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, 2021 (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 2022
continue to be impacted by the COVID-19 pandemic. Because of the unprecedented
nature of the pandemic, we are unable to predict the full extent and duration of
the financial impact of COVID-19 on our business, financial condition and
results of operations. 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.

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, our wholly-owned captive insurance
subsidiary and our captive real estate investment trust (REIT) called Standard
Bearer Healthcare REIT, Inc. (Standard Bearer) 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, the captive insurance subsidiary
or Standard Bearer are operated by the same entity. This Management's Discussion
and Analysis of Financial Condition and Results of Operations should be read in
conjunction with our consolidated financial statements and related notes
included the Annual Report.



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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 March 31, 2022, we offered skilled
nursing, senior living and rehabilitative care services through 250 skilled
nursing and senior living facilities. Of the 250 facilities, we operated 179
facilities under long-term lease arrangements and have options to purchase 11 of
those 179 facilities. Our real estate portfolio includes 102 owned real estate
properties, which included 71 facilities operated and managed by us, 32 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 32 real estate operations leased to
Pennant, two senior living operations are located on the same real estate
properties as skilled nursing facilities that we own and operate.

The following table summarizes our affiliated facilities and operational skilled
nursing beds and senior living units by ownership status as of March 31, 2022:

                                                                                                Leased (without            Total for
                                                     Owned and            Leased (with a           a Purchase              Facilities
                                                      Operated           Purchase Option)           Option)                 Operated
Number of facilities                                         71                     11                    168                      250
Percentage of total                                        28.4  %                 4.4  %                67.2  %                 100.0  %
Operational skilled nursing beds                          6,963                  1,145                 17,405                   25,513
Percentage of total                                        27.3  %                 4.5  %                68.2  %                 100.0  %
Senior living units                                       1,600                    178                    958                    2,736
Percentage of total                                        58.5  %                 6.5  %                35.0  %                 100.0  %


Ensign is a holding company with no direct operating assets, employees or
revenues. Our operating subsidiaries are operated by separate, independent
entities, each of which has its own management, employees and assets. In
addition, certain of our wholly-owned subsidiaries, referred to collectively as
the Service Center, provide centralized accounting, payroll, human resources,
information technology, legal, risk management and other centralized services to
the other operating subsidiaries through contractual relationships with such
subsidiaries. We also have a wholly-owned captive insurance subsidiary that
provides some claims-made coverage to our operating subsidiaries for general and
professional liability, as well as coverage for certain workers' compensation
insurance liabilities and our captive real estate trust owns and operates our
real estate portfolio. Our captive real estate investment trust, Standard
Bearer, owns and manages our real estate business. References herein to the
consolidated "Company" and "its" assets and activities, as well as the use of
the terms "we," "us," "our" and similar terms in this Quarterly Report, are not
meant to imply, nor should they be construed as meaning, that The Ensign Group,
Inc. has direct operating assets, employees or revenue, or that any of the
subsidiaries are operated by The Ensign Group.

Recent Activities

Revolving Credit Facility Amendment - On April 8, 2022, we entered into the
Second Amendment to Third Amended and Restated Credit Facility (the Amended
Credit Facility), which increased the revolving credit facility by $250.0
million to an aggregate principal amount of up to $600.0 million. The maturity
date of the Amended Credit Facility is April 8, 2027. Borrowings are supported
by a lending consortium arranged by Truist Securities (Truist). The interest
rates applicable to loans under the Amended Credit Facility are, at our option,
equal to either a base rate plus a margin ranging from 0.25% to 1.25% per annum
or Secured Overnight Financing Rate (SOFR) plus a margin range from 1.25% to
2.25% per annum, based on the Consolidated Total Net Debt to Consolidated EBITDA
ratio (as defined in the agreement). In addition, we will pay a commitment fee
on the unused portion of the commitments that will range from 0.20% to 0.40% per
annum, depending on the Consolidated Total Net Debt to Consolidated EBITDA
ratio.


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Captive Real Estate Investment Trust - In January of 2022, we formed Standard
Bearer Healthcare REIT, Inc. or Standard Bearer, a captive REIT. Standard Bearer
is a holding company with subsidiaries that own most of our real estate
portfolio. We expect the REIT structure will allow us to better demonstrate the
growing value of our owned real estate and provides us with an efficient vehicle
for future acquisitions of properties that could be operated by Ensign
affiliates or other third parties. We believe this structure will give us new
pathways to growth with transactions we would not have considered in the past.
Standard Bearer intends to qualify and elects to be taxed as a REIT, for U.S.
federal income tax purposes, commencing with its taxable year ending December
31, 2022.

The real estate portfolio in Standard Bearer consists of a select 95 of our 102
owned real estate properties. Of the 95 owned real estate properties in Standard
Bearer, 67 facilities are operated by Ensign operating subsidiaries and 30
facilities are leased to and operated by Pennant. Of the 30 real estate
operations leased to Pennant, two senior living operations are located on the
same real estate properties as skilled nursing facilities that we own and
operate.

The fair value of Standard Bearer's real estate portfolio is more than $1.0
billion. The fair value was determined by a third party independent valuation
specialist and incorporated each property's rental income, capitalization rate,
rental yield rate and discount rate as appropriate.

In January of 2022, as part of the formation of Standard Bearer, certain of our
operating subsidiaries and the 67 Standard Bearer subsidiaries entered into five
"triple-net" master lease agreements (collectively, the Standard Bearer Master
Leases). The lease period ranges from 15 to 19 years with three five-year
renewal option beyond the initial term, on the same terms and conditions. The
rent structure under the Standard Bearer Master Leases includes a fixed
component, subject to annual escalation equal to the lesser of (1) the
percentage change in the Consumer Price Index (but not less than zero) or (2)
2.5%. In addition to rent, the operating subsidiaries are required to pay the
following: (1) all impositions and taxes levied on or with respect to the leased
properties (other than taxes on the income of the lessor); (2) all utilities and
other services necessary or appropriate for the leased properties and the
business conducted on the leased properties; (3) all insurance required in
connection with the leased properties and the business conducted on the leased
properties; (4) all facility maintenance and repair costs; and (5) all fees in
connection with any licenses or authorizations necessary or appropriate for the
leased properties and the business conducted on the leased properties. During
the three months ended March 31, 2022, we acquired the real estate of two
skilled nursing facilities for a purchase price of $17.0 million and leased
these facilities to certain of our operating subsidiaries through the Standard
Bearer Master Leases. Total annual rental income under the Standard Bearer
Master Lease is approximately $56 million. In addition, as we expand our real
estate portfolio through our acquisition strategy, we anticipate that the
acquired real estate will be included in Standard Bearer.

Standard Bearer has no employees. Personnel and services provided to Standard
Bearer by the Service Center are pursuant to the management agreement between
Standard Bearer and the Service Center. The management agreement provides for a
base management fee and an incentive management fee, payable in cash, among
other terms. The base management fee for each applicable period is equal to 5.0%
of the total revenue of Standard Bearer. The incentive management fee is equal
to 5.0% of funds from operations (FFO) and is capped at 1.0% of total revenue.
In addition, operating expenses incurred by the Service Center on Standard
Bearer's behalf, which includes the cost of legal, tax, consulting, accounting
and other similar services rendered by the Service Center, its advisers or other
third parties, are reimbursed by Standard Bearer. During the three months ended
March 31, 2022, management fee was $1.0 million or 6.0% of total revenue of
Standard Bearer.

Standard Bearer will obtain its funding through various sources including
operating cash flows, access to debt arrangements and intercompany loans. The
intercompany debt arrangements include mortgage loans and a credit revolver
between the Ensign Group, Inc., the real estate properties and Standard Bearer
and will fund acquisitions and working capital needs. The interest rate under
the credit revolver is a base rate plus a margin ranging from 0.50% to 1.50% per
annum or LIBOR (or an alternative reference rate) plus a margin range from 1.50%
to 2.50% per annum. The intercompany mortgage loan amount is $93.0 million. As
of March 31, 2022, there is $16.8 million outstanding under the intercompany
credit revolver. In addition, third party debt held by Department of Housing and
Urban Development (HUD) mortgage loans and promissory notes are outstanding in
an aggregate amount of $159.0 million, are included in Standard Bearer.

Coronavirus Update - We are continuing to closely monitor the impact of the
global COVID-19 pandemic on our business as evidenced by the extension of the
public health emergency (PHE) through July 14, 2022. 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.

We continue to execute on key initiatives to rebuild occupancy lost due to the
pandemic. During the first quarter of 2022, our combined Same Facilities and
Transitioning Facilities occupancy increased by 3.4% compared to first quarter
of 2021 and 0.2% compared to the fourth quarter of 2021.
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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. Even with COVID-19 demands waning, the partnerships developed during
the pandemic will continue to benefit us into the future. By strengthening
existing partnerships, creating new partnerships and most importantly,
demonstrating clinical capabilities and favorable outcomes, our census has
continued to stabilize. We believe our operations 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.

We did not receive any 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 during the three months ended March 31, 2022.
To date, we have returned all Provider Relief Funds that we received and repaid
all of the Medicare Accelerated and Advance Payment Program funds received.

During the three months ended March 31, 2022 and March 31, 2021, we received
state relief funding of $17.3 million and $15.6 million and recognized $17.6
million and $16.5 million, respectively, as revenue. Our unapplied state funding
as of December 31, 2021 and 2020 was $1.5 million and $1.8 million,
respectively. See Note 3, COVID-19 Update in the Notes to the Unaudited
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 was paid out in the fourth quarter of
2021 and the remaining liabilities will be paid in the fourth quarter of 2022.

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 follow October 29, 2021. During the three months
ended March 31, 2022, the Company repurchased 0.1 million shares of our common
stock for $9.9 million. This repurchase program expired upon the repurchase of
the full authorized amount under the plan. On February 9, 2022, the Board of
Directors approved a stock repurchase program pursuant to which we may
repurchase up to $20.0 million of our common stock under the program for a
period of approximately 12 months that follow February 10, 2022. During the
three months ended March 31, 2022, we did not purchase any shares pursuant to
this stock repurchase program.


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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 March 31, 2022:
                          TX               CA               AZ               UT              CO              WA              ID            NE            IA            SC            WI            NV            KS             

Total

Number of operated facilities
Skilled nursing
operations                 65               52               29               18              14              13             11             4             4             4             2             1             -               217
Senior living
operations                  1                -                1                2               5               -              -             1             -             -             -             -             -                10
Campuses(1)                 4                1                4                1               1               -              1             2             2             -             -             -             7                23
Number of operated beds/units
Operational skilled
nursing beds            8,350            5,296            4,364            1,991           1,303           1,227            984           413           368           424           100            92           601            25,513
Senior living units       505               65              718              163             725               -             21           302            31             -             -             -           206             2,736

Number of owned and operated facilities
Skilled nursing
properties                 16                8                8                7               4               2              5             1             -             4             2             -             -                57
Senior living
communities                 1                -                -                -               3               -              -             1             -             -             -             -             -                 5
Campuses(1)                 2                -                3                -               -               -              -             -             -             -             -             -             4                 9

Number of owned and operated beds/units
Owned skilled nursing
beds                    2,012              848            1,443              684             346             204            454            88             -           424              100          -           360             6,963
Owned Senior living
units                     439                -              315                -             461               -              -           263             -             -             -             -           122             1,600

Number of owned and not operated facilities
Senior living
properties                  6                3                1                -               -               -              2             1             -             -               19          -             -                32

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

During the three months ended March 31, 2022, we expanded our operations and
real estate portfolio through a combination of long-term leases and real estate
purchases, with the addition of four stand-alone skilled nursing operations. Of
these additions, two include purchases of real estate properties, further
expanding our Standard Bearer real estate portfolio. In addition, we added two
senior living operations that were transferred from Pennant, one of which is
part of a campus operated by our affiliated operating subsidiaries. These new
operations added a total of 453 operational skilled nursing beds and 403
operational senior living units to be operated by our affiliated operating
subsidiaries.

Subsequent to March 31, 2022, we expanded our operations and real estate
portfolio through a real estate purchase, which added one stand-alone senior
living operation. In addition, we added three senior living operation that were
transferred from Pennant, two of which are part of healthcare campuses operated
by our affiliated operating subsidiaries. These new operations added 281
operational senior living units to be operated by our affiliated operating
subsidiaries. We also invested in new ancillary services that are complementary
to our existing businesses

For further discussion of our acquisitions, see Note 7, Standard Bearer and Note
9, Operation Expansions in the Notes to the Unaudited Condensed Consolidated
Financial Statements.

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:



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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.

•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 state relief
funding, which includes 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 March 31,
Skilled Mix:               2022                   2021

Days                                 33.7  %     34.4  %
Revenue                              54.3  %     55.6  %


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.


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

                                                                           Three Months Ended March 31,
Occupancy for skilled services:                                         2022                         2021
Operational beds at end of period                                           25,513                        23,619
Available patient days                                                   2,285,046                     2,122,096
Actual patient days                                                      1,695,964                     1,509,600
Occupancy percentage (based on operational beds)                              74.2  %                       71.1  %



Segments

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

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

Revenue Sources

The following table sets forth our total service revenue by payor source
generated by our skilled services segment and other service revenue and as a
percentage of total revenue for the periods indicated (dollars in thousands):
                                                                                          Three Months Ended March 31,
                                                     Skilled Services                       Other Service Revenue                     Total Service Revenue
                                                  2022               2021                  2022                  2021                2022                 2021
Medicaid(1)                                   $ 261,587          $ 227,741          $      4,761              $  3,617          $    266,348          $ 231,358
Medicare                                        208,411            190,303                     -                     -               208,411            190,303
Medicaid-skilled                                 45,949             39,993                     -                     -                45,949             39,993
Subtotal                                        515,947            458,037                 4,761                 3,617               520,708            461,654
Managed care                                    127,786            108,345                     -                     -               127,786            108,345
Private and other(2)                             43,038             34,654                17,624                18,623                60,662             53,277
Total service revenue                         $ 686,771          $ 601,036          $     22,385              $ 22,240          $    709,156          $ 623,276


                                                                                              Three Months Ended March 31,
                                                        Skilled Services                          Other Service Revenue                       Total Service Revenue
                                                   2022                  2021                  2022                  2021                  2022                  2021
Medicaid(1)                                           38.1  %               37.9  %               21.3  %               16.3  %               37.6  %               37.1  %
Medicare                                              30.3                  31.7                     -                     -                  29.4                  30.5
Medicaid-skilled                                       6.7                   6.6                     -                     -                   6.4                   6.5
Subtotal                                              75.1                  76.2                  21.3                  16.3                  73.4                  74.1
Managed care                                          18.6                  18.0                     -                     -                  18.0                  17.4
Private and other(2)                                   6.3                   5.8                  78.7                  83.7                   8.6                   8.5
Total service revenue                                100.0  %              100.0  %              100.0  %              100.0  %              100.0  %              100.0  %


(1) Medicaid payor includes revenue generated from senior living operations and
revenue related to FMAP.
(2) Private and other payors also includes revenue from senior living operations
and all payors generated in other ancillary services.





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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.

Standard Bearer

We generate rental revenue primarily by leasing post-acute care properties we
acquired to healthcare operators under triple-net lease arrangements, whereby
the tenant is solely responsible for the costs related to the property,
including property taxes, insurance, and maintenance and repair costs, subject
to certain exceptions. As of March 31, 2022, our real estate portfolio within
Standard Bearer comprised of 95 real estate properties. Of these properties, 67
are leased to affiliated skilled nursing facilities wholly-owned and managed by
us and 30 are leased to senior living operations wholly owned and managed by
Pennant. Of the 30 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 months ended
March 31, 2022, we generated rental revenues of $17.2 million, of which $13.4
million 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.

Critical Accounting Estimates

Our condensed consolidated financial statements included in this report have
been prepared in accordance with accounting principles generally accepted in the
United States of America (U.S. GAAP). The preparation of these financial
statements requires management to make judgments, estimates and assumptions that
affect the reported amounts of assets, liabilities, cash flows, revenues and
expenses, and related disclosure of contingent assets and liabilities.

See Item 2., Management's Discussion and Analysis of Financial Condition and
Results of Operations, in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2021 for further discussion of critical accounting estimates.
There were no material changes to our critical accounting policies with which
the estimates are developed since December 31, 2021.

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.
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•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.

•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 (LTC) 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, 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 the skilled nursing
facilities, senior living facilities and outpatient rehabilitation agencies of
our independent operating subsidiaries to verify continued compliance with
applicable regulations and standards. The operations must pass these inspections
to remain licensed under state laws and to comply with Medicare and Medicaid
provider agreements. The operations can only participate in these third-party
payment programs if inspections by regulatory authorities reveal that the
operations are in substantial compliance with applicable state and federal
requirements. In the ordinary course of business, federal or state regulatory
authorities may issue notices to the operations alleging deficiencies in certain
regulatory practices. These statements of deficiency may require corrective
action to regain and maintain compliance. In 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 United
States Department of Health and Human Services (HHS) Office of the Inspector
General (OIG), state Medicaid agencies, state Attorney Generals, local and state
ombudsman offices and CMS Recovery Audit Contractors, among other agencies. In
response to the inquiries, investigations and audits, federal and state agencies
continue to impose citations for regulatory deficiencies and other regulatory
penalties, including demands for refund of overpayments, expanded civil monetary
penalties that extend over long periods of time and date back to incidents prior
to surveyor visits, Medicare and Medicaid payment bans and terminations from the
Medicare and Medicaid programs, which may be temporary or permanent in nature.
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 operations.

Coronavirus

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

Temporary suspension of certain patient coverage criteria and documentation and
care requirements - The Coronavirus Aid, Relief, and Economic Security Act of
2020 (the CARES Act) and a series of temporary waivers and guidance issued by
CMS suspended various Medicare patient coverage criteria to ensure patients
continue to have adequate access to care, notwithstanding the burdens placed on
healthcare providers as related to the COVID-19 pandemic. Many of these
regulatory waivers were issued pursuant to Section 1135 of the Social Security
Act, which authorizes the HHS Secretary to temporarily waive or modify Medicare
and Medicaid requirements for affected health care providers and facilities
following the declaration of a PHE (Section 1135 Waivers). HHS also waived
requirements specific to 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 PHE, CMS ended several Emergency Waivers effective May 10, 2021. Due to
the prevalence of waves of COVID-19 variants in 2021 and continuing into 2022,
it is unclear when the remaining Emergency Waivers will expire, or whether
previously expired Emergency Waivers will be reinstated. Effective April 16,
2022, the COVID-19 PHE was extended until at least July 14, 2022. HHS has
reported that it will provide at least 60 days' advance notice prior to the
expiration or termination of the PHE.

Examples of the Emergency Waivers include, but are not limited to 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 to practice
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; (5) waiving the
requirement for LTC facilities' directors of food and nutrition services to have
specified higher education or other credentials in the areas of food service and
management and safety; and (6) temporarily waiving certain documentation,
reporting and audit requirements to allow providers, health care facilities,
Medicare Advantage (MA) 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
PHE. We believe these regulatory actions could contribute to changes in skilled
mix, which may have been different without the existence of the Emergency
Waivers.

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Pursuant to the Emergency Waivers, CMS also authorized temporary waivers on
medical review requirements, effective March 1, 2020, for the duration of the
PHE. In addition, CMS is re-prioritizing scheduled program audits and
contract-level Risk Adjustment Data Validation audits for 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.

In July 2020, CMS updated its COVID-19 Provider Burden Relief Frequently Asked
Questions (FAQ) related to claim audit waivers for multiple services. On March
30, 2020, CMS suspended most Medicare 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), and Recovery Audit Contractors (RAC). CMS authorized
MACs to resume these audit activities beginning on August 3, 2020, regardless of
the status of the PHE. All reviews would 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 would also be applied. In December of 2021, CMS issued a 2019 Novel
Coronavirus Medicare Provider Enrollment Relief FAQ document, which addressed
Medicare enrollment and re-enrollment during the ongoing PHE. Within this
December 2021 FAQ, CMS indicated that it would resume collecting application
fees in 2021 and revalidating enrollees in 2022.

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 PHE. As patients qualify for skill-in-place for
Medicare Part A stays, we could see a decrease in LTC 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's 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 PHE. CMS used this update of its March 16,
2021 Medicare FFS Response to the PHE on COVID-19 article 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 PHE and CMS's
institution of applicable waivers that facilitated payment for SNF services.

On April 7, 2022, CMS issued a memorandum that identified 16 Emergency Waivers
that would expire for SNFs and LTC facilities during the next 60 days. CMS
stated that the Emergency Waivers would expire in two groups. The first group of
Emergency Waivers to expire within 30 days of CMS's memorandum, on May 7, 2022,
contains seven Emergency Waivers. The second group of Emergency Waivers to
expire 60 days after the memorandum's issuance, on June 6, 2022, contains nine
Emergency Waivers. The Emergency Waivers expiring on May 7, 2022 are: (1) waiver
of the requirement that residents participate in-person during resident groups;
(2) physicians' ability to delegate tasks that otherwise would need to be
personally performed by a physician within a SNF; (3) waiver of the requirement
for physicians to make personal visits to patients, which the Emergency Waivers
allow physicians to delegate to other clinicians; (4) waiver of the requirement
for physicians and non-physician providers to conduct in-person visits to
nursing home residents (and allowing those visits to be made via telemedicine as
appropriate); (5) reducing LTC facilities' requirements to develop, implement
and maintain a QAPI program that satisfies federal standards; (6) waiver of LTC
facilities' obligation to participate in discharge planning for residents ending
their care at the facility; and (7) waiver of the requirement for LTC facilities
to provide residents with a copy of their records within two working days of a
resident's request for those records.

The Emergency Waivers that will expire on June 6, 2022 are: (1) waivers of SNF
physical environment conditions for temporary use facilities (including COVID-19
treatment locations) and use of interior or non-residential space within a SNF
to accommodate residents; (2) waivers of requirements for timely preventative
maintenance for certain equipment, including dialysis equipment; (3) the waiver
of inspection, testing and maintenance for the facilities and medical equipment
used within ICFs and SNFs; (4) the waiver of inspection, testing, and
maintenance for compliance with applicable life safety codes and health care
facility codes for intermediate care facilities (ICFs) and SNFs; (5) the waiver
of CMS's requirement for ICFs and SNFs to have an exterior door or window in
every room used for sleeping; (6) life safety code waivers of quarterly fire
drills and allowing SNFs to erect temporary walls and barriers between patients;
(7) waiving CMS's minimum training requirements for paid feeding assistants in
LTC facilities; (8) CMS's waiver of its requirement for nurse aides within SNFs
to receive at least 12 hours of annual in-service training; and (9) the waiver
of an SNF's normal obligation not to employ any nursing aid longer than 4 months
if he or she does not satisfy federal training and certification requirements.


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Select waivers including the three-day qualifying stay will remain in effect,
however there may be additional or other Emergency Waivers that will be
terminated or allowed to expire in coming weeks or days. CMS's memorandum may
also exacerbate the care differential between hospitals and non-hospital
facilities. Notably, CMS's April 7, 2022, memorandum specified that the
Emergency Waivers will remain in effect for hospitals and critical access
hospitals, but the specified Emergency Waivers will expire for SNFs, LTC
facilities, and inpatient hospices, among other facility types. The expiration
or termination of Emergency Waivers are determined at the agency level and may
occur quickly as well as with little public notice.

Resuming visitation and resident rights - CMS has issued guidance to facilities
throughout the PHE regarding patients' rights to visitation. While the CMS
guidance issued in March 2020 directed facilities to severely restrict
visitation, CMS has subsequently provided guidance through the course of the
pandemic (and most recently updated in November 2021 and January 2022) that
broadens visitation and provides guidance on visitation procedures.

Testing requirements - Beginning in April 2020, authorities in several states in
which our independent operating subsidiaries are located began to mandate
widespread COVID-19 testing at all nursing home and LTC facilities. This came
after the Centers for Disease Control and Prevention (CDC) stated that older
adults are at a higher risk for serious illness from the coronavirus and issued
updated testing guidelines for nursing homes. Some of these states were also
publicly reporting COVID-19 outbreaks in facilities. On 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.

Federal and state COVID-19 vaccination requirements - 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. Pfizer and Moderna's COVID-19 vaccines have since received
full FDA approval. Vaccine distribution, including the administration of first
vaccine booster shots, is now widespread in all 50 states. Through a series of
amendments to the EUA beginning in 2021 through March 2022, the FDA authorized
and the CDC recommended the use of first a single booster dose, and then a
second booster dose, to be administered to qualifying individuals. First
boosters were approved and recommended at least six months after completing the
primary vaccination series of Pfizer-BioNTech or Moderna, or two months after
completing the primary Johnson & Johnson vaccination. Second boosters of either
the Pfizer-BioNTech or Moderna vaccines were approved and recommended to be
administered to qualifying individuals at least four months after receipt of
their first vaccine booster injection.

On August 18, 2021, the Administration announced that CMS was 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, and on the same day the Administration announced that OSHA
would introduce an emergency temporary standard (ETS) requiring employers with
more than 100 employees to mandate that its employees be fully vaccinated
against COVID-19 or submit to weekly testing for the virus. Both CMS's IFR and
OSHA's ETS for vaccination were challenged in court and halted from enforcement
in certain states.

On November 5, 2021, CMS issued the Omnibus COVID-19 Health Care Staff
Vaccination interim final rule (IFR), requiring all eligible staff in certain
Medicare and Medicaid participating health facilities to complete their one- or
two-injection vaccination sequences by or before January 13, 2022. CMS's
enforcement of this IFR was temporarily blocked in certain states pending appeal
to the United States Supreme Court. By January 20, 2022, decisions of the United
States Supreme Court and other courts affirmed CMS's authority to enforce the
IFR in all states, with the last among them, Texas, subject to a deadline of
March 21, 2022 for full compliance with the IFR's vaccination requirements.
Additionally, 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 this IFR. In addition to CMS's 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.


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In addition to the IFR mandating vaccinations for health facility workers,
several states where our independent operating facilities are located have
issued vaccine mandates that apply to facility staff. California, the most
populous state, issued an order on August 5, 2021 (and expanded on September 28,
2021), requiring adult care facilities and direct care workers to be vaccinated
as well, and for all affected workers to be fully vaccinated by November 30,
2021. On February 22, 2022, California's Department of Public Health updated its
directive to allow workers who had completed their primary vaccination series
and contracted COVID-19 since becoming fully vaccinated to defer the receipt of
a vaccine booster dose by up to 90 days after infection with COVID-19;
otherwise, booster vaccine doses were required to be completed by March 1, 2022.
On August 20, 2021, the State of Washington required workers (including
employees, contractors, and volunteers) in LTC facilities and healthcare
settings to be fully vaccinated against COVID-19 by October 2021. On August 30,
2021, the Colorado Board of Health approved (and extended by 120 days on
December 15, 2021) a COVID-19 vaccine requirement for employees, contractors,
and other individuals working in certain health care facilities including
nursing homes and senior living facilities to be fully vaccinated by October
2021. None of these states have been enjoined from enforcing their respective
mandates. Non-compliance with state or federal mandates may result in imposition
of fines or other administrative action, and compliance with these laws may be
difficult due to legal challenges and changes in the applicable laws,
regulations, or directives.

Reporting requirements - Effective May 8, 2020, CMS published an IFR 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 IFR requiring LTC 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 IFR incorporating comments on its
May 21, 2021 IFR which continued the obligation for LTC and intermediate care
facilities to report COVID-19 vaccination data for both residents and staff to
the CDC National Healthcare Safety Network. This new IFR 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 IFR also addresses responses to vaccination refusal by residents and staff
in compliance with U.S. Equal Employment Opportunity Commission guidance. CMS
may initiate enforcement activities and assess civil monetary penalties for not
meeting any of these COVID-19 related reporting requirements under this IFR. We
do not believe these COVID-19 related requirements will have a material impact
on our condensed consolidated financial statements.

Survey Activity and Enforcement - On March 20, 2020, CMS announced the
initiation of focused infection control surveys intended to assess LTC 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 most recently 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.


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Medicare

Medicare presently accounts for approximately 30.3% 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 International Classification of Diseases, Tenth Revision
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. On
August 4, 2021, CMS published the SNF PPS final rule for fiscal year 2022, which
included a 1.2% net market basket increase in payment to SNFs, and reduced the
negative impact of readmissions for providers with more than 25 stays by
returning 60% of the 2% withheld by CMS regardless of that provider's
performance measures. Providers with lower volume and fewer than 25 stays will
not have any adjustments made to their payment.

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's MAC
will issue the facility a notice of non-compliance if it does not satisfy its
Quality Reporting Program reporting requirements.

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.


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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. In January 2022, SNF ratings based on
the resumed data reporting were recalculated for publication on the SNF Care
Compare website. SNF Care Compare website ratings based on SNF QRP data
reporting were refreshed in April of 2022.

Medicare Annual Payment Rule

CMS is required to calculate an annual Medicare market-basket update to the
payment rates. On July 31, 2020, CMS issued a final rule for fiscal year 2021
that updates the Medicare payment rates and the quality programs for 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 11, 2022, CMS issued a proposed rule that would decrease the aggregate
net payment by 0.7% which is comprised of a net market basket increase of 2.8%
for fiscal year 2023 plus a 1.5% market basket forecast error adjustment for a
0.4% reduction for productivity adjustment, as well as a 4.6% decrease in the
SNF PPS rates as a result of the proposed recalibrated parity adjustment.

Proposed Recalibration of the PDPM Parity Adjustment - Based on the prior year
aggregate spending, CMS has conducted a data analysis to recalibrate the parity
adjustment in order to achieve budget neutrality under PDPM. CMS is proposing a
PDPM parity adjustment using a combined methodology of a subset population that
excludes those patients whose stays utilized a COVID-19 PHE-related waiver or
who were diagnosed with COVID-19 and control period data using months with low
COVID-19 prevalence from fiscal year 2020 and 2021. As a result of this
methodology, CMS is proposing a parity adjustment that would reduce SNF spending
by 4.6%, or $1.7 billion, in fiscal year 2023 to achieve budget neutrality.

Sequestration of Medicare Rates

The Budget Control Act of 2011 requires a mandatory, across the board reduction
in federal spending, called a sequestration. Medicare FFS claims with dates of
service or dates of discharge on or after April 1, 2013 incur a 2.0% reduction
in Medicare payments. 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. On December 10, 2021, President Biden signed into law a bill to postpone
the 2.0% payment adjustment through April 1, 2022; from April 1, 2022 through
June 30, 2022, the 2.0% payment adjustment is reduced from 2.0% to 1.0%. To pay
for the change, Congress would increase the sequester cuts by one year to fiscal
year 2030.


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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 Program 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
Program 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 Program rate adjustment.

On February 28, 2022, the Administration published a fact sheet stating its
priorities for making changes to senior care, including potential changes to
regulations affecting LTCs and SNFs. The SNF-VBP Program was identified as an
area for change, with staffing levels, retention and resident experience
affecting reimbursement. Following studies by CMS, proposed rules that may
affect the SNF-VBP Program are expected in approximately one year, with final
rules to follow after a notice-and-comment period.

On April 11, 2022, CMS issued a proposed rule where VBP adjustments will not be
applied. Instead, all locations will have the same reduction, except for those
locations that have a small population. This proposed rule also requested
information to evaluate potential changes to the VBP program, but those changes
would not take effect in fiscal year 2023 and thus not apply to the annual
reimbursement rates that take effect on October 1, 2022.

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

Consistent with CMS's "Patients over Paperwork" initiative, the agency has also
been moving toward eliminating burdensome claims-based functional reporting
requirements. Beginning in 2021, CMS rescinded 21 problematic National Correct
Coding Initiative edits impacting outpatient therapy services, including
services furnished under Medicare Part B primarily related to PT and OT
services, removing a coding burden caused by requirements for additional
documentation and claim modifier coding.


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On December 1, 2020, CMS issued the calendar year 2021 Physician Fee Schedule
(PFS) Final Rule, which reduced the conversion factor (i.e. the number by which
CMS determine all current procedural terminology code payments) by 10.2%. These
changes lowered the reimbursement rate for therapy Medicare Part B specialty
providers by 9% for PT and OT and by 6% for SLP Codes. These reductions were
mitigated by the Consolidated Appropriations Act of 2021 (CAA, also referred to
as The Omnibus Appropriations Law), which was signed into law on December 27,
2020. The CAA includes three components relevant to the Medicare Part B PFS.
First, the CAA incorporates a rate relief of approximately 3.75% for fiscal year
2021. Additionally, the CAA incorporates a freeze to the payment for the
physician add-on code for three years which would effectively create relief on
the initial cuts through 2023. Finally, the relief calls for the 2% sequester to
not be applied to the Medicare Part B program for the first quarter of 2021. CMS
incorporated the first and second components of the CAA relief into the fiscal
year 2021 PFS files which were published on January 5, 2021. While the 2021 PFS
Final Rule reduced the fiscal year 2021 factor to $32.4085 (calendar year
conversion factor was $36.0896), 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 has been
suspended until April 1, 2022 and then will be implemented as a 1% sequestration
until June 30, 2022.

On November 19, 2021, CMS published the 2022 PFS, which required the use of new
modifiers (the CO modifier) to identify and make payments at 85% of the
otherwise applicable Part B payment amount for PT and OT services furnished in
whole, or in part by PT and OT assistants. On December 10, 2021, President Biden
signed the Protecting Medicare and American Farmers from Sequester Cuts Act into
law, which restored funding for Medicare payments that was removed in the 2022
PFS. Following passage of this law, CMS announced payment changes to the 2022
PFS on December 16, 2021, which would result in Medicare payments not being
reduced from January 1, 2022 through March 31, 2022. Thereafter, FFS Medicare
payments would then be adjusted by 1% from April 1, 2022 through June 30, 2022,
and further adjusted by a total of 2% from July 1, 2022 through December 31,
2022. Under the recalculated 2022 PFS announced by CMS in December of 2021, the
applicable conversion factor was reduced from the 2021 conversion factor of
$34.8931 by 0.82% to $34.6062, a smaller reduction than the those found in the
proposed rule or 2022 PFS.

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. Subsequently, the calendar year 2021 and 2022 PFS
Final Rules added certain of these PT and OT services to the list of Medicare
telehealth services on a temporary basis through at least the end of calendar
year 2023. On December 31, 2020, CMS announced its 2021 update to the list of
codes that describe Medicare Part B outpatient therapy services, making
permanent existing and new codes introduced during the COVID-19 PHE for use
under PT, OT, or SLP, including several telehealth codes as "sometimes therapy,"
to permit physicians and certain non-physician practitioners to render these
services outside a therapy plan of care when appropriate. "Sometimes therapy"
codes will not have the MPPR applied. On November 19, 2021, CMS expanded these
"sometimes therapy" codes further for the 2022 PFS, including five new codes for
remote therapeutic monitoring treatment, which are broader than pre-existing
monitoring codes and include measuring and evaluating adherence and response to
medication and therapy.

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 and ending on May
7, 2022 as part of the Emergency Waivers CMS announced it was terminating within
30 days from April 7, 2022. Our Facilities will cease using these telemedicine
Emergency Waivers upon their termination.


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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. On October 21,
2021, CMS published an extension of the timeline to complete further final
rulemaking for the PACE program until November 1, 2022, based on a proposed rule
published on November 1, 2018, regarding policy and technical changes to
Medicare Advantage, Medicare Prescription Drug Benefit, PACE, Medicaid FFS, and
Medicaid managed care programs for 2020 and 2021. Based on completed studies,
public comments, and the intervening COVID-19 pandemic that required CMS's
focus, CMS extended the timeline to issue a final rule regarding new policy and
technical changes to the PACE program until November of 2022. The November 2018
proposed rule suggests changes to payment and appeals of disputes within the
PACE program which may affect our business.

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

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 upcoming
Congressional elections in the United States and policies implemented by the
current and former Presidential administration have resulted in significant
changes in legislation, regulation, implementation of Medicare, Medicaid, and
government policy. The 2022 midterm 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 SNFs and other 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, the Administration announced
that CMS and OSHA would implement emergency rules requiring all workers within
all Medicare and Medicaid-participating nursing homes, and all employees of
companies with more than 100 employees, to be fully vaccinated against COVID-19.
Significant litigation followed, including enforcement of both the CMS and OSHA
vaccination mandates being halted by certain courts. On January 13, 2022, the
United States Supreme Court held that the OSHA vaccination mandate could not be
enforced against large employers, but that the CMS vaccination mandate could be
enforced upon Medicare- and Medicaid-participating facilities. Those states
except Texas where the CMS rule had been halted against enforcement then had to
enforce the rule. On January 20, 2022, the United States District Court for the
Northern District of Texas dismissed the block of the CMS's vaccination IFR in
Texas. That same day, CMS became empowered to enforce the IFR in Texas and set a
deadline of March 21, 2022 for full compliance with its vaccination
requirements. Since CMS became empowered to enforce the IFR in Texas, there has
not been any administrative or legislative action to change the applicability or
enforcement of this IFR.

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 thousand to
$23 thousand per violation and are adjusted annually for inflation. Under the
qui tam or "whistleblower" provisions of the FCA, a private individual with
knowledge of fraud may bring a claim on behalf of the federal government and
receive a percentage of the federal government's recovery. Due to these
whistleblower incentives, lawsuits have become more frequent. Many states also
have a false claim prohibition that mirrors or closely tracks the federal FCA.
Federal law also provides that the OIG has the authority to exclude individuals
and entities from federally funded health care programs on a number of grounds,
including, but not limited to, certain types of criminal offenses, licensure
revocations or suspensions, and exclusion from state or other federal healthcare
programs. CMS can recover overpayments from health care providers up to five
years following the year in which payment was made. On February 28, 2022, the
Administration published a fact sheet regarding nursing home care, which
identified the Administration's priorities of further funding for SNF and LTC
facility inspections, enhancing civil penalties on poor-performing facilities
and increasing the scrutiny of companies that operate more than one facility.
Proposed rules based on these directives and studies are expected in
approximately one year, with final rules to follow after a notice-and-comment
period.


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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. In 2021, the OIG released the result of an audit
finding that Medicare overpaid millions of dollars of chronic care management
(CCM) services. The OIG's 2021 report found that in calendar years 2017 and
2018, Medicare overpaid millions of dollars in CCM claims. These investigatory
actions by OIG demonstrate its increased scrutiny into post-hospital skilled
nursing facility care provided to beneficiaries and may encourage additional
oversight or stricter compliance standards.

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, which created
new paths for payment based on the Merit-based Incentive Payment System (MIPS)
or the use of Alternative Payment Models (APM). A measure to ascertain provider
quality is the Five-Star Quality Rating system, which includes a rating of one
to five in various categories. In 2018 and 2019, these calculations changed to
reflect new and additional data that affected rankings, including freezing
information regarding health inspection information, and including data to
reflect the ranking of staffing (including emphasizing the level of registered
nurse staffing), stay durations, spending, discharge outcomes and readmissions.

As of January 1, 2020, CMS assigned ratings to SNFs under its Five Star Quality
reporting system and displayed those ratings on its consumer-based Nursing Home
Compare website. CMS's assignment of ratings under its Five Star Quality for a
SNF measure is based upon numerous quality measures, which as of January 1, 2020
included staffing levels (and staffing composition, focusing on the use of
registered nurses), the use of antipsychotic medications, rate of
hospitalization, emergency department use, community discharge, improvements in
function, independently worsened and anxiety or hypnotic medication use, payroll
based journals, and Medicare spending by beneficiary. Additionally, this data is
segregated and rated separately for short-term and long-term stays in the SNF.
These measures were subject to thresholds for stars assigned based on both
staffing and quality components, with standards for score assignment that
restricted the number of 4- and 5-star ratings that could be given. This
resulted in a reduction in the number of 4- and 5-star facilities compared to
their prior ranking, including certain of our own facilities. CMS also displays
a consumer alert icon next to nursing homes that had been cited for incidents of
abuse, neglect, or exploitation on the Nursing Home Compare website, which is
updated monthly with CMS's refresh of survey inspection results on that website.
In 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, and in response 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 the manner in which 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
were not initially 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's 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's 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. When the anticipated January 2022 refresh of
Five Star Quality ratings occurs, SNF quality reporting measures will be
calculated based on the data reported from July 1, 2020 through March 31, 2021,
due to the ongoing COVID-19 PHE. When these Five Star Quality ratings are
updated, they may not contain or reflect the latest or most accurate data
regarding our facilities, including improvements in previously low-rated
facilities, or declines in performance within higher-rated facilities.

Another impact of the COVID-19 pandemic to the Nursing Home Five-Star Quality
Rating System is CMS's 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 reflected in 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
December 31, 2021, no action has been taken on this bill since its introduction
to the Senate on August 10, 2021 and referral to the Senate Finance Committee
that same day.

In January of 2022, CMS issued a bulletin stating that the Nursing Home Compare
website would begin reporting nursing home weekend staffing that same month, as
nursing homes previously had been required to submit this information to CMS.
Within the same bulletin, CMS announced that it would begin reporting
information about nursing home staff tenure and other staffing data reported to
CMS beginning in January of 2022. By July of 2022, CMS will not only disclose
weekend staffing and staff turnover data on the Nursing Home Compare website,
but also begin incorporating it into CMS's Five Star Quality ratings for nursing
homes, including SNFs and LTC facilities.

On February 28, 2022, the Administration published a fact sheet stating its
priorities for making changes to senior care, including potential changes to
regulations affecting LTC and SNF facilities. The Administration identified
three core aims of its proposed changes: (1) providing adequate staffing with
appropriate training to deliver care; (2) holding poorly performing facilities
accountable by requiring improvement as a condition of receiving federal funds;
and (3) providing the public with more information about facility conditions and
operations.

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Specifically, the Administration expressed its desires to study the appropriate
levels of staffing required for SNF and LTC facilities and issue proposed rules
within one year of its study. The SNF-VBP Program was also identified as an area
for change, with staffing levels, retention and resident experience affecting
reimbursement. The Administration's priorities also include transparency and
public disclosure for nursing home owners and operators, with information to be
made more readily available to the public, including through the Nursing Home
Care Compare website that will report new measures with regard to staffing,
retention and data to be collected in the future. The President's priorities
also include a proposed examination of the role private equity investment, real
estate investment trusts (REITs) and other investment interests play in the
nursing home sector, and their relation to the best interests of residents.
Additional enforcement authority and resources, including enhanced scrutiny of
poorly performing facilities, is another Administration priority, along with
providing enhanced tools for facilities to use in improving their performance.
The Administration also seeks to improve accessibility to nurse aide training,
tie Medicaid payments to staff wages and benefits, and to enhance the
recruitment and career paths for care workers. Finally, the Administration
wishes to incorporate the lessons learned from the COVID-19 pandemic to impose
new requirements for infection control, emergency preparedness and safety.

Proposed rules are expected to be issued within one year, with final rules to
follow after a notice-and-comment period required by federal law. Based on the
Administration's fact sheet and calls for studies regarding certain topics, it
is expected that these changes will be enacted through proposed rules and
later-enacted final rules following a notice-and-comment period, rather than
through immediately effective interim final rules. On April 11, 2022, the CMS
issued a proposed rule that requested information to be used in potentially
changing the SNF-VBP Program, setting SNF and LTC facility staffing levels, and
creating new measures relevant to reimbursement consistent with the
Administration's February 28, 2022 fact sheet.

Monitoring Compliance in Our Facilities

Governmental agencies and other authorities periodically inspect our independent
operating facilities to assess compliance with various standards, rules and
regulations. The robust regulatory and enforcement environment continues to
impact healthcare providers, especially in connection with responses to any
alleged noncompliance identified in periodic surveys and other inspections by
governmental authorities. Unannounced surveys or inspections generally occur at
least annually and may also follow a government agency's receipt of a complaint
about a facility. Facilities must pass these inspections to maintain licensure
under state law, to obtain or maintain certification under the Medicare and
Medicaid programs, to continue participation in the Veterans Administration
program at some facilities, and to comply with provider contracts with managed
care clients at many facilities. From time to time, our independent operating
subsidiaries, like others in the healthcare industry, may receive notices from
federal and state regulatory agencies of an alleged failure to substantially
comply with applicable standards, rules or regulations. These notices may
require 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 independent operating
subsidiaries fail to comply with these directives or otherwise fail to comply
substantially with licensure and certification laws, rules and regulations, the
facility could lose its certification as a Medicare or Medicaid provider, or
lose its license permitting operation in the State.

Facilities with otherwise acceptable regulatory histories generally are normally
given an opportunity to correct deficiencies and continue their participation in
the Medicare and Medicaid programs by a certain date, usually within nine
months; however, 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, may not be 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 nearly always assume the existing Medicare provider
agreement due to the difficulty and time delays generally associated with
obtaining new Medicare certifications, especially in previously certified
locations with sub-par operating histories. Accordingly, facilities that have
poor regulatory histories before acquisition by our independent operating
subsidiaries and that develop new deficiencies after acquisition are more likely
to have sanctions imposed upon them by CMS or state regulators.

In addition, CMS has increased its focus on facilities with a history of serious
or sustained quality of care problems through the special focus facility (SFF)
initiative. A facility's administrators and owners are notified when it is
identified as a SFF. This information is also provided to the general public.
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 a defined period of time.
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Sanctions such as denial of payment for new admissions often are scheduled to go
into effect before surveyors return to verify compliance. Generally, if the
surveyors confirm that the facility is in compliance upon their return, the
sanctions never take effect. However, if they determine that the facility is not
in compliance, the denial of payment goes into effect retroactive to the date
given in the original notice. This possibility sometimes leaves affected
operators, including our independent subsidiaries, with the difficult task of
deciding whether to continue accepting patients after the potential denial of
payment date, thus risking the retroactive denial of revenue associated with
those patients' care if the operators are later found to be out of compliance,
or simply refusing admissions from the potential denial of payment date until
the facility is actually found to be in compliance. In the past and from time to
time, some of our independent operating subsidiaries have been or will be in
denial of payment status due to findings of continued regulatory deficiencies,
resulting in an actual loss of the revenue associated with the Medicare and
Medicaid patients admitted after the denial of payment date. Additional
sanctions could ensue and, if imposed, could include various remedies up to and
including decertification.

CMS has undertaken several initiatives to increase or intensify Medicaid and
Medicare survey and enforcement activities, including federal oversight of state
actions. CMS 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. On February 28, 2022, the Administration
published a fact sheet regarding nursing home care, which identified the
Administration's priorities of further funding for SNF and LTC facility
inspections, as well as enhanced penalties and other tools to use against
non-compliant facilities. Proposed rules based on these directives and studies
are expected in approximately one year, with final rules to follow a
notice-and-comment period required by law. On April 11, 2022, the CMS issued a
proposed rule that requested information to be used for study and potential
rulemaking consistent with the Administration's February 28, 2022 fact sheet.

Regulations Regarding Financial Arrangements

We are also subject to federal and state laws that regulate financial
arrangement by and between healthcare providers, such as the federal and state
anti-kickback laws, the Stark laws, and various state anti-referral laws.

The 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.

Violations of the Anti-Kickback Statute can result in criminal penalties of up
to $100 thousand and ten years imprisonment. Violations of the Anti-Kickback
Statute can also result in civil monetary penalties of up to $100 thousand 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 our independent operating subsidiaries operate have adopted or are
considering similar legislative proposals, some of which extend beyond the
Medicaid program, to prohibit the payment or receipt of remuneration for the
referral of patients regardless of the source of payment for the care. We
believe that business practices of providers and financial relationships between
providers have become subject to increased scrutiny as healthcare reform efforts
continue on the federal and state levels.


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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

Health care providers 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
independent operating subsidiaries. Our independent operating subsidiaries have
adopted and implemented HIPAA compliance plans, which we believe comply with the
HIPAA privacy and security regulations. The HIPAA privacy and security
regulations have and will continue to impose significant costs on our
independent operating subsidiaries in order to comply with these standards.
There are numerous other laws and legislative and regulatory initiatives at the
federal and state levels addressing privacy and security concerns. Our
independent operating subsidiaries are also subject to any federal or state
privacy-related laws that are more restrictive than the privacy regulations
issued under HIPAA. These laws vary and could impose additional penalties for
privacy and security breaches. Healthcare entities are also required to afford
patients with certain rights of access to their health information under HIPAA
and the 21st Century Cures Act (Cures Act). 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, including
denial of access to medical records, imposing significant fines for violations
largely initiated from patient complaints. The Office of the National
Coordinator for Health Information Technology can also investigate and impose
separate penalties for information blocking violations under the Cures Act.

Antitrust Laws

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.

Americans with Disabilities Act

Our independent operating subsidiaries must also comply with the ADA, and
similar state and local laws to the extent that the facilities are "public
accommodations" as defined in those laws. The obligation to comply with the ADA
and other similar laws is an ongoing obligation, and the independent operating
subsidiaries continue to assess their facilities relative to ADA compliance and
make appropriate modifications as needed.


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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 1.9% 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 senior 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 through Medicaid waiver programs. CMS
is encouraging state Medicaid programs to expand their use of home and
community-based services as alternatives to facility-based services, pursuant to
provisions of the ACA, and other authorities, through the use of several
programs. As noted above, the Administration issued a fact sheet regarding
nursing home care priorities and reforms that it intends to seek in the coming
year. The Administration's desired changes are multi-faceted, concerning payment
to facilities, staffing level requirements, training and retention of staff,
standards of care offered to residents, increased transparency and public
disclosure of ownership, and enhanced civil remedies and other authority to
exercise upon facilities that do not satisfy CMS's standards. Proposed rules
based on these directives are expected in approximately one year, with final
rules to follow a notice-and-comment period required by law. On April 11, 2022,
the CMS issued a proposed rule that requested information to be used for study
and potential rulemaking consistent with the Administration's February 28, 2022
fact sheet.

The types of laws and statutes affecting the regulatory landscape of the
post-acute industry continue to expand. In addition to this changing regulatory
environment, federal, state and local officials are increasingly focusing their
efforts on the enforcement of these laws. In order to operate our businesses, we
must comply with federal, state and local laws relating to licensure, delivery
and adequacy of medical care, distribution of pharmaceuticals, equipment,
personnel, operating policies, fire prevention, rate-setting, billing and
reimbursement, building codes and environmental protection. Additionally, we
must also adhere to anti-kickback statues, physician referral laws, the ADA, and
safety and health standards set by the OSHA Administration. Changes in the law
or new interpretations of existing laws may have an adverse impact on our
methods and costs of doing business.

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

Results of Operations

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. We saw a recovery in our census starting in
the first quarter of 2021 and has continued into 2022. Despite the emergence of
COVID-19 variants in the first quarter of 2022, which has led to spikes in
COVID-19 caseloads and slowed down our census recoveries, we continue to
experience healthy growth in both revenue and operational earnings.
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Our net revenue for the three months ended March 31, 2022 continued to be
impacted by COVID-19. The Emergency Waivers issued by CMS, including a waiver of
the requirement to have a three-day stay in a hospital to get Medicare coverage
of a skilled nursing stay as well as the authorization of renewed skilled
nursing facility coverage without having to start a new benefit period for
certain beneficiaries who recently exhausted their skilled nursing facility
benefits, remained in effect in the first quarter of 2022. In addition, we
continued to receive state relief funding in selected states, which has been
designed to enhance reimbursement to provide additional funding to cover
COVID-19 related expenses. For the three months ended March 31, 2022, we
recorded state relief revenue of $17.6 million which directly offset against
COVID-19 related expenses we incurred in those states. See Recent Activities for
further information.

Our total revenue for the quarter increased $86.2 million, or 13.7% while our
diluted GAAP earning per share grew by 3.5%, from $0.86 to $0.89, compared to
the first quarter in 2021. We have continued to make progress on targeted
initiatives, including our foundational structure of local operations that are
the centers of excellence in the communities they serve. As part of this focus,
we have been able to expand our relationships with doctors, hospitals and
managed care plans. Revenue from our skilled services collectively increased by
14.3%. We have also strengthened our collection process and identified
non-clinical areas where we can manage spending. These operational fundamentals
coupled with the increase in occupancy, expansion to our operations and cash
generated from strong first quarter.

The following table sets forth details of operating results for our revenue,
expenses and earnings, and their respective components, as a percentage of total
revenue for the periods indicated:
                                                                               Three Months Ended March 31,
                                                                               2022                     2021

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

Expense:
Cost of services                                                                   77.9                     76.8

Rent-cost of services                                                               5.0                      5.3
General and administrative expense                                                  5.3                      5.5
Depreciation and amortization                                                       2.1                      2.2
Total expenses                                                                     90.3                     89.8
Income from operations                                                              9.7                     10.2
Other income (expense):
Interest expense                                                                   (0.3)                    (0.3)
Other (expense) income                                                             (0.1)                     0.1
Other expense, net                                                                 (0.4)                    (0.2)
Income before provision for income taxes                                            9.3                     10.0
Provision for income taxes                                                          2.2                      2.1

Net income                                                                          7.1                      7.9
Less: net income attributable to noncontrolling interests                             -                      0.1

Net income attributable to The Ensign Group, Inc.                                   7.1  %                   7.8  %



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                                      Three Months Ended March 31,
                                           2022                    2021

Segment Income(1)                            (In thousands)
Skilled services               $         98,256                 $ 88,931
Real estate(2)                 $          6,900                 $  7,713
Non-GAAP Financial Measures:
Performance Metrics

EBITDA                         $         84,038                 $ 76,707

Adjusted EBITDA                $         92,729                 $ 80,879

FFO for Standard Bearer        $         11,921                 $ 11,868

Valuation Metric
Adjusted EBITDAR               $        128,491


(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. Included in segment income for Standard Bearer for the three
months ended March 31, 2022 are expenses for intercompany management fee between
Standard Bearer and the Service Center and intercompany interest expense.
Segment income is reconciled to the Condensed Consolidated Statement of Income
in Note 8, Business Segments in Notes to Unaudited Condensed Consolidated
Financial Statements of this Quarterly Report on Form 10-Q.
(2) Standard Bearer segment income includes rental revenue from Ensign
affiliated tenants and related expenses.

The following discussion includes references to EBITDA, Adjusted EBITDA,
Adjusted EBITDAR and Funds from Operations (FFO) which are non-GAAP financial
measures (collectively, the Non-GAAP Financial Measures). 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 other expense, net and depreciation and
amortization, which can vary substantially from company to company depending on
the book value of assets, capital structure and the method by which assets were
acquired; 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 other 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.

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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 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.

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

Adjusted EBITDA

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


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

•stock-based compensation expense;

•legal finding;

•acquisition related costs;

•costs incurred related to new systems implementation;

•results related to operations not at full capacity; and

•gain on sale of assets.

Funds from Operations (FFO)

We consider FFO to be a useful supplemental measure of the operating performance
of Standard Bearer. 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 consist of Standard Bearer segment income,
excluding depreciation and amortization related to real estate, gains or losses
from sales of real estate, insurance recoveries related to real estate and
impairment of depreciable real estate assets.

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.

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

                                                                      Three Months Ended March 31,
                                                                       2022                    2021

Condensed consolidated statements of income data:                            (In thousands)
Net income                                                      $         50,088          $    49,837
Less: net (loss) income attributable to noncontrolling
interests                                                                   (252)                 631

Add: Other expense, net                                                    2,884                  893
Provision for income taxes                                                16,138               12,949
Depreciation and amortization                                             14,676               13,659

EBITDA                                                          $         84,038          $    76,707

Stock-based compensation                                                   5,167                4,054

Legal finding(a)                                                           3,353                    -
Gain on sale of assets                                                         -                 (540)
Results related to operations not at full capacity                             -                  584

Acquisition related costs(b)                                                 106                   36
Costs incurred related to new systems implementation                          65                    -

Rent related to items above                                                    -                   38

Adjusted EBITDA                                                 $         92,729          $    80,879
Rent-cost of services                                                     35,762               33,456
Less: rent related to items above                                              -                  (38)
Adjusted rent                                                             35,762               33,418

Adjusted EBITDAR                                                $        128,491

(a) Legal finding against our non-emergent transportation subsidiary.
(b) Costs incurred to acquire operations which are not capitalizable.

Results of Operations

Three Months Ended March 31, 2022 Compared to the Three Months Ended March 31,
2021

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

Three Months Ended March 31, 2022

                                                   Skilled
                                                  services            Standard Bearer            All Other             Eliminations           Consolidated
Total revenue                                     686,771                 17,193                   27,330               (17,849)            $     713,445
Total expenses, including other expense,
net                                               588,515                 10,293                   66,260               (17,849)                  647,219
Segment income (loss)                              98,256                  6,900                  (38,930)                    -                    66,226

Income before provision for income taxes                                                                                                    $      66,226


                                                                         

Three Months Ended March 31, 2021

                                             Skilled            Standard
                                            services             Bearer           All Other           Eliminations           Consolidated
Total revenue                             $  601,036          $  14,069    

$ 25,729 $ (13,581) $ 627,253
Total expenses, including other expense,
net

                                          512,105              6,356             60,027                (13,581)               564,907
Segment income (loss)                         88,931              7,713            (34,298)                     -                 62,346
Loss from sale of real estate and
impairment charges                                                                                                                   440
Income before provision for income taxes                                                                                   $      62,786



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Our total revenue increased $86.2 million, or 13.7%, compared to the three
months ended March 31, 2021. 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, 2021 increased our consolidated revenue by
$41.6 million during the three months ended March 31, 2022, when compared to the
same period in 2021. In addition, we recorded $17.6 million of state relief
revenue in the first quarter of 2022 compared to $16.5 million in the same
period in 2021, 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 March 31, 2022 and 2021:

                                                      Three Months Ended March 31,
                                                        2022                   2021              Change              % Change

Total Facility Results:                                  (Dollars in thousands)
Skilled services revenue                         $      686,771           $   601,036          $ 85,735                   14.3  %
Number of facilities at period end                          217                   200                17                    8.5  %
Number of campuses at period end*                            23                    23                 -                      -  %
Actual patient days                                   1,695,964             1,509,600           186,364                   12.3  %
Occupancy percentage - Operational beds                    74.2   %              71.1  %                                   3.1  %
Skilled mix by nursing days                                33.7   %              34.4  %                                  (0.7) %
Skilled mix by nursing revenue                             54.3   %              55.6  %                                  (1.3) %


                                                      Three Months Ended March 31,
                                                        2022                   2021              Change              % Change

Same Facility Results(1):                                (Dollars in thousands)
Skilled services revenue                         $      545,185           $   510,659          $ 34,526                    6.8  %
Number of facilities at period end                          169                   169                 -                      -  %
Number of campuses at period end*                            18                    18                 -                      -  %
Actual patient days                                   1,321,682             1,268,254            53,428                    4.2  %
Occupancy percentage - Operational beds                    75.1   %              72.2  %                                   2.9  %
Skilled mix by nursing days                                35.2   %              35.2  %                                     -  %
Skilled mix by nursing revenue                             55.6   %              56.3  %                                  (0.7) %


                                                   Three Months Ended March 31,
                                                     2022                  2021              Change              % Change

Transitioning Facility Results(2):                    (Dollars in 

thousands)

Skilled services revenue                       $      91,796           $   80,400          $ 11,396                   14.2  %
Number of facilities at period end                        27                   27                 -                      -  %
Number of campuses at period end*                          5                    5                 -                      -  %
Actual patient days                                  239,912              218,823            21,089                    9.6  %
Occupancy percentage - Operational beds                 72.6   %             66.4  %                                   6.2  %
Skilled mix by nursing days                             29.3   %             28.7  %                                   0.6  %
Skilled mix by nursing revenue                          50.3   %             49.7  %                                   0.6  %


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                                                  Three Months Ended March 31,
                                                    2022                  2021              Change             % Change

Recently Acquired Facility Results(3):               (Dollars in thousands)
Skilled services revenue                     $       49,790           $    9,977          $ 39,813                      NM
Number of facilities at period end                       21                    4                17                      NM
Number of campuses at period end*                         -                    -                 -                      NM
Actual patient days                                 134,370               22,523           111,847                      NM
Occupancy percentage - Operational beds                69.1   %             63.3  %                                     NM
Skilled mix by nursing days                            27.2   %             39.2  %                                     NM
Skilled mix by nursing revenue                         47.4   %             65.0  %                                     NM


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

Skilled services revenue increased $85.7 million, or 14.3%, compared to the
three months ended March 31, 2021. Of the $85.7 million increase, the primary
changes were from an increase in Medicaid revenue of $39.8 million, or 14.9%, an
increase in managed care revenue $19.4 million, or 17.9%, an increase in
Medicare revenue of $18.1 million, or 9.5% and an increase in private revenue of
$8.4 million or 24.2%.

The increase in revenue was primarily driven by strong performance across our
skilled services operations as our census continued to recover in the first
quarter of 2022. Our consolidated occupancy increased by 3.1%, which includes
operations acquired at lower occupancy compared to the same period in the prior
year. As COVID-19 cases declined from the same period in the previous year,
there was a shift in Medicare patients to LTC patients, resulting in a decline
in skilled mix days and skilled mix revenue.

Revenue in our Same Facilities increased $34.5 million, or 6.8% 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 2.9% to 75.1%. Managed
care skilled days increased by 9.6%, resulting in an increase in Managed Care
revenue of $9.2 million.

Revenue generated by our Transitioning Facilities increased $11.4 million, or
14.2%, primarily due to improved occupancy growth of 6.2% to 72.6% and an
increase in our total patient days and skilled mix days compared to the three
months ended March 31, 2021, demonstrating our ability to transition these
healthcare operations toward higher acuity patients.

Skilled services revenue generated by facilities purchased on or subsequent to
January 1, 2021 (Recently Acquired Facilities) increased by approximately $39.8
million compared to the three months ended March 31, 2021. We acquired seventeen
operations between April 1, 2021 and March 31, 2022 across six states.

In the future, if we acquire additional turnaround or start-up operations, we
expect to see lower occupancy rates and skilled mix, and these metrics are
expected to vary from period to period based upon the maturity of the facilities
within our portfolio. Historically, we have generally experienced lower
occupancy rates, lower skilled mix at Recently Acquired Facilities and
therefore, we anticipate generally lower overall occupancy during years of
growth.
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The following table reflects the change in skilled nursing average daily revenue
rates by payor source, excluding services that are not covered by the daily rate
(1):
                                                                                    Three Months Ended March 31,
                                      Same Facility                       Transitioning                       Acquisitions                            Total
                                 2022              2021              2022              2021              2022              2021              2022              2021
Skilled Nursing Average Daily
Revenue Rates:
Medicare                      $ 693.89          $ 689.44          $ 694.73          $ 686.64          $ 683.23          $ 806.10          $ 693.28          $ 691.34
Managed care                    508.30            505.67            474.35            455.78            506.42            543.34            504.23            500.13
Other skilled                   578.80            543.43            463.69            377.66            492.14            544.87            562.51            533.43
Total skilled revenue           598.41            593.20            588.91            577.94            587.83            683.70            596.57            592.90
Medicaid                        260.45            252.21            241.36            235.65            243.03            237.98            255.97            249.38
Private and other payors        253.91            240.56            235.00            238.07            259.89            220.36            251.36            240.06

Total skilled nursing revenue $ 378.76 $ 371.30 $ 342.36

$ 334.22 $ 338.20 $ 412.16 $ 370.39

$ 366.53

(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 0.6% and 1.2%, respectively, compared to the three months ended
March 31, 2021. The increase is attributable to the 1.2% net market basket
increase that became effective in October 2021.

Our average Medicaid rates increased 2.6% due to state reimbursement increases
and our participation in supplemental Medicaid payment programs and quality
improvement programs in various states. Medicaid rates exclude the amount of
state relief revenue we recorded.

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

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

                                                                                                 Three Months Ended March 31,
                                        Same Facility                             Transitioning                                Acquisitions                                  Total
                                  2022                2021                   2022                  2021                  2022                  2021                2022                2021
Percentage of Skilled Nursing Revenue:
Medicare                            27.6  %             29.1  %                  31.1  %             32.7  %                 26.3  %             40.8  %             27.9  %             29.7  %
Managed care                        19.8                19.1                     15.8                14.5                    12.3                 6.2                18.8                18.3
Other skilled                        8.2                 8.1                      3.4                 2.5                     8.8                18.0                 7.6                 7.6
Skilled mix                         55.6                56.3                     50.3                49.7                    47.4                65.0                54.3                55.6
Private and other payors             6.7                 6.0                      7.4                 7.0                     5.5                 1.9                 6.7                 6.1

Medicaid                            37.7                37.7                     42.3                43.3                    47.1                33.1                39.0                38.3
Total skilled nursing              100.0  %            100.0  %                 100.0  %            100.0  %                100.0  %            100.0  %            100.0  %            100.0  %


                                                                                                 Three Months Ended March 31,
                                        Same Facility                             Transitioning                                Acquisitions                                  Total
                                  2022                2021                   2022                  2021                  2022                  2021                2022                2021
Percentage of Skilled Nursing Days:
Medicare                            15.1  %             15.6  %                  15.3  %             15.9  %                 13.0  %             20.9  %             14.9  %             15.8  %
Managed care                        14.8                14.0                     11.4                10.6                     8.2                 4.7                13.8                13.4
Other skilled                        5.3                 5.6                      2.6                 2.2                     6.0                13.6                 5.0                 5.2
Skilled mix                         35.2                35.2                     29.3                28.7                    27.2                39.2                33.7                34.4
Private and other payors            10.0                 9.4                     10.7                 9.9                     7.3                 3.4                 9.9                 9.3

Medicaid                            54.8                55.4                     60.0                61.4                    65.5                57.4                56.4                56.3
Total skilled nursing              100.0  %            100.0  %                 100.0  %            100.0  %                100.0  %            100.0  %            100.0  %            100.0  %



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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 March 31,                 Change
                                     2022                   2021          $           %

Cost of service         $                  534,174                   $ 462,960              $ 71,214        15.4  %
Revenue percentage                            77.8    %                   77.0  %                            0.8  %

Cost of services related to our Skilled services segment increased $71.2
million, or 15.4%, primarily due to additional costs related to new
acquisitions, which accounted for $32.0 million of the increase to cost of
services with additional increases mainly due to higher staffing expenses. Cost
of services as a percentage of revenue increased to 77.8% from 77.0%, an
increase of 0.8%.

Standard Bearer
                                                       Three Months Ended March 31,                         Change
                                                         2022                  2021                 $                  %

                                                              (In thousands)
Rental revenue generated from third-party
tenants                                           $         3,768          $    3,478          $    290                  8.3  %
Rental revenue generated from Ensign
affiliated operations                                      13,425              10,591             2,834                 26.8
Total rental revenue                              $        17,193          $   14,069          $  3,124                 22.2  %
Segment income                                              6,900               7,713              (813)               (10.5)
Depreciation and amortization                               5,021               4,155               866                 20.8

FFO                                               $        11,921          $   11,868          $     53                  0.4  %



Rental revenue. Our rental revenue, including revenue generated from our
affiliated facilities, increased by $3.1 million, or 22.2%, to $17.2 million,
compared to the three months ended March 31, 2021. The increase in revenue is
primarily attributable to eight real estate purchases as well as annual rent
increases since the three months ended March 31, 2021.

FFO. Our FFO increased $0.1 million, or 0.4% to $11.9 million, compared to the
three months ended March 31, 2021. The increase in expenses are offset against
the increase in rental revenue of $3.1 million. Included in FFO for the three
months ended March 31, 2022 is interest expense of $1.9 million as well as
management fee expense of $1.0 million associated with the intercompany
agreements between Standard Bearer and the Service Center starting in January of
2022. As noted in Item 2., under Recent Activities, Ensign Group, Inc., the real
estate properties and Standard Bearer entered into intercompany debt
arrangements including mortgage loans and a credit revolver with the formation
of Standard Bearer in January of 2022.

All Other Revenue

Our other revenue increase by $1.6 million, or 6.2%, to $27.3 million, compared
to the three months ended March 31, 2021. Other revenue for 2022 includes senior
living revenue of $13.6 million and revenue from other ancillary services of
$11.8 million and rental income of $1.9 million. The increase in other revenue
is attributable to our senior living acquisitions as our senior living occupancy
recovers from COVID-19.

Consolidated Financial Expenses

Rent - cost of services. Our rent - cost of services as a percentage of total
revenue decreased by 0.3% to 5.0%, primarily due the growth in revenue outpacing
the increase in rent expense.

General and administrative expense - General and administrative expense
increased $4.0 million or 11.6%, to $38.3 million. This increase was primarily
due to increases in wages and benefits due to enhanced performance and growth.
General and administrative expense as a percentage of revenue decreased by 0.2%
to 5.3%.
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Depreciation and amortization - Depreciation and amortization expense increased
$1.0 million, or 7.4%, to $14.7 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 0.1%, to 2.1%, as a
percentage of revenue.

Other expense, net - Other expense, net as a percentage of revenue increased by
0.2% to 0.4%. Other expense primarily includes interest expense related to new
debt and gain or loss on the investments mirrored to our deferred compensation
program. During the three months ended March 31, 2022, we recorded a loss of
$1.2 million compared to a gain of $306 during the three months ended March 31,
2021. There is an offsetting income and offsetting expense split between cost of
services and general and administrative expenses for both periods.

Provision for income taxes -  Our effective tax rate was 24.4% for the three
months ended March 31, 2022, compared to 20.6% for the same period in 2021. The
effective tax rate for both periods is driven by the impact of excess tax
benefits from stock-based compensation, partially offset by non-deductible
expenses. The higher effective tax rate reflects a decrease in tax benefit from
stock-based payment awards. See Note 15, Income Taxes, in the Notes to the
Unaudited 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 March 31, 2022 is impacted by cash
generated from strong operational performance and the repayment of Medicare
Accelerated and Advance Payment Program funds and deferral of the employer
portion of social security taxes.

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 $15.8 million and $15.3 million for the three
months ended March 31, 2022 and 2021, respectively. We currently have
approximately $70.0 million budgeted for renovation projects for 2022. 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 March 31, 2022 consisted of bank term
deposits, money market funds and U.S. Treasury bill related investments. In
addition, as of March 31, 2022, we held debt security investments of
approximately $50.1 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 March 31, 2022 were not other-than-temporarily impaired, nor
has any event occurred subsequent to that date that would indicate any
other-than-temporary impairment.

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 March 31, 2022, along with projected operating
cash flows and available financing, will support our normal business operations
for the foreseeable future.

On October 21, 2021, the Board of Directors approved a stock repurchase program
pursuant to which we may repurchase up to $20.0 million of our common stock
under the program for a period of approximately 12 months that follow October
29, 2021. During the three months ended March 31, 2022, we repurchased
approximately 0.1 million shares of our common stock for $9.9 million. This
repurchase program expired upon the repurchase of the full authorized amount
under the plan. On February 9, 2022, the Board of Directors approved a stock
repurchase program pursuant to which we may repurchase up to $20.0 million of
our common stock under the program for a period of approximately 12 months that
follow February 10, 2022. During the three months ended March 31, 2022, we did
not purchase any shares pursuant to this stock repurchase program. The share
repurchase programs do not obligate us to acquire any specific number of shares.


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

                                                       Three Months Ended March 31,
                                                           2022                   2021

Net cash provided by/(used in):                               (In thousands)
Operating activities                            $        45,874                $  34,294
Investing activities                                    (48,240)                 (12,212)
Financing activities                                    (11,289)                (103,117)

Net decrease in cash and cash equivalents               (13,655)            

(81,035)

Cash and cash equivalents beginning of period           262,201             

236,562

Cash and cash equivalents at end of period      $       248,546                $ 155,527


Operating Activities

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

The $11.6 million increase in cash provided by operating activities for the
three months ended March 31, 2022 compared to the same period in 2021, was
primarily due to higher net income and changes in working capital. Changes in
working capital were driven by a decrease in accrued wages and related
liabilities and prepaid income taxes as a result of timing, partially offset by
the timing of accounts payable and other accrued liabilities.

Investing Activities

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

The $36.0 million increase in cash used in investing activities for the three
months ended March 31, 2022, compared to the same period in 2021, was primarily
due to an increase in cash used for expansions and capital expenditures of
$34.1 million.

Financing Activities

Financing cash flows consist primarily of payment of dividends to stockholders,
issuance and repayment of short-term and long-term debt, payment for share
repurchases, repayment of the Medicare Accelerated and Advance Payment Program
funds and sale of shares of common stock through employee equity incentive
plans.

The $91.8 million decrease in cash used in financing activities for the three
months ended March 31, 2022, compared to the same period in 2021, was primarily
due to the $102.0 million of net proceeds and repayment of the Medicare
Accelerated and Advance Payment Program funds in 2021, offset by $9.9 million of
share repurchases as part of our stock repurchase program in 2022.

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.

Subsequent to March 31, 2022, on April 8, 2022, we entered into the Amended
Credit Facility, with a revolving line of credit of up to $600.0 million in
aggregate principal. The maturity date of the Amended Credit Facility is
April 8, 2027. Borrowings are supported by a lending consortium arranged by
Truist. The interest rates applicable to loans under the Amended Credit Facility
are, at our option, equal to either a base rate plus a margin ranging from 0.25%
to 1.25% per annum or SOFR plus a margin range from 1.25% to 2.25% per annum,
based on the Consolidated Total Net Debt to Consolidated EBITDA ratio (as
defined in the agreement). In addition, we will pay a commitment fee on the
unused portion of the commitments that will range from 0.20% to 0.40% per annum,
depending on the Consolidated Total Net Debt to Consolidated EBITDA ratio.
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Mortgage Loans and Promissory Notes

As of March 31, 2022, 23 of our subsidiaries have mortgage loans insured with
HUD for an aggregate amount of $155.9 million, 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 a promissory note that was
put in place in connection with an acquisition. The note bears a fixed interest
rate of 5.3% per annum and the term of the note is 12 years. The 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

As of March 31, 2022, 179 of our facilities are under long-term lease
arrangements, of which 95 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 96 facilities leased from
CareTrust include an option to purchase that we can exercise starting on
December 1, 2024.

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

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.


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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 November 2021, the FASB issued ASU 2021-10 "Government Assistance (Topic
832): Disclosures by Business Entities about Government Assistance," which
created FASB ASC Topic 832, Government Assistance (ASC 832). ASC 832 requires
business entities to disclose information about certain government assistance
they receive. We adopted this standard on January 1, 2022 and determined there
was no material impact on the 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. Subsequent to March 31,
2022, we entered into the Second Amendment to Third Amended and Restated Credit
Agreement (Amended Credit Facility), which increased the revolving credit
facility by $250,000 to an aggregate principal amount of up to $600,000. The
amendment modifies the reference rate from LIBOR to SOFR. We are currently
evaluating the impact of ASU 2020-04 on our financial position, results of
operations and liquidity.