board of Directors
approved a stock repurchase program pursuant to which we may repurchase up to
$20.0 million of our common stock under the program for a period of
approximately 12 months that starts on October 29, 2021.
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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, 2021:
                          TX               CA               AZ               UT              CO              WA              ID            NE            IA            SC            WI            NV            KS             

Total

Number of operated facilities
Skilled nursing
operations                 62               50               29               18              14              13             10             4             4             4             2             1             -               211
Senior living
operations                  1                -                -                2               5               -              -             1             -             -             -             -             -                 9
Campuses(1)                 4                1                3                1               1               -              1             2             2             -             -             -             7                22
Number of operated beds/units
Operational skilled
nursing beds            8,028            5,078            4,203            1,991           1,305           1,227            904           413           368           426           100            92           601            24,736
Senior living units       505               65              315              163             619               -             21           301            31             -             -             -           206             2,226

Number of owned and operated facilities
Skilled nursing
properties                 15                6                7                7               4               2              5             1             -             4             2             -             -                53
Senior living
communities                 1                -                -                -               3               -              -             1             -             -             -             -             -                 5
Campuses(1)                 2                -                3                -               -               -              -             -             -             -             -             -             2                 7

Number of owned and operated beds/units
Owned skilled nursing
beds                    1,938              691            1,264              684             348             204            454            88             -           426              100          -           220             6,417
Owned Senior living
units                     439                -              315                -             355               -              -           262             -             -             -             -            74             1,445

Number of owned and not operated facilities
Senior living
properties                  6                2                1                -               -               -              2             1             -             -               19          -             -                31


(1) Campuses represent facilities that offer both skilled nursing and senior
living services.
During the nine months ended September 30, 2021, we expanded our operations
through a combination of long-term leases and a real estate purchase with the
addition of fourteen stand-alone skilled nursing operations. Of these additions,
one is related to a purchase of owned property, further expanding our real
estate portfolio. These new operations added a total of 1,504 operational
skilled nursing beds operated by our affiliated operating subsidiaries.
Subsequent to September 30, 2021, we expanded its operations through long-term
leases with the addition of three stand-alone skilled nursing operations. These
new operations added 328 operational skilled nursing beds to be operated by our
affiliated operating subsidiaries.
For further discussion of our acquisitions, see Note 8, Operation Expansions in
the Notes to the Condensed Consolidated Financial Statements.
Key Performance Indicators
We manage the fiscal aspects of our business by monitoring key performance
indicators that affect our financial performance. Revenue associated with these
metrics is generated based on contractually agreed-upon amounts or rate,
excluding the estimates of variable consideration under the revenue recognition
standard, ASC 606. These indicators and their definitions include the following:
Skilled Services
•Routine revenue - Routine revenue is generated by the contracted daily rate
charged for all contractually inclusive skilled nursing services. The inclusion
of therapy and other ancillary treatments varies by payor source and by
contract. Services provided outside of the routine contractual agreement are
recorded separately as ancillary revenue, including Medicare Part B therapy
services, and are not included in the routine revenue definition.
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•Skilled revenue - The amount of routine revenue generated from patients in the
skilled nursing facilities who are receiving higher levels of care under
Medicare, managed care, Medicaid, or other skilled reimbursement programs. The
other skilled patients who are included in this population represent very high
acuity patients who are receiving high levels of nursing and ancillary services
which are reimbursed by payors other than Medicare or managed care. Skilled
revenue excludes any revenue generated from our senior living services.
•Skilled mix - The amount of our skilled revenue as a percentage of our total
skilled nursing routine revenue. Skilled mix (in days) represents the number of
days our Medicare, managed care, or other skilled patients are receiving skilled
nursing services at the skilled nursing facilities divided by the total number
of days patients from all payor sources are receiving skilled nursing services
at the skilled nursing facilities for any given period.
•Average daily rates - The routine revenue by payor source for a period at the
skilled nursing facilities divided by actual patient days for that revenue
source for that given period. These rates exclude additional FMAP payments we
recognized as part of The Family First Coronavirus Response Act.
•Occupancy percentage (operational beds) - The total number of patients
occupying a bed in a skilled nursing facility as a percentage of the beds in a
facility which are available for occupancy during the measurement period.
•Number of facilities and operational beds - The total number of skilled nursing
facilities that we own or operate and the total number of operational beds
associated with these facilities.
Skilled Mix. Like most skilled nursing providers, we measure both patient days
and revenue by payor. Medicare, managed care and other skilled patients, whom we
refer to as high acuity patients, typically require a higher level of skilled
nursing and rehabilitative care. Accordingly, Medicare and managed care
reimbursement rates are typically higher than from other payors. In most states,
Medicaid reimbursement rates are generally the lowest of all payor types.
Changes in the payor mix can significantly affect our revenue and profitability.

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,
Skilled Mix:                                      2021                    2020                   2021                   2020

Days                                                  30.5  %                32.8  %                 31.8  %               30.6  %
Revenue                                               50.7  %                53.9  %                 52.5  %               51.8  %


Occupancy - We define occupancy derived from our skilled services as the ratio
of actual patient days (one patient day equals one patient occupying one bed for
one day) during any measurement period to the number of beds in facilities which
are available for occupancy during the measurement period. The number of
licensed beds in a skilled nursing facility that are actually operational and
available for occupancy may be less than the total official licensed bed
capacity. This sometimes occurs due to the permanent dedication of bed space to
alternative purposes, such as enhanced therapy treatment space or other
desirable uses calculated to improve service offerings and/or operational
efficiencies in a facility. In some cases, three- and four-bed wards have been
reduced to two-bed rooms for resident comfort, and larger wards have been
reduced to conform to changes in Medicare requirements. These beds are seldom
expected to be placed back into service. We believe that reporting occupancy
based on operational beds is consistent with industry practices and provides a
more useful measure of actual occupancy performance from period to period.

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,
Occupancy for skilled services:                  2021                        2020                        2021                        2020
Operational beds at end of period                    24,736                      22,991                      24,736                      22,991
Available patient days                            2,267,797                   2,113,808                   6,590,429                   6,268,801
Actual patient days                               1,665,967                   1,495,285                   4,775,274                   4,668,961
Occupancy percentage (based on
operational beds)                                      73.5  %                     70.7  %                     72.5  %                     74.5  %



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Segments
In the fourth quarter of fiscal year 2020, we began reporting the results of our
real estate portfolio as a new segment as we continue to expand our real estate
investment strategy. We have two reportable segments: (1) skilled services,
which includes the operation of skilled nursing facilities and rehabilitation
therapy services and (2) real estate, which is comprised of properties owned by
us and leased to skilled nursing and assisted living operations, including our
own operating subsidiaries and third party operators, and are subject to
triple-net long-term leases. Prior to this new segment structure, we had one
reportable segment, skilled services.
We also reported an "all other" category that includes operating results from
our senior living operations, mobile diagnostics, transportation and other
ancillary operations. Our senior living, mobile diagnostics, transportation and
other ancillary operations businesses are neither significant individually, nor
in aggregate and therefore do not constitute a reportable segment. Our Chief
Executive Officer, who is our chief operating decision maker, or CODM, reviews
financial information at the operating segment level. We have presented our
segment results in this Quarterly Report on Form 10-Q on a comparative basis to
conform to the new segment structure.

Revenue Sources

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

                                                      Three Months Ended 

September 30,

                                Skilled Services                 Other(1)                Total Service Revenue
                              2021           2020           2021          2020            2021            2020
Medicaid(2)                $ 263,072      $ 218,840      $  3,936      $  3,352      $    267,008      $ 222,192
Medicare                     176,660        189,237             -             -           176,660        189,237
Medicaid-skilled              45,308         38,232             -             -            45,308         38,232
Subtotal                     485,040        446,309         3,936         3,352           488,976        449,661
Managed care                 114,917         87,648             -             -           114,917         87,648
Private and other             42,118         36,325        18,586        21,707            60,704         58,032
Total service revenue      $ 642,075      $ 570,282      $ 22,522      $ 25,059      $    664,597      $ 595,341


                                                                                       Three Months Ended September 30,
                                                   Skilled Services                               Other(1)                              Total Service Revenue
                                              2021                 2020                  2021                  2020                  2021                  2020
Medicaid(2)                                     41.0  %               38.4  %               17.5  %               13.4  %               40.2  %               37.3  %
Medicare                                        27.5                  33.2                     -                     -                  26.6                  31.8
Medicaid-skilled                                 7.1                   6.7                     -                     -                   6.8                   6.4
Subtotal                                        75.6                  78.3                  17.5                  13.4                  73.6                  75.5
Managed care                                    17.9                  15.4                     -                     -                  17.3                  14.7
Private and other                                6.5                   6.3                  82.5                  86.6                   9.1                   9.8
Total service revenue                          100.0  %              100.0  %              100.0  %              100.0  %              100.0  %              100.0  %
(1) 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) Medicaid payor includes revenue for senior living operations and revenue related to FMAP.


                                                                    Nine Months Ended September 30,
                                                           Skilled Services                                 Other(1)                   Total Service Revenue
                                                       2021                    2020                                                   2021                  2020                   2021                 2020
Medicaid(2)                                    $         738,484          $   662,733                                          $     11,337              $  9,773             $   749,821          $   672,506
Medicare                                                 536,971              519,865                                                     -                     -                 536,971              519,865
Medicaid-skilled                                         128,041              110,626                                                     -                     -                 128,041              110,626
Subtotal                                               1,403,496            1,293,224                                                11,337                 9,773               1,414,833            1,302,997
Managed care                                             336,225              271,993                                                     -                     -                 336,225              271,993
Private and other                                        116,272              120,046                                                55,152                67,335                 171,424              187,381
Total service revenue                          $       1,855,993          $ 1,685,263                                          $     66,489              $ 77,108             $ 1,922,482          $ 1,762,371


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                                                         Nine Months Ended September 30,
                                                   Skilled Services                                                  Other(1)                                     Total Service Revenue
                                              2021                  2020                                                 2021                  2020                          2021                  2020
Medicaid(2)                                      39.8  %               39.3  %                                              17.1  %               12.7  %                       39.0  %               38.2  %
Medicare                                         28.9                  30.8                                                    -                     -                          27.9                  29.5
Medicaid-skilled                                  6.9                   6.6                                                    -                     -                           6.7                   6.3
Subtotal                                         75.6                  76.7                                                 17.1                  12.7                          73.6                  74.0
Managed care                                     18.1                  16.1                                                    -                     -                          17.5                  15.4
Private and other                                 6.3                   7.2                                                 82.9                  87.3                           8.9                  10.6
Total service revenue                           100.0  %              100.0  %                                             100.0  %              100.0  %                      100.0  %              100.0  %

(1) 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) Medicaid payor includes revenue for senior living operations and revenue related to FMAP.

In addition to the service revenue above, our rental revenue derived from
triple-net lease arrangements with third parties is $3.9 million and $11.8
million, respectively, for the three and nine months ended September 30, 2021
and $3.9 million and $11.2 million, respectively, for the three and nine months
ended September 30, 2020.
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. Several of our operating subsidiaries entered into transactions with
several such 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.

Real Estate
We generate rental revenue primarily by leasing post-acute care properties we
acquired to healthcare operators under triple-net lease arrangements, whereby
the tenant is solely responsible for the costs related to the property,
including property taxes, insurance, and maintenance and repair costs, subject
to certain exceptions. As of September 30, 2021, our real estate portfolio was
comprised of 95 real estate properties. Of these properties, 65 are leased to
affiliated skilled nursing facilities wholly-owned and managed by us, 31 are
leased to senior living operations wholly-owned and managed by Pennant and our
Service Center property, which is leased to our Service Center and numerous
third parties for commercial office space. Of the 31 real estate operations
leased to Pennant, two senior living operations are located on the same real
estate properties as skilled nursing facilities that the Company owns and
operates. During the three and nine months ended September 30, 2021, we
generated rental revenues of $16.3 million and $48.2 million, of which $12.3
million and $36.3 million, respectively, was derived from affiliated
wholly-owned healthcare 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
our other ancillary operations. Payment for these services varies and is based
upon the service provided. The payment is adjusted for an inability to obtain
appropriate billing documentation or authorizations acceptable to the payor and
other reasons unrelated to credit risk.


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Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations
are based on our condensed consolidated financial statements, which have been
prepared in accordance with U.S. Generally Accepted Accounting Principles
(GAAP). The preparation of these financial statements and related disclosures
requires us to make judgments, estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenue and expenses during the reporting period. On an ongoing basis, we
review our judgments and estimates, including but not limited to those related
to the variable considerations to arrive at the transaction price for revenue
recognition, income taxes, intangible assets and loss contingencies. We base our
estimates and judgments upon our historical experience, knowledge of current
conditions and our belief of what could occur in the future considering
available information, including assumptions that we believe to be reasonable
under the circumstances. By their nature, these estimates and judgments are
subject to an inherent degree of uncertainty, and actual results could differ
materially from the amounts reported. While we believe that our estimates,
assumptions, and judgments are reasonable, they are based on information
available when the estimate was made. Refer to Note 2, Summary of Significant
Accounting Policies, within the Notes to the Condensed Consolidated Financial
Statements for further information on our critical accounting estimates and
policies, which are as follows:
•Revenue recognition - the estimate of variable considerations to arrive at the
transaction price, including methods and assumptions used to determine
settlements with Medicare and Medicaid payors or retroactive adjustments due to
audits and reviews;
•Self-insurance - the valuation methods and assumptions used in estimating costs
to settle open claims of insureds, as well as an estimate of the cost of insured
claims that have been incurred but not reported;
•Acquisition accounting - the assumptions used to allocate the purchase price
paid for assets acquired and liabilities assumed in connection with our
acquisitions; and
•Income taxes - the estimation of valuation allowance or the need for and
magnitude of liabilities for uncertain tax position.

Industry Trends
The post-acute care industry has evolved to meet the growing demand for
post-acute and custodial healthcare services generated by an aging population,
increasing life expectancies and the trend toward shifting patient care to lower
cost settings. The industry has evolved in recent years, which we believe has
led to a number of favorable improvements in the industry, as described below:
•Shift of Patient Care to Lower Cost Alternatives - The growth of the senior
population in the U.S. continues to increase healthcare costs, often faster than
the available funding from government-sponsored healthcare programs. In
response, federal and state governments have adopted cost-containment measures
that encourage the treatment of patients in more cost-effective settings such as
skilled nursing facilities, for which the staffing requirements and associated
costs are often significantly lower than acute care hospitals and other
post-acute care settings. As a result, skilled nursing facilities are generally
serving a larger population of higher-acuity patients than in the past.
•Significant Acquisition and Consolidation Opportunities - The skilled nursing
industry is large and highly fragmented, characterized predominantly by numerous
local and regional providers. Due to the increasing demands from hospitals and
insurance carriers to implement sophisticated and expensive reporting systems,
we believe this fragmentation provides us with significant acquisition and
consolidation opportunities.
•Improving Supply and Demand Balance - The number of skilled nursing facilities
has declined modestly over the past several years. We expect that the supply and
demand balance in the skilled nursing industry will continue to improve due to
the shift of patient care to lower cost settings, an aging population and
increasing life expectancies.
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•Increased Demand Driven by Aging Populations - As seniors account for an
increasing percentage of the total U.S. population, we believe the demand for
skilled nursing and senior living services will continue to increase. According
to the census projection released by the U.S. Census Bureau in early 2020,
between 2016 and 2030, the number of individuals over 65 years old is projected
to be one of the fastest growing segments of the United States population,
growing from 16% to 21%. The Bureau expects this segment to increase nearly 50%
to 73 million, as compared to the total U.S. population which is projected to
increase by 10% over that time period. Furthermore, the generation currently
retiring has accumulated less savings than prior generations, creating demand
for more affordable senior housing and skilled nursing services. As a
high-quality provider in lower cost settings, we believe we are well-positioned
to benefit from this trend.
•Transition to Value-Based Payment Models - In response to rising healthcare
spending in the United States, commercial, government and other payors are
generally shifting away from fee-for-service payment models towards value-based
models, including risk-based payment models that tie financial incentives to
quality, efficiency and coordination of care. 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.  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. With our focus on quality care and strong clinical
outcomes, Ensign is well-positioned to benefit from these outcome-based payment
models.
We believe the post-acute industry has been and will continue to be impacted by
several other trends. The use of long-term care insurance is increasing among
seniors as a means of planning for the costs of skilled nursing services. In
addition, as a result of increased mobility in society, reduction of average
family size, and the increased number of two-wage earner couples, more residents
are looking for alternatives outside the family for their care.
GOVERNMENT REGULATION
General
Healthcare is an area of extensive and frequent regulatory change. Changes in
the law or new interpretations of existing laws may have a significant impact on
revenue, costs and business operations. Our independent, operating subsidiaries
that provide healthcare services are subject to federal, state and local laws
relating to, among other things, licensure, delivery, 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 and
business relationships with physicians, and workplace protection for healthcare
staff. Such laws include the Anti-Kickback Statue, the federal False Claims Act
(FCA), the Stark Law, the Health Care Emergency Temporary Standard, and state
corporate practice of medicine statutes.

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Governmental and other authorities periodically inspect our skilled nursing
facilities, senior living facilities and outpatient rehabilitation agencies to
verify that we continue to comply with applicable regulations and standards. We
must pass these inspections to remain licensed under state laws and to comply
with our Medicare and Medicaid provider agreements. We can only participate in
these third-party payment programs if inspections by regulatory authorities
reveal that our operations are in substantial compliance with applicable
requirements. In the ordinary course of business, we may receive notices from
federal or state regulatory authorities alleging deficiencies in certain
regulatory practices. These statements of deficiency may require us to take
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.
We believe that the regulatory environment surrounding the healthcare industry
subjects providers to intense scrutiny. In the ordinary course of business,
providers are subject to inquiries, investigations and audits by federal and
state agencies related to compliance with participation and payment rules under
government payment programs. These inquiries may originate from the HHS Office
of the Inspector General (OIG), state Medicaid agencies, local and state
ombudsman offices and CMS Recovery Audit Contractors, among other agencies. In
response to the inquiries, investigations and audits, the federal and state
governments continue to impose citations for regulatory deficiencies and other
regulatory penalties, including demands for refund of overpayments, expanded
civil monetary penalties that extend over long periods of time and date back to
incidents prior to surveyor visits, Medicare and Medicaid payment bans and
terminations from the Medicare and Medicaid programs. We vigorously contest each
such regulatory outcome when appropriate; however, there are significant legal
and other expenses involved that consume our financial and personnel resources.
Expansion of enforcement activity could adversely affect our business, financial
condition or the results of our operations.
Coronavirus
In an effort to promote efficient care delivery and to decrease the spread of
COVID-19, federal, state and local regulators have both implemented new
regulations and waived certain existing regulations, including those set forth
below.
Temporary suspension of certain patient coverage criteria and documentation and
care requirements - The Coronavirus Aid, Relief, and Economic Security Act of
2020 (the CARES Act) and a series of temporary waivers and guidance issued by
CMS suspended various Medicare patient coverage criteria to ensure patients
continue to have adequate access to care, notwithstanding the burdens placed on
healthcare providers as related to the COVID-19 pandemic. Many of these
regulatory waivers were issued pursuant to Section 1135 of the Social Security
Act, which authorizes the HHS Secretary to temporarily waive or modify Medicare
and Medicaid requirements for affected health care providers and facilities
following the declaration of a public health emergency (Section 1135 Waivers).
HHS also waived requirements specific to skilled nursing facilities pursuant to
its authority under Section 1812(f) of the Social Security Act (Section 1812(f)
Waiver, and together with the Section 1135 Waivers, the Emergency Waivers).
While many of the Emergency Waivers are expected to last throughout the duration
of the COVID-19 public health emergency, CMS ended several Emergency Waivers
effective May 10, 2021.
Examples of requirements that were waived due to the COVID-19 emergency
declaration include the following: (1) approving temporary expansion sites to
ensure that local hospitals and health systems have the capacity to handle a
potential surge of COVID-19 patients (e.g. CMS Hospital Without Walls); (2)
removing barriers for physicians, nurses, and other clinicians from the
community or from other states to allow healthcare systems to provide clinical
and workforce support where needed; (3) increasing access to telehealth and
corresponding reimbursement through Medicare to ensure patients have access to
healthcare while remaining safe at home; (4) expanding in-place COVID-19 testing
to allow for more testing at home or in community based settings; and (5)
temporarily waiving certain documentation, reporting and audit requirements to
allow providers, health care facilities, Medicare Advantage and Part D plans,
and states to focus on the provision of care (e.g., Patients Over Paperwork).
Many states have also waived regulations to ease regulatory burdens on the
healthcare industries. It remains uncertain when federal and state regulators
will resume enforcement of those regulations, which remain waived or are
otherwise not being enforced during the public health emergency. We believe
these regulatory actions could contribute to changes in skilled mix potentially
impacting the timing, amount or duration, which may have been different without
the existence of the waivers.
Pursuant to the Emergency Waivers, CMS also authorized temporary waivers on
medical review requirements, effective March 1, 2020, for the duration of the
public health emergency. In addition, CMS is re-prioritizing scheduled program
audits and contract-level Risk Adjustment Data Validation audits for Medicare
Advantage (MA) organizations, Part D sponsors, Medicare-Medicaid Plans, and
Programs of All-Inclusive Care for the Elderly organizations. Re-prioritizing
these audit activities allows providers, CMS and organizations to focus on
patient care.
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In July 2020, CMS updated their COVID-19 Provider Burden Relief Frequently Asked
Questions (FAQs) related to claim audit waivers for multiple services. On March
30, 2020, CMS suspended most Medicare Fee-For-Service (FFS) medical reviews
because of the COVID-19 pandemic. This included pre-payment medical reviews
conducted by Medicare Administrative Contractors (MACs) under the Targeted Probe
and Educate program and post-payment reviews conducted by the MACs, Supplemental
Medical Review Contractors (SMRC) reviews and Recovery Audit Contractors (RAC).
CMS authorized MACs to resume these audit activities beginning on August 3,
2020, regardless of the status of the public health emergency. All reviews will
be conducted in accordance with statutory and regulatory provisions, as well as
related billing and coding requirements. Available waivers and flexibilities for
the claims selected for review will also be applied.
Under the Emergency Waivers, CMS is also allowing skilled nursing facilities to
provide a skill-in-place program for Medicare beneficiaries who are residents of
the skilled nursing facilities that meet the skill-in-place criteria, foregoing
the usual three-day qualifying hospital stay. This waiver remains valid for the
duration of the COVID-19 public health emergency. As patients qualify for
skill-in-place for Medicare Part A stays, we could see a decrease in long-term
care Medicare Part B programs.
On August 24, 2020, CMS released a Medicaid Informational Bulletin providing
guidance to states on flexibilities that are available to increase reimbursement
for nursing facilities implementing specific infection control practices. On
September 8, 2021, CMS clarified that CMS' waivers do not waive or change other
requirements for SNF coverage under Medicare, including the SNF level of care
criteria, which is unchanged by the public health emergency. CMS used this
transmittal to further clarify that CMS will review and take action in
connection with SNF admissions that do not satisfy SNF level of care criteria
that existed prior to the public health emergency and the institution of CMS'
blanket waivers.
Resuming visitation and resident rights - CMS has issued guidance to facilities
throughout the public health emergency regarding patients' rights to visitation.
While the CMS guidance issued in March 2020 directed that facilities severely
restrict visitation, CMS has subsequently provided guidance through the course
of the pandemic (and last updated in September 2020) that broadens visitation.

Testing requirements - Beginning in April 2020, authorities in several states in
which our independent operating subsidiaries are located began to mandate
widespread COVID-19 testing at all nursing home and long-term care facilities.
This came after the Centers for Disease Control and Prevention (CDC) stated that
older adults are at a higher risk for serious illness from the coronavirus and
issued updated testing guidelines for nursing homes. Some of these states were
also publicly reporting COVID-19 outbreaks in facilities. On July 22, 2020, CMS
announced that nursing homes in states with a 5% or greater positivity rate for
COVID-19 will be required to test all nursing home staff each week. On August
26, 2020, CMS issued new parameters for testing, requiring routine monthly
testing of all facility staff if the facility's county positivity rate is less
than 5%; weekly testing if the county positivity rate is between 5% and 10%; and
twice weekly testing if the county positivity rate exceeds 10%. On April 27,
2021, CMS again issued revised parameters for testing, specifying that the
requirement for routine testing of staff applies only to those staff members
that are unvaccinated - fully vaccinated staff do not have to be routinely
tested. On September 9, 2021, the Biden-Harris administration (the
Administration) announced a forthcoming interim final rule that would require
all workers in Medicare and Medicaid participating health facilities to be fully
vaccinated and the text of this interim final rule is expected in the fourth
quarter of 2021. The routine testing requirements are in addition to obligations
to screen staff each shift, residents daily, and all persons entering the
facility for signs and symptoms of COVID-19. Facilities must test any staff or
resident, regardless of vaccination status, who has signs or symptoms of
COVID-19. In the event of a COVID-19 outbreak in the facility, all staff and
residents must be tested at regular intervals until repeat testing identifies no
new cases of COVID-19 infection among staff or residents for a 14-day period.
Additional guidance may be issued in connection with the forthcoming interim
final rules regarding mandatory worker vaccinations expected by CMS for Medicare
and Medicaid-participating facilities, which may also contain provisions
affecting the testing and vaccination of residents. In addition to CMS' testing
mandates, some states have imposed their own testing requirements for residents
and staff or are enforcing testing mandates under existing or expanded workplace
safety regulations. In addition to expected interim final rules mandating
vaccinations for health facility workers by CMS and vaccinations or testing by
the U.S. Department of Labor's Occupational Safety and Health Administration
(OSHA). Several states where our independent operating facilities are located
have issued vaccine mandates that apply to facility employees. California, the
most populous state, issued an order on August 5, 2021, requiring workers in
nursing homes and other health facilities to receive at least one vaccine dose
by September 30, 2021. On August 20, 2021, the State of Washington's governor
issued a proclamation requiring workers in long-term care facilities and
healthcare settings-including employees, contractors, and volunteers-to be fully
vaccinated against COVID-19 by October 2021. On August 30, 2021, the Colorado
Board of Health approved a COVID-19 vaccine requirement for employees,
contractors, and other individuals working in certain health care facilities
including nursing homes and assisted living facilities, mandating that these
workers fully vaccinated by October 2021. None of these state mandates allow for
regular COVID-19 testing as an alternative to vaccination. Non-compliance with
state or federal mandates may result in imposition of fines or other
administrative action.
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Reporting requirements - Effective May 8, 2020, CMS published an interim final
rule requiring skilled nursing facilities to report information related to
COVID-19 cases among facility residents and staff directly to the CDC National
Health Safety Network no less than weekly; the reported information is made
publicly available on a dedicated website. In addition, skilled nursing
facilities are required to inform residents, their families and representatives
of confirmed or suspected COVID-19 cases in their facilities. This
resident/family/representative notification is required to take place by 5:00
p.m. (local time) the next calendar day following the occurrence of: (1) a
single confirmed infection of COVID-19, or (2) three or more residents or staff
with new-onset of respiratory symptoms that occur within 72 hours of one
another.
Effective May 21, 2021, CMS published an interim final ruling requiring
long-term care facilities to report weekly COVID-19 vaccination data of both
residents and staff to the CDC National Healthcare Safety Network. Facilities
are also required to provide residents and staff with vaccine education and
offer vaccines, when available, to residents and staff. CMS may initiate
enforcement activities and assess civil monetary penalties for not meeting any
of these COVID-19 related requirements.
Effective June 11, 2021, HHS revised the Post-Payment Notice of Reporting
Requirements which are applicable to recipients of Provider Relief Funds. The
revised requirements provide additional information on the data elements that
recipients are required to report as part of the post-payment reporting process,
as well as the timing of such reporting.
Effective August 23, 2021, CMS published an interim final rule incorporating
comments on its May 21, 2021 interim final rule. This updated interim final rule
expands on the interim final rule effective May 21, 2021, continuing the
obligation for long-term care and intermediate care facilities to report
COVID-19 vaccination data for both residents and staff to the CDC National
Healthcare Safety Network. This new interim final rule requires facilities to
develop policies and procedures to ensure the availability of the COVID-19
vaccine to residents and staff, and to educate residents and staff concerning
the benefits, risks, and potential side effects associated with the vaccine.
This interim final rule also addresses responses to vaccination refusal by
residents and staff in compliance with EEOC guidance. CMS may initiate
enforcement activities and assess civil monetary penalties for not meeting any
of these COVID-19 related reporting requirements under this interim final rule.
We do not believe these COVID-19 related requirements will have a material
impact on our Condensed Consolidated Financial Statements.
Survey Activity and Enforcement - On March 20, 2020, CMS announced the
initiation of focused infection control surveys intended to assess long-term
care facility compliance with infection control requirements in connection with
the COVID-19 pandemic. CMS prioritized infection control surveys over annual
recertification and complaint surveys at the non-immediate jeopardy level,
confirming its commitment to infection prevention and control in the skilled
nursing industry. Effective August 17, 2020, CMS provided guidance authorizing
resumption of traditional survey activity.
On June 1, 2020 (and subsequently updated in January 2021), CMS introduced an
enhanced enforcement program with respect to infection control deficiencies. The
program contemplates more significant remedies against facilities with a prior
history of infection control deficiencies and imposes more stringent penalties
with deficiencies identified at a higher scope and severity. The spectrum of
remedies available to CMS for imposition on skilled nursing facilities in
connection with this enhancement includes increased monetary fines, shortened
time periods to return to compliance, and other administrative penalties.
Federal COVID-19 Vaccination Program - On December 11, 2020, the U.S. Food and
Drug Administration (FDA) issued the first emergency use authorization (EUA) for
the Pfizer-BioNTech vaccine for the prevention of COVID-19, followed by the
second EUA for the use of the Moderna COVID-19 vaccine on December 28, 2020, and
the third EUA for the Johnson & Johnson vaccine on February 27, 2021. Vaccine
distribution is now widespread in all 50 states.
On August 18, 2021, the Administration announced that CMS is developing an
emergency regulation requiring all workers within Medicare and
Medicaid-participating nursing homes to be vaccinated against COVID-19 as a
condition of participation in the Medicare and Medicaid programs. The
Administration expanded the scope of this forthcoming emergency regulation on
September 9, 2021, announcing that CMS is developing new regulations requiring
workers within all Medicare and Medicaid-certified facilities to be fully
vaccinated against COVID-19 as a condition of participating in the Medicare and
Medicaid programs. The Administration indicated that the interim final rule was
expected to be issued in the fourth quarter of 2021. Additionally, and
separately, on September 9, 2021, the Administration announced that the U.S.
Department of Labor's Occupational Safety and Health Administration (OSHA) would
introduce a rule requiring employers with more than 100 employees to mandate
that its employees be fully vaccinated against COVID-19 or submit to weekly
testing for the virus. The Administration likewise indicated that the interim
final rule for this regulation was expected to be issued in the fourth quarter
of 2021.

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On August 23, 2021, the FDA approved the licensure of the Comirnaty vaccine,
also known as the Pfizer-BioNTech vaccine. On September 22, 2021, the FDA
amended the EUA for the Pfizer-BioNTech vaccine to allow for use of a single
booster dose to individuals meeting certain criteria. On September 24, 2021, the
Centers for Disease Control and Prevention recommended that the Pfizer-BioNTech
booster dose be administrated to eligible residents and workers in long-term
care facilities. On October 20, 2021, the FDA amended the EUA for the Moderna
and Johnson & Johnson vaccines to allow for use of a single booster to
individuals meeting certain criteria. On October 21, 2021, the CDC recommended
that the Moderna and Johnson & Johnson vaccine dose be administrated to eligible
residents and workers in long-term care facilities. The FDA's amendment also
allowed for the use of booster doses from manufacturers other than the one used
in the primary vaccine series.
Medicare
Medicare presently accounts for approximately 28.9% 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. 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 Skilled Nursing Facility Prospective Payment System (SNF PPS) Rule became
effective October 1, 2019. The SNF PPS Rule includes a new case-mix model that
focuses on the patient's condition (clinically relevant factors) and resulting
care needs, rather than on the volume of care provided, to determine Medicare
reimbursement. The case mix-model is called the Patient-Driven Payment Model
(PDPM), which utilizes clinically relevant factors for determining Medicare
payment by using ICD-10 diagnosis codes and other patient characteristics as the
basis for patient classification. PDPM utilizes 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 skilled nursing facilities
resources that do not vary depending on resident characteristics.
PDPM replaces the existing case-mix classification methodology, Resource
Utilization Groups, Version IV. The structure of PDPM moves Medicare towards a
more value-based, unified post-acute care payment system. For example, PDPM
adjusts Medicare payments based on each aspect of a resident's care, thereby
more accurately addressing costs associated with medically complex patients.
PDPM also removes therapy minutes as the basis for therapy payment. Finally,
PDPM adjusts the skilled nursing facilities per diem payments to reflect varying
costs throughout the stay, through the physician therapy, occupational therapy
and non-therapy ancillary services components.
In addition, PDPM is intended to reduce paperwork requirements for performing
patient assessments. Under the SNF PPS PDPM system, the payment to skilled
nursing facilities and nursing homes is based heavily on the patient's condition
rather than the specific services provided by each skilled nursing facility.
Skilled Nursing Facility - Quality Reporting Program (SNF QRP)
The Improving Medicare Post-Acute Care Transformation Act of 2014 (IMPACT Act)
imposed new data reporting requirements for certain Post-Acute-Care (PAC)
providers. The IMPACT Act requires that each skilled nursing facility submit
their quality measures data. Beginning with fiscal year 2018, and each
subsequent year, if a skilled nursing facility does not submit required quality
data, their payment rates are reduced by 2.0% for each such fiscal year.
Application of the 2.0% reduction may result in payment rates for a fiscal year
being less than the preceding fiscal year. In addition, reporting-based
reductions to the market basket increase factor will not be cumulative; they
will only apply for the fiscal year involved. A skilled nursing facility will
receive a notification letter from its Medicare administrator contractor if it
was non-compliant with the Quality Reporting Program reporting requirements and
is subject to the payment reduction.

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Updated performance measures mandated for the SNF QRP for fiscal year 2020 were
established in the final SNF PPS rule adopted on August 8, 2019 (fiscal year
2020 SNF PPS Rule). The final rule continues implementation of the SNF QRP
measures to improve program interoperability, operational quality and safety.
Specifically, the rule adopts a number of standardized patient assessment data
elements. The SNF QRP applies to freestanding skilled nursing facilities,
skilled nursing facilities affiliated with acute care facilities, and all
non-critical access hospital swing-bed rural hospitals. Under the SNF QRP, a
skilled nursing facility's annual market basket percentage is reduced by 2.0% if
the skilled nursing facility does not submit quality measure data in accordance
with thresholds set by the IMPACT Act. Skilled nursing facilities that do not
meet the SNF QRP requirements for a program year will receive a notice of
non-compliance.
On July 29, 2021, CMS issued a final rule for the SNF QRP that adopted two new
reporting measures and updated the specifications for another measure. Starting
with the FY 2023 SNF QRP, SNFs are required for the first time to report the SNF
Healthcare-Associated Infections (HAI) measure, which tracks the number of
infections requiring hospitalization following a medical intervention, and the
COVID-19 Vaccination Coverage among Healthcare Personnel (HCP) measure, which
tracks vaccination of staff in order to assess whether SNFs are taking steps to
limit the spread of COVID-19. The Transfer of Healthcare (TOH) information data
SNFs must report, which is included in the Patient-Post-Acute Care measurement,
will be changed to exclude SNF patients discharged to their homes under the care
of either a home health service or hospice. The elimination of this information
will change how the TOH is used in calculating Patient-Post-Acute Care
measurement, and may have an impact on our quality ratings and reimbursement
from Medicare and Medicaid on a prospective basis.
Beginning in March 2020, due to the COVID-19 pandemic, CMS issued a temporary
suspension of SNF QRP reporting requirements effective until June 30, 2020. This
effectively gave skilled nursing facilities discretion as to whether to report
data from the fourth quarter (October 1, 2019 - December 31, 2019), and removed
reporting requirements entirely for the first and second quarters of 2020
(January 1, 2020 - June 30, 2020). Skilled nursing facilities were required to
resume timely quality data collection and submission of measure and patient
assessment data effective June 30, 2020.
Medicare Annual Market Basket
CMS is required to calculate an annual Medicare market-basket update to the
payment rates. On July 31, 2020, CMS issued a final rule for fiscal year 2021
that updates the Medicare payment rates and the quality programs for skilled
nursing facilities. Under the final rule, effective October 1, 2020, the
aggregate payments to skilled nursing facilities increased by 2.2% for fiscal
year 2021, compared to fiscal year 2020. This estimated increase is attributable
to a 2.2% market basket increase factor.
On July 29, 2021, CMS issued a final rule for fiscal year 2022 that updates the
Medicare payment rates and the quality programs for skilled nursing facilities.
Under the final rule, effective October 1, 2021, the aggregate net market basket
rate increased by 1.2% for fiscal year 2022, compared to fiscal year 2021. This
increase is attributable to a 2.7% market basket increase factor with a 0.8%
point reduction for forecast error adjustment and a 0.7% point reduction for
multifactor productivity adjustment.
On April 12, 2021, CMS revealed its intent to recalibrate PDPM's parity
adjustment up to 5.0% based on the prior year aggregate spending under the new
model. On July 29, 2021, CMS' final rule for fiscal year 2022 did not include
this parity adjustment and indicated that this PDPM parity adjustment would be
revisited in CMS' proposed rule for the 2023 fiscal year. The reimbursement
change, if proposed and finalized in a future fiscal year, could adversely
impact our reimbursement rates.
Sequestration of Medicare Rates
The Budget Control Act of 2011 requires a mandatory, across the board reduction
in federal spending, called a sequestration. Medicare Fee-For-Service (FFS)
claims with dates of service or dates of discharge on or after April 1, 2013
incur a 2.0% reduction in Medicare payments. All Medicare rate payments and
settlements have incurred this mandatory reduction and it will continue to be in
place through at least 2023, unless Congress takes further action. In response
to COVID-19, the CARES Act temporarily suspended the automatic 2.0% reduction of
Medicare claim reimbursements for the period of May 1, 2020 through December 31,
2020. On December 27, 2020, the Consolidated Appropriations Act further
suspended the 2.0% payment adjustment through March 31, 2021. On April 14, 2021,
Congress extended the suspension of the 2.0% payment adjustment through December
31, 2021. To pay for the change, Congress would increase the sequester cuts by
one year to fiscal year 2030.


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Skilled Nursing Facility Value-Based Purchasing (SNF-VBP) Program
The SNF-VBP Program rewards skilled nursing facilities 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
skilled nursing facilities using the SNF-VBP Program. Effective October 1, 2018,
CMS began withholding 2.0% to fund the SNF-VBP incentive payment pool and will
redistribute 60% of the withheld payments back to skilled nursing facilities
through the program. The fiscal year 2020 SNF PPS Rules estimate the economic
impact of the SNF-VBP Program to be a reduction of $213.6 million in aggregate
payments to skilled nursing facilities during fiscal year 2020. The Rule also
introduced two new quality measures to assess how health information is shared
and adopted a number of standardized patient assessment data elements that
assess factors such as cognitive function and mental status, special services,
and social determinants of health. The fiscal year 2021 SNF PPS rule updated the
deadlines for baseline period quality measure quarterly reporting and announced
performance periods and standards for the fiscal year 2023 program year, but
otherwise made no changes to the measures, scoring or payment policies. In the
fiscal year 2022 program, CMS proposed changes to account for COVID-19 impacting
readmission rates and SNF admissions during the performance periods of fiscal
year 2020. These proposed changes would impact the SNF-VBP rate adjustment. On
July 29, 2021, CMS published its final rule for the fiscal year 2022 program in
the Federal Register, adopting the proposed changes for measuring the
performance period and amending the data to be reported to CMS, which impacted
the SNF-VBP rate adjustment.
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) and physical therapy (PT) services and a separate
annual cap for occupational therapy (OT) services. These caps were implemented
under the authority of the Balanced Budget Amendments of 1997. These amounts
were previously associated with the financial limitation amounts. The Bipartisan
Budget Act of 2018 (BBA) repealed those caps while retaining and adding
additional limitations to ensure appropriate therapy services. This policy does
not limit the amount of medically necessary Medicare Part B therapy services a
beneficiary may receive. The BBA establishes coding modifier requirements to
obtain payments beyond the updated KX modifier thresholds, discussed below, and
reaffirms the specific $3,000 claim audit threshold requirements for the
Medicare Administrative Contractors. For PT and SLP combined the threshold for
coding modifier requirements is $2,110 for 2021, compared to $2,080 for 2020.
The threshold is the same for OT services. Under CMS' proposed physician fee
schedule for 2022 published on July 13, 2021, CMS proposes an expiration of the
3.75% increase in payment amounts made in the 2021 coverage fiscal year and
reduction of the conversion factor by 3.89%. This may reduce the PT and SLP
combined threshold for 2022 and affect our revenue derived from Medicare Part B.
A final rule setting the 2022 physician fee schedule is expected in the fourth
quarter of 2021.
Consistent with CMS' "Patients over Paperwork" initiative, the agency has also
been moving toward eliminating burdensome claims-based functional reporting
requirements for Part B therapy services. For example, beginning in January
2019, skilled nursing facilities are no longer required to append selected
G-codes or the severity modifiers on outpatient therapy claims. This reduces the
reporting burden on therapists providing outpatient services and increases the
amount of time that therapists can spend with their patients. Effective January
1, 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. These code edits were
previously implemented on October 1, 2020 and required additional documentation
and claim modifier coding burden when procedure codes representing many PT or OT
evaluation codes or treatment codes performed under a PT, OT, or SLP plan of
care was billed on the same date. This additional coding burden has been
removed.
On November 1, 2019, CMS issued the calendar year 2020 Physician Fee Schedule
(PFS) Final Rule establishing that therapy assistant claim modifiers will be
required starting in calendar year 2020. This rule is consistent with the
requirement of the BBA, which requires a 15% payment reduction when a physical
therapist assistant (PTA) or occupational therapy assistant (OTA) provides
services "in whole or in part" on a given day. While the modifiers are required
to be applied to the claims beginning in calendar year 2020, the 15% therapist
assistant payment reduction will not be applied until calendar year 2022. The
final rule clarified that "in whole or in part" means when 10% or more of the
services are provided by a PTA or OTA.
On December 1, 2020, CMS issued the calendar year 2021 PFS Final Rule, which
reduced the conversion factor (i.e. the number by which CMS determine all
current procedural terminology code payments) by 10.2%. These changes lowered
the reimbursement rate for therapy Medicare Part B specialty providers, specific
to our industry by 9% for PT and OT and by 6% for SLP Codes.
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The Consolidated Appropriations Act of 2021 (CAA, also referred to as The
Omnibus Appropriations Law) was signed into law on December 27, 2020. The CAA
includes three components relevant to the Medicare Part B PFS. First, the CAA
incorporates a rate relief of approximately 3.75% for fiscal year 2021.
Additionally, the CAA incorporates a freeze to the payment for the physician
add-on code for three years which would effectively create relief on the initial
cuts through 2023. Finally, the relief calls for the 2% sequester to not be
applied to the Medicare Part B program for the first quarter of 2021. CMS
incorporated the first and second components of the CAA relief into the fiscal
year 2021 PFS files which were published on January 5, 2021. While the 2021 PFS
Final Rule reduced the fiscal year 2021 factor to $32.4085 (calendar year
conversion factor was $36.0896), subsequently, the CAA restored part of the
reductions resulting in the final fiscal year 2021 conversion factor of
$34.8931. This conversion factor rate does not include the 2% sequester which
will also qualify as temporary relief for the first quarter of 2021.
On July 13, 2021, CMS issued the calendar year 2022 PFS proposed rule, which
proposes to implement the portion of the BBA requiring the use of new modifiers
to allow CMS to identify and make payments at 85% of the otherwise applicable
Part B payment amount for PT and OT services furnished in whole or in part by PT
and OT assistants. Other changes in the proposed rule, including reducing the
conversion factor by 3.89%, will have the effect of lowering the reimbursement
rate for Part B therapy services if implemented. The comment period for this
proposed rule closed on September 13, 2021, and CMS' final rule containing the
2022 physician fee schedule is anticipated in the fourth quarter of 2021.
The Multiple Procedure Payment Reduction (MPPR) continues at a 50% reduction,
which is applied to therapy procedures by reducing payments for practice expense
of the second and subsequent procedures when services provided beyond one unit
of one procedure are provided on the same day. The implementation of MPPR
includes (1) facilities that provide Medicare Part B speech-language pathology,
occupational therapy, and physical therapy services and bill under the same
provider number; and (2) providers in private practice, including
speech-language pathologists, who perform and bill for multiple services in a
single day.

On May 27, 2020, pursuant to its authority under the Emergency Waivers, CMS
added physical therapy, occupational therapy and speech-language pathology to
list of approved telehealth Providers for the Medicare Part B programs provided
by a skilled nursing facility. This waiver allows the reimbursement of certain
HCPCS codes delivered by PT, OT, SLP through telehealth through the end of the
public health emergency. Subsequently, the calendar year 2021 PFS Final Rule
added certain of these PT and OT services to the list of Medicare telehealth
services on a temporary basis through the end of the calendar year in which the
COVID-19 public health emergency ends. These services have been used to provide
some services to community-based outpatients from our skilled nursing facilities
that are eligible through local rules to provide community-based outpatient
services. Under the calendar year 2022 PFS proposed rule, these certain
telehealth services would continue to be included on the Medicare telehealth
services list until the end of calendar year 2023.
Pursuant to the Emergency Waivers, CMS allowed for the facility to bill an
originating site fee to CMS for telehealth services provided to Medicare Part B
beneficiary residents of the facility when the services are provided by a
physician from an alternate location, effective March 6, 2020 through the end of
the public health emergency, which is currently in effect through January 16,
2022. The PFS Final Rule also increased the frequency limitation on nursing
facility telehealth visits from once every 30 days to once every fourteen days.
Our facilities are utilizing this waiver as physicians elect to provide
telehealth visits to Medicare Part B beneficiaries residing in the skilled
nursing facility.
On December 31, 2020, CMS announced the annual update to the list of codes that
describe Medicare Part B outpatient therapy services, effective January 1, 2021.
Several existing and new codes introduced during the COVID-19 public health
emergency impacting skilled nursing facilities providers for use under physical
therapy, occupational therapy, or speech-language pathology plans of care were
recently made permanent including several telehealth codes. CMS designated all
these new HCPCS/CPT codes as "sometimes therapy," to permit physicians and
certain non-physician practitioners, including nurse practitioners, physician
assistants, and clinical nurse specialists, to render these services outside a
therapy plan of care when appropriate. "Sometimes Therapy" codes will not have
the MPPR applied.

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Programs of All-Inclusive Care for the Elderly
CMS issued a final rule on June 3, 2019, which updates the requirements for the
Programs of All-Inclusive Care for the Elderly (PACE) under the Medicare and
Medicaid programs. The regulation is intended to provide greater operational
flexibility, remove redundancies and outdated information and codify existing
programs. Such flexibility includes, (i) more lenient standards applicable to
the current requirement that the PACE organization be monitored for compliance
with the PACE program requirements during and after a 3-year trial period and
(ii) relieving certain restrictions placed upon the interdisciplinary team that
comprehensively assesses and provides for the individual needs of each PACE
participant by allowing one person to fill two roles and permitting secondary
participation in the PACE program. Further, non-physician primary care providers
can provide certain services in place of primary care physicians.
Preadmission Screening and Resident Review
On February 20, 2020, CMS published a proposed rule which would modernize
requirements for the Preadmission Screening and Resident Review process. This
process assesses the needs of individuals with mental illness or intellectual
disability that are applying to or residing in Medicaid-certified nursing
facilities. The proposed rule, if enacted as currently drafted, would impose
additional resident review requirements that are not reflected in current
regulations, authorize the use of telehealth, and simplify the list of
information that must be collected during evaluations.
Decisions Regarding Skilled Nursing Facility Payment
Medicare reimbursement rates and rules are subject to frequent change.
Historically, adjustments to reimbursement under Medicare have had a significant
effect on our revenue. The federal government and state governments continue to
focus on efforts to curb spending on healthcare programs such as Medicare and
Medicaid. We are not able to predict the outcome of the legislative process. We
also cannot predict the extent to which proposals will be adopted or, if adopted
and implemented, what effect, if any, such proposals and existing new
legislation will have on us. Efforts to impose reduced allowances, greater
discounts and more stringent cost controls by government and other payors are
expected to continue and could adversely affect our business, financial
condition and results of operations.
These include statutory and regulatory changes, rate adjustments (including
retroactive adjustments), administrative or executive orders and government
funding restrictions, all of which may materially adversely affect the rates at
which Medicare reimburses us for our services. Budget pressures often lead the
federal government to reduce or place limits on reimbursement rates under
Medicare. Implementation of these and other types of measures has in the past,
and could in the future, result in substantial reductions in our revenue and
operating margins. For a discussion of historic adjustments and recent changes
to the Medicare program and related reimbursement rates, see Part I, Item 1A
Risk Factors under the headings Risks Related to Our Business and Industry -
"Our revenue could be impacted by federal and state changes to reimbursement and
other aspects of Medicaid and Medicare," "Our future revenue, financial
condition and results of operations could be impacted by continued cost
containment pressures on Medicaid spending," "We may not be fully reimbursed for
all services for which each facility bills through consolidated billing, which
could adversely affect our revenue, financial condition and results of
operations" and "Reforms to the U.S. healthcare system will impose new
requirements upon us and may lower our reimbursements."
Patient Protection and Affordable Care Act
Various healthcare reform provisions became law upon enactment of the Patient
Protection and Affordable Care Act and the Healthcare Education and
Reconciliation Act (collectively, the ACA). The reforms contained in the ACA
have affected our operating subsidiaries in some manner and are directed in
large part at increased quality and cost reductions. Several of the reforms are
very significant and could ultimately change the nature of our services, the
methods of payment for our services and the underlying regulatory environment.
These reforms include modifications to the conditions of qualification for
payment, bundling of payments to cover both acute and post-acute care and the
imposition of enrollment limitations on new providers. The recent Congressional
elections in the United States and policies implemented by the former
Presidential administration have resulted in significant changes in legislation,
regulation, implementation of Medicare, Medicaid, and government policy. The
2020 Presidential and Congressional elections may significantly alter the
current regulatory framework and impact our business and the health care
industry. We continually monitor these developments so we can respond to the
changing regulatory environment impacting our business.


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Requirements of Participation
CMS has requirements that providers, including skilled nursing facilities and
other long-term care (LTC) facilities must meet in order to participate in the
Medicare and Medicaid Programs. Some requirements can be burdensome and costly,
and in recent years, CMS has modified these requirements. For example, beginning
in 2016, skilled nursing facilities were required to comply with emergency
preparedness requirements, which requirements have since been strengthened via
promulgation of additional rules.
Another relevant change is a 2019 final rule that removed the prohibition on the
use of pre-dispute, binding arbitration agreements by LTC facilities. The rule
imposed specific requirements on the use of these agreements, including
requiring the use of plain language in drafting; that facilities post a notice
in plain language that describes the policy on the use of agreements for binding
arbitration in an area that is visible to residents and visitors; that admission
to the facility not be conditioned on the signing of an arbitration agreement;
and that the facility expressly inform the resident or his/her representative of
the right not to sign the agreement as a condition of admission. Congress has
routinely introduced, but not passed, legislation addressing the issue of
arbitration agreements used by LTC facilities. While legislative action is
possible in the future, federal and state regulations remain our primary source
of authority over the use of pre-dispute binding arbitration agreements.
As discussed under the "Coronavirus" heading above, on August 18, 2021, the
Administration announced that CMS is developing an emergency regulation
requiring all workers within all Medicare and Medicaid-participating nursing
homes to be fully vaccinated against COVID-19 as a condition of participating in
the Medicare and Medicaid programs. The Administration expanded the scope of
this forthcoming emergency regulation on September 9, 2021, requiring workers
within all Medicare and Medicaid-certified facilities to be fully vaccinated
against COVID-19 as a condition of participating in the Medicare and Medicaid
programs. The Interim Final Rule is expected to be issued in the fourth quarter
of 2021.
Civil and Criminal Fraud and Abuse Laws and Enforcement
Various complex federal and state laws exist which govern a wide array of
referrals, relationships and arrangements, and prohibit fraud by healthcare
providers. Governmental agencies are devoting increasing attention and resources
to such anti-fraud efforts. The Health Insurance Portability and Accountability
Act of 1996 (HIPAA), and the Balanced Budget Act of 1997 expanded the penalties
for healthcare fraud. Additionally, in connection with our involvement with
federal healthcare reimbursement programs, the government or those acting on its
behalf may bring an action under the FCA, alleging that a healthcare provider
has defrauded the government by submitting a claim for items or services not
rendered as claimed, which may include coding errors, billing for services not
provided, and submitting false or erroneous cost reports. The Fraud Enforcement
and Recovery Act of 2009 (FERA) expanded the scope of the FCA by, among other
things, creating liability for knowingly and improperly avoiding repayment of an
overpayment received from the government and broadening protections for
whistleblowers. The FCA clarifies that if an item or service is provided in
violation of the Anti-Kickback Statute, the claim submitted for those items or
services is a false claim that may be prosecuted under the FCA as a false claim.
Civil monetary penalties under the FCA range from approximately $11,665 to
$23,331 and are adjusted each January for inflation. Under the qui tam or
"whistleblower" provisions of the FCA, a private individual with knowledge of
fraud may bring a claim on behalf of the federal government and receive a
percentage of the federal government's recovery. Due to these whistleblower
incentives, lawsuits have become more frequent. Many states also have a false
claim prohibition that mirrors or tracks the federal FCA. Federal law also
provides that OIG has the authority to exclude individuals and entities from
federally funded health care programs on a number of grounds, including, but not
limited to, certain types of criminal offenses, licensure revocations or
suspensions, and exclusion from state or other federal healthcare programs. And,
CMS can recover overpayments from health care providers up to five years
following the year in which payment was made.
In November 2019, the OIG released a report of its investigation into
overpayments to hospitals that did not comply with Medicare's post-acute-care
transfer policy. Hospitals violating this policy transferred patients to certain
post-acute-care settings, such as skilled nursing facilities, but claimed the
higher reimbursements associated with discharges to homes. A similar OIG audit
report, released in February 2019, focused on improper payments for skilled
nursing facility services when the Medicare three-day inpatient hospital stay
requirement was not met. These investigatory actions by OIG demonstrate their
increased scrutiny into post-hospital skilled nursing facility care provided to
beneficiaries and may encourage additional oversight or stricter compliance
standards.
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On numerous occasions, CMS has indicated its intent to vigilantly monitor
overall payments to skilled nursing facilities, paying particular attention to
facilities that have high reimbursements for ultra-high therapy, therapy
resource utilization groups with higher activities of daily living scores, and
long average lengths of stay. The OIG recognizes that there is a strong
financial incentive for facilities to bill for higher levels of therapies, even
when not needed by patients. We cannot predict the extent to which the OIG's
recommendations to CMS will be implemented and, what effect, if any, such
proposals would have on us. Our business model, like those of some other
for-profit operators, is based in part on seeking out higher-acuity patients
whom we believe are generally more profitable, and over time our overall patient
mix has consistently shifted to higher-acuity in most facilities we operate. We
also use specialized care-delivery software that assists our caregivers in more
accurately capturing and recording services in order to, among other things,
increase reimbursement to levels appropriate for the care actually delivered.
These efforts may place us under greater scrutiny with the OIG, CMS, our fiscal
intermediaries, recovery audit contractors and others.
Federal Healthcare Reform
In 2015, CMS released a final rule addressing, among other things,
implementation of certain provisions of Medicare Access and CHIP Reauthorization
Act of 2015, which changes the way physicians are paid who participate in
Medicare through implementation of the Quality Payment Program. Quality Payment
Program creates two tracks for physician payment: (1) the Merit-Based Incentive
Payment System (MIPS) that streamlines multiple quality programs; and (2)
Alternative Payment Models that give bonus payments for participation in
eligible Alternative Payment Models. The final rule also excluded services
furnished in skilled nursing facilities from the definition of primary care
services for purposes of the Shared Savings Program.

The Five-Star Quality Rating system includes a rating of one to five in various
categories including the use of antipsychotics in calculating the star ratings,
modified calculations for staffing levels, reflect higher standards for nursing
homes to achieve a high rating on the quality measure dimension, the rate of
hospitalization, emergency room use, community discharge, improvements in
function, independently worsened and anxiety or hypnotic medication among
nursing home residents. In 2018, (i) a freeze of the Health Inspection Five Star
Ratings; (ii) the addition of Payroll Based Journals (PBJ) data to calculate the
staffing ratings in the Nursing Home Five Star Quality Rating System; and (iii)
the addition of two claims data measures: Medicare spending per beneficiary and
rate of successful return to home or community from a skilled nursing facility
for quality measures. In 2019, (i) the addition of separate ratings for short
stay and long stay care; (ii) changes in staffing thresholds; and (iii)
modifications to put more emphasis on registered nurse (RN) staffing, including
a set rating for nursing homes that report four or more days in the quarter with
no RN on site.

CMS predicted that the 2019 changes would result in 47% of all nursing centers
to lose stars in their "Quality" ratings, 33% to lose stars in their "Staffing"
ratings and some 36% to lose stars in their "Overall" ratings. Unsurprisingly,
these changes resulted in a reduction in Ensign's number of facilities with four
or five Star ratings in 2019. In April 2020, CMS began increasing quality
measure thresholds by 50% of the average rate of improvement of QM scores every
six months. This means if there is an average rate of improvement of 2%, the
quality measure threshold will be raised 1%. This frequent adjustment is
intended to avoid larger adjustments to thresholds in the future. However, CMS
acknowledges that some facilities may see a decline in their overall five Star
rating absent any new inspection information. This change could further affect
star ratings across the industry.

On April 27, 2016, CMS added six new quality measures to its consumer-based
Nursing Home Compare website. These quality measures include the rate of
rehospitalization, emergency room use, community discharge, improvements in
function, independent worsening of ability to move, and use antianxiety or
hypnotic medication among nursing home residents. Beginning in July 2016, CMS
incorporated all these measures, except for the antianxiety/hypnotic medication
measure, into the calculation of the Nursing Home Five-Star Quality Ratings. In
2018, CMS added PBJ data to be used to calculate the staffing ratings in the
Nursing Home Five Star Quality Rating System. In 2019, CMS updated thresholds
for assigning stars for both the staffing and quality components of the system
and added measures of long-stay hospitalizations and long-stay ED visits were
added to the quality measure rating. Since the standards for performance are
more difficult to achieve, the number of our 4 and 5 Star facilities could be
reduced.

Additionally, in April of 2019, CMS announced a new framework for informing CMS'
work related to the safety and quality in America's nursing homes. The approach
includes the following pillars: Strengthening Oversight, Enhancing Enforcement,
Increasing Transparency, Improving Quality, and Putting Patients over Paperwork.
As part of the Transparency Pillar, beginning on October 23, 2019 on the Nursing
Home Compare website, CMS began displaying a consumer alert icon next to nursing
homes that have been cited for incidents of abuse, neglect, or exploitation. The
icon will be updated monthly, at the same time CMS inspection results are
updated. In February 2020, CMS announced that part of its Enhancing Enforcement
efforts would include improved oversight of state survey agencies (SSA) and
revisions to the State Performance Standards System, which is the program used
to access SSA performance.
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In 2020, in response to the COVID-19 pandemic, a temporary freeze was placed on
Skilled Nursing Facilities Quality Reporting Program data, Staffing data, and
Health Inspection data on the Nursing Home Compare website to account for the
suspended reporting and inspection obligations due to the COVID-19 pandemic. The
information reported to CMS and used in these quality calculations changed over
the period of 2020. Beginning in August of 2020, responding to the COVID-19
pandemic, CMS announced a new, targeted inspection plan to focus on urgent
patient safety threats and infection control, therefore causing a shift in the
number of nursing homes inspected and how the inspections are conducted. As this
change would disrupt the inspections and data collection CMS and state surveyors
conducted as part of the Nursing Home Five Star Quality Rating System, results
of these inspections conducted on or after March 4, 2020 initially were not used
to calculate a nursing home's health inspection star ratings. By December of
2020, CMS and state surveyors had resumed inspections of nursing homes to
include inspection data, including surveys that occurred on March 4, 2020 and
afterward, in its star rankings calculated for January 2021. CMS resumed
calculating nursing homes' health inspection ratings on January 27, 2021.
Similarly, although staff reporting requirements were waived for the first and
second quarters of 2020, this waiver ended on June 25, 2020. Thereafter, nursing
homes were required to report staffing data to CMS, which was incorporated into
CMS' Five Star Quality rating for those nursing homes beginning in January 2021.
The January 2021 calculation of Five Star Quality ratings for nursing homes
reflected nursing home-provided quarterly updates of most quality measures for
the period beginning June 2019 and ending June 2020 due to interruptions in data
collection. The quality measures that are specific to SNFs but not included in
CMS' Five Star Quality ratings for January 2021 were the measures for
percentages of new or worsening pressure injuries, and the rate of residents who
successfully return to home from a SNF. These measures may be included in future
Five Star Quality ratings and the delay may not reveal improvements in
previously low-rated facilities, or declines in performance within highly rated
facilities.

Another impact of the COVID-19 pandemic to the Nursing Home Five-Star Quality
Rating System is CMS' decision to make submission of the minimum data set
assessment data optional for the fourth quarter of 2019 and excepted for the
first and second quarters of 2020. Due to the gap in reported data, CMS did not
include the two quality measures that are based on the minimum data set
assessment-based data in its quality measure ratings in January 2021.

On August 10, 2021, the Nursing Home Improvement and Accountability Act of 2021
(Nursing Home Improvement Act) was introduced in the U.S. Senate and is intended
to update federal nursing home policy to improve quality of care and oversight.
The proposed legislation reduces SNF payments by two percentage points beginning
in fiscal year 2025 for inaccurate submission of certain data, provides federal
funding of $50 million to carry out data validation tasks for SNF data and
provides federal funding of $250 million to ensure accuracy of information on
cost reports. The Nursing Home Improvement Act also proposes to establish nurse
staffing requirements, including the requirement for the use of a 24-hour
registered professional nurse and other provisions intended to increase
transparency and accuracy of reported data regarding nursing activities, improve
accountability and enhance quality of care. If passed in its current form,
however, this bill would provide participating states with a temporary enhanced
federal Medicaid match to fund improvements in nursing home workforce and care.
This match would last six years and states would be responsible for showing CMS
that Medicaid reimbursement increases were used to increase worker wages and
yield new training resources and opportunities for nursing home staff. As of
September 30, 2021, no action has been taken on this bill since its introduction
to the Senate on August 10, 2021.

Monitoring Compliance in Our Facilities
Governmental agencies and other authorities periodically inspect our facilities
to assess our compliance with various standards, rules and regulations. The
robust regulatory and enforcement environment continues to impact healthcare
providers, especially in connection with responses to any alleged noncompliance
identified in periodic surveys and other inspections by governmental
authorities. Unannounced surveys or inspections generally occur at least
annually and may also follow a government agency's receipt of a complaint about
a facility. We must pass these inspections to maintain our 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 our provider contracts with managed care
clients at many facilities. From time to time, we, like others in the healthcare
industry, may receive notices from federal and state regulatory agencies
alleging that we failed to substantially comply with applicable standards, rules
or regulations. These notices may require us to take corrective action, may
impose civil monetary penalties for noncompliance, and may threaten or impose
other operating restrictions on skilled nursing facilities such as admission
holds, provisional skilled nursing license or increased staffing requirements.
If our facilities fail to comply with these directives or otherwise fail to
comply substantially with licensure and certification laws, rules and
regulations, we could lose our certification as a Medicare or Medicaid provider,
or lose our state licenses to operate the facilities.

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Facilities with otherwise acceptable regulatory histories generally are normally
given an opportunity to correct deficiencies and continue their participation in
the Medicare and Medicaid programs by a certain date, usually within nine
months, although where denial of payment remedies are asserted, such interim
remedies go into effect much sooner. Facilities with deficiencies that
immediately jeopardize patient health and safety and those that are classified
as poor performing facilities, however, are not generally given an opportunity
to correct their deficiencies prior to the imposition of remedies and other
enforcement actions. Moreover, facilities with poor regulatory histories
continue to be classified by CMS as poor performing facilities notwithstanding
any intervening change in ownership, unless the new owner obtains a new Medicare
provider agreement instead of assuming the facility's existing agreement.
However, new owners (including us, historically) 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 we acquire them and that
develop new deficiencies after we acquire them 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
quality of care problems through the special focus facility (SFF) initiative. A
facility's administrators and owners are notified when it is identified as a
special focus facility. This information is also provided to the general public.
The SFF designation is based in part on the facility's compliance history
typically dating before our acquisition of the facility. Local state survey
agencies recommend to CMS that facilities be placed on special focus status.
SFFs receive heightened scrutiny and more frequent regulatory surveys. Failure
to improve the quality of care can result in fines and termination from
participation in Medicare and Medicaid. A facility "graduates" from the program
once it demonstrates significant improvements in quality of care that are
continued over time.

Moreover, sanctions such as denial of payment for new admissions often are
scheduled to go into effect before surveyors return to verify compliance.
Generally, if the surveyors confirm that the facility is in compliance upon
their return, the sanctions never take effect. However, if they determine that
the facility is not in compliance, the denial of payment goes into effect
retroactive to the date given in the original notice. This possibility sometimes
leaves affected operators, including us, with the difficult task of deciding
whether to continue accepting patients after the potential denial of payment
date, thus risking the retroactive denial of revenue associated with those
patients' care if the operators are later found to be out of compliance, or
simply refusing admissions from the potential denial of payment date until the
facility is actually found to be in compliance. In the past and from time to
time, some of our affiliated facilities have been or will be in denial of
payment status due to findings of continued regulatory deficiencies, resulting
in an actual loss of the revenue associated with the Medicare and Medicaid
patients admitted after the denial of payment date. Additional sanctions could
ensue and, if imposed, these sanctions, entailing various remedies up to and
including decertification.

CMS has undertaken several initiatives to increase or intensify Medicaid and
Medicare survey and enforcement activities, including federal oversight of state
actions. CMS is taking steps to focus more survey and enforcement efforts on
facilities with findings of substandard care or repeat violations of Medicaid
and Medicare standards, and to identify multi-facility providers with patterns
of noncompliance. In addition, HHS has adopted a rule that requires CMS to
charge user fees to healthcare facilities cited during regular certification,
recertification or substantiated complaint surveys for deficiencies, which
require a revisit to assure that corrections have been made. CMS is also
increasing its oversight of state survey agencies and requiring state agencies
to use enforcement sanctions and remedies more promptly when substandard care or
repeat violations are identified, to investigate complaints more promptly, and
to survey facilities more consistently.
Regulations Regarding Financial Arrangements
We are also subject to federal and state laws that regulate financial
arrangement by healthcare providers, such as the federal and state anti-kickback
laws, the Stark laws, and various state anti-referral laws.
The Anti-Kickback Statute, Section 1128B of the Social Security Act
(Anti-Kickback Statute) prohibits the knowing and willful offer, payment,
solicitation, or receipt of any remuneration, directly or indirectly, overtly or
covertly, in cash or in kind, to induce the referral of an individual, in return
for recommending, or to arrange for, the referral of an individual for any item
or service payable under any federal healthcare program, including Medicare or
Medicaid. The OIG has issued regulations that create "safe harbors" for certain
conduct and business relationships that are deemed protected under the
Anti-Kickback Statute. In order to receive safe harbor protection, all of the
requirements of a safe harbor must be met. The fact that a given business
arrangement does not fall within one of these safe harbors, however, does not
render the arrangement per se illegal. Business arrangements of healthcare
service providers that fail to satisfy the applicable safe harbor criteria, if
investigated, will be evaluated based upon all facts and circumstances and risk
increased scrutiny and possible sanctions by enforcement authorities.

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Violations of the Anti-Kickback Statute can result in criminal penalties of up
to $100,000 and ten years imprisonment. Violations of the Anti-Kickback Statute
can also result in civil monetary penalties of up to $100,000 per violation and
an assessment of up to three times the total amount of remuneration offered,
paid, solicited, or received. Violation of the Anti-Kickback Statute may also
result in an individual's or organization's exclusion from future participation
in federal healthcare programs. State Medicaid programs are required to enact an
anti-kickback statute. Many states in which we operate have adopted or are
considering similar legislative proposals, some of which extend beyond the
Medicaid program, to prohibit the payment or receipt of remuneration for the
referral of patients regardless of the source of payment for the care. We
believe that business practices of providers and financial relationships between
providers have become subject to increased scrutiny as healthcare reform efforts
continue on the federal and state levels.
Additionally, Section 1877 of the Social Security Act, commonly known as the
"Stark Law," provides that a physician may not refer a Medicare or Medicaid
patient for a "designated health service" to an entity with which the physician
or an immediate family member has a financial relationship unless the financial
arrangement meets an exception under the Stark Law or its regulations.
Designated health services include inpatient and outpatient hospital services,
PT, OT, SLP, durable medical equipment, prosthetics, orthotics and supplies,
diagnostic imaging, enteral and parenteral feeding and supplies and home health
services. Under the Stark Law, a "financial relationship" is defined as an
ownership or investment interest or a compensation arrangement. If such a
financial relationship exists and does not meet a Stark Law exception, the
entity is prohibited from submitting or claiming payment under the Medicare or
Medicaid programs or from collecting from the patient or other payor. Many of
the compensation arrangements exceptions permit referrals if, among other
things, the arrangement is set forth in a written agreement signed by the
parties, the compensation to be paid is set in advance, is consistent with fair
market value and is not determined in a manner that takes into account the
volume or value of any referrals or other business generated between the
parties. Exceptions may have other requirements. Any funds collected for an item
or service resulting from a referral that violates the Stark Law are not
eligible for payment by federal healthcare programs and must be repaid to
Medicare or Medicaid, any other third-party payor, and the patient. Violations
of the Stark Law may result in the imposition of civil monetary penalties,
including, treble damages. Individuals and organizations may also be excluded
from participation in federal healthcare programs for Stark Law violations. Many
states have enacted healthcare provider referral laws that go beyond physician
self-referrals or apply to a greater range of services than just the designated
health services under the Stark Law.
Regulations Regarding Patient Record Confidentiality
We are also subject to laws and regulations enacted to protect the
confidentiality of patient health information. For example, HHS has issued rules
pursuant to HIPAA, including the Health Information Technology for Economic and
Clinical Health (HITECH) Act which governs our use and disclosure of protected
health information of patients. We have established policies and procedures to
comply with HIPAA privacy and security requirements at our affiliated facilities
and operating subsidiaries. We maintain a company-wide HIPAA compliance plan,
which we believe complies with the HIPAA privacy and security regulations. The
HIPAA privacy and security regulations have and will continue to impose
significant costs on our facilities in order to comply with these standards.
There are numerous other laws and legislative and regulatory initiatives at the
federal and state levels addressing privacy and security concerns. Our
operations are also subject to any federal or state privacy-related laws that
are more restrictive than the privacy regulations issued under HIPAA. These laws
vary and could impose additional penalties for privacy and security breaches.
Healthcare entities are also required to afford patients with certain rights of
access to their health information under HIPAA and the 21st Century Cures Act
(Cures Act). Recently, the Office of Civil Rights, the agency responsible for
HIPAA enforcement, has targeted investigative and enforcement efforts on
violations of patients' rights of access, imposing significant fines for
violations largely initiated from patient complaints. The Office of the National
Coordinator for Health Information Technology can also investigate and impose
separate penalties for information blocking violations under the Cures Act.
Antitrust Laws
We are also subject to federal and state antitrust laws. Enforcement of the
antitrust laws against healthcare providers is common, and antitrust liability
may arise in a wide variety of circumstances, including third party contracting,
physician relations, joint venture, merger, affiliation and acquisition
activities. In some respects, the application of federal and state antitrust
laws to healthcare is still evolving, and enforcement activity by federal and
state agencies appears to be increasing. At various times, healthcare providers
and insurance and managed care organizations may be subject to an investigation
by a governmental agency charged with the enforcement of antitrust laws, or may
be subject to administrative or judicial action by a federal or state agency or
a private party. Violators of the antitrust laws could be subject to criminal
and civil enforcement by federal and state agencies, as well as by private
litigants.

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Americans with Disabilities Act
Our facilities must also comply with the Americans with Disabilities Act (ADA),
and similar state and local laws to the extent that such 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 we continue to assess our
facilities and make appropriate modifications.
REGULATIONS SPECIFIC TO SENIOR LIVING COMMUNITIES
As previously mentioned, senior living services revenue is primarily derived
from private pay residents, with a small portion of senior living revenue
(approximately 1.8% of total revenue) derived from Medicaid funds. Thus, some of
the regulations discussed above applicable to Medicaid providers, also apply to
senior living. However, the following provides a brief overview of the
regulatory framework applicable specifically to senior living.
A majority of states provide, or are approved to provide, Medicaid payments for
personal care and medical services to some residents in licensed senior living
communities under waivers granted by or under Medicaid state plans approved by
CMS. State Medicaid programs control costs for senior living and other home and
community-based services by various means such as restrictive financial and
functional eligibility standards, enrollment limits and waiting lists. Because
rates paid to senior living community operators are generally lower than rates
paid to skilled nursing facility operators, some states use Medicaid funding of
senior living services as a means of lowering the cost of services for residents
who may not need the higher level of health services provided in skilled nursing
facilities. States that administer Medicaid programs for services in senior
living communities are responsible for monitoring the services at, and physical
conditions of, the participating communities. As a result of the growth of
senior living in recent years, states have adopted licensing standards
applicable to assisted living communities. Most state licensing standards apply
to senior living communities regardless of whether they accept Medicaid funding.
Since 2003, CMS has commenced a series of actions to increase its oversight of
state quality assurance programs for senior living communities and has provided
guidance and technical assistance to states to improve their ability to monitor
and improve the quality of services paid for through Medicaid waiver programs.
CMS is encouraging state Medicaid programs to expand their use of home and
community-based services as alternatives to facility-based services, pursuant to
provisions of the ACA, and other authorities, through the use of several
programs.
The types of laws and statutes affecting the regulatory landscape of the
post-acute industry continue to expand. In addition to this changing regulatory
environment, federal, state and local officials are increasingly focusing their
efforts on the enforcement of these laws. In order to operate our businesses, we
must comply with federal, state and local laws relating to licensure, delivery
and adequacy of medical care, distribution of pharmaceuticals, equipment,
personnel, operating policies, fire prevention, rate-setting, billing and
reimbursement, building codes and environmental protection. Additionally, we
must also adhere to anti-kickback statues, physician referral laws, the ADA, and
safety and health standards set by the Occupational Safety and Health
Administration. Changes in the law or new interpretations of existing laws may
have an adverse impact on our methods and costs of doing business.

Our operating subsidiaries are also subject to various regulations and licensing
requirements promulgated by state and local health and social service agencies
and other regulatory authorities. Requirements vary from state to state and
these requirements can affect, among other things, personnel education and
training, patient and personnel records, services, staffing levels, monitoring
of patient wellness, patient furnishings, housekeeping services, dietary
requirements, emergency plans and procedures, certification and licensing of
staff prior to beginning employment, and patient rights. These laws and
regulations could limit our ability to expand into new markets and to expand our
services and facilities in existing markets.

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. As vaccines become available and COVID-19
cases are declining in the communities we serve, we began to see a recovery in
our census during the first quarter of 2021 and our improved occupancy levels
continued into the second and third quarter of 2021. As a result, we continue to
experience healthy growth in both revenue and operational earnings.
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Our total revenue for the quarter increased $69.3 million, or 11.6% while our
diluted GAAP earning per share grew by 7.8%, from $0.77 to $0.83, compared to
the third quarter in 2020. Revenue from our skilled services collectively
increased by 12.6%. See Recent Activities for further information. Our one
operation at a time approach demonstrates our affiliated operators focus on
clinical results and operational fundamentals. We have also strengthened our
collection process and identified non-clinical areas where we can manage
spending. These operational fundamentals have continued to drive our overall
success.

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,
                                                         2021                    2020                     2021                    2020

Revenue:
Service revenue                                              99.4  %                 99.3  %                  99.4  %                 99.4  %
Rental revenue                                                0.6                     0.7                      0.6                     0.6
Total revenue                                               100.0  %                100.0  %                 100.0  %                100.0  %

Expense:
Cost of services                                             76.9                    77.6                     76.8                    77.3

Rent-cost of services                                         5.3                     5.4                      5.4                     5.5
General and administrative expense                            5.8                     5.5                      5.7                     5.4
Depreciation and amortization                                 2.1                     2.3                      2.1                     2.3
Total expenses                                               90.1                    90.8                     90.0                    90.5
Income from operations                                        9.9                     9.2                     10.0                     9.5
Other income (expense):
Interest expense                                             (0.2)                   (0.3)                    (0.3)                   (0.4)
Other income (expense), net                                     -                     0.1                      0.1                     0.1
Other expense, net                                           (0.2)                   (0.2)                    (0.2)                   (0.3)
Income before provision for income taxes                      9.7                     9.0                      9.8                     9.2
Provision for income taxes                                    2.4                     1.8                      2.2                     2.1

Net income                                                    7.3                     7.2                      7.6                     7.1
Less: net income attributable to noncontrolling
interests                                                     0.2                       -                      0.1                     0.1

Net income attributable to The Ensign Group, Inc.             7.1  %                  7.2  %                   7.5  %                  7.0  %


                                                      Three Months Ended September 30,          Nine Months Ended September 30,
                                                          2021                2020                  2021                2020

Segment Income(1)                                                            (In thousands)
Skilled services                                      $   94,429          $  84,747             $  273,370          $ 243,640
Real estate(2)                                        $    8,910          $   8,474             $   26,622          $  22,593
Non-GAAP Financial Measures:
Performance Metrics

EBITDA                                                $   79,184          $  68,573             $  233,382          $ 207,333

Adjusted EBITDA                                       $   84,739          $  72,872             $  248,141          $ 219,065

FFO for real estate segment                           $   13,846          $  12,996             $   41,035          $  36,217

Valuation Metric
Adjusted EBITDAR                                      $  120,362                                $  351,637


(1) Segment income represents operating results of the reportable segments
excluding gain and loss on sale of assets, impairment charges and provision for
income taxes. Segment income is reconciled to the Condensed Consolidated
Statement of Income in Note 7, Business Segments in Notes to Condensed
Consolidated Financial Statements of this Quarterly Report on Form 10-Q.
(2) Real estate segment income includes rental revenue from Ensign affiliated
tenants and related expenses.

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The following discussion includes references to EBITDA, Adjusted EBITDA,
Adjusted EBITDAR and Funds from Operations (FFO) which are non-GAAP financial
measures (collectively, the Non-GAAP Financial Measures). Regulation G,
Conditions for Use of Non-GAAP Financial Measures, and other provisions of the
Securities Exchange Act of 1934, as amended (the Exchange Act), define and
prescribe the conditions for use of certain non-GAAP financial information.
These Non-GAAP Financial Measures are used in addition to and in conjunction
with results presented in accordance with GAAP. These Non-GAAP Financial
Measures should not be relied upon to the exclusion of GAAP financial measures.
These Non-GAAP Financial Measures reflect an additional way of viewing aspects
of our operations that, when viewed with our GAAP results and the accompanying
reconciliations to corresponding GAAP financial measures, provide a more
complete understanding of factors and trends affecting our business.
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 interest 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; and
•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.

We use the Non-GAAP Financial Measures:

•as measurements of our operating performance to assist us in comparing our
operating performance on a consistent basis;
•to allocate resources to enhance the financial performance of our business;
•to assess the value of a potential acquisition;
•to assess the value of a transformed operation's performance;
•to evaluate the effectiveness of our operational strategies; and
•to compare our operating performance to that of our competitors.

We use certain Non-GAAP Financial Measures to compare the operating performance
of each operation. These measures are useful in this regard because they do not
include such costs as net interest expense, income taxes, depreciation and
amortization expense, which may vary from period-to-period depending upon
various factors, including the method used to finance operations, the amount of
debt that we have incurred, whether an operation is owned or leased, the date of
acquisition of a facility or business, and the tax law of the state in which a
business unit operates.

We also establish compensation programs and bonuses for our leaders that are
partially based upon the achievement of Adjusted EBITDAR targets.

Despite the importance of these measures in analyzing our underlying business,
designing incentive compensation and for our goal setting, the Non-GAAP
Financial Measures have no standardized meaning defined by GAAP. Therefore,
certain of our Non-GAAP Financial Measures have limitations as analytical tools,
and they should not be considered in isolation, or as a substitute for analysis
of our results as reported in accordance with GAAP. Some of these limitations
are:

•they do not reflect our current or future cash requirements for capital
expenditures or contractual commitments;
•they do not reflect changes in, or cash requirements for, our working capital
needs;
•they do not reflect the net interest expense, or the cash requirements
necessary to service interest or principal payments, on our debt;
•they do not reflect rent expenses, which are necessary to operate our leased
operations, in the case of Adjusted EBITDAR;
•they do not reflect any income tax payments we may be required to make;
•although depreciation and amortization are non-cash charges, the assets being
depreciated and amortized will often have to be replaced in the future, and do
not reflect any cash requirements for such replacements; and
•other companies in our industry may calculate these measures differently than
we do, which may limit their usefulness as comparative measures.

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We compensate for these limitations by using them only to supplement net income
on a basis prepared in accordance with GAAP in order to provide a more complete
understanding of the factors and trends affecting our business.

Management strongly encourages investors to review our condensed consolidated
financial statements in their entirety and to not rely on any single financial
measure. Because these Non-GAAP Financial Measures are not standardized, it may
not be possible to compare these financial measures with other companies'
Non-GAAP financial measures having the same or similar names. These Non-GAAP
Financial Measures should not be considered a substitute for, nor superior to,
financial results and measures determined or calculated in accordance with GAAP.
We strongly urge you to review the reconciliation of income from operations to
the Non-GAAP Financial Measures in the table below, along with our condensed
consolidated financial statements and related notes included elsewhere in this
document.

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

PERFORMANCE MEASURES:
EBITDA

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) interest expense, net, (b) provision for
income taxes, and (c) depreciation and amortization.

Adjusted EBITDA

We adjust EBITDA when evaluating our performance because we believe that the
exclusion of certain additional items described below provides useful
supplemental information to investors regarding our ongoing operating
performance, in the case of Adjusted EBITDA. We believe that the presentation of
Adjusted EBITDA, when combined with EBITDA and GAAP net income attributable to
The Ensign Group, Inc., is beneficial to an investor's complete understanding of
our operating performance.

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

•results related to operations not at full capacity;
•stock-based compensation expense;
•costs incurred related to real estate due diligence;
•costs incurred related to new systems implementation;
•gain on sale of assets; and
•acquisition related costs.
Funds from Operations (FFO)
We consider FFO to be a useful supplemental measure of the operating performance
of our real estate segment. Historical cost accounting for real estate assets in
accordance with U.S. GAAP implicitly assumes that the value of real estate
assets diminishes predictably over time as evidenced by the provision for
depreciation. However, since real estate values have historically risen or
fallen with market conditions, many real estate investors and analysts have
considered presentations of operating results for real estate companies that use
historical cost accounting to be insufficient. 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 mean net income attributable to common
stockholders (NICS), computed in accordance with U.S. GAAP, excluding gains (or
losses) from sales of real estate and impairment of depreciable real estate
assets and including depreciation and amortization related to real estate
earnings.

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VALUATION MEASURE:

Adjusted EBITDAR

 We use Adjusted EBITDAR as one measure in determining the value of prospective
acquisitions. It is also a commonly used measure by our management, research
analysts and investors, to compare the enterprise value of different companies
in the healthcare industry, without regard to differences in capital structures
and leasing arrangements. Adjusted EBITDAR is a financial valuation measure that
is not specified in GAAP. This measure is not displayed as a performance measure
as it excludes rent expense, which is a normal and recurring operating expense.

The adjustments made and previously described in the computation of Adjusted
EBITDA are also made when computing Adjusted EBITDAR. We calculate Adjusted
EBITDAR by excluding rent-cost of services from Adjusted EBITDA.

We believe the use of Adjusted EBITDAR allows the investor to compare
operational results of companies who have operating and capital leases. A
significant portion of capital lease expenditures are recorded in interest,
whereas operating lease expenditures are recorded in rent expense.

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

                                              Three Months Ended September 30,    Nine Months Ended September 30,
                                               2021                2020               2021                2020

Consolidated statements of income data:                                (In 

thousands)

Net income                                 $   48,344          $  43,313          $  148,764          $ 125,202
Less: net income attributable to
noncontrolling interests                        1,063                253               2,852              1,045

Add: Interest expense, net                      1,461                890               2,867              5,068
Provision for income taxes                     16,513             10,866              43,220             37,026
Depreciation and amortization                  13,929             13,757              41,383             41,082

EBITDA                                     $   79,184          $  68,573          $  233,382          $ 207,333

Stock-based compensation                        5,082              4,173              13,769             10,936
Results related to operations not at full
capacity(a)                                         -                 81                 584                620

Gain on sale of assets                              -                  -                (540)                 -

Costs incurred related to real estate due 287
diligence

                                                              -                 458                  -
Acquisition related costs(b)                      145                 20                 333                104
Costs incurred related to new systems              41                                    117
implementation                                                         -                                      -

Rent related to items above                         -                 25                  38                 72

Adjusted EBITDA                            $   84,739          $  72,872          $  248,141          $ 219,065
Rent-cost of services                          35,623             32,504             103,534             97,318
Less: rent related to items above                   -                (25)                (38)               (72)
Adjusted rent                                  35,623             32,479             103,496             97,246

Adjusted EBITDAR                           $  120,362                             $  351,637

(a) Represents results of operations not at full capacity during the period
presented.
(b) Costs incurred to acquire operations which are not capitalizable.

Three Months Ended September 30, 2021 Compared to the Three Months Ended
September 30, 2020

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, 2021

                                                   Skilled
                                                  services             Real estate             All Other             Eliminations           Consolidated
Total revenue                                     642,075                16,271                  22,522               (12,338)            $     668,530
Total expenses, including other expense,
net                                               547,646                 7,361                  61,004               (12,338)                  

603,673

Segment income (loss)                              94,429                 8,910                 (38,482)                    -                    

64,857

Income before provision for income taxes                                                                                                  $      64,857


                                                                         

Three Months Ended September 30, 2020

                                             Skilled
                                            services            Real estate          All Other           Eliminations           Consolidated
Total revenue                             $  570,282          $     15,536 

$ 25,059 $ (11,622) $ 599,255
Total expenses, including other expense,
net

                                          485,535                 7,062             61,348                (11,622)               542,323
Segment income (loss)                         84,747                 8,474            (36,289)                     -                 56,932
Loss from sale of real estate and
impairment charges                                                                                                                   (2,753)
Income before provision for income taxes                                                                                      $      54,179



Our total revenue increased $69.3 million, or 11.6%, compared to the three
months ended September 30, 2020. The increase in revenue was primarily driven by
an increase in our patient days and occupancy from our skilled services
operations, along with the impact of acquisitions. Total revenue from operations
acquired on or subsequent to January 1, 2020 increased our consolidated revenue
by $37.6 million during the three months ended September 30, 2021, when compared
to the same period in 2020. In addition, we recorded $19.2 million of state
relief revenue in the third quarter of 2021 compared to $11.7 million in the
same period in 2020, which correlated directly to the additional COVID-19
related expenses incurred. All state relief revenue is included in Medicaid
revenue.

Skilled Services

Revenue

The following table presents the skilled services revenue and key performance
metrics by category during the three months ended September 30, 2021 and 2020:
                                                     Three Months Ended September 30,
                                                        2021                    2020              Change              % Change

Total Facility Results:                                   (Dollars in 

thousands)

Skilled services revenue                         $       642,075           $   570,282          $ 71,793                   12.6  %
Number of facilities at period end                           211                   195                16                    8.2  %
Number of campuses at period end*                             22                    22                 -                      -  %
Actual patient days                                    1,665,967             1,495,285           170,682                   11.4  %
Occupancy percentage - Operational beds                     73.5   %              70.7  %                                   2.8  %
Skilled mix by nursing days                                 30.5   %              32.8  %                                  (2.3) %
Skilled mix by nursing revenue                              50.7   %              53.9  %                                  (3.2) %


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                                                     Three Months Ended September 30,
                                                        2021                    2020              Change              % Change

Same Facility Results(1):                                 (Dollars in 

thousands)

Skilled services revenue                         $       504,408           $   477,534          $ 26,874                    5.6  %
Number of facilities at period end                           165                   165                 -                      -  %
Number of campuses at period end*                             15                    15                 -                      -  %
Actual patient days                                    1,286,623             1,237,406            49,217                    4.0  %
Occupancy percentage - Operational beds                     74.4   %              71.6  %                                   2.8  %
Skilled mix by nursing days                                 32.3   %              34.0  %                                  (1.7) %
Skilled mix by nursing revenue                              52.8   %              55.2  %                                  (2.4) %


                                                  Three Months Ended September 30,
                                                      2021                   2020              Change             % Change

Transitioning Facility Results(2):                     (Dollars in 

thousands)

Skilled services revenue                       $        94,443           $   86,013          $ 8,430                    9.8  %
Number of facilities at period end                          27                   27                -                      -  %
Number of campuses at period end*                            6                    6                -                      -  %
Actual patient days                                    253,790              237,067           16,723                    7.1  %
Occupancy percentage - Operational beds                   70.4   %             66.0  %                                  4.4  %
Skilled mix by nursing days                               26.8   %             28.1  %                                 (1.3) %
Skilled mix by nursing revenue                            46.0   %             48.8  %                                 (2.8) %


                                                 Three Months Ended September 30,
                                                     2021                   2020              Change             % Change

Recently Acquired Facility Results(3):                (Dollars in 

thousands)

Skilled services revenue                     $         43,224           $    6,735          $ 36,489                      NM
Number of facilities at period end                         19                    3                16                      NM
Number of campuses at period end*                           1                    1                 -                      NM
Actual patient days                                   125,554               20,812           104,742                      NM
Occupancy percentage - Operational beds                  70.5   %             79.6  %                                     NM
Skilled mix by nursing days                              19.4   %             14.2  %                                     NM
Skilled mix by nursing revenue                           36.4   %             24.5  %                                     NM


*Campus represents a facility that offers both skilled nursing and senior living
services. Revenue and expenses related to skilled nursing and senior living
services have been allocated and recorded in the respective operating segment.
In the first half of 2021, we converted two campuses into two skilled nursing
facilities.
(1)Same Facility results represent all facilities purchased prior to January 1,
2018.
(2)Transitioning Facility results represent all facilities purchased from
January 1, 2018 to December 31, 2019.
(3)Recently Acquired Facility (Acquisitions) results represent all facilities
purchased on or subsequent to January 1, 2020.

Skilled services revenue increased $71.8 million, or 12.6%, compared to the
three months ended September 30, 2020. Of the $71.8 million increase, the
primary changes were from an increase in Medicaid custodial revenue of $44.2
million, or 20.2%, and an increase in managed care revenue $27.3 million, or
31.1%. This is partially offset by the decreases in Medicare revenue of $12.6
million, or 6.6%.

The increase in revenue was primarily driven by strong performance across our
skilled services operations as our census continued to recover in the third
quarter of 2021. Our consolidated occupancy increased by 2.8%, which includes
operations acquired at lower occupancy compared to the same period in the prior
year. As COVID-19 cases declined from the previous year, there has been a shift
in Medicare patients to long-term care patients, resulting to a decline in
skilled mix days and skilled mix revenue.

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Revenue in our Same Facilities increased $26.9 million, or 5.6% due to increased
occupancy and total patient days. Our diligent efforts to strengthen our
partnership with various managed care organizations, hospitals and the local
communities we operate in, increased our occupancy by 2.8% to 74.4%. Managed
care skilled days increased by 25.0%, resulting in an increase in Managed Care
revenue of $18.3 million. Skilled days and Medicare census days decreased due to
the shift of high acuity patients to long-term patients and the return of
long-term patients to the facilities as COVID-19 cases decreased from prior
year.

Revenue generated by our Transitioning Facilities increased $8.4 million, or
9.8%, primarily due to improved occupancy growth of 4.4% to 70.4% and increase
in our total patient days compared to the three months ended September 30, 2020,
demonstrating our ability to transition these healthcare operations toward
higher acuity patients.

Skilled services revenue generated by facilities purchased on or subsequent to
January 1, 2020 (Recently Acquired Facilities) increased by approximately $36.5
million compared to the three months ended September 30, 2020. We acquired
sixteen operations between October 1, 2020 and September 30, 2021 across four
states.
In the future, if we acquire additional turnaround or start-up operations, we
expect to see lower occupancy rates and skilled mix, and these metrics are
expected to vary from period to period based upon the maturity of the facilities
within our portfolio. Historically, we have generally experienced lower
occupancy rates, lower skilled mix at Recently Acquired Facilities and
therefore, we anticipate generally lower overall occupancy during years of
growth.
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,

                                      Same Facility                       Transitioning                       Acquisitions                            Total
                                 2021              2020              2021              2020              2021              2020              2021              2020
Skilled Nursing Average Daily
Revenue Rates:
Medicare                      $ 683.28          $ 660.07          $ 677.33          $ 642.45          $ 657.89          $ 559.70          $ 680.85          $ 656.43
Managed care                    500.25            494.95            479.61            487.57            492.63            458.30            497.19            493.78
Other skilled                   540.57            543.90            441.12            376.85            518.53            294.75            530.24            535.22
Total skilled revenue           580.08            585.40            565.62            577.31            583.50            512.69            578.30            583.86
Medicaid                        249.83            246.20            245.33            240.22            244.79            266.08            248.66            245.54
Private and other payors        237.38            233.90            230.02            220.45            247.76            244.88            237.00            231.77

Total skilled nursing revenue $ 355.26 $ 360.22 $ 329.50

$ 332.75 $ 310.74 $ 297.96 $ 347.98

$ 354.99

(1) These rates exclude additional FMAP we recognized and include sequestration
reversal of 2%.

Our Medicare daily rates at Same Facilities and Transitioning Facilities
increased by 3.5% and 5.4%, respectively, compared to the three months ended
September 30, 2020. The increase is attributable to the 2.2% net market basket
increase that became effective in October 2020. Included in revenue for the
three months ended September 30, 2021 and 2020 is the result of the temporary
suspension of the 2% Medicare sequestration, which started on May 1, 2020 and
was extended through December 31, 2021.

Our average Medicaid rates increased 1.3% due to state reimbursement increases
and our participation in supplemental Medicaid payment programs and quality
improvement programs in various states. Medicaid rates exclude the amount of
state relief revenue we recorded.

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

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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,
                                       Same Facility                            Transitioning                                Acquisitions                                  Total
                                 2021               2020                   2021                  2020                  2021                  2020                2021                2020
Percentage of Skilled
Nursing Revenue:
Medicare                          24.6  %             31.0  %                  25.3  %             33.5  %                 21.4  %             17.5  %             24.5  %             31.2  %
Managed care                      19.2                15.6                     16.4                13.6                     9.1                 5.9                18.1                15.2
Other skilled                      9.0                 8.6                      4.3                 1.7                     5.9                 1.1                 8.1                 7.5
Skilled mix                       52.8                55.2                     46.0                48.8                    36.4                24.5                50.7                53.9
Private and other payors           7.0                 6.9                      7.7                 7.9                     8.6                12.2                 7.2                 7.1

Medicaid                          40.2                37.9                     46.3                43.3                    55.0                63.3                42.1                39.0
Total skilled nursing            100.0  %            100.0  %                 100.0  %            100.0  %                100.0  %            100.0  %            100.0  %            100.0  %


                                                                                              Three Months Ended September 30,
                                       Same Facility                            Transitioning                                Acquisitions                                  Total
                                 2021               2020                   2021                  2020                  2021                  2020                2021                2020
Percentage of Skilled
Nursing Days:
Medicare                          12.8  %             16.9  %                  12.3  %             17.4  %                 10.1  %              9.3  %             12.5  %             16.9  %
Managed care                      13.6                11.3                     11.3                 9.3                     5.8                 3.8                12.7                10.9
Other skilled                      5.9                 5.8                      3.2                 1.4                     3.5                 1.1                 5.3                 5.0
Skilled mix                       32.3                34.0                     26.8                28.1                    19.4                14.2                30.5                32.8
Private and other payors          10.5                10.5                     11.1                11.9                    10.8                14.9                10.6                10.8

Medicaid                          57.2                55.5                     62.1                60.0                    69.8                70.9                58.9                56.4
Total skilled nursing            100.0  %            100.0  %                 100.0  %            100.0  %                100.0  %            100.0  %            100.0  %            100.0  %



Cost of Services

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

                                               Three Months Ended September
                                                            30,                           Change
                                                      2021             2020              $           %

Cost of service                                $     495,541                       $  437,979                 $ 57,562                13.1  %
Revenue percentage                                      77.2     %                       76.8  %                                       0.4  %

Cost of services related to our Skilled services segment increased $57.6
million, or 13.1%, primarily due to additional costs related to new
acquisitions, which accounted for $29.3 million of the increase to cost of
services. Cost of services as a percentage of revenue increased to 77.2% from
76.8%, an increase of 0.4%. The increase is mainly due to higher staffing
expenses.

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Real Estate Segment
                                                     Three Months Ended September 30,                       Change
                                                         2021                   2020                 $                 %

                                                              (In thousands)
Rental revenue generated from third-party
tenants                                           $          3,933          $    3,914          $     19                0.5  %
Rental revenue generated from Ensign
affiliated operations                                       12,338              11,622               716                6.2
Total rental revenue                              $         16,271          $   15,536          $    735                4.7  %
Segment income                                               8,910               8,474               436                5.1
Depreciation and amortization                                4,936               4,522               414                9.2

FFO                                               $         13,846          $   12,996          $    850                6.5  %



Rental revenue. Our rental revenue, including revenue generated from our
affiliated facilities, increased by $0.7 million, or 4.7%, to $16.3 million,
compared to the three months ended September 30, 2020. The increase in revenue
is primarily attributable to acquisitions and CPI increases.

FFO. Our FFO increased $0.9 million, or 6.5% to $13.8 million, compared to the
three months ended September 30, 2020. The increase in FFO is primarily related
to the increase in rental revenue.

All Other Service Revenue

Our other revenue decreased by $2.5 million, or 10.1%, to $22.5 million,
compared to the three months ended September 30, 2020. Other revenue for 2021
includes senior living revenue of $12.3 million and revenue from other ancillary
services of $10.2 million. The decrease in other revenue is due to the impact of
COVID-19, which negatively impacted services in our other ancillary services.
Consolidated Financial Expenses

Rent - cost of services. Our rent - cost of services as a percentage of total
revenue decreased by 0.1% to 5.3%, primarily due the growth in revenue outpacing
the increase in rent expense.
General and administrative expense - General and administrative expense
increased $5.7 million or 17.5%, to $38.6 million. This increase was primarily
due to increases in wages and benefits due to enhanced performance and growth.
General and administrative expense as a percentage of revenue increased by 0.3%
to 5.8%.
Depreciation and amortization - Depreciation and amortization expense increased
$0.2 million, or 1.3%, to $13.9 million. This increase was primarily related to
the additional depreciation and amortization incurred as a result of our newly
acquired operations. Depreciation and amortization decreased 0.2%, to 2.1%, as a
percentage of revenue.
Other expense, net - Other expense, net as a percentage of revenue remained
flat. Other expense primarily includes interest expense related to debt.
Provision for income taxes -  Our effective tax rate was 25.5% for the three
months ended September 30, 2021, compared to 20.1% for the same period in 2020.
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. The higher effective tax rate reflects a decrease in tax benefit from
stock-based payment awards. See Note 14, Income Taxes, in the Notes to the
Condensed Consolidated Financial Statements for further discussion.

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Nine Months Ended September 30, 2021 Compared to the Nine Months Ended
September 30, 2020
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, 2021

                                                 Skilled services           Real estate          All Other           Eliminations          Consolidated
Total revenue                                  $       1,855,993          $ 

48,181 $ 66,489 $ (36,344) $ 1,934,319
Total expenses, including other expense,
net

                                                    1,582,623                21,559            174,937                (36,344)            1,742,775
Segment income (loss)                                    273,370                26,622           (108,448)                     -               191,544
Gain from sale of real estate(1)                                                                                                                   440
Income before provision for income taxes                                                                                                  $    191,984

(1) Gain from sale of real estate includes gains or losses from the sale of real estate, insurance recoveries and impairment charges from operations.

Nine Months Ended September 30, 2020

                                                  Skilled services           Real estate          All Other           Eliminations          Consolidated
Total revenue                                   $       1,685,263          $     45,489          $  77,108          $     (34,293)         $  1,773,567
Total expenses, including other expense,
net                                                     1,441,623                22,896            178,360                (34,293)            1,608,586
Segment income (loss)                                     243,640                22,593           (101,252)                     -               164,981
Loss from sale of real estate and
impairment charges                                                                                                                               

(2,753)

Income before provision for income taxes                                                                                                   $    162,228



Our total revenue increased $160.8 million, or 9.1%, compared to the nine months
ended September 30, 2020. The increase in revenue was primarily driven by an
increase in our skilled service segment and the increase in skilled mix days and
revenue per patient day from our skilled services operations, along with the
impact of acquisitions. Total revenue from operations acquired on or subsequent
to January 1, 2020 increased our consolidated revenue by $84.6 million during
the nine months ended September 30, 2021, when compared to the same period in
2020. In addition, we recorded $52.4 million of state relief revenue during the
nine months ended in 2021 compared to $24.8 million in 2020, which correlated
directly to the additional COVID-19 related expenses incurred. All state relief
revenue is included in Medicaid revenue.

Skilled Services Segment

Revenue

The following table presents the skilled services revenue and key performance
metrics by category during the nine months ended September 30, 2021 and 2020:
                                                         Nine Months Ended September 30,
                                                         2021                      2020                   Change              % Change

Total Facility Results:                                       (Dollars in thousands)
Skilled services revenue                          $   1,855,993                     1,685,263          $ 170,730                   10.1  %
Number of facilities at period end                          211                           195                 16                    8.2  %
Number of campuses at period end*                            22                            22                  -                      -  %
Actual patient days                                   4,775,274                     4,668,961            106,313                    2.3  %
Occupancy percentage - Operational beds                    72.5    %                     74.5  %                                   (2.0) %
Skilled mix by nursing days                                31.8    %                     30.6  %                                    1.2  %
Skilled mix by nursing revenue                             52.5    %                     51.8  %                                    0.7  %


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                                                      Nine Months Ended September 30,
                                                         2021                    2020               Change              % Change

Same Facility Results(1):                                  (Dollars in 

thousands)

Skilled services revenue                          $     1,488,708           $ 1,422,453          $  66,255                    4.7  %
Number of facilities at period end                            165                   165                  -                      -  %
Number of campuses at period end*                              15                    15                  -                      -  %
Actual patient days                                     3,770,536             3,871,433           (100,897)                  (2.6) %
Occupancy percentage - Operational beds                      73.5   %              75.3  %                                   (1.8) %
Skilled mix by nursing days                                  33.3   %              32.0  %                                    1.3  %
Skilled mix by nursing revenue                               54.2   %              53.4  %                                    0.8  %


                                                   Nine Months Ended September 30,
                                                       2021                   2020             Change              % Change

Transitioning Facility Results(2):                      (Dollars in 

thousands)

Skilled services revenue                        $       272,085           $ 248,396          $ 23,689                    9.5  %
Number of facilities at period end                           27                  27                 -                      -  %
Number of campuses at period end*                             6                   6                 -                      -  %
Actual patient days                                     733,034             751,396           (18,362)                  (2.4) %
Occupancy percentage - Operational beds                    68.6   %            70.5  %                                  (1.9) %
Skilled mix by nursing days                                28.0   %            24.1  %                                   3.9  %
Skilled mix by nursing revenue                             47.8   %            44.1  %                                   3.7  %


                                                 Nine Months Ended September 30,
                                                     2021                   2020             Change             % Change

Recently Acquired Facility Results(3):                (Dollars in 

thousands)

Skilled services revenue                      $        95,200           $  14,414          $ 80,786                      NM
Number of facilities at period end                         19                   3                16                      NM
Number of campuses at period end*                           1                   1                 -                      NM
Actual patient days                                   271,704              46,132           225,572                      NM
Occupancy percentage - Operational beds                  69.0   %            77.1  %                                     NM
Skilled mix by nursing days                              21.3   %            15.5  %                                     NM
Skilled mix by nursing revenue                           39.4   %            27.7  %                                     NM




*Campus represents a facility that offers both skilled nursing and senior living
services. Revenue and expenses related to skilled nursing and senior living
services have been allocated and recorded in the respective operating segment.
In the first half of 2021, we converted two campuses into two skilled nursing
facilities.
(1)Same Facility results represent all facilities purchased prior to January 1,
2018.
(2)Transitioning Facility results represent all facilities purchased from
January 1, 2018 to December 31, 2019.
(3)Recently Acquired Facility (Acquisitions) results represent all facilities
purchased on or subsequent to January 1, 2020.

Skilled services revenue increased $170.7 million, or 10.1%, compared to the
nine months ended September 30, 2020. Of the $170.7 million increase, the
primary changes were from increases in managed care revenue of $64.2 million, or
23.6%, Medicare revenue of $17.1 million, or 3.3%, and Medicaid custodial
revenue of $75.8 million, or 11.4%.

The increase in revenue was primarily driven by strong performance across our
skilled services operations. The impact of COVID-19 on our census started in
March 2020 and continued into the first quarter of 2021. Census began to recover
in the second quarter of 2021. Our consolidated occupancy decreased by 2.0%,
which includes operations acquired at lower occupancy, compared to the same
period in the prior year. The impact of the decline in occupancy was offset by
the increase in skilled mix days due to a shift toward high acuity patients.

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Revenue in our Same Facilities increased $66.3 million, or 4.7% due to higher
patient acuity and skilled days, offset by the decrease in occupancy of 1.8%,
which primarily declined in the three months ended March 31, 2021 and has
increased in the three months ended June 30, 2021 and September 30, 2021. The
decline in our occupancy is mainly in our non-skilled patient days, which was
offset by the shift toward high acuity patients. Total revenue for Same
Facilities included $41.5 million and $20.4 million of Medicaid revenue related
to state relief funding for the nine months ended September 30, 2021 and 2020,
respectively. Managed care revenue increased by $45.4 million or 19.2%, driven
by increases in managed care days as our partnership with various managed care
organizations, hospitals and the local communities strengthened.

Revenue generated by our Transitioning Facilities increased $23.7 million, or
9.5%, primarily due to increases in our daily rate and skilled mix days compared
to the nine months ended September 30, 2020, demonstrating our ability to
transition these healthcare operations that were acquired two and three years
ago. In addition, we experienced a shift toward higher acuity patients, as
demonstrated by increased census in all skilled payors. Our skilled days
increased by 13.3%, coupled with an increase from our skilled mix revenue daily
rate of 1.5%.

Skilled services revenue generated by facilities purchased on or subsequent to
January 1, 2020 (Recently Acquired Facilities) increased by approximately $80.8
million compared to the nine months ended September 30, 2020. We acquired
sixteen operations between October 1, 2020 and September 30, 2021 across four
states.
In the future, if we acquire additional facilities that are underperforming and
need to be turned around or invest in start-up operations, we expect to see
lower occupancy rates and skilled mix and these metrics are expected to vary
from period to period based upon the maturity of the facilities within our
portfolio. Historically, we have generally experienced lower occupancy rates and
lower skilled mix at Recently Acquired Facilities and therefore, we anticipate
generally lower overall occupancy during years of growth.
The following table reflects the change in skilled nursing average daily revenue
rates by payor source, excluding services that are not covered by the daily rate
(1):
                                                                            

Nine Months Ended September 30,

                                      Same Facility                       Transitioning                       Acquisitions                            Total
                                 2021              2020              2021              2020              2021              2020              2021              2020
Skilled Nursing Average Daily
Revenue Rates:
Medicare                      $ 687.73          $ 663.07          $ 676.05          $ 637.77          $ 683.72          $ 554.63          $ 685.78          $ 658.38
Managed care                    503.74            488.29            480.30            466.78            462.47            427.07            499.44            485.33
Other skilled                   542.82            535.05            422.31            352.17            514.89            294.75            531.21            526.54
Total skilled revenue           586.70            577.62            567.57            559.42            588.80            515.22            584.19            574.99
Medicaid                        249.95            237.63            241.93            226.81            243.23            250.04            248.20            235.88
Private and other payors        237.82            233.47            235.69            218.56            250.98            237.08            238.26            230.81

Total skilled nursing revenue $ 361.04 $ 345.88 $ 332.56

$ 306.08 $ 317.48 $ 289.04 $ 354.19

$ 338.91

(1) These rates exclude additional FMAP we recognized and include sequestration
reversal of 2%.

Our Medicare daily rates at Same Facilities and Transitioning Facilities
increased by 3.7% and 6.0%, respectively, compared to the nine months ended
September 30, 2020. The increase is attributable to the 2.2% net market basket
increase that became effective in October 2020 coupled with our continued shift
towards higher acuity patients. Included in revenue for the nine months ended
September 30, 2021 is nine months impact of the temporary suspension of the 2%
Medicare sequestration, which started on May 1, 2020 and was extended through
December 31, 2021. Revenue for the nine months ended September 30, 2020 included
five months of impact from the temporary suspension of the 2% Medicare
sequestration.

Our average Medicaid rates increased 5.2% 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.


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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
                                 2021               2020                   2021                  2020                  2021                  2020                2021                2020
Percentage of Skilled Nursing Revenue:
Medicare                          26.3  %             28.5  %                  27.2  %             29.1  %                 23.9  %             21.6  %             26.3  %             28.6  %
Managed care                      19.2                16.5                     17.0                13.5                     8.4                 5.7                18.4                15.9
Other skilled                      8.7                 8.4                      3.6                 1.5                     7.1                 0.4                 7.8                 7.3
Skilled mix                       54.2                53.4                     47.8                44.1                    39.4                27.7                52.5                51.8
Private and other payors           6.6                 7.3                      7.6                 9.1                     8.3                14.1                 6.8                 7.7

Medicaid                          39.2                39.3                     44.6                46.8                    52.3                58.2                40.7                40.5
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
                                 2021               2020                   2021                  2020                  2021                  2020                2021                2020
Percentage of Skilled Nursing Days:
Medicare                          13.8  %             14.9  %                  13.4  %             14.0  %                 11.1  %             11.2  %             13.6  %             14.7  %
Managed care                      13.8                11.7                     11.8                 8.9                     5.8                 3.8                13.0                11.1
Other skilled                      5.7                 5.4                      2.8                 1.2                     4.4                 0.5                 5.2                 4.8
Skilled mix                       33.3                32.0                     28.0                24.1                    21.3                15.5                31.8                30.6
Private and other payors          10.0                10.8                     10.6                12.7                    10.4                17.2                10.1                11.1

Medicaid                          56.7                57.2                     61.4                63.2                    68.3                67.3                58.1                58.3
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
                                                       2021            2020              $            %

Cost of service                                 $   1,430,718                      $ 1,299,566                 $ 131,152                10.1  %
Revenue percentage                                       77.1    %                        77.1  %                                          -  %



Cost of services related to our skilled services segment increased $131.2
million, or 10.1%, due primarily to additional costs at new acquisitions, which
accounted for $63.4 million of the increase. Cost of services as a percentage of
revenue remained consistent at 77.1%.

Real Estate Segment
                                                      Nine Months Ended
                                                        September 30,                   Change
                                                       2021           2020             $           %

Rental revenue generated from third-party
tenants                                           $     11,837                    $  11,196                 $    641                 5.7  %
Rental revenue generated from Ensign
affiliated operations                                   36,344                       34,293                    2,051                 6.0
Total rental revenue                              $     48,181                    $  45,489                 $  2,692                 5.9  %
Segment income                                          26,622                       22,593                    4,029                17.8
Depreciation and amortization                           14,413                       13,624                      789                 5.8

FFO                                               $     41,035                    $  36,217                 $  4,818                13.3  %



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Rental revenue. Our rental revenue, including revenue generated from our
affiliated facilities, increased by $2.7 million, or 5.9% to $48.2 million,
compared to the nine months ended September 30, 2020. The increase in revenue is
primarily attributable to acquisitions and CPI increases.

FFO. Our FFO increased $4.8 million, or 13.3% to $41.0 million, compared to the
nine months ended September 30, 2020. The increase in FFO is primarily related
to the increase in rental revenue and the decrease in interest expense.

All Other Service Revenue

Our other revenue decreased by $10.6 million, or 13.8% to $66.5 million,
compared to the nine months ended September 30, 2020. Other revenue for 2021
includes senior living revenue of $36.1 million and revenue from other ancillary
services of $30.4 million. The decrease in revenue is due to the impact of
COVID-19, which negatively impacted services in our other ancillary services.

Consolidated Financial Expenses
Rent - cost of services. Our rent - cost of services as a percentage of total
revenue decreased by 0.1% to 5.4%, primarily due to the growth in revenue
outpacing the increase in rent expense.
General and administrative expense. General and administrative expense increased
$13.2 million or 13.7%, to $109.7 million. This increase was primarily due to
increases in wages and benefits due to enhanced performance and growth. General
and administrative expense increased by 0.3% to 5.7%, as a percentage of
revenue.
Depreciation and amortization. Depreciation and amortization expense increased
$0.3 million, or 0.7%, to $41.4 million. This increase was primarily related to
the additional depreciation and amortization incurred as a result of our newly
acquired operations. Depreciation and amortization decreased 0.2%, to 2.1%, as a
percentage of revenue.
Other expense, net. Other expense, net as a percentage of revenue decreased by
0.1%, to 0.2%. Other expense primarily includes interest expense related to
borrowings under mortgage debt. As there was no outstanding debt under the
Credit Facility, interest expense decreased.
Provision for income taxes.  Our effective tax rate was 22.5% for the nine
months ended September 30, 2021, compared to 22.8% for the same period in 2020.
The effective tax rate for both periods is driven by the impact of excess tax
benefits from stock-based compensation, partially offset by non-deductible
expenses. See Note 14, Income Taxes, in the Notes to the Condensed Consolidated
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, 2021 is impacted by cash
generated from strong operational performance and the repayment of Medicare
Accelerated and Advance Payment Program funds.
Historically, we have primarily financed the majority of our acquisitions
through the financing of our operating subsidiaries through mortgages, our
Credit Facility, and cash generated from operations. Total capital expenditures
for property and equipment were $50.1 million and $37.8 million for the nine
months ended September 30, 2021 and 2020, respectively. We currently have
approximately $65.0 million budgeted for renovation projects for 2021. We
believe our current cash balances, our cash flow from operations and the amounts
available under our Credit Facility will be sufficient to cover our operating
needs for at least the next 12 months.

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

Our cash and cash equivalents as of September 30, 2021 consisted of bank term
deposits, money market funds and U.S. Treasury bill related investments. In
addition, as of September 30, 2021, we held debt security investments of
approximately $48.0 million, which were split between AA, A and BBB rated
securities. We believe our debt security investments that were in an unrealized
loss position as of September 30, 2021 were not other-than-temporarily impaired,
nor has any event occurred subsequent to that date that would indicate any
other-than-temporary impairment.


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As mentioned above, our primary sources of cash is from our ongoing operations.
Our positive cash flows have supported our business and have allowed us to pay
regular dividends to our stockholders. We currently anticipate that existing
cash and total investments as of September 30, 2021, along with projected
operating cash flows and available financing, will support our normal business
operations for the foreseeable future.

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

                                                                      Nine Months Ended September 30,
                                                                         2021                    2020

Net cash provided by/(used in):                                                (In thousands)
Operating activities                                              $        204,489          $   282,161
Investing activities                                                       (57,869)             (48,485)
Financing activities                                                       (78,562)            (117,471)

Net increase in cash and cash equivalents                                   68,058              116,205
Cash and cash equivalents beginning of period                              236,562               59,175

Cash and cash equivalents at end of period                        $        

304,620 $ 175,380

Operating Activities
Cash provided by operating activities is net income adjusted for certain
non-cash items and changes in operating assets and liabilities.
The $77.7 million decrease in cash provided by operating activities for the nine
months ended September 30, 2021 compared to the same period in 2020, was
primarily due to changes in working capital partially offset by higher net
income. Changes in working capital was driven by the deferred payment of the
employer portion of social security taxes, which will be paid out in December
2021 and December 2022, timing of accounts receivable collections and payments
of expenses.
Investing Activities
Investing cash flows consist primarily of capital expenditures, investment
activities, insurance proceeds and cash used for acquisitions.
The $9.4 million increase in cash used in investing activities for the nine
months ended September 30, 2021, compared to the same period in 2020, was
primarily due to an increase in cash used for capital expenditures of
$12.3 million, which is partially offset by an increase in cash from insurance
proceeds of $6.7 million.
Financing Activities
Financing cash flows consist primarily of payment of dividends to stockholders,
issuance and repayment of short-term and long-term debt, repayment of the
Medicare Accelerated and Advance Payment Program funds and sale of shares of
common stock through employee equity incentive plans.

The $39.0 million decrease in cash used in financing activities for the nine
months ended September 30, 2021, compared to the same period in 2020, was
primarily due to the proceeds and repayment of the Medicare Accelerated and
Advance Payment Program funds offset by repayment and proceeds from borrowings.

Credit Facility with a Lending Consortium Arranged by Truist

We maintain the Credit Facility with a lending consortium arranged by Truist,
which includes a revolving line of credit of up to $350.0 million in aggregate
principal amount. The maturity date of the Credit Facility is October 1, 2024.
The interest rates applicable to loans under the Credit Facility are, at the
Company's option, equal to either a base rate plus a margin ranging from 0.50%
to 1.50% per annum or LIBOR plus a margin range from 1.50% to 2.50% per annum,
based on the Consolidated Total Net Debt to Consolidated EBITDA ratio (as
defined in the agreement). In addition, we pay a commitment fee on the unused
portion of the commitments that ranges from 0.25% to 0.45% per annum, depending
on the Consolidated Total Net Debt to Consolidated EBITDA ratio.


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Mortgage Loans and Promissory Notes

During September 30, 2021, three of our subsidiaries entered into HUD mortgage
loans in the aggregate amount of $31.4 million. As a result, 22 of our
subsidiaries have mortgage loans insured with HUD for an aggregate amount of
$143.8 million, as of September 30, 2021, which subjects these subsidiaries to
HUD oversight and periodic inspections. The mortgage loans bear effective
interest rates range of 3.1% to 4.2%, including fixed interest rates range of
2.4% to 3.3% per annum. Amounts borrowed under the mortgage loans may be
prepaid, subject to prepayment fees of the principal balance on the date of
prepayment. For the majority of the loans, the prepayment fee is 10% during the
first three years and is reduced by 3% in the fourth year of the loan, and
reduced by 1% per year for years five through ten of the loan. There is no
prepayment penalty after year ten. The term of the mortgage loans are 25 to 35
years.

In addition to the HUD mortgage loans above, we have two promissory notes. The
notes bear fixed interest rates of 5.0% and 5.3% per annum and the term of the
notes are ten months and 12 years, respectively. The 12 year note, which was
used for an acquisition, is secured by the real property comprising the facility
and the rent, issues and profits thereof, as well as all personal property used
in the operation of the facility.
Operating Leases
During the fiscal year of 2021, 166 of our facilities are under long-term lease
arrangements, of which 94 of the operations are under nine triple-net Master
Leases and one stand-alone lease with CareTrust REIT, Inc. (CareTrust). The
Master Leases consist of multiple leases, each with its own pool of properties,
that have varying maturities and diversity in property geography. Under each
master lease, our individual subsidiaries that operate those properties are the
tenants and CareTrust's individual subsidiaries that own the properties subject
to the Master Leases are the landlords. The rent structure under the Master
Leases includes a fixed component, subject to annual escalation equal to the
lesser of the percentage change in the Consumer Price Index (but not less than
zero) or 2.5%. At our option, we can extend the Master Leases for two or three
five-year renewal terms beyond the initial term, on the same terms and
conditions. If we elect to renew the term of a Master Lease, the renewal will be
effective as to all, but not less than all, of the leased property then subject
to the Master Lease. Additionally, four of the 95 facilities leased from
CareTrust include an option to purchase that we can exercise starting on
December 1, 2024. In the second quarter of 2021, the Company added four
operations and extended the term for one of the Master Leases for an additional
15 years. In the third quarter of 2021, we also added two operations and
extended the term for one of the Master Leases for an additional 17 years. As a
result, the total lease liabilities and right-of-use assets increased by $54.7
million and $63.4 million, respectively, to reflect the new lease obligations.
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. 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.
Forty-three of our affiliated facilities, excluding the facilities that are
operated under the Master Leases from CareTrust, are operated under eight
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. Failure to comply
with Medicare and Medicaid provider requirements is a default under several of
our leases, master lease agreements and debt financing instruments. In addition,
other potential defaults related to an individual facility may cause a default
of an entire master lease portfolio and could trigger cross-default provisions
in our outstanding debt arrangements and other leases. 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.
U.S. Department of Justice Civil Investigative Demand
On May 31, 2018, we received a Civil Investigative Demand (CID) from the U.S.
Department of Justice stating that it is investigating to determine whether we
have violated the False Claims Act and/or the Anti-Kickback Statute with respect
to the relationships between certain of our skilled nursing facilities and
persons who served as medical directors, advisory board participants or other
referral sources. The CID covered the period from October 3, 2013 through 2018,
and was limited in scope to ten of our Southern California skilled nursing
facilities. In October 2018, the Department of Justice made an additional
request for information covering the period of January 1, 2011 through 2018,
relating to the same topic. As a general matter, our operating entities maintain
policies and procedures to promote compliance with the False Claims Act, the
Anti-Kickback Statute, and other applicable regulatory requirements. We have
fully cooperated with the U.S. Department of Justice and promptly responded to
its requests for information; in April 2020, we were advised that the U.S.
Department of Justice declined to intervene in any subsequent action based on or
related to the subject matter of this investigation.
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Inflation

We have historically derived a substantial portion of our revenue from the
Medicare program. We also derive revenue from state Medicaid and similar
reimbursement programs. Payments under these programs generally provide for
reimbursement levels that are adjusted for inflation annually based upon the
state's fiscal year for the Medicaid programs and in each October for the
Medicare program. These adjustments may not continue in the future, and even if
received, such adjustments may not reflect the actual increase in our costs for
providing healthcare services.

Labor and supply expenses make up a substantial portion of our cost of services.
Those expenses can be subject to increase in periods of rising inflation and
when labor shortages occur in the marketplace. To date, we have generally been
able to implement cost control measures or obtain increases in reimbursement
sufficient to offset increases in these expenses. There can be no assurance that
we will be able to anticipate fully or otherwise respond to any future
inflationary pressures.
Recent Accounting Pronouncements

Except for rules and interpretive releases of the Securities and Exchange
Commission (SEC) under authority of federal securities laws and a limited number
of grandfathered standards, the Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC) is the sole source of authoritative GAAP
literature recognized by the FASB and applicable to us. For any new
pronouncements announced, we consider whether the new pronouncements could alter
previous generally accepted accounting principles and determines whether any new
or modified principles will have a material impact on our reported financial
position or operations in the near term. The applicability of any standard is
subject to the formal review of our financial management and certain standards
are under consideration.

Recent Accounting Standards Adopted by the Company

In December 2019, the FASB issued Accounting Standards Update (ASU) 2019-12
"Simplifying the Accounting for Income Taxes (Topic 740)", as part of its
simplification initiative to reduce the cost and complexity in accounting for
income taxes. ASU 2019-12 removes certain exceptions related to the approach for
intraperiod tax allocation, the methodology for calculating income taxes in an
interim period and the recognition of deferred tax liabilities for outside basis
differences. ASU 2019-12 also amends other aspects of the guidance to help
simplify and promote consistent application of GAAP. We adopted this standard on
January 1, 2021 and determined there was no material impact on our financial
position, results of operations and liquidity.

In May 2020, the SEC issued Final Rule Release No. 33-10786, "Amendments to
Financial Disclosures about Acquired and Disposed Businesses" ("SEC Rule
33-10786"), which amends the disclosure requirements applicable to acquisitions
and dispositions of businesses. Amendments within SEC Rule 33-10786 primarily
impact (1) the tests and thresholds used to determine the significance of
acquisitions and dispositions; (2) the form and content of pro forma information
required to be disclosed in connection with significant acquisitions and
dispositions; (3) acquiree financial statement requirements; and (4) thresholds
used to determine the significance of acquisitions and dispositions of real
estate operations, and related financial statement requirements, among others.
We adopted this standard on January 1, 2021 and determined there was no material
impact on our condensed consolidated financial statements.

Accounting Standards Recently Issued but Not Yet Adopted by the Company

In February 2020, the FASB issued ASU 2020-04 "Reference Rate Reform (Topic
848)" which provides temporary, optional practical expedients and exceptions to
enable a smoother transition to reference rates which are expected to replace
LIBOR reference rates. Adoption of the provisions of ASU 2020-04 is optional.
The amendments are effective for all entities from the beginning of the interim
period that includes the issuance date of the ASU. An entity may elect to apply
the amendments prospectively through December 31, 2022. We are currently
evaluating the impact of ASU 2020-04 on our financial position, results of
operations and liquidity.

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In November 2020, the SEC issued final rules 33-10890 and 34-90459 "Management's
Discussion and Analysis, Selected Financial Data, and Supplementary Financial
Information," which modernizes and simplifies certain disclosure requirements of
Regulation S-K. Certain key rule amendments eliminate the requirement to
disclose Selected Financial Data; Selected Quarterly Financial Data, with
certain exceptions; the impact of inflation and changing prices, provided the
impact is not material; off-balance sheet arrangements in tabular form; and the
aggregate amount of contractual obligations in tabular form. The final rules
also amended various aspects of Item 303, "Management's Discussion and Analysis
of Financial Condition and Results of Operations," among others. The final rules
are effective for all registration statements and annual reports filed on or
after August 9, 2021, with early adoption permitted. We are currently evaluating
the impact of the disclosure changes in our annual reports.

In July 2021, the FASB issued ASU 2021-05 "Lessors-Certain Leases with Variable
Lease Payments (Topic 842)," which amends the lessor classification guidance to
introduce additional criteria when classifying leases with variable lease
payments that do not depend on a reference index or a rate. This guidance is
effective for annual periods beginning after December 15, 2021, which will be
our fiscal year 2022, with early adoption permitted. We have not yet determined
the effect of the ASU on our results of operations, financial condition or cash
flows.

Off-Balance Sheet Arrangements

As of September 30, 2021, we had approximately $6.5 million on our Credit
Facility of borrowing capacity pledged as collateral to secure outstanding
letters of credit, which is a reduction of $1.0 million from the second quarter.