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 Interim
Financial Statements and accompanying notes, which appear elsewhere in this
Quarterly Report on Form 10-Q. We urge you to carefully review and consider the
various disclosures made by us in this Quarterly Report and in our other reports
filed with the Securities and Exchange Commission (SEC), including our Annual
Report on Form 10-K for the year ended December 31, 2022 (Annual Report), which
discusses our business and related risks in greater detail, as well as
subsequent reports we may file from time to time on Form 10-Q and Form 8-K, for
additional information. The section entitled "Risk Factors" contained in Part
II, Item 1A of this Quarterly Report on Form 10-Q, and similar discussions in
our other SEC filings, also describe some of the important risk factors that may
affect our business, financial condition, results of operations and/or
liquidity. You should carefully consider those risks, in addition to the other
information in this Quarterly Report on Form 10-Q and in our other filings with
the SEC, before deciding to purchase, hold or sell our common stock.

This Quarterly Report on Form 10-Q contains "forward-looking statements," within
the meaning of the Private Securities Litigation Reform Act of 1995, which
include, but are not limited to our expected future financial position, results
of operations, cash flows, financing plans, business strategy, budgets, capital
expenditures, competitive positions, growth opportunities, and plans and
objectives of management. Forward-looking statements can often be identified by
words such as "anticipates," "expects," "intends," "plans," "predicts,"
"believes," "seeks," "estimates," "may," "will," "should," "would," "could,"
"potential," "continue," "ongoing," similar expressions, and variations or
negatives of these words. These statements are not guarantees of future
performance and are subject to risks, uncertainties and assumptions that are
difficult to predict. Additionally, our business and operations for 2023
continue to be impacted by changes of the COVID-19 environment. Because of the
unprecedented nature of the pandemic, we are unable to predict the full extent
and duration of the financial impact of these changes on our business, financial
condition and results of operations. Our actual results could differ materially
from those expressed in any forward-looking statements as a result of various
factors, some of which are listed under the section "Risk Factors" contained in
Part II, Item 1A of this Quarterly Report on Form 10-Q. These forward-looking
statements speak only as of the date of this Quarterly Report on Form 10-Q, and
are based on our current expectations, estimates and projections about our
industry and business, management's beliefs, and certain assumptions made by us,
all of which are subject to change. We undertake no obligation to revise or
update publicly any forward-looking statement for any reason, except as
otherwise required by law.

As used in this Management's Discussion and Analysis of Financial Condition and
Results of Operations, the words, "Ensign," "Company," "we," "our" and "us"
refer to The Ensign Group, Inc. and its consolidated subsidiaries. All of our
affiliated operations, the Service Center, our wholly-owned captive insurance
subsidiary and our captive real estate investment trust (REIT) called Standard
Bearer Healthcare REIT, Inc. (Standard Bearer) are operated by separate,
wholly-owned, independent subsidiaries that have their own management, employees
and assets. The use of "Ensign," "Company," "we," "us," "our" and similar
verbiage in this Quarterly Report on Form 10-Q is not meant to imply that any of
our affiliated operations, the Service Center, the captive insurance subsidiary
or Standard Bearer are operated by the same entity. This Management's Discussion
and Analysis of Financial Condition and Results of Operations should be read in
conjunction with our Interim Financial Statements included in this Quarterly
Report.

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Overview

We are a provider of health care services across the post-acute care continuum
and engage in the operation, ownership, acquisition, development and leasing of
skilled nursing, senior living and other healthcare related properties and other
ancillary businesses located in Arizona, California, Colorado, Idaho, Iowa,
Kansas, Nebraska, Nevada, South Carolina, Texas, Utah, Washington and Wisconsin.
Our operating subsidiaries, each of which strives to be the operation of choice
in the community it serves, provide a broad spectrum of skilled nursing, senior
living and other ancillary services. As of March 31, 2023, we offered skilled
nursing, senior living and rehabilitative care services through 290 skilled
nursing and senior living facilities. Of the 290 facilities, we operated 211
facilities under long-term lease arrangements and have options to purchase 11 of
those facilities. Our real estate portfolio includes 108 owned real estate
properties, which included 79 facilities operated and managed by us, 29 senior
living operations leased to and operated by The Pennant Group, Inc., or Pennant,
as part of the spin-off transaction that occurred in October 2019, 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 of March 31, 2023:
                                                                                                Leased (without            Total for
                                                     Owned and            Leased (with a           a Purchase              Facilities
                                                      Operated           Purchase Option)           Option)                 Operated
Number of facilities                                         79                     11                    200                      290
Percentage of total                                        27.2  %                 3.8  %                69.0  %                 100.0  %
Operational skilled nursing beds                          7,833                  1,145                 20,937                   29,915
Percentage of total                                        26.2  %                 3.8  %                70.0  %                 100.0  %
Senior living units                                       1,705                    178                  1,144                    3,027
Percentage of total                                        56.3  %                 5.9  %                37.8  %                 100.0  %


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

Recent Activities

Operational Update - On January 30, 2023, the Biden-Harris Administration
announced its plan to extend the public health emergency (PHE) for a final time
to May 11, 2023. Our primary focus has always been and continues to be the
health and safety of our patients, residents, employees and their respective
families. Even with the anticipated end of the PHE, we continue to implement new
measures and maintain existing ones to provide the safest possible environment
within our sites of service, taking into consideration the vulnerable nature of
our patients and the unique exposure risks of our staff.

We continue to execute on key initiatives to rebuild occupancy lost due to the
pandemic. Our combined Same Facilities and Transitioning Facilities occupancy is
78.5%, which represents a 4.3% increase compared to the prior year quarter, and
is closer to our pre-pandemic occupancy levels, which was at 80.1% in March
2020. The innovative approaches and strategic partnerships developed during the
pandemic have supported our occupancy improvements and continue to enable us to
gain additional market share. These key initiatives together with our dedication
to operational fundamentals resulted in a strong first quarter.
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We receive state relief funding from various states, including healthcare relief
funding under the American Rescue Plan Act (ARPA), increases in the Federal
Medical Assistance Percentage (FMAP) under the Families First Coronavirus
Response Act (FFCRA) and other state specific relief programs. We use this
funding to reimburse the recipient for healthcare and labor related expenses
that are attributable to the COVID-19 pandemic or are associated with providing
patient care. The Consolidated Appropriations Act of 2023 (CAA 2023) and the end
of the PHE will result in the gradual phase down of the temporary increase in
FMAP funding. During the three months ended March 31, 2023, the temporary
increase to FMAP remained unchanged at 6.2%. It is expected that the increase
will decline to 5% in the second quarter, 2.5% in the third quarter and 1.5% in
the fourth quarter. Additionally, in some states, we will continue to receive
state relief funding through the ARPA and other state relief programs through
the end of 2023.

During the three months ended March 31, 2023 and 2022, we recognized $26.4
million and $17.6 million, respectively, of combined state relief funding as
revenue.

Facility Information

The following table sets forth the location of our operated and owned facilities
by type as well as the number of beds and units located at operated and owned
facilities as of March 31, 2023:
                          TX               CA               AZ               UT               CO               WA              ID            SC            NE            IA            KS            NV            WI             

Total

Number of operated facilities
Skilled nursing
operations                 77               67               30               18               18               13             11             7             4             4             -             2             2               253
Senior living
operations                  1                -                1                2                5                1              -             -             1             -             -             -             -                11
Campuses(1)                 4                3                5                1                1                -              1             -             2             2             7             -             -                26
Number of operated beds/units
Operational skilled
nursing beds            9,859            6,760            4,517            1,989            1,890            1,227            998           866           413           368           570           358           100            29,915
Senior living units       509              197              757              163              725               98             21             -           313            31           213             -             -             3,027

Number of owned and operated facilities
Skilled nursing
properties                 18               10                9                7                4                2              5             5             1             -             -             -             2                63
Senior living
communities                 1                -                -                -                3                -              -             -             1             -             -             -             -                 5
Campuses(1)                 2                1                4                -                -                -              -             -             -             -             4             -             -                11
Number of owned and operated beds/units
Owned skilled nursing
beds                    2,279            1,182            1,596              682              361              204            468           544            88             -           329             -              100          7,833
Owned Senior living
units                     443               42              356                -              461                -              -             -           274             -           129             -             -             1,705
Number of owned and not operated facilities
Senior living
properties                  6                2                1                -                -                -              -             -             -             -             -             1               19             29

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

During the three months ended March 31, 2023, we expanded our operations through
long-term leases, with the addition of 19 stand-alone skilled nursing
operations. These new operations added a total of 1,764 operational skilled
nursing beds to be operated by our affiliated operating subsidiaries. For
further discussion of our expansions, see Note 8, Operation Expansions in the
Notes to the Interim Financial Statements.

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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 ARPA, FFCRA and
other state relief programs.

•Occupancy percentage (operational beds) - The total number of patients
occupying a bed in a skilled nursing facility as a percentage of the beds in a
facility which are available for occupancy during the measurement period.

•Number of facilities and operational beds - The total number of skilled nursing
facilities that we own or operate and the total number of operational beds
associated with these facilities.

Skilled Mix - Like most skilled nursing providers, we measure both patient days
and revenue by payor. Medicare, managed care and other skilled patients, whom we
refer to as high acuity patients, typically require a higher level of skilled
nursing and rehabilitative care. Accordingly, Medicare and managed care
reimbursement rates are typically higher than from other payors. In most states,
Medicaid reimbursement rates are generally the lowest of all payor types.
Changes in the payor mix can significantly affect our revenue and profitability.

The following table summarizes our overall skilled mix from our skilled nursing
services for the periods indicated as a percentage of our total skilled nursing
routine revenue and as a percentage of total skilled nursing patient days:
                     Three Months Ended March 31,
Skilled Mix:               2023                   2022
Days                                 32.3  %     33.7  %
Revenue                              52.7  %     54.3  %


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.


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

                                                                           Three Months Ended March 31,
Occupancy for skilled services:                                         2023                         2022
Operational beds at end of period                                           29,915                        25,513
Available patient days                                                   2,627,531                     2,285,046
Actual patient days                                                      2,047,705                     1,695,964
Occupancy percentage (based on operational beds)                              77.9  %                       74.2  %


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 select properties owned by us through
our captive REIT and leased to skilled nursing and senior living operations,
including our own operating subsidiaries and third party operators.

We also reported an "all other" category that includes operating results from
our senior living operations, mobile diagnostics, transportation, other real
estate and other ancillary operations. 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 our "All Other" category and as a
percentage of total revenue for the periods indicated (dollars in thousands):
                                                                                          Three Months Ended March 31,
                                                     Skilled Services                       Other Service Revenue                     Total Service Revenue
                                                  2023               2022                  2023                  2022                2023                 2022
Medicaid(1)                                   $ 333,445          $ 261,587          $      6,819              $  4,761          $    340,264          $ 266,348
Medicare                                        247,723            208,411                     -                     -               247,723            208,411
Medicaid-skilled                                 57,927             45,949                     -                     -                57,927             45,949
Subtotal                                        639,095            515,947                 6,819                 4,761               645,914            520,708
Managed care                                    156,663            127,786                     -                     -               156,663            127,786
Private and other(2)                             55,165             43,038                24,176                17,624                79,341             60,662
TOTAL SERVICE REVENUE                         $ 850,923          $ 686,771          $     30,995              $ 22,385          $    881,918          $ 709,156


                                                                                         Three Months Ended March 31,
                                                   Skilled Services                          Other Service Revenue                       Total Service Revenue
                                              2023                  2022                  2023                  2022                  2023                  2022
Medicaid(1)                                      39.2  %               38.1  %               22.0  %               21.3  %               38.6  %               37.6  %
Medicare                                         29.1                  30.3                     -                     -                  28.1                  29.4
Medicaid-skilled                                  6.8                   6.7                     -                     -                   6.6                   6.4
Subtotal                                         75.1                  75.1                  22.0                  21.3                  73.3                  73.4
Managed care                                     18.4                  18.6                     -                     -                  17.8                  18.0
Private and other(2)                              6.5                   6.3                  78.0                  78.7                   8.9                   8.6
TOTAL SERVICE REVENUE                           100.0  %              100.0  %              100.0  %              100.0  %              100.0  %              100.0  %
(1) Medicaid payor includes revenue for senior living operations and revenue related to state relief funding.
(2) Private and other payors in our "all other" category includes revenue from senior living operations and all payors generated in our other ancillary operations.






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Skilled Services

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

We are participating in supplemental payment programs in various states that
provide supplemental Medicaid payments for skilled nursing facilities that are
licensed to non-state government-owned entities such as city and county hospital
districts. Numerous operating subsidiaries entered into transactions with
various hospital districts providing for the transfer of the licenses for those
skilled nursing facilities to the hospital districts. Each affected operating
subsidiary agreement between the hospital district and our subsidiary is
terminable by either party to fully restore the prior license status.

Standard Bearer

We generate rental revenue primarily by leasing post-acute care properties that
we acquired to healthcare operators under triple-net lease arrangements, whereby
the tenant is solely responsible for the costs related to the property,
including property taxes, insurance and maintenance and repair costs, subject to
certain exceptions. As of March 31, 2023, our real estate portfolio within
Standard Bearer is comprised of 103 real estate properties. Of these properties,
75 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 months ended March 31, 2023,
we generated rental revenues of $19.7 million, of which $15.9 million was
derived from affiliated wholly-owned healthcare operators, and therefore
eliminated in consolidation.

Other

Within our senior living operations, we generate revenue primarily from private
pay sources, with a portion earned from Medicaid payors or through other
state-specific programs. In addition, we hold majority membership interests in
certain of 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 Interim Financial Statements included in this report have been prepared in
accordance with accounting principles generally accepted in the United States of
America (U.S. GAAP). The preparation of these financial statements requires
management to make judgments, estimates and assumptions that affect the reported
amounts of assets, liabilities, cash flows, revenues and expenses, and related
disclosure of contingent assets and liabilities.

See Item 2., Management's Discussion and Analysis of Financial Condition and
Results of Operations, in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2022 for further discussion of critical accounting estimates.
There were no material changes to our critical accounting policies with which
the estimates are developed since December 31, 2022.

Industry Trends

The post-acute care industry has evolved to meet the growing demand for
post-acute and custodial healthcare services generated by an aging population,
increasing life expectancies and the trend toward shifting patient care to lower
cost settings. The industry has evolved in recent years, which we believe has
led to a number of favorable improvements in the industry, as described below:

•Shift of Patient Care to Lower Cost Alternatives - The growth of the senior
population in the U.S. continues to increase healthcare costs, often faster than
the available funding from government-sponsored healthcare programs. In
response, federal and state governments have adopted cost-containment measures
that encourage the treatment of patients in more cost-effective settings such as
skilled nursing facilities, for which the staffing requirements and associated
costs are often significantly lower than acute care hospitals and other
post-acute care settings. As a result, skilled nursing facilities are generally
serving a larger population of higher-acuity patients than in the past.

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•Significant Acquisition and Consolidation Opportunities - The skilled nursing
industry is large and highly fragmented, characterized predominantly by numerous
local and regional providers. Due to the increasing demands from hospitals and
insurance carriers to implement sophisticated and expensive reporting systems,
we believe this fragmentation provides us with significant acquisition and
consolidation opportunities.

•Improving Supply and Demand Balance - The number of skilled nursing facilities
has declined modestly over the past several years. We expect that the supply and
demand balance in the skilled nursing industry will continue to improve due to
the shift of patient care to lower cost settings, an aging population and
increasing life expectancies.

•Increased Demand Driven by Aging Populations - As seniors account for an
increasing percentage of the total U.S. population, we believe the demand for
skilled nursing and senior living services will continue to increase. According
to the census projection released by the U.S. Census Bureau in early 2020,
between 2016 and 2030, the number of individuals over 65 years old is projected
to be one of the fastest growing segments of the United States population,
growing from 16% to 21%. The Bureau expects this segment to increase nearly 50%
to 73 million, as compared to the total U.S. population which is projected to
increase by 10% over that time period. Furthermore, the generation currently
retiring has accumulated less savings than prior generations, creating demand
for more affordable senior housing and skilled nursing services. As a
high-quality provider in lower cost settings, we believe we are well-positioned
to benefit from this trend.

•Transition to Value-Based Payment Models - In response to rising healthcare
spending in the United States, commercial, government and other payors are
generally shifting away from fee-for-service payment models towards value-based
models, including risk-based payment models that tie financial incentives to
quality, efficiency and coordination of care. We believe that patient-centered
outcomes driven reimbursement models will continue to grow in prominence. Many
of our operations already receive value-based payments, and as valued-based
payment systems continue to increase in prominence, it is our view that our
strong clinical outcomes will be increasingly rewarded.

•Accountable Care Organizations and Reimbursement Reform - A significant goal of
U.S. federal health care reform is to transform the delivery of health care by
changing reimbursement to reflect and support the quality and safety of care
that providers deliver, increase efficiency and reduce growth in spending.
Reimbursement models that provide financial incentives to encourage efficiency,
affordability and high-quality care have been developed and implemented by
government and commercial third-party payers. The most prolific of these models,
the Accountable Care Organization (ACO) model, incentivizes groups of providers
to share in savings that are achieved through the coordination of care and
chronic disease management of an assigned patient population. Reimbursement
methodology reform includes Value-Based Purchasing (VBP), in which a portion of
provider reimbursement is redistributed based on relative performance, or
improvement on designated economic, clinical quality and patient satisfaction
metrics. In addition, the Centers for Medicare and Medicaid Services (CMS) has
implemented Episode-based demonstration, voluntary and mandatory payment
initiatives that bundle acute care and post-acute care reimbursement. These
bundled payment models incentivize cross-continuum care coordination and include
financial and performance accountability for episodes of care. These
reimbursement methodologies and similar programs are likely to continue and
expand, both in government and commercial health plans. Many of our operations
already participate in ACOs. With our focus on quality care and strong clinical
outcomes, Ensign is well-positioned to benefit from these outcome-based payment
models.

We believe the post-acute industry has been and will continue to be impacted by
several other trends. The use of long-term care (LTC) insurance is increasing
among seniors as a means of planning for the costs of skilled nursing services.
In addition, as a result of increased mobility in society, reduction of average
family size and the increased number of two-wage earner couples, more residents
are looking for alternatives outside the family for their care.

GOVERNMENT REGULATION

General

Healthcare is an area of extensive and frequent regulatory change. Changes in
the law or new interpretations of existing laws may have a significant impact on
revenue, costs and business operations. Our independent operating subsidiaries
that provide healthcare services are subject to federal, state and local laws
relating to, among other things, licensure, quality and adequacy of care,
physical plant requirements, life safety, personnel and operating policies. In
addition, these same subsidiaries are subject to federal and state laws that
govern billing and reimbursement, relationships with vendors, 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.
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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 and Human Services (HHS) Office of the Inspector
General (OIG), state Medicaid agencies, state Attorney Generals, local and state
ombudsman offices and CMS Recovery Audit Contractors, among other agencies. In
response to the inquiries, investigations and audits, federal and state agencies
continue to impose citations for regulatory deficiencies and other regulatory
penalties, including demands for refund of overpayments, expanded civil monetary
penalties that extend over long periods of time and date back to incidents prior
to surveyor visits, Medicare and Medicaid payment bans and terminations from the
Medicare and Medicaid programs, which may be temporary or permanent in nature.
We vigorously contest each such regulatory outcome when appropriate; however,
there are significant legal and other expenses involved that consume our
financial and personnel resources. Expansion of enforcement activity could
adversely affect our business, financial condition or the results of operations.

Proposed and Anticipated Rulemaking and Administrative Actions

The federal government, through CMS rulemaking, Presidential executive actions
or Congressional legislation, and the state and local governments have recently
released the following proposed rulemaking or administrative actions that may
have an impact on our independent operating skilled nursing facilities (SNF) or
long-term care (LTC) facilities:

Biden-Harris Administration's Nursing Home Care Priorities - On February 28,
2022, the Biden-Harris Administration issued a fact sheet regarding nursing home
care priorities and reforms that it intends to seek in the coming year. The
Biden-Harris Administration's desired changes are multi-faceted, concerning
payment to facilities, staffing level requirements, training and retention of
staff, standards of care offered to residents, increased transparency and public
disclosure of ownership, and enhanced civil remedies and other authority to
exercise upon facilities that do not satisfy CMS's standards. Proposed rules
based on these directives are expected in 2023, including those highlighted
below, with final rules to follow a notice-and-comment period required by law.

Proposed Rule over Ownership Transparency - On February 13, 2023, CMS issued a
proposed rule that, if finalized and implemented, would require SNFs to disclose
certain information regarding their ownership and managerial relationships.
Consistent with the announcements by the Biden-Harris Administration in February
2022, CMS's proposed rule sought to enact Section 6101 of the ACA and require
SNF disclosure of information to CMS that includes the identity of any person or
legal entity that: (1) exercises financial, operational, or managerial control
over any facility or part of a facility, or provides services to a facility that
include its policies and procedures or cash management services; (2) leases or
subleases real property to the facility, or owns 5% or more of the real
property's total value; and (3) provides any management or administrative
services (or consults regarding the same), or provides accounting or financial
services to the SNF. Under the proposed rule, this information would be required
upon initial enrollment (including a change of ownership) and during
revalidation of Medicare participation. This proposed rule also would require a
SNF to disclose its organizational structure and identities of employees and up
to corporate officers and directors, to Medicare and state Medicaid agencies.

Proposed Federal Legislation - On March 9, 2023, Rep. Debbie Dingell introduced
bill H.R. 1493, the HCBS Access Act, which seeks to expand access to and
resources available for home and community based services (HCBS). The purpose of
this bill is to provide Medicaid funding to individuals who provide direct home-
and community-based care to adults over the age of 60 or people who have
disabilities. In addition to providing Medicaid funding for their services, this
bill also seeks to provide financial resources for the training of these direct
care providers, who are intended to provide services to the elderly or disabled
that range from advocacy and community integration to transportation and daily
assistance tasks ranging from bathing and laundry to meal preparation and
housekeeping. This bill was introduced on March 9, 2023 and referred to the
Committee on Energy and Commerce, Committee on Education and the Workforce, and
Committee on Oversight and Accountability, that same day. No further action has
been taken on the HCBS Access Act since its introduction and referral to the
aforementioned committees.
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Proposed State Legislation - Many states in which our independent operating
subsidiaries operate have introduced legislation that would create or change
laws and regulations related to our business and industry. For example, several
states are considering legislation that would require skilled nursing facility
expenses be maintained at a specified ratio of reimbursement from governmental
programs, thereby limiting the facility's profit or revenue. We continually
monitor these introduced bills and other legislative developments so we can
respond to the changing regulatory environment impacting our business.

Proposed Fiscal Year 2024 Skilled Nursing Facility Prospective Payment System
(SNF PPS) - On April 4, 2023, CMS issued its proposed rule for the fiscal year
2024 SNF PPS, which included proposed changes for Medicare payment rates, the
SNF Quality Reporting Program (QRP) and the SNF Value-Based Purchasing (VBP)
Program.

The proposed changes to the Medicare payment rates is an increase in the
aggregate net market basket by 3.7%. The increase includes a 6.1% update to the
market basket, which is based on a 2.7% current year market basket increase plus
a 3.6% market basket error adjustment, less a 0.2% productivity adjustment and a
negative 2.3% adjustment as a result of the second phase of the recalibrated
parity adjustment.

The proposed changes to the SNF QRP, which may be altered significantly if
adopted in final rulemaking, include: (1) beginning in fiscal year 2025,
adopting the discharge function score measure, which assesses the SNF residents
who meet or exceed an expected discharge function score; (2) beginning in fiscal
year 2026, adopting the "CoreQ" measure of short stay discharge to determine the
percentage of residents discharged from a SNF within 100 days of admission and
their satisfaction with the SNF's performance during the patient's residency;
(3) beginning in fiscal year 2026, tracking the percentage of patients and
residents up-to-date with COVID-19 vaccinations recommended based on the CDC's
most recent guidelines; and (4) beginning in fiscal year 2025, measuring the
percentage of SNF healthcare personnel who are considered up-to-date with
recommended COVID-19 vaccination requirements identified by the CDC's most
recent guidance. Further, in fiscal year 2025, CMS proposes removing scoring of
SNFs for change in self-care and change in mobility for medical rehabilitation
patients. CMS also proposes the public reporting of SNFs' transfer of health
information to both other providers and patients as a measure of calculating and
reporting the skill of any SNF on CMS's nursing home compare website.

The proposed changes to the SNF VBP Program seeks the adoption of four new
quality measures which include (1) nursing staff turnover measure in fiscal
years 2024 and 2026; (2) the discharge function score measure in fiscal years
2025 and 2027, to determine the percentage of discharged SNF residents who meet
or exceed expected discharge function scores; adoption of the long stay
hospitalization measure per 100 patients to evaluate the hospitalization rate of
long-stay SNF residents; (3) the percentage of residents experiencing falls to
be reported in fiscal years 2025 and 2027; and (4) replacing the SNF 30-day
all-cause readmission measure with the skilled nursing facility within stay
potentially reasonable readmissions in fiscal year 2025.

Biden-Harris Administration Executive Order - On April 18, 2023, President Biden
signed an executive order seeking to increase access to affordable, high-quality
long-term care for adults who are older or disabled. This executive order
articulated the Biden-Harris Administration's policy to enable families to have
access to affordable, high-quality care for older or disabled family members,
and to support the workforce of individuals who would provide such care,
including through adequate wages and the ability to unionize. This executive
order directed HHS and CMS to take steps to use existing funding and resources
to connect home- and community-based workers with education and training
opportunities and to create greater opportunities for workers in those fields to
obtain health insurance and retirement benefits. Consistent with the
Biden-Harris Administration's February 2022 guidance discussed above, this
executive order stated its priorities for HHS and CMS to investigate resources
and methods to provide greater resources and training to caregivers, including
family caregivers, and for the Department of Labor to provide resources and
guidance to aid in the development and protection of a caregiving-focused
workforce.

Proposed CMS Minimum Staffing Mandate - Consistent with announcements by the
Biden-Harris Administration in February 2022, CMS launched a nursing home
staffing study focused on minimum level and staffing type required at nursing
homes. The proposed rule for the fiscal year 2023 SNF PPS released in April of
2022 contained a request for information that solicited public comments
regarding SNF and LTC facility staffing requirements. CMS received more than
3,000 comments in response to this request for information, which CMS evaluated
along with other data in a mixed-methods study it conducted in August of 2022.
Certain organizations, including the American Health Care Association, have
predicted that the mandatory minimum staffing mandate may be as high as 4.1
hours per patient day across nursing aides, licensed practical nurses and
registered nurses involved in resident care. The information CMS has gathered
and studied since 2022 will serve as the basis for proposed minimum staffing
requirements in SNFs beginning this spring. CMS's final rule, once issued, may
vary significantly from the substance of the proposed rule.

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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, which are scheduled to expire on May 11, 2023.

Temporary suspension of certain patient coverage criteria and documentation and
care requirements - The Coronavirus Aid, Relief and Economic Security Act of
2020 (the CARES Act) and a series of temporary waivers and guidance issued by
CMS suspended various Medicare patient coverage criteria to ensure patients
continue to have adequate access to care, notwithstanding the burdens placed on
healthcare providers as related to the COVID-19 pandemic. Many of these
regulatory waivers were issued pursuant to Section 1135 of the Social Security
Act, which authorizes the HHS Secretary to temporarily waive or modify Medicare
and Medicaid requirements for affected health care providers and facilities
following the declaration of a Public Health Emergency (PHE). HHS also waived
requirements specific to SNFs. While these waivers remained in effect during the
quarter immediately ending before this report, all of these waivers are
scheduled and expected to end with the PHE's expiration on May 11, 2023.

Pursuant to the Emergency Waivers, CMS authorized temporary waivers on medical
review requirements, effective March 1, 2020. In addition, 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. The
reprioritization of its audit activities were time-limited and normal activities
resumed in 2022.

Beginning on May 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. The expiration of additional
Emergency Waivers in place for SNF and LTC facilities, along with the expiration
of other Emergency Waivers for other residential facilities other than hospitals
and critical access hospitals occurred on June 6, 2022.

The first group of seven Emergency Waivers that expired on May 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 on June 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 a
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.

Examples of the Emergency Waivers still in effect as of March 31, 2023 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 SNF that meet the skill-in-place
criteria, foregoing the usual three-day qualifying hospital stay; and (3)
temporarily waiving certain documentation and reporting requirements regarding
patient admission, transfer and discharge.


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Resuming visitation and resident rights - CMS has issued guidance to facilities
throughout the PHE regarding patients' rights to visitation. While the CMS
guidance issued in March 2020 directed facilities to severely restrict
visitation, CMS subsequently provided and updated guidance through the course of
the pandemic that broadens visitation and provides guidance on visitation
procedures. On September 23, 2022, CMS updated its visitation guidance to
recommend the use of masks or face coverings when the county where the facility
is located has a high rate of COVID-19 transmission, encouraged the use of masks
or face coverings regardless of COVID-19 transmission status and allowed
residents and visitors to choose not to wear masks or face coverings when alone
in the resident's room or in a dedicated visitation area. This most recent CMS
guidance also included updated advice related to isolation of known or suspected
positive COVID-19 cases or those exposed to positive COVID-19 cases. The
guidance also encouraged distancing during large group gatherings within the
facility. Absent further rulemaking or superseding direction, this guidance
regarding visitation and resident rights will expire and cease effect as of the
PHE's anticipated expiration on May 11, 2023.

Testing requirements - Beginning in April 2020, authorities in several states in
which our independent operating subsidiaries are located began to mandate
widespread COVID-19 testing at all nursing home and LTC facilities. This came
after the Centers for Disease Control and Prevention (CDC) stated that older
adults are at a higher risk for serious illness from the coronavirus and issued
updated testing guidelines for nursing homes. Some of these states were also
publicly reporting COVID-19 outbreaks in facilities. On April 27, 2021, CMS
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.
Thereafter, CMS's interim final rule (IFR) regarding COVID-19 testing of staff,
released on September 23, 2022 stated that routine testing of asymptomatic staff
for COVID-19 is no longer generally recommended without exposure to COVID-19,
but may be performed at the discretion of the LTC facility. This guidance
clarified that individuals who show symptoms of COVID-19, regardless of
vaccination status, should be tested for COVID-19 as soon as possible.
Additionally, this IFR called for testing of residents and staff that came into
close contact with a COVID-19 positive resident or staff, regardless of
vaccination status, or test all resident and staff if close contact cannot be
identified and investigation of an outbreak when there is a single positive
COVID-19 case among residents or staff of the LTC facility. Absent further
rulemaking or superseding direction, this IFR will expire and cease effect as of
the PHE's anticipated expiration on May 11, 2023.

Federal and state COVID-19 vaccination requirements - As the Pfizer, Moderna,
Johnson & Johnson and Novavax vaccines received FDA approval, CMS developed an
IFR 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. In addition, OSHA introduced an emergency
temporary standard (ETS) requiring employers with more than 100 employees to
mandate that its employees be fully vaccinated against COVID-19 or submit to
weekly testing for the virus. Both CMS's IFR and OSHA's emergency temporary
standard (ETS) for vaccination were challenged in court and halted from
enforcement in certain states, but the United States Supreme Court allowed CMS
to enforce its vaccine mandate nationwide.

In addition to the IFR mandating vaccinations for health facility workers,
several states where our independent operating facilities are located had issued
vaccine mandates that largely aligned with CMS's requirements, however these
mandates have since been rescinded. On October 23, 2022, CMS issued further
guidance unifying its recommendations for all facilities under its oversight,
including SNFs and LTC facilities, reaffirming CMS's activities to verify
vaccination of all SNF and LTC facility staff, and where necessary, to pursue
corrective action for facilities found deficient in this requirement. Although
the PHE will not automatically terminate CMS's IFR regarding staff vaccination,
this IFR may likely expire during the fall of 2024 unless made permanent through
formal rulemaking.

Reporting requirements - In accordance with CMS reporting guidance, SNFs are
required to report to the CDC National Health Safety Network certain information
related to COVID-19 cases on a weekly basis. Facilities are also required to
provide residents and staff with vaccine education and offer vaccines, when
available, to residents and staff. The IFR published on August 23, 2021 requires
facilities to develop policies and procedures to ensure the availability of the
COVID-19 vaccine to residents and staff and to educate them concerning the
benefits, risks and potential side effects associated with the vaccine. CMS may
initiate enforcement activities and assess civil monetary penalties for not
meeting any of these COVID-19 related reporting requirements under this IFR and
reaffirmed its intent to seek corrective action against SNFs and LTC facilities
that do not satisfy these requirements. We do not believe these COVID-19 related
requirements will have a material impact on our Interim Financial Statements.

Survey Activity and Enforcement - In response to the COVID-19 pandemic
environment, CMS included infection controls as part of its survey process along
with updating its patients' and residents' rights to receive visitor guidance.
The spectrum of remedies available to CMS for imposition includes increased
monetary fines, shortened time periods to return to compliance and other
administrative penalties for deficiencies. In advance of the PHE's anticipated
expiration, CMS's surveyors had resumed using standard survey processes to
continue assessing infection prevention and control under extant standards,
rather than the COVID-19 specific focused infection tool that CMS used in 2021
and 2022.
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Changes to Medicaid Reimbursement - In March of 2020, the Families First
Coronavirus Relief Act (FFCRA) provided a 6.2% increase to the Federal Medicaid
Assistance Percentage (FMAP) during the PHE. In addition to this funding
increase, the FFCRA imposed conditions restricting the disenrollment and
standards for re-enrolling Medicaid beneficiaries to promote continuous care of
beneficiaries during the PHE. The CAA 2023 amended these Medicaid enrollment
protections and increased FMAP funding provided in the FFCRA. In the first
quarter of 2023, the FMAP increase CMS provides to the states will remain
elevated by 6.2%, but will decline for the remaining quarters in 2023, subject
to further reductions noted below: for the second quarter, April through June
2023, this increase will be reduced to 5%; in the third quarter, from July
through September, the FMAP increase will be reduced to 2.5%, and in October
through December, the FMAP increase will be reduced to 1.5%. Previously, the
FMAP funding was dependent on the termination of the PHE. The ultimate amount of
funding from each state will vary substantially based on that states' policies.

CMS's provision of these increased FMAP funds to states is conditioned upon
states reporting to CMS certain Medicaid-related information, including data
pertaining to Medicaid renewals, termination of Medicaid coverage, beneficiary
customer service information, and other eligibility and renewal information that
may be identified in regulations or by the HHS Secretary. States that do not
report required data to CMS beginning in July of 2023 will be penalized 0.25
percentage points, up to a total of one percentage point, for each quarter the
state does not report data to CMS. The CAA 2023 also grants CMS authority to
impose fines, penalties, and other sanctions upon states that do not comply with
this law's requirements for the unwinding of increased FMAP payments.

Under the CAA 2023, states may begin disenrolling Medicaid beneficiaries
beginning on April 1, 2023 after a full review of such beneficiaries'
eligibility. The FFCRA contemplated continuous Medicaid enrollment until the end
of the PHE and provided funding for enrollment during that duration. The CAA
2023 winds down this Medicaid spending for continuous enrollment in phases,
ultimately reducing CMS's contribution to state-administered Medicaid programs.
CMS guidance permits states up to 14 months to initiate and process traditional
Medicaid renewals, including the eligibility and enrollment process.

Medicare

Medicare presently accounts for approximately 29.1% of our skilled nursing
services revenue year-to-date, being our second-largest payor. The Medicare
program and its reimbursement rates and rules are subject to frequent change.
These include statutory and regulatory changes, rate adjustments (including
retroactive adjustments), administrative or executive orders and government
funding restrictions, all of which may materially adversely affect the rates at
which Medicare reimburses us for our services. Budget pressures often lead the
federal government to reduce or place limits on reimbursement rates under
Medicare. Implementation of these and other types of measures has in the past,
and could in the future, result in substantial reductions in our revenue and
operating margins.

Patient-Driven Payment Model (PDPM)

The SNF PPS Rule became effective October 1, 2019. The SNF PPS Rule includes a
new case-mix model that focuses on the patient's condition (clinically relevant
factors) and resulting care needs, rather than on the volume of care provided,
to determine Medicare reimbursement. The case mix-model is called the
Patient-Driven Payment Model (PDPM), which utilizes clinically relevant factors
for determining Medicare payment by using International Classification of
Diseases, Tenth Revision diagnosis codes and other patient characteristics as
the basis for patient classification. PDPM utilizes five case-mix adjusted
payment components: physician therapy, occupational therapy, speech language
pathology, nursing and social services and non-therapy ancillary services. It
also uses a sixth non-case mix component to cover utilization of 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.

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Skilled Nursing Facility - Quality Reporting Program (SNF QRP)

The Improving Medicare Post-Acute Care Transformation Act of 2014 (IMPACT Act)
provided data reporting requirements for certain Post-Acute-Care (PAC)
providers. The IMPACT Act requires that each SNF submit its quality measures
data. If a SNF does not submit required quality data, its 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 Medicare Administrative Contractor will issue the facility a
notice of non-compliance if it does not satisfy its QRP reporting requirements.

The SNF QRP standardized 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.

On July 29, 2021, two new reporting measures were required under the SNF QRP.
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 COVID-19 vaccination of staff in order to assess whether SNFs are
taking steps to limit the spread of COVID-19. The Transfer of Healthcare (TOH)
information data SNFs must report, which is included in the Patient-Post-Acute
Care measurement, will be changed to exclude SNF patients discharged to their
homes under the care of either a home health service or hospice. The elimination
of this information will change how the TOH is used in calculating
Patient-Post-Acute Care measurement, and may have an impact on our quality
ratings and reimbursement from Medicare and Medicaid on a prospective basis.

Beginning in March 2020, due to the COVID-19 pandemic, CMS issued a temporary
suspension of SNF QRP reporting requirements effective until June 30, 2020. This
effectively gave 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 effective June 30, 2020.
In January 2022, SNF ratings based on the resumed data reporting were
recalculated for publication.

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 six new measures were included in the five-star rating in October 2022 in
addition to other changes. In addition, CMS also implemented a planned increase
to the quality measure reporting thresholds, increasing each threshold by
one-half of the average improvement of quality measure scores since CMS last set
quality measure thresholds. Going forward, CMS plans to implement similar rating
threshold increases every six months.

On July 29, 2022, CMS announced the adoption of a process measure for influenza
vaccination coverage among healthcare personnel within SNFs. This measure will
be determined by the percentage of SNF healthcare personnel who receive an
influenza vaccine any time from when it first becomes available through March 31
of the following year. SNFs began submitting this data on October 1, 2022
through March 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, until October 1, 2023.
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On January 25, 2023, CMS announced that the most recently reported QRP data was
incorporated in the January 2023 refresh of the information available through
the SNF Care Compare website. On February 14, 2023, CMS released a draft of the
latest minimum data set (MDS) specifications for information to be collected and
reported to CMS by SNFs under the QRP. CMS anticipates releasing the final MDS
specifications in May of 2023, with these specifications and reporting
requirements implemented on October 1, 2023.

Medicare Annual Payment Rule

CMS is required to calculate an annual Medicare market-basket update to the
payment rates. On July 29, 2022, CMS issued a final rule for fiscal year 2023
that increased the Medicare payment rates to aggregate net market basket by
2.7%. The increase is resulted from the 5.1% update to the market basket, which
is based on a 3.9% current year market basket increase plus a 1.5% market basket
error adjustment, less a 0.3% productivity adjustment and a negative 2.3%
adjustment as a result of the recalibrated parity adjustment. The recalibrated
parity adjustment is being phased in at a rate of 2.3% per year 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 after April 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,
unless Congress takes further action. In response to COVID-19, the CARES Act
temporarily suspended the automatic 2.0% reduction of Medicare claim
reimbursements for the period of May 1, 2020 through December 31, 2020. On
December 27, 2020, the Consolidated Appropriations Act further suspended the
2.0% payment adjustment through March 31, 2021. On April 14, 2021, Congress
extended the suspension of the 2.0% payment adjustment through December 31,
2021. On December 10, 2021, President Biden signed into law a bill to postpone
the 2.0% payment adjustment through April 1, 2022; from April 1, 2022 through
June 30, 2022, the 2.0% payment adjustment is reduced from 2.0% to 1.0%. To pay
for the change, Congress would increase the sequester cuts by one year to fiscal
year 2030. As of July 1, 2022, Medicare's sequestration cuts have reverted to
2%, which was the sequestration rate in effect before the COVID-19 PHE
commenced. Under the CAA 2023, a further 4% cut to Medicare spending that would
have been required under the Statutory Pay-As-You-Go Act of 2010 (PAYGO) was
waived for fiscal years 2023 and 2024. Instead, the CAA 2023 deferred any
further Medicare sequestration under PAYGO until fiscal year 2025. The CAA 2023
also offset planned Medicare sequestrations that were as high as 4%, and instead
maintained fee schedule cuts of approximately 2%.

Skilled Nursing Facility Value-Based Purchasing (SNF-VBP) Program

The SNF-VBP Program rewards SNFs with incentive payments based on the quality of
care they provide to Medicare beneficiaries, as measured by a hospital
readmissions measure. CMS annually adjusts its payment rules for SNFs using the
SNF-VBP Program. To fund the SNF-VBP Program incentive payment pool, CMS
withheld 2% of Medicare payments and will redistribute 60% of the withheld
payments back to SNFs through the program. The program also introduced 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. On July 29, 2021, CMS finalized its changes for measuring the
performance period and amending the data to be reported to CMS, which impacted
the SNF-VBP Program rate adjustment to account for COVID-19 impacting
readmission rates and SNF admissions during the performance periods of fiscal
year 2020. The deadlines for baseline period quality measure quarterly reporting
and performance periods and standards will start in the 2023 program year.

On July 29, 2022, 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 payments. 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 rate of successful discharges to the community from a
SNF setting.


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On February 28, 2022, the Biden 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. In March of 2023, CMS updated its FAQ
for the SNF-VBP program to incorporate information and details from the fiscal
year 2023 SNF PPS final rule. This FAQ contained information regarding scoring
policies for the fiscal year 2023 SNF PPS final rule, based on the SNF
readmission measure not being counted for 2023 due to the potential effects of
the COVID-19 PHE in calculating that score and information about technical
updates for the measurement of SNF readmissions.

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 was $2,150 for CY 2022 with the same threshold for
OT services. For CY 2023, the KX modifier threshold has been increased by 3.8%,
to $2,230 for PT and SLP, with the same threshold for OT services as well. The
KX modifier is a modifier added to medical claims to indicate the providing
clinician attests that the services corresponding to that claim were medically
necessary and that the justification for those services is contained within the
patient's medical records. This modifier is intended for use where the services
will exceed the threshold for those services set by the BBA and updated by
annual fee schedule rules, yet are still appropriate and medically necessary,
and thus should be compensated by Medicare.

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.

The calendar year 2022 PFS (2022 PFS) required the use of new modifiers 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. The 2022 PFS resulted in FFS Medicare payments adjusted by a
sequester of 1% from April 1, 2022 through June 30, 2022, and further adjusted
by a total of 2% from July 1, 2022 through December 31, 2022.

On November 1, 2022, CMS issued the calendar year 2023 PFS resulted in a PFS
conversion factor of $33.06, a decrease of $1.55 from the calendar year 2022 PFS
conversion factor of $34.61. This is a 4.45% cut to the conversion factor for
calendar year 2023.

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.


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On May 27, 2020, pursuant to its authority under the Emergency Waivers, CMS
added physical therapy, occupational therapy and speech-language pathology to
the 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. On
December 31, 2020, CMS announced its 2021 update to the list of codes that
describe Medicare Part B outpatient therapy services, making permanent existing
and new codes introduced during the COVID-19 PHE for use under PT, OT, or SLP,
including several telehealth codes as "sometimes therapy," to permit physicians
and certain non-physician practitioners to render these services outside a
therapy plan of care when appropriate. "Sometimes therapy" codes will not have
the MPPR applied. On November 19, 2021, CMS expanded these "sometimes therapy"
codes further for the 2022 PFS, including five new codes for remote therapeutic
monitoring treatment, which are broader than pre-existing monitoring codes and
include measuring and evaluating adherence and response to medication and
therapy. The Emergency Waivers allow therapists to bill Telehealth therapy
services up to 151 days after the end of the PHE. The CAA 2023 also extended
certain, but not all, telehealth flexibilities until December 31, 2024, ensuring
that those select telehealth flexibilities would not expire with the PHE upon
its anticipated expiration date of May 11, 2023. The CAA 2023 extended the use
of certain codes for Telehealth Services beyond the PHE Extension and through
the end of CY 2024. On February 13, 2023, CMS extended the use of these codes
for telehealth through the end of CY 2023.

Pursuant to the Emergency Waivers, CMS allowed for the facility to bill an
originating site fee to CMS for telehealth services provided to Medicare Part B
beneficiary residents of the facility when the services were provided by a
physician from an alternate location, effective March 6, 2020 and ending on May
7, 2022. Our facilities have thus ceased using these telemedicine Emergency
Waivers upon their termination.

Programs of All-Inclusive Care for the Elderly

The requirements under the Programs of All-Inclusive Care for the Elderly (PACE)
provide greater operational flexibility and update information under the
Medicare and Medicaid programs. Such flexibility includes: (i) more lenient
standards applicable to the current requirement that the PACE organization be
monitored for compliance with the PACE program requirements during and after a
3-year trial period and (ii) relieving certain restrictions placed upon the
interdisciplinary team that comprehensively assesses and provides for the
individual needs of each PACE participant by allowing one person to fill two
roles and permitting secondary participation in the PACE program. Further,
non-physician primary care providers can provide certain services in place of
primary care physicians. On February 1, 2023, CMS issued its final rule, which
takes effect on April 3, 2023, requiring the collection of data by Medicare
Advantage organizations and their service providers and the submission of data
to CMS for risk adjustment data validation (RADV) audits. The purpose of these
RADV audits is to maintain the accuracy of risk-adjusted payments made to
Medicare Advantage organizations.

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 II, Item 1A
Risk Factors under the headings Risks Related to Our Business and Industry.


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Patient Protection and Affordable Care Act

Various healthcare reform provisions became law upon enactment of the Patient
Protection and Affordable Care Act and the Healthcare Education and
Reconciliation Act (collectively, the ACA). The reforms contained in the ACA
have affected our operating subsidiaries in some manner and are directed in
large part at increased quality and cost reductions. Several of the reforms are
very significant and could ultimately change the nature of our services, the
methods of payment for our services and the underlying regulatory environment.
These reforms include modifications to the conditions of qualification for
payment, bundling of payments to cover both acute and post-acute care and the
imposition of enrollment limitations on new providers. The upcoming
Congressional elections in the United States and policies implemented by the
current and former Presidential administration have resulted in significant
changes in legislation, regulation, implementation of Medicare, Medicaid and
government policy. In August of 2022, Congress passed and the Biden-Harris
Administration signed into law the Inflation Reduction Act of 2022 (IRA), which
continued and expanded certain provisions of the ACA. Among other things, the
IRA extended premium subsidies paid by the federal government, which were
scheduled to expire at the end of 2022, until the end of 2024, resulting in
subsidies being available to offset or reduce the costs of private health
insurance policies for older persons on fixed incomes or with limited savings.
This may aid older patients in obtaining or keeping their health insurance in
order to pay for long-term care services. Other healthcare-related provisions of
the IRA include phased-in provisions for Medicare to negotiate the prices of
certain prescription drugs, limiting the out-of-pocket cost of prescribed drugs
to Medicare Part D recipients to $2,000 per year (in addition to a monthly cap
on out-of-pocket prescription drug expenses) and limiting the monthly cost of
insulin to $35. At the end of 2022, Congress passed and the Biden-Harris
Administration signed into law the CAA 2023, which revised the funds available
to fund Medicare in 2023 and deferred the PAYGO sequestration of Medicare
expenses, resulting in the calendar year 2023 PFS increasing its conversion
factor from $33.06 to more than $33.89.

The results of the 2022 midterm elections, which led to a change in control of
the House of Representatives and the eventual 2024 presidential election may
significantly alter the current regulatory framework and impact our business and
the health care industry, including any further extensions or expansions of
certain ACA provisions, namely recent rulemaking activity regarding ACA Section
1557's anti-discrimination provisions. 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 of
these requirements can be burdensome and costly.

One such requirement of participation in the Medicare and Medicaid programs
involves limitations around the use of pre-dispute, binding arbitration
agreements by LTC facilities. CMS has issued guidance and direction around
arbitration, to include: the facility must not require signing of an arbitration
agreement as a condition of admission or a requirement to continue to receive
care at the facility, and the agreement must expressly contain language to this
effect; the facility must inform the resident or the resident's representative
of the right not to sign the agreement; the facility must confirm that the
agreement is explained in a manner that can be understood and that the resident
or their representative acknowledges their understanding of the agreement; the
agreement must provide for the right to rescind the agreement within 30 calendar
days of signing; and the agreement may not contain language that prohibits or
discourages communications with federal, state, or local officials, including
federal and state surveyors, other federal or state health department employees,
and representatives of the Office of the State Long-Term Care Ombudsperson.
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 regulations and state/federal laws remain our
primary source of authority over the use of pre-dispute binding arbitration
agreements.

On June 29, 2022, CMS announced updated guidance for Phase 2 and 3 of the
Requirements of Participation. CMS distributed these updates to surveyors and
state agencies in order to, among other things, enhance responses to resident
complaints and reported incidents. This updated guidance arises directly from
President 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 payroll to
evaluate staffing sufficiency; (5) residents' rights (including visitation); (6)
potential inaccurate diagnoses or assessments; (7) prescription and use of
pharmaceuticals, including psychotropics and drugs that act like psychotropics;
(8) infection prevention and control; (9) arbitration of disputes between
facilities and residents; (10) psychosocial outcomes and related severity; and
(11) the timeliness and completion of state investigations to improve
consistency in the application of standards among various states.
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On July 29, 2022, CMS updated the Medicare Requirements of Participation for LTC
facilities, which includes the modification of requirements associated with a
facility's physical environment to minimize unnecessary renovation expenses that
could result in the closure of LTC facilities because of the related expense.
Specifically, CMS is "grandfathering" certain facilities and will allow LTC
facilities that were participating in Medicare before July 5, 2016 and that
previously used the Fire Safety Evaluation System (FSES) to continue using the
2001 FSES mandatory values when determining compliance with applicable
standards. In addition, CMS updated the Requirements of Participation to include
revising existing qualification requirements for directors of food and nutrition
services in LTC facilities while "grandfathering" in 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 more specific educational and
certification requirements.

On February 17, 2023, CMS further revised the survey resources that CMS and
state surveyors use in evaluating LTC facilities' compliance with federal
Requirements for Participation. This revision incorporated the recent changes to
CMS's focused infection control survey item, which CMS had removed in favor of
standard infection control survey measures. CMS published these updated survey
resources on its website along with annotations to Appendix PP of the Medicare
State Operations Manual. These changes were made to the most recent revision of
LTC facility survey documents that CMS had last revised in October of 2022. In
October 2022, CMS had published the survey resources CMS and state surveyors
would be using to evaluate LTC facilities' compliance with vaccination and
reporting requirements, which CMS updated in November of 2022. These updates
provided more information for state surveyors to utilize when evaluating LTC
facilities' compliance with the Medicare Requirements of Participation, as well
as included guidance for facilities on operationalizing compliance with these
requirements based on how surveyors would measure and evaluate facility
performance. On September 27, 2022, CMS also provided a summary of its major
software enhancements, describing the tools updated and used by CMS to measure
and evaluate LTC facility compliance with the Medicare Requirements of
Participation.

Civil and Criminal Fraud and Abuse Laws and Enforcement

Various complex federal and state laws exist which govern a wide array of
referrals, relationships and arrangements, and prohibit fraud by healthcare
providers. Governmental agencies are devoting increasing attention and resources
to such anti-fraud efforts. The Health Insurance Portability and Accountability
Act of 1996 (HIPAA) and the Balanced Budget Act of 1997 expanded the penalties
for healthcare fraud. Additionally, in connection with our involvement with
federal healthcare reimbursement programs, the government or those acting on its
behalf may bring an action under the FCA, alleging that a healthcare provider
has defrauded the government by submitting a claim for items or services not
rendered as claimed, which may include coding errors, billing for services not
provided and submitting false or erroneous cost reports. The Fraud Enforcement
and Recovery Act of 2009 (FERA) expanded the scope of the FCA by, among other
things, creating liability for knowingly and improperly avoiding repayment of an
overpayment received from the government and broadening protections for
whistleblowers. The FCA clarifies that if an item or service is provided in
violation of the AKS, the claim submitted for those items or services is a false
claim that may be prosecuted under the FCA as a false claim. Civil monetary
penalties under the FCA range from approximately $0.01 to $0.03 million per
violation and are adjusted annually for inflation. Under the qui tam or
"whistleblower" provisions of the FCA, a private individual with knowledge of
fraud may bring a claim on behalf of the federal government and receive a
percentage of the federal government's recovery. Due to these whistleblower
incentives, lawsuits have become more frequent. Many states also have a false
claim prohibition that mirrors or closely tracks the federal FCA.

Federal law also provides that the OIG has the authority to exclude individuals
and entities from federally funded health care programs on a number of grounds,
including, but not limited to, certain types of criminal offenses, licensure
revocations or suspensions and exclusion from state or other federal healthcare
programs. CMS can recover overpayments from health care providers up to five
years following the year in which payment was made. On February 28, 2022, the
Biden-Harris Administration published a fact sheet regarding nursing home care,
which identified the Administration's priorities of further funding for SNF and
LTC facility inspections, enhancing civil penalties on poor-performing
facilities and increasing the scrutiny of companies that operate more than one
facility. Proposed rules based on these directives and studies are expected in
2023, with final rules to follow after a notice-and-comment period.


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In November 2019, the OIG released a report of its investigation into
overpayments to hospitals that did not comply with Medicare's post-acute-care
transfer policy. Hospitals violating this policy transferred patients to certain
post-acute-care settings, such as SNFs, but claimed the higher reimbursements
associated with discharges to homes. A similar OIG audit report, released in
February 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. In 2022, the OIG released an audit revealing that CMS had not
collected $226 million, or 45%, of identified overpayments within that period,
potentially affecting SNFs. 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.

Most recently, on January 19, 2023, the OIG released a report finding that more
than 1,000 nursing homes had COVID-19 infection rates of 75% or more during the
first year of the pandemic. The OIG's conclusion from this study is that better
protections are needed for future emergencies. Based on this study's findings,
the OIG recommended the following: (1) more scrutiny of existing nursing staff
requirements; (2) improving how surveys can identify infection control risks and
improve on nursing home responses to those risks; and (3) targeting nursing
homes in need of infection control intervention for enhanced oversight and
assistance. The OIG study further noted that CMS agreed with its first and third
recommendations for corrective action.

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.

Federal Healthcare Reform

Five-Star Quality Reporting Metrics - The Quality Payment Program (QPP) was
created under the Medicare Access and Children's Health Insurance Program (CHIP)
Reauthorization Act of 2015. This program was 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.

The Five-Star Quality reporting system for nursing homes is displayed on CMS's
consumer-based Nursing 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 in August 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 in CMS's Five-Star
Quality ratings for SNFs from March through December 2020. CMS resumed
calculating nursing homes' health inspection ratings on January 27, 2021 and has
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Similarly, although staff reporting requirements were waived for the first six
months of 2020, this waiver ended on June 25, 2020. Thereafter, SNFs were
required to report staffing data to CMS, which was incorporated into CMS's
Five-Star Quality rating beginning in January 2021. The January 2021 Five-Star
Quality rating calculation reflected SNF-provided quarterly updates of most
quality measures for the period between June 2019 and June 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. CMS's last refresh of the
Nursing Home Compare website occurred in January of 2023.

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. This data was included in the October 2022
refresh of the Nursing Home Care Compare website as well, in addition to
increasing the thresholds for quality measures reported on the Nursing Home Care
Compare website based on average improvement over prior quality measures.

In January of 2023, CMS updated the Nursing Home Five-Star Quality Rating
System's Technical Users' Guide. As explained in the latest update to this
guide, CMS will be auditing schizophrenia coding within the MDS reported to CMS,
with adjustments to quality ratings based on any inaccuracies in this
schizophrenia-related data captured in the MDS. These scoring adjustments for
inaccurate schizophrenia-related data reporting include: (1) downgrading the
overall quality measure and long-stay quality measure ratings to one star for a
period of six months (thus lowering the facility's total star rating by one
entire star); (2) suppressing the short-stay quality measure rating for six
months; and (3) suppressing the long-stay antipsychotic quality measure for a
period of 12 months. Additionally, CMS will not display citations that a
facility has informally disputed on the Nursing Home Care Compare website. The
outcome of such citations will not be included in the calculation of a
facility's star rating until the dispute is completed and the underlying survey
considered final. CMS also published the star rating cut point table in January
of 2023 for that month's refresh of the Nursing Home Care Compare website data,
disclosing the points needed for each star rating within every state.

State Legislation Concerning Nursing Home Supervision - California passed into
law Assembly Bill (AB) 35, which changes the limitations, or "caps," on
non-economic damages that can be awarded in medical negligence cases filed
against healthcare providers (including skilled nursing and long-term care
facilities). Beginning on January 1, 2023, non-economic damages (i.e. pain and
suffering) available to plaintiffs suing healthcare providers in medical
malpractice and professional negligence cases will be increased from $0.25
million to $0.35 million, and will then increase by $0.04 million per year over
the following ten years up to a $0.75 million cap. Once the limit reaches $0.75
million, a 2% annual inflationary adjustment will attach beginning on January 1,
2034. In wrongful death cases that arise from claims of medical malpractice and
professional negligence, the cap on non-economic damages will increase from
$0.25 million to $0.50 million on January 1, 2023, and increase every year
thereafter for ten years until the cap on non-economic damages in such cases is
$1.0 million; thereafter, this cap will also be subject to an annual 2% increase
to reflect changes in the cost of living. The caps are separate as to each
claim, meaning that there is one cap for negligence and one cap for wrongful
death. The new limits on non-economic damages apply prospectively to lawsuits
filed on and after January 1, 2023.

On September 27, 2022, California's Governor signed into law AB 1502, also known
as the Skilled Nursing Facility Ownership and Management Reform Act of 2022.
Expected to take effect on July 1, 2023, this law will affect new license
applications for SNFs. AB 1502 increases the oversight authority of the
California Department of Public Health, and changes several provisions regarding
SNF licensing in the State of California. First, the law eliminates previous
regulatory provisions that permitted SNFs to operate in advance of receiving
their formal license from the State. AB 1502 also requires SNF license
applicants to disclose additional information to the Department of Public Health
in connection with a license application and requires the Department of Public
Health to consider more data regarding the applicant's prior operations before
issuing it a license. This data includes, but is not limited to: prior
citations; sanctions imposed by CMS; legal proceedings commenced by other State
or Federal authorities; findings made regarding the applicant by agencies or
courts; and actions taken against other facilities owned, operated, or managed
by the applicant. The same analysis described above is intended to apply to
applications for a change in ownership or a change in management of a skilled
nursing facility. AB 1502 authorizes the Department of Public Health to impose
civil penalties of up to $0.01 million, and other enforcement action as
appropriate, upon applicants that fail to comply with the law's requirements.


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Monitoring Compliance in Our Facilities

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

On October 21, 2022, CMS issued a Memorandum identifying the changes it intends
to make in connection with the oversight of those facilities that fall under the
SFF Program. These proposed measures included increased penalties for SFFs that
fail to improve their performance upon further inspection by CMS, increasing the
standards SFFs must meet to graduate from the SFF program, maintaining
heightened oversight of any SFF for a period of three years after it graduates
and increasing the technical assistance CMS provides to SFFs. The CMS Memorandum
also identifies grants that will be available to aid in the hiring, training and
education of personnel involved in resident care, including licensed practical
nurses and registered nurses. In addition to the communication from CMS, the
White House also issued a fact sheet covering these same issues on October 21,
2022. The fact sheet further identified measures the Biden-Harris Administration
is taking to increase staffing requirements, halt illegal or improper debt
collection activities, increase transparency in facility ownership and operation
(including SNF performance), and tie reimbursement to the quality of
performance.


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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 revenue associated with 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.

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 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 Social
Security Act. 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 Social Security Act can result in inflation-adjusted criminal
penalties of more than $0.1 million and ten years imprisonment. It can also
result in inflation-adjusted civil monetary penalties of more than $0.1 million
per violation and an assessment of up to three times the total amount of
remuneration offered, paid, solicited, or received. It may also result in an
individual's or organization's exclusion from future participation in federal
healthcare programs. State Medicaid programs are required to enact an
anti-kickback statute. Many states in which our independent operating
subsidiaries operate have adopted or are considering similar legislative
proposals, some of which extend beyond the Medicaid program, to prohibit the
payment or receipt of remuneration for the referral of patients regardless of
the source of payment for the care. We believe that business practices of
providers and financial relationships between providers have become subject to
increased scrutiny as healthcare reform efforts continue on the federal and
state levels.


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Additionally, the "Stark Law" of the Social Security Act provides that a
physician may not refer a Medicare or Medicaid patient for a "designated health
service" to an entity with which the physician or an immediate family member has
a financial relationship unless the financial arrangement meets an exception
under the Stark Law or its regulations. Designated health services include
inpatient and outpatient hospital services, PT, OT, SLP, durable medical
equipment, prosthetics, orthotics and supplies, diagnostic imaging, enteral and
parenteral feeding and supplies and home health services. Under the Stark Law, a
"financial relationship" is defined as an ownership or investment interest or a
compensation arrangement. If such a financial relationship exists and does not
meet a Stark Law exception, the entity is prohibited from submitting or claiming
payment under the Medicare or Medicaid programs or from collecting from the
patient or other payor. Many of the compensation arrangements exceptions permit
referrals if, among other things, the arrangement is set forth in a written
agreement signed by the parties, the compensation to be paid is set in advance,
is consistent with fair market value and is not determined in a manner that
takes into account the volume or value of any referrals or other business
generated between the parties. Exceptions may have other requirements. Any funds
collected for an item or service resulting from a referral that violates the
Stark Law are not eligible for payment by federal healthcare programs and must
be repaid to Medicare or Medicaid, any other third-party payor, and the patient.
Violations of the Stark Law may result in the imposition of civil monetary
penalties, including, treble damages. Individuals and organizations may also be
excluded from participation in federal healthcare programs for Stark Law
violations. Many states have enacted healthcare provider referral laws that go
beyond physician self-referrals or apply to a greater range of services than
just the designated health services under the Stark Law.

Regulations Regarding Patient Record Confidentiality

Health care providers are also subject to laws and regulations enacted to
protect the confidentiality of patient health information. For example, HHS has
issued rules pursuant to HIPAA, including the Health Information Technology for
Economic and Clinical Health (HITECH) Act which governs our use and disclosure
of protected health information of patients. We have established policies and
procedures to comply with HIPAA privacy and security requirements at our
independent operating subsidiaries. Our independent operating subsidiaries have
adopted and implemented HIPAA compliance plans, which we believe comply with the
HIPAA privacy and security regulations. The HIPAA privacy and security
regulations have and will continue to impose significant costs on our
independent operating subsidiaries in order to comply with these standards.
There are numerous other laws and legislative and regulatory initiatives at the
federal and state levels addressing privacy and security concerns. Our
independent operating subsidiaries are also subject to any federal or state
privacy-related laws that are more restrictive than the privacy regulations
issued under HIPAA. These laws vary and could impose additional penalties for
privacy and security breaches. Healthcare entities are also required to afford
patients with certain rights of access to their health information under HIPAA
and the 21st Century Cures Act (Cures Act). 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. . On February 3, 2023, the DOJ's
Antitrust Division withdrew its support from three policies that had been
jointly created by the DOJ and the Federal Trade Commission in 1993, 1996, and
2011 which previously created longstanding "antitrust safety zones" for the
healthcare industry. After withdrawing its support from the policies, the DOJ
announced it would take a case-by-case enforcement approach to evaluate conduct
in the healthcare industry, citing that the previous policies were outdated and
overly permissive. With no further guidance provided by the DOJ, during this
uncertainty, healthcare providers and insurance and managed care organizations
may be subject to an investigation by a governmental agency charged with the
enforcement of antitrust laws, or may be subject to administrative or judicial
action by a federal or state agency or a private party. Violators of the
antitrust laws could be subject to criminal and civil enforcement by federal and
state agencies, as well as by private litigants.

Americans with Disabilities Act

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

We are electing for Standard Bearer to be taxed as a REIT for U.S. federal
income tax purposes beginning with its taxable year ended December 31, 2022.
Standard Bearer's qualification as a REIT will depend upon its ability to meet,
on a continuing basis, various complex requirements under the Internal Revenue
Code, relating to, among other things, the sources of its gross income, the
composition and value of its assets, distribution levels to its shareholders and
the concentration of ownership of its capital stock. We believe that Standard
Bearer is organized in conformity with the requirements for qualification and
taxation as a REIT under the Code and that its manner of operation has and will
enable it to continue to meet the requirements for qualification and taxation as
a REIT.

REGULATIONS SPECIFIC TO SENIOR LIVING COMMUNITIES

As previously mentioned, senior living services revenue (approximately 2.1% of
total revenue) is primarily derived from private pay residents, with a small
portion of senior living 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.

CMS has continued to commence 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.

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

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

RESULTS OF OPERATIONS

We believe we exist to dignify and transform post-acute care. We set out a
strategy to achieve our goal of ensuring our patients are receiving the best
possible care through our ability to acquire, integrate and improve our
operations. Our results serve as a strong indicator that our strategy is working
and our transformation is underway.


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Our total revenue for the three months ended March 31, 2023 increased $173.4
million, or 24.3%, while our diluted GAAP earnings per share grew by 18.0%, from
$0.89 to $1.05, compared to the three months ended March 31, 2022. Over the
quarter, we have continued to make progress on targeted initiatives related to
increasing occupancy in our mature facilities, acquiring new skilled nursing
operations and integrating them with our proven cultural and operational
principles and most importantly, attracting and developing our people.

Our combined Same Facilities and Transitioning Facilities occupancy increased by
4.3% compared to the same period in 2022. We saw a recovery in our census
starting in the first quarter of 2021, which has continued through the first
quarter of 2023. See Recent Activities for our operational update.

During the three months ended March 31, 2023, we added 19 new operations. We are
excited to be adding new operations in several geographies including 17 new
operations in California. As part of these California facilities, we inherited a
solid operational foundation, including an amazing group of highly skilled team
members who will continue to have an impact on our culture and organization for
years to come. We look forward to working together to help each operation reach
its full clinical and financial potential.

Our strength remains in our operating model, which empowers each operator to
form their own market-specific strategy and to adjust to the needs of their
local medical communities, including methods for attracting new healthcare
professionals into our workforce and retaining and developing existing staff.
Despite continued labor pressures, there are positive trends on both turnover
and agency usage in some of our markets.

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

Three Months Ended March 31,

                                                                             2023                      2022

REVENUE:
Service revenue                                                                   99.4  %                   99.4  %
Rental revenue                                                                     0.6                       0.6
TOTAL REVENUE                                                                    100.0  %                  100.0  %

Expenses:
Cost of services                                                                  78.5                      77.9

Rent-cost of services                                                              5.3                       5.0
General and administrative expense                                                 5.9                       5.3
Depreciation and amortization                                                      1.9                       2.1
TOTAL EXPENSES                                                                    91.6                      90.3
Income from operations                                                             8.4                       9.7
Other income (expense):
Interest expense                                                                  (0.2)                     (0.3)
Other income (expense)                                                             0.6                      (0.1)
Other income (expense), net                                                        0.4                      (0.4)
Income before provision for income taxes                                           8.8                       9.3
Provision for income taxes                                                         2.1                       2.2

NET INCOME                                                                         6.7                       7.1
Less: net income attributable to noncontrolling interests                            -                         -

 Net income attributable to The Ensign Group, Inc.                                 6.7  %                    7.1  %



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                                      Three Months Ended March 31,
                                           2023                    2022

SEGMENT INCOME(1)                            (In thousands)
Skilled services               $        113,345                 $ 98,256
Standard Bearer(2)             $          7,219                 $  6,900
NON-GAAP FINANCIAL MEASURES:
PERFORMANCE METRICS

Adjusted EBT                   $         86,344                 $ 75,246
EBITDA                         $         91,870                 $ 84,038

Adjusted EBITDA                $         99,785                 $ 92,729

FFO for Standard Bearer        $         13,185                 $ 11,921

VALUATION METRICS
Adjusted EBITDAR               $        146,422


(1) Segment income represents operating results of the reportable segments
excluding gain and loss on sale of assets, real estate insurance recoveries and
losses, impairment charges and provision for income taxes. Included in segment
income for Standard Bearer for the three months ended March 31, 2023 are
expenses for intercompany management fees between Standard Bearer and the
Service Center and intercompany interest expense. Segment income is reconciled
to the Consolidated Statement of Income in Note 7, Business Segments in Notes to
Interim Financial Statements of this Quarterly Report on Form 10-Q.
(2) Standard Bearer segment income includes rental revenue from Ensign
affiliated tenants and expenses.

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

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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 Interim 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

Adjusted EBT

We adjust income before provision for income taxes (Adjusted EBT) when
evaluating our performance because we believe that the exclusion of certain
additional items described below provides useful supplemental information to
investors regarding our ongoing operating performance, in the case of Adjusted
EBT. We believe that the presentation of Adjusted EBT, when combined with income
before provision for income taxes and GAAP net income attributable to The Ensign
Group, Inc., is beneficial to an investor's complete understanding of our
operating performance. We use this performance measure as an indicator of
business performance, as well as for operational planning, decision-making
purposes and to determine compensation in our executive compensation plan.

Adjusted EBT is income before provision for income taxes 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

•depreciation and amortization of patient base intangible assets.

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

Adjusted EBITDA

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

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

Funds from Operations (FFO)

We consider FFO to be a useful supplemental measure of the operating performance
of Standard Bearer. Historical cost accounting for real estate assets in
accordance with U.S. GAAP implicitly assumes that the value of real estate
assets diminishes predictably over time as evidenced by the provision for
depreciation. However, since real estate values have historically risen or
fallen with market conditions, many real estate investors and analysts have
considered presentations of operating results for real estate companies that use
historical cost accounting to be insufficient. In response, the National
Association of Real Estate Investment Trusts (NAREIT) created FFO as a
supplemental measure of operating performance for REITs, which excludes
historical cost depreciation from net income. We define (in accordance with the
definition used by NAREIT) FFO to consist of Standard Bearer segment income,
excluding depreciation and amortization related to real estate, gains or losses
from 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,
and is therefore presented only for the current period.

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

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

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

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                                                                      Three Months Ended March 31,
                                                                        2023                  2022

Consolidated statements of income data:                                      (In thousands)
Income before provision for income taxes                         $        

78,382 $ 66,226

Stock-based compensation                                                   6,573               5,167

Legal finding(a)                                                              67               3,626

Acquisition related costs(b)                                                 460                 106
Costs incurred related to new systems implementation                         815                  65
Depreciation and amortization - patient base(c)                               47                  56
ADJUSTED EBT                                                     $        86,344          $   75,246


(a) Legal finding against our ancillary services subsidiary, which includes the
portion attributable to non-controlling interests.
(b) Costs incurred to acquire operations that are not capitalizable.
(c) Included in depreciation and amortization are amortization expenses related
to patient base intangible assets at newly acquired skilled nursing and senior
living facilities.

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

                                                                      Three Months Ended March 31,
                                                                        2023                   2022

Consolidated statements of income data:                                      (In thousands)
Net income                                                       $         59,969          $   50,088
Less: net income (loss) attributable to noncontrolling interests              117                (252)

Add: Other (income) expense, net                                           (3,507)              2,884
Provision for income taxes                                                 18,413              16,138
Depreciation and amortization                                              17,112              14,676

EBITDA                                                           $         91,870          $   84,038

Stock-based compensation                                                    6,573               5,167

Legal finding(a)                                                               67               3,353

Acquisition related costs(b)                                                  460                 106
Costs incurred related to new systems implementation                          815                  65

ADJUSTED EBITDA                                                  $         99,785          $   92,729
Rent-cost of services                                                      46,637              35,762

ADJUSTED EBITDAR                                                 $        146,422

(a) Legal finding against our ancillary services subsidiary, which excludes the
portion attributable to non-controlling interests.
(b) Costs incurred to acquire operations that are not capitalizable.

Three Months Ended March 31, 2023 Compared to the Three Months Ended March 31,
2022

The following table sets forth details of operating results for our revenue and
earnings, and their respective components, by our reportable segment for the
periods indicated.
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Three Months Ended March 31, 2023

                                                  Skilled            Standard
                                                 services             Bearer           All Other           Eliminations           Consolidated
Total Revenue                                  $  850,923          $  19,717          $  37,096          $     (20,895)         $     886,841
Total expenses, including other income,
net                                               737,578             12,498             79,278                (20,895)               808,459
Segment income (loss)                             113,345              7,219            (42,182)                     -                 78,382

Income before provision for income taxes                                                                                        $      78,382


                                                                         

Three Months Ended March 31, 2022

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

Income before provision for income taxes                                                                                  $      66,226



Our total revenue increased by $173.4 million, or 24.3%, compared to the three
months ended March 31, 2022. The increase in revenue was driven by an increase
in occupancy from our skilled services operations, growth in skilled average
daily census and the impact of acquisitions. Total revenue from operations
acquired on or subsequent to April 1, 2022 increased our consolidated revenue by
$102.5 million during the three months ended March 31, 2023, when compared to
the same period in 2022. In addition, we recorded $26.4 million of state relief
revenue in the first quarter of 2023 compared to $17.6 million in the same
period in 2022, which directly correlated to the additional COVID-19 and related
labor expenses incurred. All state relief revenue is included in Medicaid
revenue.

Skilled Services

REVENUE

The following table presents the skilled services revenue and key performance
metrics by category during the three months ended March 31, 2023 and 2022:

                                                         Three Months Ended March 31,
                                              2023             2022           Change        % Change

TOTAL FACILITY RESULTS:                                     (Dollars in thousands)
Skilled services revenue                  $  850,923       $  686,771       $ 164,152         23.9  %
Number of facilities at period end               253              215              38         17.7  %
Number of campuses at period end*                 26               25               1          4.0  %
Actual patient days                        2,047,705        1,695,964         351,741         20.7  %
Occupancy percentage - Operational beds         77.9  %          74.2  %                       3.7  %
Skilled mix by nursing days                     32.3  %          33.7  %                      (1.4) %
Skilled mix by nursing revenue                  52.7  %          54.3  %                      (1.6) %


                                                         Three Months Ended March 31,
                                              2023             2022           Change       % Change

SAME FACILITY RESULTS:(1)                                   (Dollars in thousands)
Skilled services revenue                  $  682,023       $  625,315       $ 56,708          9.1  %
Number of facilities at period end               189              189              -            -  %
Number of campuses at period end*                 24               24              -            -  %
Actual patient days                        1,610,815        1,524,145         86,670          5.7  %
Occupancy percentage - Operational beds         78.8  %          74.6  %                      4.2  %
Skilled mix by nursing days                     33.8  %          34.5  %                     (0.7) %
Skilled mix by nursing revenue                  53.8  %          55.1  %                     (1.3) %


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                                                       Three Months Ended March 31,
                                              2023            2022         Change       % Change

TRANSITIONING FACILITY RESULTS:(2)                        (Dollars in 

thousands)

Skilled services revenue                  $   61,767       $ 54,798       $ 6,969         12.7  %
Number of facilities at period end                22             22             -            -  %
Number of campuses at period end*                  1              1             -            -  %
Actual patient days                          161,420        149,689        11,731          7.8  %
Occupancy percentage - Operational beds         76.2  %        70.8  %                     5.4  %
Skilled mix by nursing days                     23.9  %        25.4  %                    (1.5) %
Skilled mix by nursing revenue                  41.9  %        45.3  %                    (3.4) %


                                                        Three Months Ended March 31,
                                              2023            2022         Change        % Change

RECENTLY ACQUIRED FACILITY RESULTS:(3)                     (Dollars in 

thousands)

Skilled services revenue                  $  107,133       $ 6,658       $ 100,475               NM
Number of facilities at period end                42             4              38               NM
Number of campuses at period end*                  1             -               1               NM
Actual patient days                          275,470        22,130         253,340               NM

Occupancy percentage - Operational beds 74.3 % 74.6 %

                      NM
Skilled mix by nursing days                     28.8  %       36.4  %                            NM
Skilled mix by nursing revenue                  52.0  %       52.9  %                            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.
Since the second quarter of 2022, we converted two skilled nursing facilities
into campuses.
(1)Same Facility results represent all facilities purchased prior to January 1,
2020.
(2)Transitioning Facility results represent all facilities purchased from
January 1, 2020 to December 31, 2021.
(3)Recently Acquired Facility (Acquisitions) results represent all facilities
purchased on or subsequent to January 1, 2022.

Skilled services revenue increased by $164.2 million, or 23.9%, compared to the
three months ended March 31, 2022. The increases in skilled services revenue
were across all payer types including increases in Medicaid revenue of $83.8
million, or 27.3%, Medicare revenue of $39.3 million, or 18.9%, managed care
revenue of $28.9 million, or 22.6% and private revenue of $12.2 million or
28.4%.

The increase in skilled services revenue was primarily driven by strong
performance across our skilled services operations as our census continued to
recover in the first quarter of 2023, growth in skilled census, state specific
relief programs and acquisitions. Our consolidated occupancy increased by 3.7%
during the three months ended March 31, 2023 compared to the same period in
2022.

Revenue in our Same Facilities increased by $56.7 million, or 9.1% due to
increased occupancy and revenue per patient day. Our diligent efforts to
strengthen our partnerships with various managed care organizations, hospitals
and the local communities we operate in increased our managed care days by 9.0%,
resulting in an increase in managed care revenue of 11.9%.

Revenue generated by our Transitioning Facilities increased by $7.0 million, or
12.7%, primarily due to improved occupancy growth and increase in revenue per
patient day. Our private days, managed care skilled days and Medicaid days
increased by 26.0%, 11.6% and 7.5%, respectively, demonstrating our ability to
focus on increasing occupancy across payer types.

Skilled services revenue generated by facilities purchased on or subsequent to
January 1, 2022 (Recently Acquired Facilities) increased by approximately $100.5
million compared to the three months ended March 31, 2022. We acquired 39
operations between April 1, 2022 and March 31, 2023 across six states.
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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. Included in our metrics for Recently Acquired Facilities are 17
facilities we acquired that are matured and have higher occupancy rates, higher
skilled mix days and skilled mix revenue.

The following table reflects the change in skilled nursing average daily revenue
rates by payor source, excluding services that are not covered by the daily rate
(1):
                                                                                    Three Months Ended March 31,
                                      Same Facility                       Transitioning                       Acquisitions                            Total
                                 2023              2022              2023              2022              2023              2022              2023              2022

SKILLED NURSING AVERAGE DAILY REVENUE RATES:
Medicare                      $ 713.34          $ 696.47          $ 679.63          $ 660.41          $ 744.78          $ 654.84          $ 715.64          $ 693.28
Managed care                    518.22            505.14            528.34            497.72            526.01            449.63            519.43            504.23
Other skilled                   602.42            573.13            490.47            542.21            485.83            416.91            585.02            562.51
Total skilled revenue           610.08            598.96            605.05            593.98            638.23            452.56            613.16            596.57
Medicaid                        267.48            258.00            264.27            241.77            236.54            231.89            262.78            255.97
Private and other payors        264.33            251.03            259.14            256.43            246.19            185.27            261.40            251.36

Total skilled nursing revenue $ 382.89 $ 374.97 $ 345.19

$ 332.53 $ 353.22 $ 311.54 $ 375.92

$ 370.39

(1) These rates exclude state relief funding and include sequestration reversal
of 2% in the three months ended March 31, 2022.

Our Medicare daily rates at Same Facilities and Transitioning Facilities
increased by 2.4% and 2.9%, respectively, compared to the three months ended
March 31, 2022. The increase is attributable to the 2.7% net market basket
increase that became effective in October 2022, offset by the reinstatement of
the 2% sequestration starting in the third quarter of 2022. In addition, we have
seen a shift to higher acuity patients.

Our average Medicaid rates increased 2.7% due to state reimbursement increases
and our participation in supplemental Medicaid payment programs and quality
improvement programs in various states. Medicaid rates exclude the amount of
state relief revenue we recorded.

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

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

                                                                                                 Three Months Ended March 31,
                                        Same Facility                             Transitioning                                Acquisitions                                  Total
                                  2023                2022                   2023                  2022                  2023                  2022                2023                2022
PERCENTAGE OF SKILLED NURSING REVENUE
Medicare                            25.3  %             28.1  %                  25.1  %             28.3  %                 32.7  %              8.6  %             26.2  %             27.9  %
Managed care                        20.1                19.4                     13.3                12.5                    13.7                14.3                18.8                18.8
Other skilled                        8.4                 7.6                      3.5                 4.5                     5.6                30.0                 7.7                 7.6
Skilled Mix                         53.8                55.1                     41.9                45.3                    52.0                52.9                52.7                54.3
Private and other payors             7.1                 6.7                      8.6                 7.5                     7.4                 1.0                 7.3                 6.7

Medicaid                            39.1                38.2                     49.5                47.2                    40.6                46.1                40.0                39.0
TOTAL SKILLED NURSING              100.0  %            100.0  %                 100.0  %            100.0  %                100.0  %            100.0  %            100.0  %            100.0  %


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                                                                                                 Three Months Ended March 31,
                                        Same Facility                             Transitioning                                Acquisitions                                  Total
                                  2023                2022                   2023                  2022                  2023                  2022                2023                2022
PERCENTAGE OF SKILLED NURSING DAYS
Medicare                            13.6  %             15.2  %                  12.8  %             14.3  %                 15.5  %              4.1  %             13.8  %             14.9  %
Managed care                        14.8                14.4                      8.7                 8.4                     9.2                 9.9                13.6                13.8
Other skilled                        5.4                 4.9                      2.4                 2.7                     4.1                22.4                 4.9                 5.0
Skilled Mix                         33.8                34.5                     23.9                25.4                    28.8                36.4                32.3                33.7
Private and other payors            10.2                10.0                     11.4                 9.7                    10.6                 1.7                10.4                 9.9

Medicaid                            56.0                55.5                     64.7                64.9                    60.6                61.9                57.3                56.4
TOTAL SKILLED NURSING              100.0  %            100.0  %                 100.0  %            100.0  %                100.0  %            100.0  %            100.0  %            100.0  %



Cost of Services

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

                              Three Months Ended March 31,                 Change
                                     2023                   2022          $           %

Cost of service         $                  670,669                   $ 534,174              $ 136,495        25.6  %
Revenue percentage                            78.8    %                   77.8  %                             1.0  %



Cost of services related to our skilled services segment increased by $136.5
million, or 25.6%. Cost of services as a percentage of revenue increased to
78.8% from 77.8% due to costs related to new acquisitions, specifically agency
costs, with additional impact from delayed collections. As a result of the labor
environment, our operations experienced staff hiring and retention constraints,
which resulted in additional overtime, benefits and bonuses to our staff and
higher use of contracted labor.

Standard Bearer
                                                       Three Months Ended March 31,                        Change
                                                         2023                  2022                 $                  %

                                                          (Dollars in thousands)
Rental revenue generated from third-party
tenants                                           $         3,786          $    3,768          $     18                 0.5  %
Rental revenue generated from Ensign
affiliated operations                                      15,931              13,425             2,506                18.7
TOTAL RENTAL REVENUE                              $        19,717          $   17,193          $  2,524                14.7  %
Segment income                                              7,219               6,900               319                 4.6
Depreciation and amortization                               5,966               5,021               945                18.8

FFO                                               $        13,185          $   11,921          $  1,264                10.6  %



Rental revenue. Our rental revenue, including revenue generated from our
affiliated facilities, increased by $2.5 million, or 14.7%, to $19.7 million,
compared to the three months ended March 31, 2022. The increase in revenue is
primarily attributable to eight real estate purchases, as well as annual rent
increases since the three months ended March 31, 2022.

FFO. Our FFO increased by $1.3 million, or 10.6% to $13.2 million, compared to
the three months ended March 31, 2022. The increase in rental revenue of $2.5
million is offset by increases in interest expense of $1.0 million as well as
management fee expense of $0.2 million associated with the intercompany
agreements between Standard Bearer and the Service Center.


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All Other Revenue

Our other revenue increased by $9.8 million, or 35.7%, to $37.1 million,
compared to the three months ended March 31, 2022. Other revenue for 2023
includes senior living revenue of $18.5 million, revenue from other ancillary
services of $16.0 million and sub-rental income of $2.6 million. The increase in
other revenue is primarily attributable to our senior living operations'
occupancy rates rebounding from COVID-19.

Consolidated Financial Expenses

Rent - cost of services. Our rent - cost of services as a percentage of total
revenue increased by 0.3% to 5.3%, primarily due to lease obligations acquired
as part of our operational expansions.

General and administrative expense - General and administrative expense
increased $13.6 million or 35.6%, to $51.9 million. General and administrative
expense as a percentage of revenue increased by 0.6% to 5.9%. This increase was
primarily due to increases in system implementation costs, bonuses due to
enhanced performance, our annual leadership conference and headcount due to
acquisition activity.

Depreciation and amortization - Depreciation and amortization expense increased
$2.4 million, or 16.6%, to $17.1 million. This increase was primarily related to
the additional depreciation and amortization incurred as a result of our newly
acquired operations and capital expenditures. Depreciation and amortization
decreased 0.2%, to 1.9%, as a percentage of revenue.

Other income (expense), net - Other income (expense), net as a percentage of
revenue increased by 0.8% to 0.4%. Other income primarily includes interest
income from our investments offset by interest expense related to our debt.
During the three months ended March 31, 2023, the deferred compensation
investment program had a gain of $1.2 million. There is an offsetting expense
allocated between cost of services and general and administrative expenses.
During the three months ended March 31, 2022, the deferred compensation
investment program had a loss of $1.2 million. There is an offsetting reduction
in expense allocated between cost of services and general and administrative
expenses.

Provision for income taxes - Our effective tax rate was 23.5% for the three
months ended March 31, 2023, compared to 24.4% for the same period in 2022. The
effective tax rate for both periods is driven by the impact of excess tax
benefits from stock-based compensation, partially offset by non-deductible
expenses including non-deductible compensation. See Note 14, Income Taxes, in
the Interim Financial Statements for further discussion.

Liquidity and Capital Resources

Our primary sources of liquidity have historically been derived from our cash
flows from operations and long-term debt secured by our real property and our
Revolving Credit Facility. Our liquidity as of March 31, 2023 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. Cash paid to fund acquisitions was $33.8 million for
the three months ended March 31, 2022, and no cash was paid for the three months
ended March 31, 2023. Total capital expenditures for property and equipment were
$26.7 million and $15.8 million for the three months ended March 31, 2023 and
2022, respectively. We currently have approximately $80.0 million budgeted for
renovation projects in 2023. 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 of March 31, 2023 consisted of bank term
deposits, money market funds and U.S. Treasury bill related investments. In
addition, as of March 31, 2023, we held investments of approximately $102.2
million. We believe our investments that were in an unrealized loss position as
of March 31, 2023 do not require an allowance for expected credit losses, nor
has any event occurred subsequent to that date that would indicate so.

As mentioned above, our primary sources of cash is from our ongoing operations.
Our positive cash flows have supported our business and have allowed us to pay
regular dividends to our stockholders. We currently anticipate that existing
cash and total investments as of March 31, 2023, along with projected operating
cash flows and available financing, will support our normal business operations
for the foreseeable future.
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On July 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 from August 2, 2022.
Under this program, we are authorized to repurchase our issued and outstanding
common shares from time to time in open-market and privately negotiated
transactions and block trades in accordance with federal securities laws. The
share repurchase program does not obligate us to acquire any specific number of
shares. We did not purchase any shares pursuant to this stock repurchase program
during the three months ended March 31, 2023.

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

                                                                                 Three Months Ended March 31,
                                                                                   2023                  2022

NET CASH PROVIDED BY/(USED IN):                                                         (In thousands)
Operating activities                                                        $        48,344          $   45,874
Investing activities                                                                (35,971)            (48,240)
Financing activities                                                                 (1,674)            (11,289)

Net increase/(decrease) in cash and cash equivalents                                 10,699             (13,655)
Cash and cash equivalents beginning of period                                       316,270             262,201

Cash and cash equivalents at end of period                                  $       326,969          $  248,546


Operating Activities

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

The $2.5 million increase in cash provided by operating activities for the three
months ended March 31, 2023 compared to the same period in 2022 was primarily
due to higher net income offset by changes in working capital. Changes in
working capital were driven by timing of collections of accounts receivable.

Investing Activities

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

The $12.3 million decrease in cash used in investing activities for the three
months ended March 31, 2023 compared to the same period in 2022, was primarily
due to a decrease in cash used for expansions and capital expenditures of
$23.0 million offset by an increase in cash used for investments of
$9.2 million.

Financing Activities

Financing cash flows consist primarily of payment of dividends to stockholders,
issuance and repayment of short-term and long-term debt, payment for share
repurchases and sale of subsidiary shares.

The $9.6 million decrease in cash used in financing activities for the three
months ended March 31, 2023 compared to the same period in 2022, was primarily
due to $9.9 million of share repurchases as part of our stock repurchase program
in 2022, offset by an increase in dividends paid of $0.2 million.

Credit Facility with a Lending Consortium Arranged by Truist

On April 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
is April 8, 2027 and we modified the reference rate from LIBOR to SOFR.
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.
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Mortgage Loans and Promissory Note

As of March 31, 2023, 23 of our subsidiaries have mortgage loans insured with
HUD for an aggregate amount of $152.7 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. In addition to the interest rate, we incur
other fees for HUD placement, including but not limited to audit fees. 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,
during the first three years, the prepayment fee is 10.0% and is reduced by 3.0%
in the fourth year of the loan, and reduced by 1.0% per year for years five
through ten of the loan. There is no prepayment penalty after year ten. The
terms for all the mortgage loans are 25 to 35 years.

In addition to the HUD mortgage loans above, one of our subsidiaries has a
promissory note that bears a fixed interest rate of 5.3% per annum and has a
term of 12 years. The note, which was used for an acquisition, is secured by the
real property comprising the facility and the rent, issues and profits thereof,
as well as all personal property used in the operation of the facility.

Operating Leases

As of March 31, 2023, 211 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 a Master Lease, the renewal will be
effective as to all, but not less than all, of the leased property then subject
to the Master Lease. Additionally, four of the 97 facilities leased from
CareTrust include an option to purchase that we can exercise starting on
December 1, 2024.

We also lease certain affiliated facilities and our administrative offices under
non-cancelable operating leases, most of which have initial lease terms ranging
from five to 20 years and is subject to annual escalation equal to the
percentage change in the Consumer Price Index with a stated cap percentage. In
addition, we lease certain of our equipment under non-cancelable operating
leases with initial terms ranging from three to five years. Most of these leases
contain renewal options, certain of which involve rent increases.

Seventy-eight of our affiliated facilities, excluding the facilities that are
operated under the Master Leases from CareTrust, are operated under 12 separate
master lease arrangements. Under these master leases, a breach at a single
facility could subject one or more of the other affiliated facilities covered by
the same master lease to the same default risk. Failure to comply with Medicare
and Medicaid provider requirements is a default under several of our leases,
master lease agreements and debt financing instruments. In addition, other
potential defaults related to an individual facility may cause a default of an
entire master lease portfolio and could trigger cross-default provisions in our
outstanding debt arrangements and other leases. With an indivisible lease, it is
difficult to restructure the composition of the portfolio or economic terms of
the lease without the consent of the landlord.

U.S. Department of Justice Civil Investigative Demand

On May 31, 2018, we received a Civil Investigative Demand (CID) from the U.S.
Department of Justice stating that it was investigating to determine whether
there had been a violation of 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 serve or have served as medical directors, advisory
board participants or other referral sources. As a general matter, our operating
entities have established and maintain policies and procedures to promote
compliance with the False Claims Act, the Anti-Kickback Statute, and other
applicable regulatory requirements. We have fully cooperated with the U.S.
Department of Justice and promptly responded to its requests for information; in
April 2020, we were advised that the U.S. Department of Justice declined to
intervene in any subsequent action based on or related to the subject matter of
this investigation.


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Inflation

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

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

Recent Accounting Pronouncements

Except for rules and interpretive releases of the Securities and Exchange
Commission (SEC) under authority of federal securities laws and a limited number
of grandfathered standards, the 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.