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 theSecurities and Exchange Commission (SEC), including our Annual Report on Form 10-K for the year endedDecember 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 otherSEC 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 theSEC , 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 toThe 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) calledStandard 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. 34
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Overview
We are a provider of health care services across the post-acute care continuum, engaged in the operation, ownership, acquisition, development and leasing of skilled nursing, senior living and other healthcare related properties and other ancillary businesses located inArizona ,California ,Colorado ,Idaho ,Iowa ,Kansas ,Nebraska ,Nevada ,South Carolina ,Texas ,Utah ,Washington andWisconsin . 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 ofJune 30, 2022 , we offered skilled nursing, senior living and rehabilitative care services through 251 skilled nursing and senior living facilities. Of the 251 facilities, we operated 180 facilities under long-term lease arrangements and have options to purchase 11. Our real estate portfolio includes 100 owned real estate properties, which included 71 facilities operated and managed by us, 29 senior living operations leased to and operated byThe Pennant Group, Inc. , or Pennant, as part of the spin-off transaction that occurred inOctober 2019 (Spin-Off), and the Service Center location. Of the 29 real estate operations leased to Pennant, one senior living operation is located on the same real estate property as a skilled nursing facility that we own and operate. The following table summarizes our affiliated facilities and operational skilled nursing beds and senior living units by ownership status as ofJune 30, 2022 : Leased (without Total for Owned and Leased (with a a Purchase Facilities Operated Purchase Option) Option) Operated Number of facilities 71 11 169 251 Percentage of total 28.3 % 4.4 % 67.3 % 100.0 % Operational skilled nursing beds 7,014 1,145 17,390 25,549 Percentage of total 27.5 % 4.5 % 68.0 % 100.0 % Senior living units 1,649 178 1,146 2,973 Percentage of total 55.5 % 6.0 % 38.5 % 100.0 % Ensign is a holding company with no direct operating assets, employees or revenues. Our operating subsidiaries are operated by separate, independent entities, each of which has its own management, employees and assets. In addition, certain of our wholly-owned subsidiaries, referred to collectively as the Service Center, provide centralized accounting, payroll, human resources, information technology, legal, risk management and other centralized services to the other operating subsidiaries through contractual relationships with such subsidiaries. We also have a wholly-owned captive insurance subsidiary that provides some claims-made coverage to our operating subsidiaries for general and professional liability, as well as coverage for certain workers' compensation insurance liabilities and our captive real estate trust owns and operates our real estate portfolio. 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, thatThe Ensign Group, Inc. has direct operating assets, employees or revenue, or that any of the subsidiaries are operated byThe Ensign Group .
Recent Activities
Revolving Credit Facility Amendment - OnApril 8, 2022 , we entered into the Second Amendment to the Third Amended and Restated Credit Facility (such agreement, the Amended Credit Agreement, and the revolving credit facility thereunder, the Revolving Credit Facility), which increased the Revolving Credit Facility by$250.0 million to an aggregate principal amount of up to$600.0 million . Pursuant to the Amended Credit Agreement, the Company transitioned from the London Interbank Offered Rate (LIBOR) to the Secured Overnight Financing Rate (SOFR) as the applicable reference rate for borrowings under the Revolving Credit Facility. The maturity date of the Amended Credit Facility isApril 8, 2027 . Borrowings are supported by a lending consortium arranged byTruist Securities (Truist). The interest rates applicable to loans under the Revolving Credit Facility are, at our option, equal to either a base rate plus a margin ranging from 0.25% to 1.25% per annum or SOFR plus a margin range from 1.25% to 2.25% per annum, based on the Consolidated Total Net Debt to Consolidated EBITDA ratio (as defined in the Amended Credit Agreement). In addition, we will pay a commitment fee on the unused portion of the commitments, which will range from 0.20% to 0.40% per annum, depending on the Consolidated Total Net Debt to Consolidated EBITDA ratio. As part of the entry into the Amended Credit Agreement, deferred financing costs of$0.6 million were written off and additional deferred financing costs of$3.2 million were capitalized during the three months endedJune 30, 2022 . 35
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Captive Real Estate Investment Trust - In January of 2022, we formedStandard 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, forU.S. federal income tax purposes, commencing with its taxable year endingDecember 31, 2022 . The real estate portfolio in Standard Bearer consists of a select 95 of our 100 owned real estate properties. Of the 95 owned real estate properties in Standard Bearer, 67 facilities are operated by Ensign operating subsidiaries and 29 facilities are leased to and operated by Pennant. Of the 29 real estate operations leased to Pennant, one senior living operation is located on the same real estate property as a skilled nursing facility that we own and operate. During six months endedJune 30, 2022 , we acquired the real estate of two skilled nursing facilities for a purchase price of$17.4 million and leased these facilities to certain of our operating subsidiaries through the Standard Bearer Master Leases. Subsequent toJune 30, 2022 , we expanded our real estate portfolio with the addition of five skilled nursing properties and one campus property with an estimated total purchase price of$47.9 million . As ofJune 30, 2022 , 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. InJanuary 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 options 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. Total annual rental income under the Standard BearerMaster Lease is approximately$55.7 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 and six months endedJune 30, 2022 , the Service Center management fee was$1.1 million and$2.1 million , respectively, both of which represent 6% of total Standard Bearer rental revenue. 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 the Revolving Credit Facility to fund acquisitions and working capital needs. As part of the Amended Credit Agreement discussed in Note 16, Debt, the interest rates applicable to loans under the Revolving Credit Facility were amended, such that the rates are, at the Company's 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. As ofJune 30, 2022 , there is$36.8 million outstanding under the intercompany credit revolver. There is also an intercompany mortgage loan amount of$93.0 million which is subject to a fixed interest rate. In addition, third party debt held by theDepartment of Housing and Urban Development (HUD) mortgage loans and promissory notes outstanding in an aggregate amount of$158.3 million , and are included in Standard Bearer. 36
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During the three months endedJune 30, 2022 , Standard Bearer established shareholders of its preferred shares through contributions of cash of$0.1 million . These preferred shares were fully vested at the time of the contributions by the shareholders. In addition, as part of the formation of Standard Bearer in January of 2022, we established theStandard Bearer Healthcare REIT, Inc. 2022 Omnibus Incentive Plan (Standard Bearer Equity Plan). During the three months endedJune 30, 2022 , Standard Bearer sold fully vested common shares from the Standard Bearer Equity Plan to shareholders for cash of$6.5 million . We did not grant any stock options nor restricted shares during the three and six months endedJune 30, 2022 . Coronavirus Update - We are continuing to closely monitor the impact of the global COVID-19 pandemic on our business. InJuly 2022 , the public health emergency (PHE) was extended throughOctober 13, 2022 . Our primary focus continues to be 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 second quarter of 2022, our combined Same Facilities and Transitioning Facilities occupancy increased by 2.6% compared to second quarter of 2021 and 0.9% compared to the first quarter of 2022. 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 and six months endedJune 30, 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 and six months endedJune 30, 2022 , we received an additional$27.3 million and$44.7 million in state relief funding, respectively, and recognized$24.5 million and$42.1 million as revenue, respectively. During the three and six months endedJune 30, 2021 , we received an additional$16.8 million and$32.4 million in state relief funding and recognized$16.7 million and$33.2 million , respectively, as revenue. 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 paid byDecember 31, 2021 and the remaining 50% payable byDecember 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 - OnFebruary 9, 2022 , the Board of Directors approved a stock repurchase program pursuant to which we could repurchase up to$20.0 million of our common stock under the program for a period of approximately 12 months fromFebruary 10, 2022 . During the three months endedJune 30, 2022 , we repurchased 0.3 million shares of our common stock for$20.0 million . This repurchase program expired upon the repurchase of the fully authorized amount under the plan. OnJuly 28, 2022 , the Board of Directors approved a stock repurchase program pursuant to which we may repurchase up to$20.0 million of our common stock under the program for a period of approximately 12 months beginningAugust 2, 2022 . 37
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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 ofJune 30, 2022 : TX CA AZ UT CO WA ID NE IA SC WI NV KS Total Number of operated facilities Skilled nursing operations 65 50 29 18 14 13 11 4 4 4 2 1 - 215 Senior living operations 1 - 1 2 5 1 - 1 - - - - - 11 Campuses(1) 4 3 4 1 1 - 1 2 2 - - - 7 25 Number of operated beds/units Operational skilled nursing beds 8,350 5,296 4,400 1,991 1,303 1,227 984 413 368 424 100 92 601 25,549 Senior living units 505 197 718 163 725 98 21 302 31 - - - 213 2,973 Number of owned and operated facilities Skilled nursing properties 16 7 8 7 4 2 5 1 - 4 2 - - 56 Senior living communities 1 - - - 3 - - 1 - - - - - 5 Campuses(1) 2 1 3 - - - - - - - - - 4 10 Number of owned and operated beds/units Owned skilled nursing beds 2,012 848 1,494 684 346 204 454 88 - 424 100 - 360 7,014 Owned Senior living units 439 42 315 - 461 - - 263 - - - - 129 1,649 Number of owned and not operated facilities Senior living properties 6 2 1 - - - - - - - 19 1 - 29
(1) Campuses represent facilities that offer both skilled nursing and senior living services.
During the six months endedJune 30, 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, Standard Bearer acquired the real estate of two of the stand-alone skilled nursing operations, which were leased back to Ensign affiliated entities. In addition, we added five senior living operations that were transferred from Pennant, three of which are part of campuses operated by our affiliated operating subsidiaries. These new operations added a total of 453 operational skilled nursing beds and 633 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. Subsequent toJune 30, 2022 , we expanded our operations through a combination of long-term leases and real estate purchases, with the addition of seven stand-alone skilled nursing operations and one campus operation. Of these additions, Standard Bearer acquired the real estate of three of these operations, which were leased back to Ensign affiliated entities. These new operations added 1,100 operational skilled nursing beds and 61 operational senior living units to be operated by our affiliated operating subsidiaries. In addition, we purchased the real estate of three skilled nursing properties which our affiliated operating subsidiaries already operated, further expanding our real estate portfolio. 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. 38
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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,Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 606. These indicators and their definitions include the following: Skilled Services •Routine revenue - Routine revenue is generated by the contracted daily rate charged for all contractually inclusive skilled nursing services. The inclusion of therapy and other ancillary treatments varies by payor source and by contract. Services provided outside of the routine contractual agreement are recorded separately as ancillary revenue, including Medicare Part B therapy services, and are not included in the routine revenue definition. •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 June 30, Six Months Ended June 30, Skilled Mix: 2022 2021 2022 2021 Days 31.1 % 30.9 % 32.4 % 32.6 % Revenue 50.9 % 51.4 % 52.6 % 53.5 % 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 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. 39
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The following table summarizes our overall occupancy statistics for skilled
nursing operations for the periods indicated:
Three Months Ended June 30, Six Months Ended June 30, Occupancy for skilled services: 2022 2021 2022 2021 Operational beds at end of period 25,549 24,486 25,549 24,486 Available patient days 2,321,233 2,200,536 4,606,279 4,322,632 Actual patient days 1,745,027 1,599,707 3,440,991 3,109,307 Occupancy percentage (based on operational beds) 75.2 % 72.7 % 74.7 % 71.9 % 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 June 30, Skilled Services Other Service Revenue Total Service Revenue 2022 2021 2022 2021 2022 2021 Medicaid(1)$ 287,827 $ 247,671 $ 6,301 $ 3,784 $ 294,128 $ 251,455 Medicare 190,494 170,008 - - 190,494 170,008 Medicaid-skilled 49,763 42,740 - - 49,763 42,740 Subtotal 528,084 460,419 6,301 3,784 534,385 464,203 Managed care 128,587 112,963 - - 128,587 112,963 Private and other(2) 45,807 39,500 19,568 17,943 65,375 57,443 TOTAL SERVICE REVENUE$ 702,478 $ 612,882 $ 25,869 $ 21,727 $ 728,347 $ 634,609 Three Months Ended June 30, Skilled Services Other Service Revenue Total Service Revenue 2022 2021 2022 2021 2022 2021 Medicaid(1) 41.0 % 40.4 % 24.4 % 17.4 % 40.4 % 39.6 % Medicare 27.1 27.7 - - 26.2 26.8 Medicaid-skilled 7.1 7.0 - - 6.8 6.7 Subtotal 75.2 75.1 24.4 17.4 73.4 73.1 Managed care 18.3 18.4 - - 17.7 17.8 Private and other(2) 6.5 6.5 75.6 82.6 8.9 9.1 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. 40
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Table of Contents Six Months Ended June 30, Skilled Services Other Total Service Revenue 2022 2021 2022 2021 2022 2021 Medicaid(1)$ 549,414 $ 475,412 $ 11,062 $ 7,401 $ 560,476 $ 482,813 Medicare 398,905 360,311 - - 398,905 360,311 Medicaid-skilled 95,712 82,733 - - 95,712 82,733 Subtotal 1,044,031 918,456 11,062 7,401 1,055,093 925,857 Managed care 256,373 221,308 - - 256,373 221,308 Private and other(2) 88,845 74,154 37,192 36,566 126,037 110,720 TOTAL SERVICE REVENUE$ 1,389,249 $ 1,213,918 $ 48,254 $ 43,967 $ 1,437,503 $ 1,257,885 Six Months Ended June 30, Skilled Services Other Total Service Revenue 2022 2021 2022 2021 2022 2021 Medicaid(1) 39.5 % 39.2 % 22.9 % 16.8 % 39.0 % 38.4 % Medicare 28.7 29.7 - - 27.7 28.6 Medicaid-skilled 6.9 6.8 - - 6.7 6.6 Subtotal 75.1 75.7 22.9 16.8 73.4 73.6 Managed care 18.5 18.2 - - 17.8 17.6 Private and other(2) 6.4 6.1 77.1 83.2 8.8 8.8 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.
Skilled Services
Within our skilled nursing operations, we generate revenue from Medicaid, private pay, managed care and Medicare payors. We believe that our skilled mix, which we define as the number of days Medicare, managed care and other skilled patients are receiving services at our skilled nursing operations divided by the total number of days patients are receiving services at our skilled nursing operations, from all payor sources (less days from senior living services) for any given period, is an important indicator of our success in attracting high-acuity patients because it represents the percentage of our patients who are reimbursed by Medicare, managed care and other skilled payors, for whom we receive higher reimbursement rates. We are participating in supplemental payment programs in various states that provide supplemental Medicaid payments for skilled nursing facilities that are licensed to non-state government-owned entities such as city and county hospital districts. Numerous operating subsidiaries entered into transactions with various hospital districts providing for the transfer of the licenses for those skilled nursing facilities to the hospital districts. Each affected operating subsidiary agreement between the hospital district and our subsidiary is terminable by either party to fully restore the prior license status.
Standard Bearer
We generate rental revenue primarily by leasing post-acute care properties 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 ofJune 30, 2022 , our real estate portfolio within Standard Bearer is comprised of 95 real estate properties. Of these properties, 67 are leased to affiliated skilled nursing facilities wholly-owned and managed by us and 29 are leased to senior living operations wholly-owned and managed by Pennant. Of the 29 real estate operations leased to Pennant, one senior living operation is located on the same real estate property as a skilled nursing facility that we own and operate. During the three and six months endedJune 30, 2022 , we generated rental revenues of$17.6 million and$34.8 million , respectively, of which$13.9 million and$27.3 million , respectively, was derived from affiliated wholly-owned healthcare operators, and therefore eliminated in consolidation. 41
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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 inthe 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 endedDecember 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 sinceDecember 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 ofPatient Care to Lower Cost Alternatives - The growth of the senior population in theU.S. continues to increase healthcare costs, often faster than the available funding from government-sponsored healthcare programs. In response, federal and state governments have adopted cost-containment measures that encourage the treatment of patients in more cost-effective settings such as skilled nursing facilities, for which the staffing requirements and associated costs are often significantly lower than acute care hospitals and other post-acute care settings. As a result, skilled nursing facilities are generally serving a larger population of higher-acuity patients than in the past. •Significant Acquisition and Consolidation Opportunities - The skilled nursing industry is large and highly fragmented, characterized predominantly by numerous local and regional providers. Due to the increasing demands from hospitals and insurance carriers to implement sophisticated and expensive reporting systems, we believe this fragmentation provides us with significant acquisition and consolidation opportunities. •Improving Supply and Demand Balance - The number of skilled nursing facilities has declined modestly over the past several years. We expect that the supply and demand balance in the skilled nursing industry will continue to improve due to the shift of patient care to lower cost settings, an aging population and increasing life expectancies. •Increased Demand Driven by Aging Populations - As seniors account for an increasing percentage of the totalU.S. population, we believe the demand for skilled nursing and senior living services will continue to increase. According to the census projection released by theU.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 ofthe United States population, growing from 16% to 21%. The Bureau expects this segment to increase nearly 50% to 73 million, as compared to the totalU.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 inthe 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. 42
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•Accountable Care Organizations and Reimbursement Reform - A significant goal ofU.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, theAccountable 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, theCenters 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, business relationships with physicians, and workplace protection for healthcare staff. Such laws include the Anti-Kickback Statute (AKS), the federal False Claims Act (FCA), the Stark Law, the Health Care Emergency Temporary Standard, and state corporate practice of medicine statutes. Governmental and other authorities periodically inspect the skilled nursing facilities (SNFs), senior living facilities and outpatient rehabilitation agencies of our independent operating subsidiaries to verify continued compliance with applicable regulations and standards. 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 andHuman 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. 43
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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 theSocial 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 SNFs 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). Pursuant to the Emergency Waivers, CMS also authorized temporary waivers on medical review requirements, effectiveMarch 1, 2020 . In addition, in March of 2020, CMS also downgraded the priority for scheduled program audits and contract-level Risk Adjustment Data Validation audits for Medicare Advantage organizations, Part D sponsors, Medicare-Medicaid Plans, and Programs of All-Inclusive Care for the Elderly organizations. Reducing the priority of those standard or scheduled audit activities allows providers, CMS and other organizations to focus on patient care, including directing audit activities toward infection control. CMS stated that this reprioritization of its audit activities would be time-limited and it would announce when normal activities would resume after the end of the PHE. Beginning onMay 7, 2021 , CMS started to end certain Emergency Waivers related to the COVID-19 pandemic, beginning with waivers regarding data reporting and resident grouping, transfer, and discharge. OnApril 7, 2022 , CMS announced the expiration of additional Emergency Waivers in place for SNF and LTC facilities, with other Emergency Waivers for other residential facilities other than hospitals and critical access hospitals, that expired onJune 6, 2022 . The first group of seven (7) Emergency Waivers that expired onMay 7, 2022 were: (1) waiver of the requirement that residents participate in-person during resident groups; (2) physicians' ability to delegate tasks that otherwise would need to be personally performed by a physician within a SNF; (3) waiver of the requirement for physicians to make personal visits to patients, which the Emergency Waivers allow physicians to delegate to other clinicians; (4) waiver of the requirement for physicians and non-physician providers to conduct in-person visits to nursing home residents (and allowing those visits to be made via telemedicine as appropriate); (5) reducing LTC facilities' requirements to develop, implement and maintain a Quality Assurance and Performance Improvement (QAPI) program that satisfies federal standards; (6) waiver of LTC facilities' obligation to participate in discharge planning for residents ending their care at the facility; and (7) waiver of the requirement for LTC facilities to provide residents with a copy of their records within two working days of a resident's request for those records. The Emergency Waivers that expired onJune 6, 2022 were: (1) waivers of SNF physical environment conditions for temporary use facilities (including COVID-19 treatment locations) and use of interior or non-residential space within a SNF to accommodate residents; (2) waivers of requirements for timely preventative maintenance for certain equipment, including dialysis equipment; (3) the waiver of inspection, testing and maintenance for the facilities and medical equipment used within ICFs and SNFs; (4) the waiver of inspection, testing, and maintenance for compliance with applicable life safety codes and health care facility codes for intermediate care facilities (ICFs) and SNFs; (5) the waiver of CMS's requirement for ICFs and SNFs to have an exterior door or window in every room used for sleeping; (6) life safety code waivers of quarterly fire drills and allowing SNFs to erect temporary walls and barriers between patients; (7) waiving CMS's minimum training requirements for paid feeding assistants in LTC facilities; (8) CMS's waiver of its requirement for nurse aides within SNFs to receive at least 12 hours of annual in-service training; and (9) the waiver of 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. Select Emergency Waivers, including the three-day inpatient hospital qualifying stay, remain in effect. As patients qualify for skill-in-place for Medicare Part A stays, we could see a decrease in LTC Medicare Part B programs. There may be additional or other Emergency Waivers that will be terminated or allowed to expire, though; this expiration may occur quickly and with little public notice. 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, as CMS has not announced the expiration of additional Emergency Waivers since itsApril 7, 2022 memorandum. 44
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Examples of the Emergency Waivers still in effect as ofJuly 1, 2022 include, but are not limited to the following: (1) approving temporary transfer, discharge, and cohorting of patients to ensure that facilities can separate COVID-19 negative patients from those that are positive for or have been exposed to the virus; (2) allowing SNFs to provide a skill-in-place program for Medicare beneficiaries who are residents of the SNFs that meet the skill-in-place criteria, foregoing the usual three-day qualifying hospital stay; (3) 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 (4) temporarily waiving certain documentation and reporting requirements regarding patient admission, transfer, and discharge (e.g., Patients Over Paperwork). Some 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. Resuming visitation and resident rights - CMS has issued guidance to facilities throughout the PHE regarding patients' rights to visitation. While the CMS guidance issued inMarch 2020 directed facilities to severely restrict visitation, CMS has subsequently provided guidance through the course of the pandemic (and most recently updated onMarch 10, 2022 ) that broadens visitation and provides guidance on visitation procedures. Testing requirements - Beginning inApril 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 theCenters 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. OnJuly 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. OnAugust 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%. OnApril 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 - OnDecember 11, 2020 , theU.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 onDecember 28, 2020 , and the third EUA for the Johnson & Johnson vaccine onFebruary 27, 2021 . Pfizer and Moderna's COVID-19 vaccines have since received full FDA approval. OnAugust 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 onSeptember 9, 2021 , and on the same day the Administration announced thatOSHA 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 interim final rule (IFR) andOSHA's ETS for vaccination were challenged in court and halted from enforcement in certain states. OnNovember 5, 2021 , CMS issued the Omnibus COVID-19 Health Care Staff Vaccination IFR, requiring all eligible staff in certain Medicare and Medicaid participating health facilities to complete their one- or two-injection vaccination sequences by or beforeJanuary 13, 2022 . CMS's enforcement of this IFR was temporarily blocked in certain states pending appeal to theUnited States Supreme Court . ByJanuary 20, 2022 , decisions of theUnited 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 ofMarch 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 additional testing requirements for residents and staff, or are enforcing testing mandates under existing or expanded workplace safety regulations. 45
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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. These vaccine mandates are largely aligned with the Omnibus COVID-19 Health Care Staff Vaccination IFR.California issued an order onAugust 5, 2021 (and expanded onSeptember 28, 2021 ), requiring adult care facilities and direct care workers to be vaccinated as well, and for all affected workers to be fully vaccinated byNovember 30, 2021 . OnFebruary 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 byMarch 1, 2022 . Reporting requirements - EffectiveMay 8, 2020 , CMS published an IFR requiring SNFs to report information related to COVID-19 cases among facility residents and staff directly to theCDC National Health Safety Network no less than weekly; the reported information is made publicly available on a dedicated website. In addition, SNFs 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 by5:00 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. EffectiveMay 21, 2021 , CMS published an IFR requiring LTC facilities to report weekly COVID-19 vaccination data of both residents and staff to theCDC 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. EffectiveJune 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. EffectiveAugust 23, 2021 , CMS published an IFR incorporating comments on itsMay 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 theCDC 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 withU.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 - OnMarch 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. EffectiveAugust 17, 2020 , CMS provided guidance authorizing resumption of traditional survey activity. OnJune 1, 2020 (and updated inJanuary 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. In February of 2022, CMS updated this tool to refocus its attention toward the traditional survey process while preventing the spread of COVID-19 variants, considering the IFR, and amending prior guidance to reflect patients and residents' rights to receive visitors. The spectrum of remedies available to CMS for imposition on SNFs in connection with this enhancement includes increased monetary fines, shortened time periods to return to compliance, and other administrative penalties.
Medicare
Medicare presently accounts for approximately 28.7% 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. 46
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Patient-Driven Payment Model (PDPM)
The Skilled Nursing Facility Prospective Payment System (SNF PPS) Rule became effectiveOctober 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 SNFs' resources that do not vary depending on resident characteristics. PDPM replaces the existing case-mix classification methodology, Resource Utilization Groups, Version IV. The structure of PDPM moves Medicare towards a more value-based, unified post-acute care payment system. For example, PDPM adjusts Medicare payments based on each aspect of a resident's care, thereby more accurately addressing costs associated with medically complex patients. PDPM also removes therapy minutes as the basis for therapy payment. Finally, PDPM adjusts the SNFs' per diem payments to reflect varying costs throughout the stay, through the physician therapy, occupational therapy and non-therapy ancillary services components. In addition, PDPM is intended to reduce paperwork requirements for performing patient assessments. Under the SNF PPS PDPM system, the payment to SNFs and nursing homes is based heavily on the patient's condition rather than the specific services provided by each SNF. OnAugust 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 SNF submit their quality measures data. Beginning with fiscal year 2018, and each subsequent year, if a SNF 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 SNF'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 onAugust 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 SNFs, SNFs affiliated with acute care facilities, and all non-critical access hospital swing-bed rural hospitals. The additional data elements adopted in the 2020 SNF PPS Rule were retained through the 2022 SNF PPS Rule, although the collection and reporting of this data to CMS is delayed for at least two full fiscal years after the end of the PHE. OnJuly 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 inMarch 2020 , due to the COVID-19 pandemic, CMS issued a temporary suspension of SNF QRP reporting requirements effective untilJune 30, 2020 . This effectively gave SNFs discretion as to whether to report data from the fourth quarter (October 1, 2019 -December 31, 2019 ), and removed reporting requirements entirely for the first and second quarters of 2020 (January 1, 2020 -June 30, 2020 ). SNFs were required to resume timely quality data collection and submission of measure and patient assessment data effectiveJune 30, 2020 . InJanuary 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 inApril 2022 . 47
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In July of 2022, CMS announced revisions to calculating its five-star ratings for the Nursing Home Compare website. Under this new calculation, points are assigned to a SNF based on its performance across six measures: (1) case-mix adjusted total nurse staffing levels (including registered nurses, licensed practical nurses, and nursing aides), measured by hours per resident per day; (2) case-mix adjusted registered nurse staffing levels, measured by hours per resident per day; (3) case-mix adjusted total nurse staffing levels (including registered nurses, licensed practical nurses, and nursing aides), measured by hours per resident day on the weekend; (4) total nurse turnover, defined as the percentage of nursing staff that left the nursing home over a 12-month period; (5) registered nurse turnover, defined as the percentage of registered nursing staff that left the nursing home over a 12-month period; and (6) administrator turnover, defined as the percentage of administrators that left the nursing home over a 12-month period. These six measures will be measured on a quarterly basis. Staff measurements are scored based on the points assigned to these six measures. For case-mix adjusted total nurse staffing and case-mix adjusted registered nurse staffing, each measure is scored on a 100-point scale in 10-point increments. For case-mix adjusted total nurse staffing on weekends, total nurse turnover, and total registered nurse turnover, each measure is scored on a 50-point scale in five-point increments. The measure of administrator turnover is measured on a 30-point scale, with points assigned based on the number of administrator departures during the measurement period. The result of these staffing measures will affect a SNF's total five-star score reported on the Nursing Home Compare website. These changes are in addition to those previously announced in theJanuary 2022 andApril 2022 revisions, and began with theJuly 2022 refresh of the Nursing Home Compare website. OnJuly 29, 2022 , CMS announced the adoption of a process measure for influenza vaccination coverage among healthcare personnel within SNFs. This measure will be determined by the percentage of SNF healthcare personnel who receive an influence vaccine any time from when it first became available throughMarch 31 of the following year. SNFs will begin submitting this data to CMS through theCDC National Healthcare Safety Network beginning onOctober 1, 2022 throughMarch 31, 2023 . Additionally, CMS revised certain SNF data reporting requirements, including the transfer of health information measures and certain patient assessment data elements, including ethnicity, preferred language, health literacy, and social isolation, untilOctober 1, 2023 .
Medicare Annual Payment Rule
CMS is required to calculate an annual Medicare market-basket update to the payment rates. OnJuly 31, 2020 , CMS issued a final rule for fiscal year 2021 that updates the Medicare payment rates and the quality programs for SNFs. Under the final rule, effectiveOctober 1, 2020 , the aggregate payments to SNFs 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. OnJuly 29, 2021 , CMS issued a final rule for fiscal year 2022 that updates the Medicare payment rates and the quality programs for SNFs. Under the final rule, effectiveOctober 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. OnJuly 29, 2022 , CMS issued a final rule for fiscal year 2023 that updates the Medicare payment rates to aggregate net market basket increased by 2.7%. The increase is resulted from the 5.1% update to the payment rates, which is based on a 3.9% market basket increase plus a 1.5% point market basket error adjustment and less a 0.3% point productivity adjustment as well as a negative 2.3% as a result of the recalibrated parity adjustment. The recalibrated parity adjustment is being phased in over two years.
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 afterApril 1, 2013 incur a 2.0% reduction in Medicare payments. All Medicare rate payments and settlements have incurred this mandatory reduction and will continue to be in place through at least 2023, unlessCongress 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 ofMay 1, 2020 throughDecember 31, 2020 . OnDecember 27, 2020 , the Consolidated Appropriations Act further suspended the 2.0% payment adjustment throughMarch 31, 2021 . OnApril 14, 2021 ,Congress extended the suspension of the 2.0% payment adjustment throughDecember 31, 2021 . OnDecember 10, 2021 ,President Biden signed into law a bill to postpone the 2.0% payment adjustment throughApril 1, 2022 ; fromApril 1, 2022 throughJune 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. 48
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Skilled Nursing Facility Value-Based Purchasing (SNF-VBP) Program
The SNF-VBP Program rewards SNFs with incentive payments based on the quality of care they provide to Medicare beneficiaries, as measured by a hospital readmissions measure. CMS annually adjusts its payment rules for SNFs using the SNF-VBP Program. EffectiveOctober 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 SNFs 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 SNFs 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. OnJuly 29, 2021 , CMS published its final rule for the fiscal year 2022 program in theFederal 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. OnFebruary 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 by early 2023, with final rules to follow after a notice-and-comment period. OnJuly 29, 2022 final rule, CMS released the final rule electing to not apply the SNF 30-Day All-Cause Readmission Measure (SNFRM) as part of performance scoring for fiscal year 2023. CMS will still publicly report the SNFRM, but it will not affect SNF payment. The final rule for the fiscal year 2023 SNF PPS also provided for SNF-VBP program expansion beyond the use of its single, all-cause hospital readmission measure to determine payment, with the inclusion of measures in fiscal year 2026 for SNF healthcare associated infections requiring hospitalization (SNF HAI) and total nursing hours per resident day measures, and in fiscal year 2027 the discharge to community -post acute care measure for SNFs, which assesses the right of successful discharges to community from a SNF setting.
Part B Rehabilitation Requirements
Some of our revenue is paid by the Medicare Part B program under a fee schedule. Part B services are limited with a payment cap by combined speech-language pathology services (SLP), physical therapy (PT) services, and a separate annual cap for occupational therapy (OT) services. 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 with the same threshold 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. 49
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OnDecember 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 onDecember 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 onJanuary 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 was suspended untilApril 1, 2022 and then was implemented as a 1% sequestration untilJune 30, 2022 . OnNovember 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. OnDecember 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 onDecember 16, 2021 , which resulted in Medicare payments not being reduced fromJanuary 1, 2022 throughMarch 31, 2022 . Thereafter, FFS Medicare payments were adjusted by 1% fromApril 1, 2022 throughJune 30, 2022 , and further adjusted by a total of 2% fromJuly 1, 2022 throughDecember 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. OnJuly 7, 2022 , CMS issued a proposed rule for the calendar year 2023 PFS that would result in calendar year 2022's 3% increase in physician fee schedule payments expiring for calendar year 2023. As a result, the proposed calendar year 2023 PFS conversion factor is$33.08 , a decrease of$1.53 from the calendar year 2022 PFS conversion factor of$34.6062 . A final rule setting the calendar year 2023 physician fee schedule is expected in the second half of 2022. 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. OnMay 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 SNF. Subsequently, the calendar year 2021 and 2022 PFS Final Rules added certain of these PT and OT services to the list of Medicare telehealth services on a temporary basis through at least the end of calendar year 2023. OnDecember 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. OnNovember 19, 2021 , CMS expanded these "sometimes therapy" codes further for the 2022 PFS, including five new codes for remote therapeutic monitoring treatment, which are broader than pre-existing monitoring codes and include measuring and evaluating adherence and response to medication and therapy. The PHE Waivers allow therapists to bill Telehealth therapy services up to the latter of, the end of calendar year 2023 or the end of the PHE. Pursuant to the Emergency Waivers, CMS allowed for the facility to bill an originating site fee to CMS for telehealth services provided to Medicare Part B beneficiary residents of the facility when the services were provided by a physician from an alternate location, effectiveMarch 6, 2020 and ending onMay 7, 2022 . This Emergency Waiver for telehealth services was included within the Emergency Waivers CMS announced it was terminating within 30 days fromApril 7, 2022 . Our Facilities have thus ceased using these telemedicine Emergency Waivers upon their termination. OnJuly 7, 2022 , CMS proposed the calendar year 2023 Physician Fee Schedule to include a 4.4% negative adjustment to the conversion fact or in addition to the 1% negative base rate for an aggregate negative adjustment of 5.4%. 50
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Programs of All-Inclusive Care for the Elderly
CMS issued a final rule onJune 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. OnOctober 21, 2021 , CMS published an extension of the timeline to complete further final rulemaking for the PACE program untilNovember 1, 2022 , based on a proposed rule published onNovember 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. TheNovember 2018 proposed rule suggests changes to payment and appeals of disputes within the PACE program which may affect our business.
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 inthe 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.
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, SNFs were required to comply with emergency preparedness requirements, which requirements have since been strengthened via promulgation of additional rules. 51
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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 andOSHA 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 andOSHA vaccination mandates being halted by certain courts. OnJanuary 13, 2022 , theUnited States Supreme Court held that theOSHA 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 exceptTexas where the CMS rule had been halted against enforcement then had to enforce the rule. OnJanuary 20, 2022 , theUnited States District Court for the Northern District of Texas dismissed the block of the CMS's vaccination IFR inTexas . That same day, CMS became empowered to enforce the IFR inTexas and set a deadline ofMarch 21, 2022 for full compliance with its vaccination requirements. Since CMS became empowered to enforce the IFR inTexas , there has not been any administrative or legislative action to change the applicability or enforcement of this IFR. OnJune 29, 2022 , CMS announced updated guidance for Phase 2 and 3 of the Requirements of Participation. These updates concern nursing home resident health and safety. CMS distributed these updates to surveyors and state agencies in order to enhance responses to resident complaints and reported incidents. This updated guidance arises directly fromPresident Biden's March 2022 State of the Union Address and accompanying fact sheet regarding nursing home areas of study and potential change. The guidance focuses on the following topics: (1) resident abuse and neglect (including reporting of abuse); (2) admission, transfer, and discharge; (3) mental health and substance abuse disorders; (4) nurse staffing and reporting of payrolls to evaluate staffing sufficiency; (5) residents' rights (including visitation); (6) potential inaccurate diagnoses or assessments; (7) prescription and use of pharmaceuticals; (8) infection control and prevention; (9) arbitration of disputes between facilities and residents; (10) psychosocial outcomes and their severity; and (11) the timeliness and completion of state investigations to improve consistency in standards among various states. OnJuly 29, 2022 , CMS updated the Medicare Requirements of Participation for LTC facilities, which includes the physical environment requirements to allow facilities to avoid unnecessary renovation expenses that could cause the closure of LTC facilities due to their expense; specifically, CMS is grandfathering certain facilities and will allow LTC facilities that were participating in Medicare beforeJuly 5, 2016 and that previously used the Fire Safety Evaluation System (FSES) to continue using the 2001 FSES mandatory values when determining compliance with applicable standards. In addition, CMS updated the Requirements of Participation to include revising existing qualification requirements for directors of food and nutrition services in LTC facilities, grandfathering directors with two or more years of experience and certain minimum training in food safety so that they may continue in that role without obtaining specific educational and certification requirements. 52
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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 theFCA , 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 theFCA by, among other things, creating liability for knowingly and improperly avoiding repayment of an overpayment received from the government and broadening protections for whistleblowers. TheFCA clarifies that if an item or service is provided in violation of the AKS, the claim submitted for those items or services is a false claim that may be prosecuted under theFCA as a false claim. Civil monetary penalties under theFCA range from approximately$11 thousand to$23 thousand per violation and are adjusted annually for inflation. Under the qui tam or "whistleblower" provisions of theFCA , 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 federalFCA . 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. OnFebruary 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 by early 2023, with final rules to follow after a notice-and-comment period. InNovember 2019 , the OIG released a report of its investigation into overpayments to hospitals that did not comply with Medicare's post-acute-care transfer policy. Hospitals violating this policy transferred patients to certain post-acute-care settings, such as SNFs, but claimed the higher reimbursements associated with discharges to homes. A similar OIG audit report, released inFebruary 2019 , focused on improper payments for SNF 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 SNF 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 SNFs, paying particular attention to facilities that have high reimbursements for ultra-high therapy, therapy resource utilization groups with higher activities of daily living scores, and long average lengths of stay. The OIG recognizes that there is a strong financial incentive for facilities to bill for higher levels of therapies, even when not needed by patients. We cannot predict the extent to which the OIG's recommendations to CMS will be implemented and, what effect, if any, such proposals would have on us. Our business model, like those of some other for-profit operators, is based in part on seeking out higher-acuity patients whom we believe are generally more profitable, and over time our overall patient mix has consistently shifted to higher-acuity in most facilities we operate. 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. 53
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Federal Healthcare Reform
Five-Star Quality Reporting Metrics - 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 changed the way Medicare-participating providers are paid by implementing the Quality Payment Program (QPP). QPP created new paths for payment based on the Merit-based Incentive Payment System (MIPS) or the use of Alternative Payment Models (APM), which relied on quality data CMS gathered and evaluated using the Five-Star Quality Rating system, which includes a rating of one to five in various categories. These categories include (but are not limited to) the results of surveys conducted by state inspectors, other health inspection outcomes, staffing, spending, readmissions, and stay durations; the data collected and its weighting in determining a rating on a scale of one to five stars is subject to periodic and ongoing revision, re-balancing, and adjustment by CMS to reflect market conditions and CMS's priorities in patient care. Since 2020, CMS's measurement of the data reported by providers, including SNFs, has become more competitive and resulted in a reduction of four- and five-star rankings available under CMS's Five-Star Quality Rating system. Beginning inJanuary 2020 , CMS began displaying the ratings under this Five-Star Quality reporting system for nursing homes on its consumer-basedNursing Home Compare website. CMS also displays a consumer alert icon next to nursing homes that have been cited for incidents of abuse, neglect, or exploitation on the Nursing Home Compare website, which is updated monthly with CMS's refresh of survey inspection results on that website. In 2020, in response to the COVID-19 pandemic, CMS temporarily froze SNF Quality Reporting Program data, including data in the staffing and health inspection domains, on the Nursing Home Compare website to account for the then-suspended reporting and inspection obligations. After suspending inspections in early 2020, CMS announced a new and targeted inspection plan inAugust 2020 to focus on urgent patient safety threats and infection control, which affected the number of nursing homes inspected and the substance of those inspections. These safety inspections collected different information than traditional surveys, and as a result these survey results were not incorporated inCMS's Five-Star Quality ratings for SNFs from March throughDecember 2020 . CMS resumed calculating nursing homes' s health inspection ratings onJanuary 27, 2021 and has continued to include this measure in subsequent updates. Similarly, although staff reporting requirements were waived for the first and second quarters of 2020, this waiver ended onJune 25, 2020 . Thereafter, SNFs were required to report staffing data to CMS, which was incorporated into CMS's Five-Star Quality rating beginning inJanuary 2021 . TheJanuary 2021 Five-Star Quality rating calculation reflected SNF-provided quarterly updates of most quality measures for the period betweenJune 2019 andJune 2020 , reflecting the time period in which the normal reporting and inspection obligations were frozen due to COVID-19. CMS's refreshes of the Nursing Home Compare website since January of 2021 have included these quality measures, and other new measures as discussed within this Government Regulation heading. In January of 2022, CMS issued a bulletin stating that as of the same month, the Nursing Home Compare website would begin reporting SNF weekend staffing as well as staff tenure and other collected staffing data . Beginning in July of 2022, CMS began disclosing weekend staffing of all nurses, as well as staff turnover data for all nurses and administrators, on the Nursing Home Compare website. CMS also now incorporates this data into its Five-Star Quality ratings for SNFs and LTC facilities. This data is adjusted based on a facility's case mixture and evaluated on a quarterly basis. Proposed Legislation Concerning Nursing Home Supervision - OnAugust 10, 2021 , the Nursing Home Improvement and Accountability Act of 2021 (Nursing Home Improvement Act) was introduced in theU.S. Senate and was intended to update federal nursing home policy to improve quality of care and oversight. The proposed legislation would reduce SNF payments for inaccurate submission of certain data and provide federal funding to carry out SNF data validation and ensure accuracy of cost report information. The Nursing Home Improvement Act also proposed staffing requirements for SNFs and other measures intended to improve transparency, accountability, and quality of care within nursing homes. If passed in its current form the bill would provide participating states with funds for up to six years in order to fund demonstrated improvements in nursing home workforce and care delivery. As ofJuly 29, 2022 , no action has been taken on this bill since its introduction to theSenate onAugust 10, 2021 and referral to theSenate Finance Committee that same day. A similar bill introduced in theUnited States House of Representatives in January of 2021, Bill No. H.R.598, was introduced and referred to theWays and Means Committee's Healthcare Subcommittee onFebruary 2, 2021 . As ofJuly 29, 2022 , no further action has been taken on this bill. 54
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Proposed and Anticipated Administrative Action - OnFebruary 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's priorities, which are to be studied throughout 2022, include transparency and public disclosure for nursing home owners and operators, and an examination of the role of private equity investment, real estate investment trusts (REITs) and other investment interests in this sector. The SNF-VBP Program was also identified as an area for change, with staffing levels, retention and resident experience affecting reimbursement. Additional enforcement authority and resources, including enhanced scrutiny of poorly performing facilities and tools for improving their performance, is another Administration priority. The Administration also seeks to improve accessibility to nurse aide training, tie Medicaid payments to staff wages and benefits, and 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. OnApril 11, 2022 , CMS issued a proposed rule that could potentially lead to changes in the SNF-VBP Program, and setting SNF and LTC facility staffing levels. OnJune 29, 2022 , CMS published guidance to surveyors for consistently evaluating Phase 2 and 3 Requirements of Participation for LTC facilities, addressing topics including infection control, resident safety, arbitration of disputes, nurse staffing, and mental health disorders.
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 theVeterans 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 SNFs such as admission holds, provisional skilled nursing license, or increased staffing requirements. If our independent operating subsidiaries fail to comply with these directives or otherwise fail to comply substantially with licensure and certification laws, rules and regulations, the facility could lose its certification as a Medicare or Medicaid provider, or lose its license permitting operation in the State. Facilities with otherwise acceptable regulatory histories generally are normally given an opportunity to correct deficiencies and continue their participation in the Medicare and Medicaid programs by a certain date, usually within six months; 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. 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. 55
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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. 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. OnFebruary 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. OnApril 11, 2022 , the CMS issued a proposed rule that requested information to be used for study and potential rulemaking.
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 AKS, Section 1128B of the Social Security Act 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 AKS. 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 AKS can result in criminal penalties of up to$112 thousand and ten years imprisonment. Violations of the AKS can also result in civil monetary penalties of up to$112 thousand per violation and an assessment of up to three times the total amount of remuneration offered, paid, solicited, or received. Violation of the AKS 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. 56
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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 aStark 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 forStark 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 forEconomic 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).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 theADA , 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 theADA and other similar laws is an ongoing obligation, and the independent operating subsidiaries continue to assess their facilities relative toADA compliance and make appropriate modifications as needed. 57
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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 2.1% 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 SNF operators, some states use Medicaid funding of senior living services as a means of lowering the cost of services for residents who may not need the higher level of health services provided in SNFs. States that administer Medicaid programs for services in senior living communities are responsible for monitoring the services at, and physical conditions of, the participating communities. As a result of the growth of senior living in recent years, states have adopted licensing standards applicable to senior living communities. Most state licensing standards apply to senior living communities regardless of whether they accept Medicaid funding. 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 by early 2023, with final rules to follow a notice-and-comment period required by law. OnApril 11, 2022 , the CMS issued a proposed rule that requested information to be used for study and potential rulemaking consistent with the Administration'sFebruary 28, 2022 fact sheet. OnJune 29, 2022 , CMS published guidance to surveyors for consistently evaluating Phase 2 and 3 Requirements of Participation for LTC facilities, as detailed under the Requirements of Participation heading, addressing topics including infection control, resident safety, arbitration of disputes, nurse staffing and mental health disorders. 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, theADA , and safety and health standards set by theOSHA 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. 58
-------------------------------------------------------------------------------- Table of Contents 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, we continue to experience healthy growth in both revenue and operational earnings. Our net revenue for the three months endedJune 30, 2022 continues 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 SNF coverage without having to start a new benefit period for certain beneficiaries who recently exhausted their SNF benefits, remained in effect in the first half 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 and six months endedJune 30, 2022 , we recorded state relief revenue of$24.5 million and$42.1 million , respectively, 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$94.0 million , or 14.7% while our diluted GAAP earning per share grew by 16.1%, from$0.87 to$1.01 , compared to the second quarter in 2021. We have continued to make progress on targeted initiatives, including our foundational structure of local operations that are the centers of excellence in the communities they serve. As part of this focus, we have been able to expand our relationships with doctors, hospitals and managed care plans. Revenue from our skilled services collectively increased by 14.6%. We have refocused on operational fundamentals including identifying non-clinical areas where we can manage spending. These fundamentals coupled with the increase in occupancy and expansion to our operations resulted in a strong second quarter. The following table sets forth details of operating results for our revenue, expenses and earnings, and their respective components, as a percentage of total revenue for the periods indicated: Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 REVENUE: Service revenue 99.4 % 99.4 % 99.4 % 99.4 % Rental revenue 0.6 0.6 0.6 0.6 TOTAL REVENUE 100.0 % 100.0 % 100.0 % 100.0 % Expenses: Cost of services 76.9 76.4 77.4 76.7 Rent-cost of services 5.1 5.4 5.0 5.4 General and administrative expense 5.3 5.8 5.4 5.5 Depreciation and amortization 2.0 2.2 2.0 2.2 TOTAL EXPENSES 89.3 89.8 89.8 89.8 Income from operations 10.7 10.2 10.2 10.2 Other income (expense): Interest expense (0.4) (0.3) (0.3) (0.3) Other (expense) income (0.3) 0.2 (0.2) 0.1 Other expense, net (0.7) (0.1) (0.5) (0.2) Income before provision for income taxes 10.0 10.1 9.7 10.0 Provision for income taxes 2.1 2.2 2.2 2.1 NET INCOME 7.9 7.9 7.5 7.9 Less: net income attributable to noncontrolling interests - 0.2 - 0.1 Net income attributable to The Ensign Group, Inc. 7.9 % 7.7 % 7.5 % 7.8 % 59
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Table of Contents Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 SEGMENT INCOME(1) (In thousands) Skilled services$ 102,266 $ 90,010 $ 200,522 $ 178,941 Standard Bearer(2) $ 6,838$ 7,906 $ 13,738 $ 15,619 NON-GAAP FINANCIAL MEASURES: PERFORMANCE METRICS EBITDA$ 92,978 $ 77,491 $ 177,016 $ 154,198 Adjusted EBITDA$ 96,096 $ 82,523 $ 188,825 $ 163,402 FFO for Standard Bearer$ 12,054 $ 12,154 $ 23,975 $ 24,022 VALUATION METRICS Adjusted EBITDAR$ 133,324 $ 261,815 (1) Segment income represents operating results of the reportable segments excluding gain and loss on sale of assets, insurance recoveries and losses, impairment charges and provision for income taxes. Included in segment income for Standard Bearer for the three and six months endedJune 30, 2022 are expenses for intercompany management fees between Standard Bearer and the Service Center and intercompany interest expense. Segment income is reconciled to the Condensed Consolidated Statement of Income in Note 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. 60 -------------------------------------------------------------------------------- Table of Contents We also establish compensation programs and bonuses for our leaders that are partially based upon the achievement of Adjusted EBITDAR targets. Despite the importance of these measures in analyzing our underlying business, designing incentive compensation and for our goal setting, the Non-GAAP Financial Measures have no standardized meaning defined by GAAP. Therefore, certain of our Non-GAAP Financial Measures have limitations as analytical tools, and they should not be considered in isolation, or as a substitute for analysis of our results as reported in accordance with GAAP. Some of these limitations are:
•they do not reflect our current or future cash requirements for capital
expenditures or contractual commitments;
•they do not reflect changes in, or cash requirements for, our working capital
needs;
•they do not reflect the 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 toThe Ensign Group, Inc. , is beneficial to an investor's complete understanding of our operating performance. 61
-------------------------------------------------------------------------------- Table of Contents 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
and other costs;
•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 withU.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, theNational Association of Real Estate Investment Trusts (NAREIT) created FFO as a supplemental measure of operating performance for REITs, which excludes historical cost depreciation from net income. We define (in accordance with the definition used by NAREIT) FFO to consist of Standard Bearer segment income, excluding depreciation and amortization related to real estate, gains or losses from the sale of real estate, insurance recoveries related to real estate and impairment of depreciable real estate assets.
VALUATION MEASURE:
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.
62 -------------------------------------------------------------------------------- Table of Contents The table below reconciles net income to EBITDA, Adjusted EBITDA and Adjusted EBITDAR for the periods presented: Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Condensed consolidated statements of income data: (In thousands) Net income$ 57,803 $ 50,583 $ 107,891 $ 100,420 Less: net (loss) income attributable to noncontrolling interests 112 1,158 (140) 1,789 Add: Other expense, net 5,275 513 8,159 1,406 Provision for income taxes 15,154 13,758 31,292 26,707 Depreciation and amortization 14,858 13,795 29,534 27,454 EBITDA$ 92,978 $ 77,491 $ 177,016 $ 154,198 Stock-based compensation 5,616 4,633 10,783 8,687 Legal finding(a) - - 3,353 - Gain on sale of assets (2,567) - (2,567) (540) Results related to operations not at full capacity - - - 584 Acquisition related costs, new systems implementation costs and other costs(b) 69 399 240 435 Rent related to items above - - - 38 Adjusted EBITDA$ 96,096 $ 82,523 $ 188,825 $ 163,402 Rent-cost of services 37,228 34,455 72,990 67,911 Less: rent related to items above - - - (38) Adjusted rent 37,228 34,455 72,990 67,873 Adjusted EBITDAR$ 133,324 $ 261,815 (a) Legal finding against our non-emergent transportation subsidiary. (b) Costs incurred to acquire operations and system implementation costs that are not capitalizable. Other costs includes legal, transactional and other costs incurred related to the formation of Standard Bearer and other real estate related activities.
Three Months Ended
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
Skilled services Standard Bearer All Other Eliminations Consolidated Total Revenue 702,478 17,598 30,619 (18,209)$ 732,486 Total expenses, including other expense, net 600,212 10,760 69,233 (18,209)
661,996
Segment income (loss) 102,266 6,838 (38,614) -
70,490
Gain from sale of real estate
2,467
Income before provision for income taxes$ 72,957
Three Months Ended
Skilled Standard services Bearer All Other Eliminations Consolidated Total Revenue$ 612,882 $ 14,214 $ 25,245 $ (13,805) $ 638,536 Total expenses, including other expense, net 522,872 6,308 58,820 (13,805) 574,195 Segment income (loss) 90,010 7,906 (33,575) - 64,341 Income before provision for income taxes$ 64,341 63
-------------------------------------------------------------------------------- Table of Contents Our total revenue increased$94.0 million , or 14.7%, compared to the three months endedJune 30, 2021 . The increase in revenue was primarily driven by an increase in patient days and occupancy from our skilled services operations, along with the impact of acquisitions. Total revenue from operations acquired on or subsequent toJanuary 1, 2021 increased our consolidated revenue by$41.1 million during the three months endedJune 30, 2022 , when compared to the same period in 2021. In addition, we recorded$24.5 million of state relief revenue in the second quarter of 2022 compared to$16.7 million in the same period in 2021, which directly correlated to the additional COVID-19 related expenses incurred. All state relief revenue is included in Medicaid revenue. Skilled Services REVENUE
The following table presents the skilled services revenue and key performance
metrics by category during the three months ended
Three Months Ended June 30, 2022 2021 Change % Change TOTAL FACILITY RESULTS: (Dollars in thousands) Skilled services revenue$ 702,478 $ 612,882 $ 89,596 14.6 % Number of facilities at period end 215 206 9 4.4 % Number of campuses at period end* 25 25 - - % Actual patient days 1,745,027 1,599,707 145,320 9.1 % Occupancy percentage - Operational beds 75.2 % 72.7 % 2.5 % Skilled mix by nursing days 31.1 % 30.9 % 0.2 % Skilled mix by nursing revenue 50.9 % 51.4 % (0.5) % Three Months Ended June 30, 2022 2021 Change % Change SAME FACILITY RESULTS:(1) (Dollars in thousands) Skilled services revenue$ 551,548 $ 511,921 $ 39,627 7.7 % Number of facilities at period end 167 167 - - % Number of campuses at period end* 20 20 - - % Actual patient days 1,348,252 1,315,775 32,477 2.5 % Occupancy percentage - Operational beds 75.8 % 74.0 % 1.8 % Skilled mix by nursing days 32.6 % 32.3 % 0.3 % Skilled mix by nursing revenue 52.6 % 52.9 % (0.3) % Three Months Ended June 30, 2022 2021 Change % Change TRANSITIONING FACILITY RESULTS:(2) (Dollars in
thousands)
Skilled services revenue$ 94,881 $ 80,487 $ 14,394 17.9 % Number of facilities at period end 27 27 - - % Number of campuses at period end* 5 5 - - % Actual patient days 248,767 226,729 22,038 9.7 % Occupancy percentage - Operational beds 74.4 % 68.0 % 6.4 % Skilled mix by nursing days 26.4 % 24.9 % 1.5 % Skilled mix by nursing revenue 45.0 % 44.4 % 0.6 % 64
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Table of Contents Three Months Ended June 30, 2022 2021 Change % Change RECENTLY ACQUIRED FACILITY RESULTS:(3) (Dollars in
thousands)
Skilled services revenue$ 56,049 $ 20,474 $ 35,575 NM Number of facilities at period end 21 12 9 NM Number of campuses at period end* - - - NM Actual patient days 148,008 57,203 90,805 NM
Occupancy percentage - Operational beds 71.2 % 64.9 %
NM Skilled mix by nursing days 25.2 % 21.8 % NM Skilled mix by nursing revenue 44.2 % 41.3 % NM *Campus represents a facility that offers both skilled nursing and senior living services. Revenue and expenses related to skilled nursing and senior living services have been allocated and recorded in the respective operating segment. In the second quarter of 2022, we converted two skilled nursing facilities into campuses. (1)Same Facility results represent all facilities purchased prior toJanuary 1, 2019 . (2)Transitioning Facility results represent all facilities purchased fromJanuary 1, 2019 toDecember 31, 2020 . (3)Recently Acquired Facility (Acquisitions) results represent all facilities purchased on or subsequent toJanuary 1, 2021 .
Skilled services revenue increased
three months ended
changes were from increases in Medicaid revenue of
managed care revenue of
million
The increase in revenue was primarily driven by strong performance across our skilled services operations as our census continued to recover in the second quarter of 2022. Our consolidated occupancy increased by 2.5%. 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 revenue. Revenue in our Same Facilities increased$39.6 million , or 7.7% due to increased occupancy and revenue per patient day. Our diligent efforts to strengthen our partnership with various managed care organizations, hospitals and the local communities we operate in, increased our occupancy by 1.8% to 75.8%. Managed care and Medicare skilled days increased by 4.1% and 4.0%, respectively, resulting in an increase in Managed Care and Medicare revenue. Revenue generated by our Transitioning Facilities increased$14.4 million , or 17.9%, primarily due to improved occupancy growth of 6.4% to 74.4% and an increase in total patient days and skilled mix days compared to the three months endedJune 30, 2021 , demonstrating our ability to transition these healthcare operations toward higher acuity patients. This resulted in managed care days increasing by 26.0%, and Medicare days increasing by 8.9%. Skilled services revenue generated by facilities purchased on or subsequent toJanuary 1, 2021 (Recently Acquired Facilities) increased by approximately$35.6 million compared to the three months endedJune 30, 2021 . We acquired nine operations betweenJuly 1, 2021 andJune 30, 2022 across four states. In the future, if we acquire additional turnaround or start-up operations, we expect to see lower occupancy rates and skilled mix, and these metrics are expected to vary from period to period based upon the maturity of the facilities within our portfolio. Historically, we have generally experienced lower occupancy rates, lower skilled mix at Recently Acquired Facilities and therefore, we anticipate generally lower overall occupancy during years of growth. 65
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The following table reflects the change in skilled nursing average daily revenue rates by payor source, excluding services that are not covered by the daily rate (1): Three Months Ended June 30, Same Facility Transitioning Acquisitions Total 2022 2021 2022 2021 2022 2021 2022 2021 SKILLED NURSING AVERAGE DAILY REVENUE RATES: Medicare$ 689.53 $ 685.30 $ 678.08 $ 670.99 $ 698.18 $ 717.04 $ 688.61 $ 684.33 Managed care 514.98 505.71 473.64 462.43 512.97 516.40 509.64 501.06 Other skilled 579.53 538.16 461.06 424.35 488.46 538.34 560.62 530.17 Total skilled revenue 595.65 582.66 565.76 560.31 586.80 622.36 591.41 581.11 Medicaid 261.00 249.46 251.78 232.53 249.28 245.07 258.48 246.65 Private and other payors 250.25 238.06 228.39 232.50 250.88 271.47 246.87 238.06
Total skilled nursing revenue
(1) These rates exclude additional Federal Medical Assistance Percentage (FMAP)
and include sequestration reversal of 1% in 2022 and 2% in 2021.
Our Medicare daily rates at Same Facilities and Transitioning Facilities
increased by 0.6% and 1.1%, respectively, compared to the three months ended
increase that became effective in
sequestration reversal of 1% compared to 2% in 2021.
Our average Medicaid rates increased 4.8% due to state reimbursement increases and our participation in supplemental Medicaid payment programs and quality improvement programs in various states. Medicaid rates exclude the amount of state relief revenue we recorded. 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 June 30, Same Facility Transitioning Acquisitions Total 2022 2021 2022 2021 2022 2021 2022 2021 PERCENTAGE OF SKILLED NURSING REVENUE Medicare 24.3 % 24.7 % 24.7 % 26.0 % 22.9 % 23.7 % 24.2 % 24.8 % Managed care 19.6 19.6 16.6 14.9 11.1 8.1 18.5 18.6 Other skilled 8.7 8.6 3.7 3.5 10.2 9.5 8.2 8.0 Skilled Mix 52.6 52.9 45.0 44.4 44.2 41.3 50.9 51.4 Private and other payors 7.1 6.9 7.9 8.1 6.4 5.9 7.2 7.0 Medicaid 40.3 40.2 47.1 47.5 49.4 52.8 41.9 41.6 TOTAL SKILLED NURSING 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % Three Months Ended June 30, Same Facility Transitioning Acquisitions Total 2022 2021 2022 2021 2022 2021 2022 2021 PERCENTAGE OF SKILLEDNURSING DAYS Medicare 13.0 % 12.8 % 12.1 % 12.2 % 10.9 % 10.9 % 12.7 % 12.6 % Managed care 14.0 13.8 11.7 10.1 7.3 5.1 13.1 13.0 Other skilled 5.6 5.7 2.6 2.6 7.0 5.8 5.3 5.3 Skilled Mix 32.6 32.3 26.4 24.9 25.2 21.8 31.1 30.9 Private and other payors 10.5 10.4 11.5 10.9 8.5 7.2 10.5 10.3 Medicaid 56.9 57.3 62.1 64.2 66.3 71.0 58.4 58.8 TOTAL SKILLED NURSING 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 66
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The following table sets forth total cost of services for our Skilled services
segment for the periods indicated (dollars in thousands):
Three Months Ended June 30, Change 2022 2021 $ % Cost of service $ 544,751$ 472,217 $ 72,534 15.4 % Revenue percentage 77.5 % 77.0 % 0.5 %
Cost of services related to our Skilled services segment increased
million
acquisitions, which accounted for
services with additional increases due to higher staffing expenses, primarily
agency. Cost of services as a percentage of revenue increased to 77.5% from
77.0%.
Standard Bearer Three Months Ended June 30, Change 2022 2021 $ % (Dollars in thousands) Rental revenue generated from third-party tenants$ 3,704 $ 3,430 $ 274 8.0 % Rental revenue generated from Ensign affiliated operations 13,894 10,784 3,110 28.8 TOTAL RENTAL REVENUE$ 17,598 $ 14,214 $ 3,384 23.8 % Segment income 6,838 7,906 (1,068) (13.5) Depreciation and amortization 5,216 4,248 968 22.8 FFO$ 12,054 $ 12,154 $ (100) (0.8) % Rental revenue. Our rental revenue, including revenue generated from our affiliated facilities, increased by$3.4 million , or 23.8%, to$17.6 million , compared to the three months endedJune 30, 2021 . The increase in revenue is primarily attributable to seven real estate purchases as well as annual rent increases since the three months endedJune 30, 2021 . FFO. Our FFO decreased$0.1 million , or 0.8% to$12.1 million , compared to the three months endedJune 30, 2021 . The increase in rental revenue of$3.4 million is offset by interest expense of$1.9 million as well as management fee expense of$1.1 million associated with the intercompany agreements between Standard Bearer and the Service Center that started 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 the Revolving Credit Facility, and an intercompany management agreement with the formation of Standard Bearer in January of 2022. The additional offsets to rental revenue include increases in interest expense related to new mortgage loans held by HUD, property taxes and other expenses related to the formation of Standard Bearer.
All Other Revenue
Our other revenue increase by$5.4 million , or 21.3%, to$30.6 million , compared to the three months endedJune 30, 2021 . Other revenue for 2022 includes senior living revenue of$17.3 million and revenue from other ancillary services of$11.5 million and rental income of$1.8 million . The increase in other revenue is attributable to our senior living acquisitions as our senior living occupancy rate rebounds from the COVID-19 decreases.
Consolidated Financial Expenses
Rent - cost of services. Our rent - cost of services as a percentage of total revenue decreased by 0.3% to 5.1%, primarily due the growth in revenue outpacing the increase in rent expense. General and administrative expense - General and administrative expense increased$1.6 million or 4.4%, to$38.5 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 0.5% to 5.3%. 67
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Depreciation and amortization - Depreciation and amortization expense increased$1.1 million , or 7.7%, to$14.9 million . This increase was primarily related to the additional depreciation and amortization incurred as a result of our newly acquired operations and capital expenditures. Depreciation and amortization decreased 0.2%, to 2.0%, as a percentage of revenue. Other expense, net - Other expense, net as a percentage of revenue increased by 0.6% to 0.7%. Other expense primarily includes interest expense related to our debt and gain or loss on the deferred compensation investment program. During the three months endedJune 30, 2022 , we recorded a loss on those investments of$3.3 million compared to a gain of$0.8 million during the three months endedJune 30, 2021 . There is an offsetting reduction in expense split between cost of services and general and administrative expenses for both periods. Provision for income taxes - Our effective tax rate was 20.8% for the three months endedJune 30, 2022 , compared to 21.4% for the same period in 2021. The effective tax rate for both periods is driven by the impact of excess tax benefits from stock-based compensation, partially offset by non-deductible expenses including non-deductible compensation. See Note 15, Income Taxes, in the Notes to the Unaudited Condensed Consolidated Financial Statements for further discussion.
Six Months Ended
The following table sets forth details of operating results for our revenue and earnings, and their respective components, by our reportable segment for the periods indicated:
Six Months Ended
Standard Skilled services Bearer All Other Eliminations Consolidated Total revenue$ 1,389,249 $ 34,791 $ 57,949 $ (36,058) $ 1,445,931 Total expenses, including other expense, net 1,188,727 21,053 135,493 (36,058) 1,309,215 Segment income (loss) 200,522 13,738 (77,544) - 136,716 Gain from sale of real estate 2,467 Income before provision for income taxes$ 139,183 Six Months Ended June 30, 2021 Standard Skilled services Bearer All Other Eliminations Consolidated Total revenue$ 1,213,918
Total expenses, including other expense,
net
1,034,977 12,664 118,847 (27,386) 1,139,102 Segment income (loss) 178,941 15,619 (67,873) - 126,687 Loss from sale of real estate and impairment charges 440 Income before provision for income taxes$ 127,127 Our total revenue increased$180.1 million , or 14.2%, compared to the six months endedJune 30, 2021 . The increase in revenue was primarily driven by an increase in patient days and occupancy from our skilled services operations, along with the impact of acquisitions. Total revenue from operations acquired on or subsequent toJanuary 1, 2021 increased our consolidated revenue by$82.8 million during the six months endedJune 30, 2022 , when compared to the same period in 2021. In addition, we recorded$42.1 million of state relief revenue during the six months ended in 2022 compared to$33.2 million in 2021, which directly correlated to the additional COVID-19 related expenses incurred. All state relief revenue is included in Medicaid revenue. 68
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Table of Contents Skilled Services Segment Revenue
The following table presents the skilled services revenue and key performance
metrics by category during the six months ended
Six Months Ended June 30, 2022 2021 Change % Change TOTAL FACILITY RESULTS: (Dollars in thousands) Skilled services revenue$ 1,389,249 1,213,918$ 175,331 14.4 % Number of facilities at period end 215 206 9 4.4 % Number of campuses at period end* 25 25 - - % Actual patient days 3,440,991 3,109,307 331,684 10.7 % Occupancy percentage - Operational beds 74.7 % 71.9 % 2.8 % Skilled mix by nursing days 32.4 % 32.6 % (0.2) % Skilled mix by nursing revenue 52.6 % 53.5 % (0.9) % Six Months Ended June 30, 2022 2021 Change % Change SAME FACILITY RESULTS:(1) (Dollars in thousands) Skilled services revenue$ 1,096,733 $ 1,022,580 $ 74,153 7.3 % Number of facilities at period end 167 167 - - % Number of campuses at period end* 20 20 - - % Actual patient days 2,669,934 2,584,029 85,905 3.3 % Occupancy percentage - Operational beds 75.4 % 73.1 % 2.3 % Skilled mix by nursing days 33.9 % 33.7 % 0.2 % Skilled mix by nursing revenue 54.1 % 54.6 % (0.5) % Six Months Ended June 30, 2022 2021 Change % Change TRANSITIONING FACILITY RESULTS:(2) (Dollars in
thousands)
Skilled services revenue$ 186,677 $ 160,887 $ 25,790 16.0 % Number of facilities at period end 27 27 - - % Number of campuses at period end* 5 5 - - % Actual patient days 488,679 445,552 43,127 9.7 % Occupancy percentage - Operational beds 73.5 % 67.2 % 6.3 % Skilled mix by nursing days 27.8 % 26.8 % 1.0 % Skilled mix by nursing revenue 47.7 % 47.1 % 0.6 % 69
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Table of Contents Six Months Ended June 30, 2022 2021 Change % Change RECENTLY ACQUIRED FACILITY RESULTS:(3) (Dollars in
thousands)
Skilled services revenue$ 105,839 $ 30,451 $ 75,388 NM Number of facilities at period end 21 12 9 NM Number of campuses at period end* - - - NM Actual patient days 282,378 79,726 202,652 NM
Occupancy percentage - Operational beds 70.2 % 64.4 %
NM Skilled mix by nursing days 26.2 % 26.7 % NM Skilled mix by nursing revenue 45.7 % 49.1 % NM *Campus represents a facility that offers both skilled nursing and senior living services. Revenue and expenses related to skilled nursing and senior living services have been allocated and recorded in the respective operating segment. In the first half of 2022, we converted three skilled nursing facilities into campuses. (1)Same Facility results represent all facilities purchased prior toJanuary 1, 2019 . (2)Transitioning Facility results represent all facilities purchased fromJanuary 1, 2019 toDecember 31, 2020 . (3)Recently Acquired Facility (Acquisitions) results represent all facilities purchased on or subsequent toJanuary 1, 2021 . Skilled services revenue increased$175.3 million , or 14.4%, compared to the six months endedJune 30, 2021 . Of the$175.3 million increase, the primary changes were from increases in Medicaid custodial revenue of$74.0 million , or 15.6%, managed care revenue of$35.0 million , or 15.8% and Medicare revenue of$38.6 million , or 10.7%. The increase in revenue was primarily driven by our consolidated occupancy increasing by 2.8%, which includes operations acquired at lower occupancy, compared to the same period in the prior year. As COVID-19 cases declined from the same period in the previous year, there was a shift in Medicare patients to LTC patients. However, strong skilled mix days were maintained due to increase in managed care and other skilled days. Revenue in our Same Facilities increased$74.2 million , or 7.3% due to increased occupancy and increase in skilled mix 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 2.3% to 75.4%. Managed care skilled days increased by 6.8%, resulting in an increase in managed care revenue. Revenue generated by our Transitioning Facilities increased$25.8 million , or 16.0%, primarily due to improved occupancy growth of 6.3% to 73.5% and an increase in our total patient days and skilled mix days compared to the six months endedJune 30, 2021 , demonstrating our ability to transition these healthcare operations toward higher acuity patients. Managed care and Medicare days increased by 22.0% and 7.0%, respectively, resulting in an increase in managed care and Medicare revenue. Skilled services revenue generated by facilities purchased on or subsequent toJanuary 1, 2021 (Recently Acquired Facilities) increased by approximately$75.4 million compared to the six months endedJune 30, 2021 . We acquired nine operations betweenJuly 1, 2021 andJune 30, 2022 across four states. In the future, if we acquire additional facilities that are underperforming and need to be turned around or invest in start-up operations, we expect to see lower occupancy rates and skilled mix and these metrics are expected to vary from period to period based upon the maturity of the facilities within our portfolio. Historically, we have generally experienced lower occupancy rates and lower skilled mix at Recently Acquired Facilities and therefore, we anticipate generally lower overall occupancy during years of growth. 70
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The following table reflects the change in skilled nursing average daily revenue rates by payor source, excluding services that are not covered by the daily rate (1): Six Months Ended June 30, Same Facility Transitioning Acquisitions Total 2022 2021 2022 2021 2022 2021 2022 2021 SKILLED NURSING AVERAGE DAILY REVENUE RATES Medicare$ 691.85 $ 687.54 $ 687.25 $ 679.73 $ 690.41 $ 755.33 $ 691.10 $ 688.12 Managed care 511.59 505.69 473.98 459.08 509.64 523.55 506.90 500.60 Other skilled 579.17 540.72 462.30 403.54 490.07 541.48 561.53 531.74 Total skilled revenue 597.07 588.07 577.72 569.60 587.31 647.77 594.06 587.15 Medicaid 260.73 250.79 246.75 234.03 246.33 243.36 257.26 247.95 Private and other payors 252.02 239.22 231.51 235.10 254.79 263.40 249.02 238.98
Total skilled nursing revenue
(1) These rates exclude additional Federal Medical Assistance Percentage (FMAP) and include sequestration reversal of 1% for the second quarter in 2022 and 2% for the first quarter of 2022 and the six months endedJune 30, 2021 . Our Medicare daily rates at Same Facilities and Transitioning Facilities increased by 0.6% and 1.1%, respectively, compared to the six months endedJune 30, 2021 . The increase is attributable to the 1.2% net market basket increase that became effective inOctober 2021 . Medicare daily rates in 2022 includes three months of sequestration reversal of 1% and three months of sequestration of reversal of 2% compared to six months of sequestration reversal of 2% in 2021. Our average Medicaid rates increased 3.8% due to state reimbursement increases and our participation in supplemental Medicaid payment programs and quality improvement programs in various states. Medicaid rates exclude the amount of state relief revenue we recorded. Payor Sources as a Percentage of Skilled Nursing Services. We use our skilled mix as a measure of the quality of reimbursements we receive at our affiliated skilled nursing facilities over various periods.
The following tables set forth our percentage of skilled nursing patient revenue
and days by payor source:
Six Months Ended June 30, Same Facility Transitioning Acquisitions Total 2022 2021 2022 2021 2022 2021 2022 2021 PERCENTAGE OF SKILLED NURSING REVENUE Medicare 25.9 % 26.9 % 27.9 % 29.4 % 24.5 % 29.4 % 26.1 % 27.3 % Managed care 19.7 19.4 16.2 14.7 11.7 7.4 18.6 18.5 Other skilled 8.5 8.3 3.6 3.0 9.5 12.3 7.9 7.7 Skilled mix 54.1 54.6 47.7 47.1 45.7 49.1 52.6 53.5 Private and other payors 6.9 6.5 7.6 7.5 6.0 4.6 7.0 6.5 Medicaid 39.0 38.9 44.7 45.4 48.3 46.3 40.4 40.0 TOTAL SKILLED NURSING 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 71
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Table of Contents Six Months Ended June 30, Same Facility Transitioning Acquisitions Total 2022 2021 2022 2021 2022 2021 2022 2021 PERCENTAGE OF SKILLEDNURSING DAYS Medicare 14.0 % 14.2 % 13.7 % 14.0 % 11.9 % 13.7 % 13.8 % 14.2 % Managed care 14.4 13.9 11.5 10.4 7.7 5.0 13.4 13.2 Other skilled 5.5 5.6 2.6 2.4 6.6 8.0 5.2 5.2 Skilled mix 33.9 33.7 27.8 26.8 26.2 26.7 32.4 32.6 Private and other payors 10.2 9.9 11.1 10.4 7.9 6.1 10.2 9.8 Medicaid 55.9 56.4 61.1 62.8 65.9 67.2 57.4 57.6 TOTAL SKILLED NURSING 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % Cost of Services
The following table sets forth total cost of services for our skilled services
segment for the periods indicated (dollars in thousands):
Six Months Ended June 30, Change 2022 2021 $ % Cost of service $ 1,078,925$ 935,177 $ 143,748 15.4 % Revenue percentage 77.7 % 77.0 % 0.7 % Cost of services related to our skilled services segment increased by$143.7 million , or 15.4%, due primarily to additional costs at new acquisitions, which accounted for$59.6 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 77.7% from 77.0%. Standard Bearer Six Months Ended June 30, Change 2022 2021 $ % (Dollars in thousands) Rental revenue generated from third-party tenants$ 7,472 6,908$ 564 8.2 % Rental revenue generated from Ensign affiliated operations 27,319 21,375 5,944 27.8 TOTAL RENTAL REVENUE$ 34,791 $ 28,283 $ 6,508 23.0 % Segment income 13,738 15,619 (1,881) (12.0) Depreciation and amortization 10,237 8,403 1,834 21.8 FFO$ 23,975 $ 24,022 $ (47) (0.2) % Rental revenue. Our rental revenue, including revenue generated from our affiliated facilities, increased by$6.5 million , or 23.0% to$34.8 million , compared to the six months endedJune 30, 2021 . The increase in revenue is primarily attributable to seven real estate purchases as well as annual rent increases since the six months endedJune 30, 2021 . FFO. Our FFO remained consistent at$24.0 million , for both the six months endedJune 30, 2022 and 2021. The increase in rental revenue of$6.5 million is offset by interest expense of$3.8 million as well as management fee expense of$2.1 million associated with the intercompany agreements between Standard Bearer and the Service Center starting in January of 2022. As noted in Item 2., Recent Activities, the Company, the real estate properties and Standard Bearer entered into intercompany debt arrangements, including mortgage loans and the Revolving Credit Facility, and an intercompany management agreement with the formation of Standard Bearer in January of 2022. The additional offsets to rental revenue include increases in interest expense related to new mortgage loans held by HUD, and other expenses related to the formation of Standard Bearer. 72
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All Other Revenue
Our other revenue increased by$7.0 million , or 13.7% to$57.9 million , compared to the six months endedJune 30, 2021 . Other revenue for 2022 includes senior living revenue of$30.9 million and revenue from other ancillary services of$23.3 million and rental income of$3.7 million . The increase in other revenue is attributable to our senior living acquisitions as our senior living occupancy rate rebounds from COVID-19 decreases.
Consolidated Financial Expenses
Rent - cost of services. Our rent - cost of services as a percentage of total
revenue decreased by 0.4% to 5.0%, primarily due to the growth in revenue
outpacing the increase in rent expense.
General and administrative expense. General and administrative expense increased$5.6 million or 7.9%, to$76.8 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 0.1% to 5.4%. Depreciation and amortization. Depreciation and amortization expense increased$2.1 million , or 7.6%, to$29.5 million . This increase was primarily related to the additional depreciation and amortization incurred as a result of our newly acquired operations. Depreciation and amortization decreased 0.2%, to 2.0%, as a percentage of revenue. Other expense, net. Other expense, net as a percentage of revenue increased by 0.3%, to 0.5%. Other expense primarily includes interest expense related to our debt and gain or loss on the deferred compensation investments. During the six months endedJune 30, 2022 , we recorded a loss on those investments of$4.5 million compared to a gain of$1.1 million during the six months endedJune 30, 2021 . There is an offsetting reduction in expense split between cost of services and general and administrative expenses for both periods. Provision for income taxes. Our effective tax rate was 22.5% for the six months endedJune 30, 2022 , compared to 21.0% 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 Revolving Credit Facility. Our liquidity as ofJune 30, 2022 is impacted by cash generated from strong operational performance and increased acquisition and share repurchase activities. Historically, we have primarily financed the majority of our acquisitions through mortgages on our properties, our Revolving Credit Facility and cash generated from operations. Total capital expenditures for property and equipment were$37.1 million and$33.8 million for the six months endedJune 30, 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 for borrowing under our Revolving 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 ofJune 30, 2022 consisted of bank term deposits, money market funds andU.S. Treasury bill related investments. In addition, as ofJune 30, 2022 , we held debt security investments of approximately$49.1 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 ofJune 30, 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 ofJune 30, 2022 , along with projected operating cash flows and available financing, will support our normal business operations for the foreseeable future. 73
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OnOctober 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 fromOctober 29, 2021 . During the three months endedMarch 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 fully authorized amount under the plan. OnFebruary 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 fromFebruary 10, 2022 . During the three months endedJune 30, 2022 , we repurchased approximately 0.3 million shares of our common stock for$20.0 million . This repurchase program expired upon the repurchase of the fully authorized amount under the plan. The share repurchase programs do not obligate us to acquire any specific number of shares.
The following table presents selected data from our condensed consolidated
statement of cash flows for the periods presented:
Six Months Ended June 30, 2022 2021 NET CASH PROVIDED BY/(USED IN): (In thousands) Operating activities$ 129,813 $ 108,397 Investing activities (76,596) (40,862) Financing activities (29,838) (105,686) Net increase/(decrease) in cash and cash equivalents 23,379 (38,151) Cash and cash equivalents beginning of period 262,201 236,562 Cash and cash equivalents at end of period$ 285,580 $ 198,411 Operating Activities
Cash provided by operating activities is net income adjusted for certain
non-cash items and changes in operating assets and liabilities.
The$21.4 million increase in cash provided by operating activities for the six months endedJune 30, 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 timing of collections of accounts receivable and payments 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
months ended
due to an increase in cash used for expansions and capital expenditures of
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 subsidiary shares. The$75.8 million decrease in cash used in financing activities for the six months endedJune 30, 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$29.9 million of share repurchases as part of our stock repurchase program in 2022. Additionally, we received proceeds of$6.7 million from the sale of preferred shares and common stock of Standard Bearer offset by payment of deferred financing fees of$3.2 million associated with the entry into the Amended Credit Agreement inApril 2022 . 74
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Credit Facility with a Lending Consortium Arranged by Truist
OnApril 8, 2022 , we entered into the Amended Credit Agreement, which increased the amount of the revolving line of credit thereunder to$600.0 million in aggregate principal amount. The maturity date of the Revolving Credit Facility isApril 8, 2027 . Borrowings are supported by a lending consortium arranged by Truist. The interest rates applicable to loans under the Revolving Credit Facility are, at our option, equal to either a base rate plus a margin ranging from 0.25% to 1.25% per annum or SOFR plus a margin range from 1.25% to 2.25% per annum, based on the Consolidated Total Net Debt to Consolidated EBITDA ratio (as defined in the Amended Credit Agreement). In addition, we will pay a commitment fee on the unused portion of the commitments that will range from 0.20% to 0.40% per annum, depending on the Consolidated Total Net Debt to Consolidated EBITDA ratio.
Mortgage Loans and Promissory Notes
As ofJune 30, 2022 , 23 of our subsidiaries have mortgage loans insured with HUD for an aggregate amount of$155.1 million , which subjects these subsidiaries to HUD oversight and periodic inspections. The mortgage loans bear effective interest rates at a range of 3.1% to 4.2%, including fixed interest rates at a range of 2.4% to 3.3% per annum. 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 is reduced by 1% per year for years five through ten of the loan. There is no prepayment penalty after year ten. The term of the mortgage loans are 25 to 35 years. In addition to the HUD mortgage loans above, we have two promissory notes. The notes bear fixed interest rates of 6.3% and 5.3% per annum and the term of the notes are 10 months and 12 years, respectively. The 12 year note, which was used for an acquisition, is secured by the real property comprising the facility and the rent, issues and profits thereof, as well as all personal property used in the operation of the facility.
Operating Leases
As ofJune 30, 2022 , 180 of our facilities are under long-term lease arrangements, of which 96 of the operations are under nine triple-net Master Leases and one stand-alone lease with CareTrust REIT, Inc. (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 aMaster 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 97 facilities leased from CareTrust include an option to purchase that we can exercise starting onDecember 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. 75
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OnMay 31, 2018 , we received a Civil Investigative Demand (CID) from theU.S. Department of Justice stating that it is investigating to determine whether we have violated the False Claims Act and/or the Anti-Kickback Statute with respect to the relationships between certain of our skilled nursing facilities and persons who served as medical directors, advisory board participants or other referral sources. The CID covered the period fromOctober 3, 2013 through 2018, and was limited in scope to ten of ourSouthern California skilled nursing facilities. InOctober 2018 , theDepartment of Justice made an additional request for information covering the period ofJanuary 1, 2011 through 2018, relating to the same topic. As a general matter, our operating entities maintain policies and procedures to promote compliance with the False Claims Act, the Anti-Kickback Statute, and other applicable regulatory requirements. We have fully cooperated with theU.S. Department of Justice and promptly responded to its requests for information; inApril 2020 , we were advised that theU.S. Department of Justice declined to intervene in any subsequent action based on or related to the subject matter of this investigation.
Inflation
We have historically derived a substantial portion of our revenue from the Medicare program. We also derive revenue from state Medicaid and similar reimbursement programs. Payments under these programs generally provide for reimbursement levels that are adjusted for inflation annually based upon the state's fiscal year for the Medicaid programs and in each October for the Medicare program. These adjustments may not continue in the future, and even if received, such adjustments may not reflect the actual increase in our costs for providing healthcare services. Labor and supply expenses make up a substantial portion of our cost of services. Those expenses can be subject to increase in periods of rising inflation and when labor shortages occur in the marketplace. To date, we have generally been able to implement cost control measures or obtain increases in reimbursement sufficient to offset increases in these expenses. There can be no assurance that we will be able to anticipate fully or otherwise respond to any future inflationary pressures.
Recent Accounting Pronouncements
Except for rules and interpretive releases of theSecurities and Exchange Commission (SEC) under authority of federal securities laws and a limited number of grandfathered standards, the FASB ASC is the sole source of authoritative GAAP literature recognized by the FASB and applicable to us. For any new pronouncements announced, we consider whether the new pronouncements could alter previous generally accepted accounting principles and determines whether any new or modified principles will have a material impact on our reported financial position or operations in the near term. The applicability of any standard is subject to the formal review of our financial management and certain standards are under consideration. Recent Accounting Standards Adopted by the Company - InNovember 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 onJanuary 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 - InFebruary 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 throughDecember 31, 2022 . OnApril 8, 2022 , we entered into 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 . Pursuant to the Amended Credit Agreement, we transitioned from LIBOR to SOFR as the applicable reference rate for borrowings under the Revolving Credit Facility. As part of the transition from LIBOR to SOFR reference rates, we determined there was no material impact on our condensed consolidated financial statements. 76
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The Ensign Group Reports Second Quarter 2022 Results
Aflac Incorporated Announces Second Quarter Results, Reports Second Quarter Net Earnings of $1.4 Billion, Declares Third Quarter Cash Dividend
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