Table of ContentsThis Quarterly Report on Form 10-Q contains "forward-looking statements," within the meaning of the Private Securities Litigation Reform Act of 1995, which include, but are not limited to our expected future financial position, results of operations, cash flows, financing plans, business strategy, budgets, capital expenditures, competitive positions, growth opportunities, and plans and objectives of management. Forward-looking statements can often be identified by words such as "anticipates," "expects," "intends," "plans," "predicts," "believes," "seeks," "estimates," "may," "will," "should," "would," "could," "potential," "continue," "ongoing," similar expressions, and variations or negatives of these words. These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Additionally, our business and operations for 2022 continue to be impacted by the COVID-19 pandemic. Because of the unprecedented nature of the pandemic, we are unable to predict the full extent and duration of the financial impact of COVID-19 on our business, financial condition and results of operations. Our actual results could differ materially from those expressed in any forward-looking statements as a result of various factors, some of which are listed under the section "Risk Factors" contained in Part II, Item 1A of this Quarterly Report on Form 10-Q. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q, and are based on our current expectations, estimates and projections about our industry and business, management's beliefs, and certain assumptions made by us, all of which are subject to change. We undertake no obligation to revise or update publicly any forward-looking statement for any reason, except as otherwise required by law. As used in this Management's Discussion and Analysis of Financial Condition and Results of Operations, the words, "Ensign," "Company," "we," "our" and "us" refer to The Ensign Group, Inc. and its consolidated subsidiaries. All of our affiliated operations, the Service Center, our wholly-owned captive insurance subsidiary and our captive real estate investment trust (REIT) called Standard Bearer Healthcare REIT, Inc. (Standard Bearer) are operated by separate, wholly-owned, independent subsidiaries that have their own management, employees and assets. The use of "Ensign," "Company," "we," "us," "our" and similar verbiage in this Quarterly Report on Form 10-Q is not meant to imply that any of our affiliated operations, the Service Center, the captive insurance subsidiary or Standard Bearer are operated by the same entity. This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements and related notes included the Annual Report.
OverviewWe are a provider of health care services across the post-acute care continuum, engaged in the operation, ownership, acquisition, development and leasing of skilled nursing, senior living and other healthcare related properties and other ancillary businesses located in Arizona, California, Colorado, Idaho, Iowa, Kansas, Nebraska, Nevada, South Carolina, Texas, Utah, Washington and Wisconsin. Our operating subsidiaries, each of which strives to be the operation of choice in the community it serves, provide a broad spectrum of skilled nursing, senior living and other ancillary services. As of September 30, 2022, we offered skilled nursing, senior living and rehabilitative care services through 259 skilled nursing and senior living facilities. Of the 259 facilities, we operated 182 facilities under long-term lease arrangements and have options to purchase 11. Our real estate portfolio includes 106 owned real estate properties, which included 77 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 (Spin-Off), and the Service Center location. Of the 29 real estate operations leased to Pennant, one senior living operation is located on the same real estate property as a skilled nursing facility that we own and operate. The following table summarizes our affiliated facilities and operational skilled nursing beds and senior living units by ownership status as of September 30, 2022: Leased (without Total for Owned and Leased (with a a Purchase Facilities Operated Purchase Option) Option) Operated Number of facilities 77 11 171 259 Percentage of total 29.7 % 4.2 % 66.1 % 100.0 % Operational skilled nursing beds 7,650 1,145 17,835 26,630 Percentage of total 28.7 % 4.3 % 67.0 % 100.0 % Senior living units 1,690 178 1,146 3,014 Percentage of total 56.1 % 5.9 % 38.0 % 100.0 % 36
Table of ContentsEnsign 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 ActivitiesCaptive Real Estate Investment Trust - In January of 2022, we formed Standard Bearer Healthcare REIT, Inc. or Standard Bearer, a captive REIT. Standard Bearer is a holding company with subsidiaries that own most of our real estate portfolio. We expect the REIT structure will allow us to better demonstrate the growing value of our owned real estate and provides us with an efficient vehicle for future acquisitions of properties that could be operated by Ensign affiliates or other third parties. We believe this structure will give us new pathways to growth with transactions we would not have considered in the past. Standard Bearer intends to qualify and elects to be taxed as a REIT, for U.S. federal income tax purposes, commencing with its taxable year ending December 31, 2022. During the nine months ended September 30, 2022, we acquired the real estate of eight skilled nursing facilities, all of which were leased to certain of our operating subsidiaries through the Standard Bearer Master Leases for a purchase price of $65.6 million. Of the eight, three were previously operated and managed by us. The resulting real estate portfolio in Standard Bearer consists of a select 101 of our 106 owned real estate properties. Of the 101 owned real estate properties in Standard Bearer, 73 facilities are operated by Ensign operating subsidiaries and 29 facilities are leased to and operated by Pennant. Of the 29 real estate operations leased to Pennant, one senior living operation is located on the same real estate property as a skilled nursing facility that we own and operate. Subsequent to September 30, 2022, we expanded our real estate portfolio with the addition of one skilled nursing property with an estimated total purchase price of $8.0 million.
As of September 30, 2022, the fair value of Standard Bearer's real estate
portfolio is approximately $1.1 billion. The fair value was determined by a
third party independent valuation specialist and incorporated each property's
rental income, capitalization rate, rental yield rate and discount rate.
Table of ContentsStandard Bearer will obtain its funding through various sources including operating cash flows, access to debt arrangements and intercompany loans. The intercompany debt arrangements include mortgage loans and the Revolving Credit Facility to fund acquisitions and working capital needs. As part of the Amended Credit Agreement discussed in Note 16, Debt, the interest rates applicable to loans under the Revolving Credit Facility were amended, such that the rates are, at the Company's option, equal to either a base rate plus a margin ranging from 0.25% to 1.25% per annum or SOFR plus a margin range from 1.25% to 2.25% per annum. As of September 30, 2022, there is $44.8 million outstanding under the intercompany credit revolver. There is also an intercompany mortgage loan amount of $93.0 million which is subject to a fixed interest rate. In addition, third party debt held by the Department of Housing and Urban Development (HUD) mortgage loans and promissory notes outstanding in an aggregate amount of $157.3 million, and are included in Standard Bearer. In the second quarter of 2022, Standard Bearer established shareholders of its preferred shares through contributions of cash of $0.1 million. These preferred shares were fully vested at the time of the contributions by the shareholders. In addition, as part of the formation of Standard Bearer in January of 2022, we established the Standard Bearer Healthcare REIT, Inc. 2022 Omnibus Incentive Plan (Standard Bearer Equity Plan). In the second quarter of 2022, Standard Bearer sold fully vested common shares from the Standard Bearer Equity Plan to shareholders for cash of $6.5 million. We did not grant any stock options nor restricted shares during the three and nine months ended September 30, 2022. Revolving Credit Facility Amendment - On April 8, 2022, we entered into the Second Amendment to the Third Amended and Restated Credit Facility (such agreement, the Amended Credit Agreement, and the revolving credit facility thereunder, the Revolving Credit Facility), which increased the Revolving Credit Facility by $250.0 million to an aggregate principal amount of up to $600.0 million. Pursuant to the Amended Credit Agreement, the Company transitioned from the London Interbank Offered Rate (LIBOR) to the Secured Overnight Financing Rate (SOFR) as the applicable reference rate for borrowings under the Revolving Credit Facility. The maturity date of the Amended Credit Facility is April 8, 2027. Borrowings are supported by a lending consortium arranged by Truist Securities (Truist). The interest rates applicable to loans under the Revolving Credit Facility are, at our option, equal to either a base rate plus a margin ranging from 0.25% to 1.25% per annum or SOFR plus a margin range from 1.25% to 2.25% per annum, based on the Consolidated Total Net Debt to Consolidated EBITDA ratio (as defined in the Amended Credit Agreement). In addition, we will pay a commitment fee on the unused portion of the commitments, which will range from 0.20% to 0.40% per annum, depending on the Consolidated Total Net Debt to Consolidated EBITDA ratio. As part of the entry into the Amended Credit Agreement, deferred financing costs of $0.6 million were written off and additional deferred financing costs of $3.2 million were capitalized during the nine months ended September 30, 2022. Coronavirus Update - We are continuing to closely monitor the impact of the global COVID-19 pandemic on our business. In October 2022, the public health emergency (PHE) was extended through January 11, 2023. Our primary focus continues to be the health and safety of our patients, residents, employees and their respective families. We continue to implement measures necessary to provide the safest possible environment within our sites of service, taking into consideration the vulnerable nature of our patients and the unique exposure risks of our staff. We continue to execute on key initiatives to rebuild occupancy lost due to the pandemic. During the third quarter of 2022, our combined Same Facilities and Transitioning Facilities occupancy increased by 2.9% compared to the third quarter of 2021 and 1.1% compared to the second quarter of 2022. The improvements in occupancy were due to our operations developing innovative approaches to confront the occupancy declines, including strategic partnerships with upstream and downstream continuum partners and increasing clinical competencies to treat high-acuity patients, including those that are COVID-19 positive. Even with COVID-19 demands waning, the partnerships developed during the pandemic will continue to benefit us into the future. By strengthening existing partnerships, creating new partnerships and most importantly, demonstrating clinical capabilities and favorable outcomes, our census has continued to stabilize. We believe our operations will continue to gain additional market share as a result of relationships with acute care providers and other health care partners.
During the three and nine months ended September 30, 2022, we received an
additional $20.3 million and $65.0 million in state relief funding,
respectively, and recognized $21.4 million and $63.5 million as revenue,
respectively. During the three and nine months ended September 30, 2021, we
received $17.8 million and $50.3 million in state relief funding and recognized
$19.2 million and $52.4 million, respectively, as revenue.
Table of ContentsCommon Stock Repurchase Program - On July 28, 2022, the Board of Directors approved a stock repurchase program pursuant to which we could repurchase up to $20.0 million of our common stock under the program for a period of approximately 12 months from August 2, 2022. On February 9, 2022, the Board of Directors approved a stock repurchase program pursuant to which we could repurchase up to $20.0 million of our common stock under the program for a period of approximately 12 months from February 10, 2022. In the second quarter of 2022, we repurchased 0.3 million shares of our common stock for $20.0 million. This repurchase program expired upon the repurchase of the fully authorized amount under the plan. We did not repurchase any shares during the third quarter of 2022. Facility Information The following table sets forth the location of our operated and owned facilities by type as well as the number of beds and units located at operated and owned facilities as of September 30, 2022: TX CA AZ UT CO WA ID NE IA SC WI NV KS
TotalNumber of operated facilities Skilled nursing operations 71 50 29 18 14 13 11 4 4 4 2 2 - 222 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 9,119 5,296 4,436 1,991 1,313 1,227 984 413 368 424 100 358 601 26,630 Senior living units 505 197 759 163 725 98 21 302 31 - - - 213 3,014 Number of owned and operated facilities Skilled nursing properties 18 10 8 7 4 2 5 1 - 4 2 - - 61 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 2,268 1,182 1,530 684 356 204 454 88 - 424 100 - 360 7,650 Owned Senior living units 439 42 356 - 461 - - 263 - - - - 129 1,690 Number of owned and not operated facilities Senior living properties 6 2 1 - - - - - - - 19 1 - 29
(1) Campuses represent facilities that offer both skilled nursing and senior living services.During the nine months ended September 30, 2022, we expanded our operations and real estate portfolio through a combination of long-term leases and real estate purchases, with the addition of 11 stand-alone skilled nursing operations. Of these additions, Standard Bearer acquired the real estate of five of the stand-alone skilled nursing operations, which were leased back to Ensign affiliated entities. In addition, we purchased the real estate of three skilled nursing properties which our affiliated operating subsidiaries already operated, further expanding our real estate portfolio. We also added five senior living operations that were transferred from Pennant, three of which are part of campuses operated by our affiliated operating subsidiaries. These new operations added a total of 1,553 operational skilled nursing beds and 674 operational senior living units to be operated by our affiliated operating subsidiaries. Additionally, we invested in new ancillary services that are complementary to our existing businesses. Subsequent to September 30, 2022, we expanded our operations through a combination of long-term leases and real estate purchases, with the addition of nine stand-alone skilled nursing operations. Of these additions, Standard Bearer acquired the real estate of one of these operations, which was leased back to an Ensign affiliated entity. These new operations added 1,115 operational skilled nursing beds to be operated by our affiliated operating subsidiaries. 39
Table of ContentsFor further discussion of our acquisitions, see Note 7, Standard Bearer and Note 9, Operation Expansions in the Notes to the Unaudited Condensed Consolidated Financial Statements.
Key Performance IndicatorsWe manage the fiscal aspects of our business by monitoring key performance indicators that affect our financial performance. Revenue associated with these metrics is generated based on contractually agreed-upon amounts or rate, excluding the estimates of variable consideration under the revenue recognition standard, Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 606. These indicators and their definitions include the following: Skilled Services •Routine revenue - Routine revenue is generated by the contracted daily rate charged for all contractually inclusive skilled nursing services. The inclusion of therapy and other ancillary treatments varies by payor source and by contract. Services provided outside of the routine contractual agreement are recorded separately as ancillary revenue, including Medicare Part B therapy services, and are not included in the routine revenue definition. •Skilled revenue - The amount of routine revenue generated from patients in the skilled nursing facilities who are receiving higher levels of care under Medicare, managed care, Medicaid, or other skilled reimbursement programs. The other skilled patients who are included in this population represent very high acuity patients who are receiving high levels of nursing and ancillary services which are reimbursed by payors other than Medicare or managed care. Skilled revenue excludes any revenue generated from our senior living services. •Skilled mix - The amount of our skilled revenue as a percentage of our total skilled nursing routine revenue. Skilled mix (in days) represents the number of days our Medicare, managed care, or other skilled patients are receiving skilled nursing services at the skilled nursing facilities divided by the total number of days patients from all payor sources are receiving skilled nursing services at the skilled nursing facilities for any given period.
•Average daily rates - The routine revenue by payor source for a period at the
skilled nursing facilities divided by actual patient days for that revenue
source for that given period. These rates exclude additional state relief
funding, which includes payments we recognized as part of The Family First
Coronavirus Response Act.
•Occupancy percentage (operational beds) - The total number of patients
occupying a bed in a skilled nursing facility as a percentage of the beds in a
facility which are available for occupancy during the measurement period.
•Number of facilities and operational beds - The total number of skilled nursing
facilities that we own or operate and the total number of operational beds
associated with these facilities.
Table of ContentsOccupancy - 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.
The following table summarizes our overall occupancy statistics for skilled
nursing operations for the periods indicated:
We have two reportable segments: (1) skilled services, which includes the
operation of skilled nursing facilities and rehabilitation therapy services and
(2) Standard Bearer, which is comprised of selected properties owned by us
through our captive REIT and leased to skilled nursing and senior living
operations, including our own operating subsidiaries and third party operators.
The following table sets forth our total service revenue by payor source
generated by our skilled services segment and other service revenue and as a
percentage of total revenue for the periods indicated (dollars in thousands):
--------------------------------------------------------------------------------Table of Contents Three Months Ended September 30, Skilled Services Other Service Revenue Total Service Revenue 2022 2021 2022 2021 2022 2021 Medicaid(1) 40.0 % 41.0 % 25.2 % 17.5 % 39.5 % 40.2 % Medicare 28.6 27.5 - - 27.6 26.6 Medicaid-skilled 6.8 7.1 - - 6.6 6.8 Subtotal 75.4 75.6 25.2 17.5 73.7 73.6 Managed care 17.9 17.9 - - 17.3 17.3 Private and other(2) 6.7 6.5 74.8 82.5 9.0 9.1 TOTAL SERVICE REVENUE 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % (1) Medicaid payor includes revenue generated from senior living operations and revenue related to FMAP and other COVID-19 related state funding. (2) Private and other payors also includes revenue from senior living operations and all payors generated in other ancillary services. Nine Months Ended September 30, Skilled Services Other Total Service Revenue 2022 2021 2022 2021 2022 2021 Medicaid(1) $ 845,341 $ 738,484 $ 17,750 $ 11,337 $ 863,091 $ 749,821 Medicare 610,009 536,971 - - 610,009 536,971 Medicaid-skilled 146,355 128,041 - - 146,355 128,041 Subtotal 1,601,705 1,403,496 17,750 11,337 1,619,455 1,414,833 Managed care 389,036 336,225 - - 389,036 336,225 Private and other(2) 137,826 116,272 57,069 55,152 194,895 171,424 TOTAL SERVICE REVENUE $ 2,128,567 $ 1,855,993 $ 74,819 $ 66,489 $ 2,203,386 $ 1,922,482 Nine Months Ended September 30, Skilled Services Other Total Service Revenue 2022 2021 2022 2021 2022 2021 Medicaid(1) 39.7 % 39.8 % 23.7 % 17.1 % 39.2 % 39.0 % Medicare 28.7 28.9 - - 27.7 27.9 Medicaid-skilled 6.8 6.9 - - 6.6 6.7 Subtotal 75.2 75.6 23.7 17.1 73.5 73.6 Managed care 18.3 18.1 - - 17.7 17.5 Private and other(2) 6.5 6.3 76.3 82.9 8.8 8.9 TOTAL SERVICE REVENUE 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % (1) Medicaid payor includes revenue generated from senior living operations and revenue related to FMAP and other COVID-19 related state funding. (2) Private and other payors also includes revenue from senior living operations and all payors generated in other ancillary services.
Skilled ServicesWithin 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. 42
Table of Contents
Standard BearerWe generate rental revenue primarily by leasing post-acute care properties we acquired to healthcare operators under triple-net lease arrangements, whereby the tenant is solely responsible for the costs related to the property, including property taxes, insurance and maintenance and repair costs, subject to certain exceptions. As of September 30, 2022, our real estate portfolio within Standard Bearer is comprised of 101 real estate properties. Of these properties, 73 are leased to affiliated skilled nursing facilities wholly-owned and managed by us and 29 are leased to senior living operations wholly-owned and managed by Pennant. Of the 29 real estate operations leased to Pennant, one senior living operation is located on the same real estate property as a skilled nursing facility that we own and operate. During the three and nine months ended September 30, 2022, we generated rental revenues of $18.7 million and $53.5 million, respectively, of which $15.0 million and $42.3 million, respectively, was derived from affiliated wholly-owned healthcare operators, and therefore eliminated in consolidation. Other Within our senior living operations, we generate revenue primarily from private pay sources, with a portion earned from Medicaid payors or through other state-specific programs. In addition, we hold majority membership interests in 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 EstimatesOur condensed consolidated financial statements included in this report have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The preparation of these financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, cash flows, revenues and expenses, and related disclosure of contingent assets and liabilities. See Item 2., Management's Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 for further discussion of critical accounting estimates. There were no material changes to our critical accounting policies with which the estimates are developed since December 31, 2021.
Industry TrendsThe post-acute care industry has evolved to meet the growing demand for post-acute and custodial healthcare services generated by an aging population, increasing life expectancies and the trend toward shifting patient care to lower cost settings. The industry has evolved in recent years, which we believe has led to a number of favorable improvements in the industry, as described below: •Shift of Patient Care to Lower Cost Alternatives - The growth of the senior population in the U.S. continues to increase healthcare costs, often faster than the available funding from government-sponsored healthcare programs. In response, federal and state governments have adopted cost-containment measures that encourage the treatment of patients in more cost-effective settings such as skilled nursing facilities, for which the staffing requirements and associated costs are often significantly lower than acute care hospitals and other post-acute care settings. As a result, skilled nursing facilities are generally serving a larger population of higher-acuity patients than in the past. •Significant Acquisition and Consolidation Opportunities - The skilled nursing industry is large and highly fragmented, characterized predominantly by numerous local and regional providers. Due to the increasing demands from hospitals and insurance carriers to implement sophisticated and expensive reporting systems, we believe this fragmentation provides us with significant acquisition and consolidation opportunities. •Improving Supply and Demand Balance - The number of skilled nursing facilities has declined modestly over the past several years. We expect that the supply and demand balance in the skilled nursing industry will continue to improve due to the shift of patient care to lower cost settings, an aging population and increasing life expectancies. 43
Table of Contents•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. 44
Table of ContentsGovernmental 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.
CoronavirusIn an effort to promote efficient care delivery and to decrease the spread of COVID-19, federal, state and local regulators have implemented new regulations and waived (in some cases, temporarily) certain existing regulations, including those set forth below. Temporary suspension of certain patient coverage criteria and documentation and care requirements - The Coronavirus Aid, Relief and Economic Security Act of 2020 (the CARES Act) and a series of temporary waivers and guidance issued by CMS suspended various Medicare patient coverage criteria to ensure patients continue to have adequate access to care, notwithstanding the burdens placed on healthcare providers as related to the COVID-19 pandemic. Many of these regulatory waivers were issued pursuant to Section 1135 of the Social Security Act, which authorizes the HHS Secretary to temporarily waive or modify Medicare and Medicaid requirements for affected health care providers and facilities following the declaration of a PHE (Section 1135 Waivers). HHS also waived requirements specific to SNFs pursuant to its authority under Section 1812(f) of the Social Security Act (Section 1812(f) Waiver, and together with the Section 1135 Waivers, the Emergency Waivers). Pursuant to the Emergency Waivers, CMS also authorized temporary waivers on medical review requirements, effective March 1, 2020. In addition, in March of 2020, CMS also downgraded the priority for scheduled program audits and contract-level Risk Adjustment Data Validation audits for Medicare Advantage organizations, Part D sponsors, Medicare-Medicaid Plans and Programs of All-Inclusive Care for the Elderly organizations. Reducing the priority of those standard or scheduled audit activities allows providers, CMS and other organizations to focus on patient care, including directing audit activities toward infection control. CMS stated that this reprioritization of its audit activities would be time-limited and normal activities began to occur 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. On April 7, 2022, CMS announced the expiration of additional Emergency Waivers in place for SNF and LTC facilities, with other Emergency Waivers for other residential facilities other than hospitals and critical access hospitals, that expired on June 6, 2022. 45
Table of ContentsThe first group of seven (7) 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 an SNF's normal obligation not to employ any nursing aid longer than 4 months if he or she does not satisfy federal training and certification requirements. The Emergency Waivers that did not expire on June 6, 2022, including the three-day inpatient hospital qualifying stay, remain in effect. As patients qualify for skill-in-place for Medicare Part A stays, we could see a decrease in LTC Medicare Part B programs. CMS may terminate other Emergency Waivers affecting SNF and other LTC facilities in the future and these terminations may occur quickly and with little public notice. Due to the prevalence of waves of COVID-19 variants, it is unclear when the remaining Emergency Waivers will expire. Examples of the Emergency Waivers still in effect as of October 1, 2022 include, but are not limited to the following: (1) approving temporary transfer, discharge and cohorting of patients to ensure that facilities can separate COVID-19 negative patients from those that are positive for or have been exposed to the virus; (2) allowing SNFs to provide a skill-in-place program for Medicare beneficiaries who are residents of the SNFs that meet the skill-in-place criteria, foregoing the usual three-day qualifying hospital stay; and (3) temporarily waiving certain documentation and reporting requirements regarding patient admission, transfer and discharge (e.g., Patients Over Paperwork). Some States have also waived regulations to ease regulatory burdens on the healthcare industries. It remains uncertain when federal and state regulators will resume enforcement of those regulations, which remain waived or are otherwise not being enforced during the PHE. We believe these regulatory actions could contribute to changes in skilled mix, which may have been different without the existence of the Emergency Waivers. Resuming visitation and resident rights - CMS has issued guidance to facilities throughout the PHE regarding patients' rights to visitation. While the CMS guidance issued in March 2020 directed facilities to severely restrict visitation, CMS has subsequently provided guidance through the course of the pandemic (and most recently updated on March 10, 2022) that broadens visitation and provides guidance on visitation procedures. On September 23, 2022, CMS updated its guidance regarding visitation to nursing homes, requiring 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, but 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 guidance also clarified CMS's guidance for isolation of known or suspected positive cases, exposure to positive cases and encouraged distancing during large group gatherings within the facility. 46
Table of ContentsTesting 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. CMS's interim final rule (IFR) released on September 23, 2022 regarding COVID-19 testing stated that routine testing of staff for COVID-19 is no longer generally recommended without exposure to COVID-19. 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 and investigation of an outbreak when there is a single positive COVID-19 case among residents or staff of the LTC facility. 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 ETS for vaccination were challenged in court and halted from enforcement in certain states. In addition to the IFR mandating vaccinations for health facility workers, several states where our independent operating facilities are located have issued vaccine mandates that apply to facility staff. These vaccine mandates are largely aligned with CMS's requirements. For example, California issued an order requiring adult care facilities and direct care workers to be vaccinated as well, and for all affected workers to be fully vaccinated by November 30, 2021. The order was expanded to allow workers who had completed their primary vaccination series and contracted COVID-19 since becoming fully vaccinated to defer the receipt of a vaccine booster dose by up to 90 days after infection with COVID-19; otherwise, booster vaccine doses were required to be completed by March 1, 2022. 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 residents and staff 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. We do not believe these COVID-19 related requirements will have a material impact on our condensed consolidated 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.
MedicareMedicare presently accounts for approximately 28.7% of our skilled nursing services revenue year-to-date, being our second-largest payor. The Medicare program and its reimbursement rates and rules are subject to frequent change. These include statutory and regulatory changes, rate adjustments (including retroactive adjustments), administrative or executive orders and government funding restrictions, all of which may materially adversely affect the rates at which Medicare reimburses us for our services. Budget pressures often lead the federal government to reduce or place limits on reimbursement rates under Medicare. Implementation of these and other types of measures has in the past, and could in the future, result in substantial reductions in our revenue and operating margins. 47
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Patient-Driven Payment Model (PDPM)The Skilled Nursing Facility Prospective Payment System (SNF PPS) Rule became effective October 1, 2019. The SNF PPS Rule includes a new case-mix model that focuses on the patient's condition (clinically relevant factors) and resulting care needs, rather than on the volume of care provided, to determine Medicare reimbursement. The case mix-model is called the Patient-Driven Payment Model (PDPM), which utilizes clinically relevant factors for determining Medicare payment by using International Classification of Diseases, Tenth Revision diagnosis codes and other patient characteristics as the basis for patient classification. PDPM utilizes five case-mix adjusted payment components: physician therapy, occupational therapy, speech language pathology, nursing and social services and non-therapy ancillary services. It also uses a sixth non-case mix component to cover utilization of 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.
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 their quality measures data. If a SNF does not submit required quality data, their payment rates are reduced by 2.0% for each such fiscal year. Application of the 2.0% reduction may result in payment rates for a fiscal year being less than the preceding fiscal year. In addition, reporting-based reductions to the market basket increase factor will not be cumulative; they will only apply for the fiscal year involved. A SNF's Medicare Administrative Contractor will issue the facility a notice of non-compliance if it does not satisfy its Quality Reporting Program (QPR) 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.
Table of ContentsIn July of 2022, CMS announced revisions to calculating its five-star ratings for the Nursing Home Compare website. Under this new calculation, points are assigned to a SNF based on its performance across six measures: (1) case-mix adjusted total nurse staffing levels (including registered nurses, licensed practical nurses, and nursing aides), measured by hours per resident per day; (2) case-mix adjusted registered nurse staffing levels, measured by hours per resident per day; (3) case-mix adjusted total nurse staffing levels (including registered nurses, licensed practical nurses, and nursing aides), measured by hours per resident day on the weekend; (4) total nurse turnover, defined as the percentage of nursing staff that left the nursing home over a 12-month period; (5) registered nurse turnover, defined as the percentage of registered nursing staff that left the nursing home over a 12-month period; and (6) administrator turnover, defined as the percentage of administrators that left the nursing home over a 12-month period. These six measures will be measured on a quarterly basis. Staff measurements are scored based on the points assigned to these six measures. For case-mix adjusted total nurse staffing and case-mix adjusted registered nurse staffing, each measure is scored on a 100-point scale in 10-point increments. For case-mix adjusted total nurse staffing on weekends, total nurse turnover, and total registered nurse turnover, each measure is scored on a 50-point scale in five-point increments. The measure of administrator turnover is measured on a 30-point scale, with points assigned based on the number of administrator departures during the measurement period. The result of these staffing measures will affect a SNF's total five-star score reported on the Nursing Home Compare website. These changes are in addition to those previously announced in the January 2022 and April 2022 revisions, and began with the July 2022 refresh of the Nursing Home Compare website. 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 became available through March 31 of the following year. SNFs will begin submitting this data to CMS through the CDC National Healthcare Safety Network beginning 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.
Medicare Annual Payment RuleCMS is required to calculate an annual Medicare market-basket update to the payment rates. On July 31, 2020, CMS issued a final rule for fiscal year 2021 that updates the Medicare payment rates and the quality programs for SNFs. Under the final rule, effective October 1, 2020, the aggregate payments to SNFs increased by 2.2% for fiscal year 2021, compared to fiscal year 2020. This estimated increase is attributable to a net 2.2% market basket increase factor. On July 29, 2022, CMS issued a final rule for fiscal year 2023 that updates the Medicare payment rates to aggregate net market basket increased by 2.7%. The increase is resulted from the 5.1% update to the 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. On July 29, 2021, CMS issued a final rule for fiscal year 2022 that updates the Medicare payment rates and the quality programs for SNFs. Under the final rule, effective October 1, 2021, the aggregate net market basket rate increased by 1.2% for fiscal year 2022, compared to fiscal year 2021. This increase is attributable to a 2.7% market basket increase factor with a 0.8% point reduction for forecast error adjustment and a 0.7% point reduction for multifactor productivity adjustment. 49
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Sequestration of Medicare RatesThe 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.
Skilled Nursing Facility Value-Based Purchasing (SNF-VBP) ProgramThe 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 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. On February 28, 2022, the Administration published a fact sheet stating its priorities for making changes to senior care, including potential changes to regulations affecting LTCs and SNFs. The SNF-VBP Program was identified as an area for change, with staffing levels, retention and resident experience affecting reimbursement. Following studies by CMS, proposed rules that may affect the SNF-VBP Program are expected by early 2023, with final rules to follow after a notice-and-comment period.
Part B Rehabilitation RequirementsSome of our revenue is paid by the Medicare Part B program under a fee schedule. Part B services are limited with a payment cap by combined speech-language pathology services (SLP), physical therapy (PT) services and a separate annual cap for occupational therapy (OT) services. These caps were implemented under the authority of the Balanced Budget Amendments of 1997. These amounts were previously associated with the financial limitation amounts. The Bipartisan Budget Act of 2018 (BBA) repealed those caps while retaining and adding additional limitations to ensure appropriate therapy services. This policy does not limit the amount of medically necessary Medicare Part B therapy services a beneficiary may receive. The BBA establishes coding modifier requirements to obtain payments beyond the updated KX modifier thresholds, discussed below, and reaffirms the specific $3,000 claim audit threshold requirements for the Medicare Administrative Contractors. For PT and SLP combined the threshold for coding modifier requirements is $2,110 for 2021. The KX Modifier threshold is set at $2,150 for CY 2022 with the same threshold for OT services. 50
Table of ContentsConsistent 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. On December 1, 2020, CMS issued the calendar year 2021 Physician Fee Schedule (PFS) Final Rule, which reduced the conversion factor (i.e. the number by which CMS determine all current procedural terminology code payments) by 10.2%. These changes lowered the reimbursement rate for therapy Medicare Part B specialty providers by 9% for PT and OT and by 6% for SLP codes. These reductions were mitigated by the Consolidated Appropriations Act of 2021 (CAA, also referred to as The Omnibus Appropriations Law), which was signed into law on December 27, 2020. The CAA includes three components relevant to the Medicare Part B PFS. First, the CAA incorporates a rate relief of approximately 3.75% for fiscal year 2021. Additionally, the CAA incorporates a freeze to the payment for the physician add-on code for three years which would effectively create relief on the initial cuts through 2023. Finally, the relief calls for the 2% sequester to not be applied to the Medicare Part B program for the first quarter of 2021. CMS incorporated the first and second components of the CAA relief into the fiscal year 2021 PFS files which were published on January 5, 2021. While the 2021 PFS Final Rule reduced the fiscal year 2021 factor to $32.41 (calendar year conversion factor was $36.09), the CAA restored part of the reductions resulting in the final fiscal year 2021 conversion factor of $34.89. This conversion factor rate does not include the 2% sequester which was suspended until April 1, 2022 and then was implemented as a 1% sequestration until June 30, 2022. 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. On November 19, 2021, CMS published the 2022 PFS, which required the use of new modifiers (the CO modifier) to identify and make payments at 85% of the otherwise applicable Part B payment amount for PT and OT services furnished in whole, or in part by PT and OT assistants. On December 10, 2021, President Biden signed the Protecting Medicare and American Farmers from Sequester Cuts Act into law, which restored funding for Medicare payments that was removed in the 2022 PFS. Following passage of this law, CMS announced payment changes to the 2022 PFS on December 16, 2021, which resulted in Medicare payments not being reduced from January 1, 2022 through March 31, 2022. Thereafter, FFS Medicare payments were adjusted by 1% from April 1, 2022 through June 30, 2022, and further adjusted by a total of 2% from July 1, 2022 through December 31, 2022. Under the recalculated 2022 PFS announced by CMS in December of 2021, the applicable conversion factor was reduced from the 2021 conversion factor of $34.89 by 0.82% to $34.61, a smaller reduction than the those found in the proposed rule or 2022 PFS. On July 7, 2022, CMS issued a proposed rule for the calendar year 2023 PFS that would result in calendar year 2022's 3% increase in physician fee schedule payments expiring for calendar year 2023. Additionally, the proposed 2023 PFS includes a 4.4% negative adjustment to the conversion factor in addition to the 1.0% negative base rate for an aggregate negative adjustment of 5.4%. As a result, the proposed calendar year 2023 PFS conversion factor is $33.08, a decrease of $1.53 from the calendar year 2022 PFS conversion factor of $34.61. A final rule setting the calendar year 2023 physician fee schedule is expected in the fourth quarter of 2022. The Multiple Procedure Payment Reduction (MPPR) continues at a 50% reduction, which is applied to therapy procedures by reducing payments for practice expense of the second and subsequent procedures when services provided beyond one unit of one procedure are provided on the same day. The implementation of MPPR includes (1) facilities that provide Medicare Part B speech-language pathology, occupational therapy and physical therapy services and bill under the same provider number; and (2) providers in private practice, including speech-language pathologists, who perform and bill for multiple services in a single day. On May 27, 2020, pursuant to its authority under the Emergency Waivers, CMS added physical therapy, occupational therapy and speech-language pathology to list of approved telehealth Providers for the Medicare Part B programs provided by a 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 PHE Waivers allow therapists to bill Telehealth therapy services up to the latter of, the end of calendar year 2023 or the end of the PHE. 51
Table of ContentsPursuant 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 ElderlyThe 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 October 21, 2021, CMS published an extension of the timeline to complete further final rulemaking for the PACE program until November 1, 2022, which focuses on policy and technical changes to Medicare Advantage, Medicare Prescription Drug Benefit, PACE, Medicaid FFS and Medicaid managed care programs.
Decisions Regarding Skilled Nursing Facility PaymentMedicare reimbursement rates and rules are subject to frequent change. Historically, adjustments to reimbursement under Medicare have had a significant effect on our revenue. The federal government and state governments continue to focus on efforts to curb spending on healthcare programs such as Medicare and Medicaid. We are not able to predict the outcome of the legislative process. We also cannot predict the extent to which proposals will be adopted or, if adopted and implemented, what effect, if any, such proposals and existing new legislation will have on us. Efforts to impose reduced allowances, greater discounts and more stringent cost controls by government and other payors are expected to continue and could adversely affect our business, financial condition and results of operations. These include statutory and regulatory changes, rate adjustments (including retroactive adjustments), administrative or executive orders and government funding restrictions, all of which may materially adversely affect the rates at which Medicare reimburses us for our services. Budget pressures often lead the federal government to reduce or place limits on reimbursement rates under Medicare. Implementation of these and other types of measures has in the past, and could in the future, result in substantial reductions in our revenue and operating margins. For a discussion of historic adjustments and recent changes to the Medicare program and related reimbursement rates, see Part I, Item 1A Risk Factors under the headings Risks Related to Our Business and Industry.
Patient Protection and Affordable Care ActVarious 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.
The 2022 midterm elections 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. We continually
monitor these developments so we can respond to the changing regulatory
environment impacting our business.
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Requirements of ParticipationCMS 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. As part of participating in the Medicare and Medicaid programs, there are specific requirements on the use of pre-dispute, binding arbitration agreements by LTC facilities, including requiring the use of plain language in drafting; that facilities post a notice in plain language that describes the policy on the use of agreements for binding arbitration in an area that is visible to residents and visitors; that admission to the facility not be conditioned on the signing of an arbitration agreement; and that the facility expressly inform the resident or his/her representative of the right not to sign the agreement as a condition of admission. Congress has routinely introduced, but not passed, legislation addressing the issue of arbitration agreements used by LTC facilities. While legislative action is possible in the future, federal and state regulations remain our primary source of authority over the use of pre-dispute binding arbitration agreements. On June 29, 2022, CMS announced updated guidance for Phase 2 and 3 of the Requirements of Participation. These updates concern nursing home resident health and safety. CMS distributed these updates to surveyors and state agencies in order to enhance responses to resident complaints and reported incidents. This updated guidance arises directly 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 payrolls to evaluate staffing sufficiency; (5) residents' rights (including visitation); (6) potential inaccurate diagnoses or assessments; (7) prescription and use of pharmaceuticals; (8) infection control and prevention; (9) arbitration of disputes between facilities and residents; (10) psychosocial outcomes and their severity; and (11) the timeliness and completion of state investigations to improve consistency in standards among various states. On July 29, 2022, CMS updated the Medicare Requirements of Participation for LTC facilities, which includes the physical environment requirements to allow facilities to avoid unnecessary renovation expenses that could cause the closure of LTC facilities due to their expense; specifically, CMS is grandfathering certain facilities and will allow LTC facilities that were participating in Medicare 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, grandfathering directors with two or more years of experience and certain minimum training in food safety so that they may continue in that role without obtaining specific educational and certification requirements. On September 26 and 27, 2022, CMS updated its survey resources for LTC facilities, including with respect to staff vaccine measurements. These included updating the survey pathway for infection prevention control and immunization and the focused infection control survey folder for infection prevention control and immunization, focusing on updated COVID-19 testing protocols. These updates provided more information for state surveyors to evaluate LTC facilities' compliance with the Medicare Requirements of Participation, as well as guidance for facilities on compliance with these requirements based on how surveyors would measure and evaluate their 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 facilities' compliance with the Medicare Requirements of Participation.
Civil and Criminal Fraud and Abuse Laws and EnforcementVarious 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 $11 to $23 thousand per violation and are adjusted annually for inflation. Under the qui tam or "whistleblower" provisions of the FCA, a private individual with knowledge of fraud may bring a claim on behalf of the federal government and receive a percentage of the federal government's recovery. Due to these whistleblower incentives, lawsuits have become more frequent. Many states also have a false claim prohibition that mirrors or closely tracks the federal FCA. 53
Table of ContentsFederal law also provides that the OIG has the authority to exclude individuals and entities from federally funded health care programs on a number of grounds, including, but not limited to, certain types of criminal offenses, licensure revocations or suspensions and exclusion from state or other federal healthcare programs. CMS can recover overpayments from health care providers up to five years following the year in which payment was made. On February 28, 2022, the Administration published a fact sheet regarding nursing home care, which identified the Administration's priorities of further funding for SNF and LTC facility inspections, enhancing civil penalties on poor-performing facilities and increasing the scrutiny of companies that operate more than one facility. Proposed rules based on these directives and studies are expected by early 2023, with final rules to follow after a notice-and-comment period. 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. These investigatory actions by OIG demonstrate its increased scrutiny into post-hospital SNF care provided to beneficiaries and may encourage additional oversight or stricter compliance standards. On numerous occasions, CMS has indicated its intent to vigilantly monitor overall payments to SNFs, paying particular attention to facilities that have high reimbursements for ultra-high therapy, therapy resource utilization groups with higher activities of daily living scores and long average lengths of stay. The OIG recognizes that there is a strong financial incentive for facilities to bill for higher levels of therapies, even when not needed by patients. We cannot predict the extent to which the OIG's recommendations to CMS will be implemented and, what effect, if any, such proposals would have on us. Our business model, like those of some other for-profit operators, is based in part on seeking out higher-acuity patients whom we believe are generally more profitable and over time our overall patient mix has consistently shifted to higher-acuity in most facilities we operate. We also use specialized care-delivery software that assists our caregivers in more accurately capturing and recording services in order to, among other things, increase reimbursement to levels appropriate for the care actually delivered. These efforts may place us under greater scrutiny with the OIG, CMS, our fiscal intermediaries, recovery audit contractors and others. 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 continued to include this measure in subsequent updates. 54
Table of ContentsSimilarly, although staff reporting requirements were waived for the first and second quarters 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. In January of 2022, CMS issued a bulletin stating that as of the same month, the Nursing Home Compare website would begin reporting SNF weekend staffing as well as staff tenure and other collected staffing data. Beginning in July of 2022, CMS began disclosing weekend staffing of all nurses, as well as staff turnover data for all nurses and administrators, on the Nursing Home Compare website. CMS also now incorporates this data into its Five-Star Quality ratings for SNFs and LTC facilities. This data is adjusted based on a facility's case mixture and evaluated on a quarterly basis. Proposed Federal Legislation Concerning Nursing Home Supervision - On August 10, 2021, the Nursing Home Improvement and Accountability Act of 2021 (Nursing Home Improvement Act) was introduced in the U.S. Senate and was intended to update federal nursing home policy to improve quality of care and oversight. The proposed legislation would reduce SNF payments for inaccurate submission of certain data and provide federal funding to carry out SNF data validation and ensure accuracy of cost report information. The Nursing Home Improvement Act also proposed staffing requirements for SNFs and other measures intended to improve transparency, accountability and quality of care within nursing homes. If passed in its current form the bill would provide participating states with funds for up to six years in order to fund demonstrated improvements in nursing home workforce and care delivery. As of July 29, 2022, no action has been taken on this bill since its introduction to the Senate on August 10, 2021 and referral to the Senate Finance Committee that same day. A similar bill introduced in the United States House of Representatives in January of 2021, Bill No. H.R.598, was introduced and referred to the Ways and Means Committee's Healthcare Subcommittee on February 2, 2021. As of September 30, 2022, no further action has been taken on this bill. Proposed State Legislation Concerning Nursing Home Supervision - California passed into law 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 $250,000 to $350,000, and will then increase by $40,000 per year over the following ten years up to a $750,000 cap. Once the limit reaches $750,000, a 2% annual inflationary adjustment will all 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 $250,000 to $500,000 on January 1, 2023, and increase every year thereafter for ten years until the cap on non-economic damages in such cases is $1 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. This law will affect new license applications for SNFs, and is expected to effect on July 1, 2023. 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 date 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 $10,000, and other enforcement action as appropriate, upon applicants that fail to comply with the law's requirements. 55
Table of ContentsProposed and Anticipated Administrative Action - On February 28, 2022, the Administration published a fact sheet stating its priorities for making changes to senior care, including potential changes to regulations affecting LTC and SNF facilities. The Administration's priorities, which are to be studied throughout 2022, include transparency and public disclosure for nursing home owners and operators and an examination of the role of private equity investment, real estate investment trusts (REITs) and other investment interests in this sector. The SNF-VBP Program was also identified as an area for change, with staffing levels, retention and resident experience affecting reimbursement. Additional enforcement authority and resources, including enhanced scrutiny of poorly performing facilities and tools for improving their performance, is another Administration priority. The Administration also seeks to improve accessibility to nurse aide training, tie Medicaid payments to staff wages and benefits and enhance the recruitment and career paths for care workers. Finally, the Administration wishes to incorporate the lessons learned from the COVID-19 pandemic to impose new requirements for infection control, emergency preparedness and safety. On April 11, 2022, CMS issued a proposed rule that could potentially lead to changes in the SNF-VBP Program, and setting SNF and LTC facility staffing levels. On June 29, 2022, CMS published guidance to surveyors for consistently evaluating Phase 2 and 3 Requirements of Participation for LTC facilities, addressing topics including infection control, resident safety, arbitration of disputes, nurse staffing and mental health disorders.
On September 22, 2022, CMS issued an IFR addressing nursing home visitation,
including recommending the use of masks and face coverings to combat the
transmission of COVID-19 and testing of symptomatic nursing home staff and
residents regardless of COVID-19 vaccination status.
Monitoring Compliance in Our FacilitiesGovernmental 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. 56
Table of ContentsOn 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 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. Sanctions such as denial of payment for new admissions often are scheduled to go into effect before surveyors return to verify compliance. Generally, if the surveyors confirm that the facility is in compliance upon their return, the sanctions never take effect. However, if they determine that the facility is not in compliance, the denial of payment goes into effect retroactive to the date given in the original notice. This possibility sometimes leaves affected operators, including our independent subsidiaries, with the difficult task of deciding whether to continue accepting patients after the potential denial of payment date, thus risking the retroactive denial of revenue associated with those patients' care if the operators are later found to be out of compliance, or simply refusing admissions from the potential denial of payment date until the facility is actually found to be in compliance. In the past and from time to time, some of our independent operating subsidiaries have been or will be in denial of payment status due to findings of continued regulatory deficiencies, resulting in an actual loss of the revenue associated with the Medicare and Medicaid patients admitted after the denial of payment date. Additional sanctions could ensue and, if imposed, could include various remedies up to and including decertification. CMS has undertaken several initiatives to increase or intensify Medicaid and Medicare survey and enforcement activities, including federal oversight of state actions. CMS is taking steps to focus more survey and enforcement efforts on facilities with findings of substandard care or repeat violations of Medicaid and Medicare standards, and to identify multi-facility providers with patterns of noncompliance. CMS is also increasing its oversight of state survey agencies and requiring state agencies to use enforcement sanctions and remedies more promptly when substandard care or repeat violations are identified, to investigate complaints more promptly, and to survey facilities more consistently. On February 28, 2022, the Administration published a fact sheet regarding nursing home care, which identified the Administration's priorities of further funding for SNF and LTC facility inspections, as well as enhanced penalties and other tools to use against non-compliant facilities. Proposed rules based on these directives and studies are expected in approximately one year, with final rules to follow a notice-and-comment period required by law.
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.
Table of ContentsAdditionally, Section 1877 of the Social Security Act, commonly known as the "Stark Law," provides that a physician may not refer a Medicare or Medicaid patient for a "designated health service" to an entity with which the physician or an immediate family member has a financial relationship unless the financial arrangement meets an exception under the Stark Law or its regulations. Designated health services include inpatient and outpatient hospital services, PT, OT, SLP, durable medical equipment, prosthetics, orthotics and supplies, diagnostic imaging, enteral and parenteral feeding and supplies and home health services. Under the Stark Law, a "financial relationship" is defined as an ownership or investment interest or a compensation arrangement. If such a financial relationship exists and does not meet a Stark Law exception, the entity is prohibited from submitting or claiming payment under the Medicare or Medicaid programs or from collecting from the patient or other payor. Many of the compensation arrangements exceptions permit referrals if, among other things, the arrangement is set forth in a written agreement signed by the parties, the compensation to be paid is set in advance, is consistent with fair market value and is not determined in a manner that takes into account the volume or value of any referrals or other business generated between the parties. Exceptions may have other requirements. Any funds collected for an item or service resulting from a referral that violates the Stark Law are not eligible for payment by federal healthcare programs and must be repaid to Medicare or Medicaid, any other third-party payor, and the patient. Violations of the Stark Law may result in the imposition of civil monetary penalties, including, treble damages. Individuals and organizations may also be excluded from participation in federal healthcare programs for Stark Law violations. Many states have enacted healthcare provider referral laws that go beyond physician self-referrals or apply to a greater range of services than just the designated health services under the Stark Law.
Regulations Regarding Patient Record ConfidentialityHealth 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 LawsWe are also subject to federal and state antitrust laws. Enforcement of the antitrust laws against healthcare providers is common, and antitrust liability may arise in a wide variety of circumstances, including third party contracting, physician relations, joint venture, merger, affiliation and acquisition activities. In some respects, the application of federal and state antitrust laws to healthcare is still evolving, and enforcement activity by federal and state agencies appears to be increasing. At various times, healthcare providers and insurance and managed care organizations may be subject to an investigation by a governmental agency charged with the enforcement of antitrust laws, or may be subject to administrative or judicial action by a federal or state agency or a private party. Violators of the antitrust laws could be subject to criminal and civil enforcement by federal and state agencies, as well as by private litigants.
Americans with Disabilities ActOur 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. 58
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REGULATIONS SPECIFIC TO SENIOR LIVING COMMUNITIESAs previously mentioned, senior living services revenue is primarily derived from private pay residents, with a small portion of senior living revenue (approximately 2.2% of total revenue) derived from Medicaid funds. Thus, some of the regulations discussed above applicable to Medicaid providers, also apply to senior living. However, the following provides a brief overview of the regulatory framework applicable specifically to senior living. A majority of states provide, or are approved to provide, Medicaid payments for personal care and medical services to some residents in licensed senior living communities under waivers granted by or under Medicaid state plans approved by CMS. State Medicaid programs control costs for senior living and other home and community-based services by various means such as restrictive financial and functional eligibility standards, enrollment limits and waiting lists. Because rates paid to senior living community operators are generally lower than rates paid to SNF operators, some states use Medicaid funding of senior living services as a means of lowering the cost of services for residents who may not need the higher level of health services provided in SNFs. States that administer Medicaid programs for services in senior living communities are responsible for monitoring the services at, and physical conditions of, the participating communities. As a result of the growth of senior living in recent years, states have adopted licensing standards applicable to senior living communities. Most state licensing standards apply to senior living communities regardless of whether they accept Medicaid funding. Since 2003, CMS has commenced a series of actions to increase its oversight of state quality assurance programs for senior living communities, and has provided guidance and technical assistance to states to improve their ability to monitor and improve the quality of services paid through Medicaid waiver programs. CMS is encouraging state Medicaid programs to expand their use of home and community-based services as alternatives to facility-based services, pursuant to provisions of the ACA, and other authorities, through the use of several programs. As noted above, the Administration issued a fact sheet regarding nursing home care priorities and reforms that it intends to seek in the coming year. The Administration's desired changes are multi-faceted, concerning payment to facilities, staffing level requirements, training and retention of staff, standards of care offered to residents, increased transparency and public disclosure of ownership, and enhanced civil remedies and other authority to exercise upon facilities that do not satisfy CMS's standards. Proposed rules based on these directives are expected by early 2023, with final rules to follow a notice-and-comment period required by law. On April 11, 2022, the CMS issued a proposed rule that requested information to be used for study and potential rulemaking consistent with the Administration's February 28, 2022 fact sheet. On June 29, 2022, CMS published guidance to surveyors for consistently evaluating Phase 2 and 3 Requirements of Participation for LTC facilities, as detailed under the Requirements of Participation heading, addressing topics including infection control, resident safety, arbitration of disputes, nurse staffing and mental health disorders. The types of laws and statutes affecting the regulatory landscape of the post-acute industry continue to expand. In addition to this changing regulatory environment, federal, state and local officials are increasingly focusing their efforts on the enforcement of these laws. In order to operate our businesses, we must comply with federal, state and local laws relating to licensure, delivery and adequacy of medical care, distribution of pharmaceuticals, equipment, personnel, operating policies, fire prevention, rate-setting, billing and reimbursement, building codes and environmental protection. Additionally, we must also adhere to anti-kickback statues, physician referral laws, 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. 59 -------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS We believe we exist to dignify and transform post-acute care. We set out a strategy to achieve our goal of ensuring our patients are receiving the best possible care through our ability to acquire, integrate and improve our operations. Our results serve as a strong indicator that our strategy is working and our transformation is underway. We saw a recovery in our census starting in the first quarter of 2021, which has continued into 2022. Despite the emergence of COVID-19 variants and subvariants beginning in the first and third quarters of 2022, we continue to experience healthy growth in both revenue and operational earnings. Our net revenue for the three months ended September 30, 2022 continues to be impacted by COVID-19, with the emergence of COVID-19 subvariants beginning in July 2022. We continued to receive state relief funding in selected states, which has been designed to enhance reimbursement to provide additional funding to cover COVID-19 related expenses. For the three and nine months ended September 30, 2022, we recorded state relief revenue of $21.4 million and $63.5 million, respectively, which directly offset against COVID-19 related expenses we incurred in those states. See Recent Activities for further information. In addition, the Emergency Waivers issued by CMS, including a waiver for the requirement to have a three-day stay in a hospital to receive Medicare coverage of a skilled nursing stay, as well as, the authorization of renewed SNF coverage without having to start a new benefit period for certain beneficiaries who recently exhausted their SNF benefits, remained in effect through the current quarter. Our total revenue for the quarter increased $101.5 million, or 15.2% while our diluted GAAP earning per share grew by 19.3%, from $0.83 to $0.99, compared to the third quarter in 2021. We have continued to make progress on targeted initiatives, including our foundational structure of local operations that are the centers of excellence in the communities they serve. As part of this focus, we have been able to expand our relationships with doctors, hospitals and managed care plans. Additionally, we continue to seek out opportunities to expand our operations and real estate, adding 17 new operations and eight real estate properties, three of which we previously operated, during the nine months ended September 30, 2022. These expansions coupled with our refocused operational fundamentals and increase in occupancy resulted in a strong third quarter. The following table sets forth details of operating results for our revenue, expenses and earnings, and their respective components, as a percentage of total revenue for the periods indicated: 60
--------------------------------------------------------------------------------Table of Contents Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 REVENUE: Service revenue 99.5 % 99.4 % 99.4 % 99.4 % Rental revenue 0.5 0.6 0.6 0.6 TOTAL REVENUE 100.0 % 100.0 % 100.0 % 100.0 % Expenses: Cost of services 78.1 76.9 77.7 76.8 Rent-cost of services 5.1 5.3 5.0 5.4 General and administrative expense 5.1 5.8 5.2 5.7 Depreciation and amortization 2.1 2.1 2.1 2.1 TOTAL EXPENSES 90.4 90.1 90.0 90.0 Income from operations 9.6 9.9 10.0 10.0 Other income (expense): Interest expense (0.2) (0.2) (0.3) (0.3) Other income (expense) - - (0.2) 0.1 Other expense, net (0.2) (0.2) (0.5) (0.2) Income before provision for income taxes 9.4 9.7 9.5 9.8 Provision for income taxes 2.1 2.4 2.1 2.2 NET INCOME 7.3 7.3 7.4 7.6 Less: net income attributable to noncontrolling interests - 0.2 - 0.1 Net income attributable to The Ensign Group, Inc. 7.3 % 7.1 % 7.4 % 7.5 % Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 SEGMENT INCOME(1) (In thousands) Skilled services $ 101,750 $ 94,429 $ 302,272 $ 273,370 Standard Bearer(2) $ 6,941 $ 7,940 $ 20,679 $ 23,559 NON-GAAP FINANCIAL MEASURES: PERFORMANCE METRICS EBITDA $ 90,165 $
79,184 $ 267,181 $ 233,382Adjusted EBITDA $ 96,588 $
84,739 $ 285,413 $ 248,141FFO for Standard Bearer $ 12,502 $
12,329 $ 36,477 $ 36,351VALUATION METRICS Adjusted EBITDAR $ 135,495 $ 397,310 (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 and nine months ended September 30, 2022 are expenses for intercompany management fees between Standard Bearer and the Service Center and intercompany interest expense. Segment income is reconciled to the Condensed Consolidated Statement of Income in Note 8, Business Segments in Notes to Unaudited Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q. (2) Standard Bearer segment income includes rental revenue from Ensign affiliated tenants and related expenses. 61 -------------------------------------------------------------------------------- Table of Contents The following discussion includes references to EBITDA, Adjusted EBITDA, Adjusted EBITDAR and Funds from Operations (FFO) which are non-GAAP financial measures (collectively, the Non-GAAP Financial Measures). Regulation G, Conditions for Use of Non-GAAP Financial Measures, and other provisions of the Securities Exchange Act of 1934, as amended (the Exchange Act), define and prescribe the conditions for use of certain non-GAAP financial information. These Non-GAAP Financial Measures are used in addition to and in conjunction with results presented in accordance with GAAP. These Non-GAAP Financial Measures should not be relied upon to the exclusion of GAAP financial measures. These Non-GAAP Financial Measures reflect an additional way of viewing aspects of our operations that, when viewed with our GAAP results and the accompanying reconciliations to corresponding GAAP financial measures, provide a more complete understanding of factors and trends affecting our business. We believe the presentation of certain Non-GAAP Financial Measures are useful to investors and other external users of our financial statements regarding our results of operations because: •they are widely used by investors and analysts in our industry as a supplemental measure to evaluate the overall performance of companies in our industry without regard to items such as other expense, net and depreciation and amortization, which can vary substantially from company to company depending on the book value of assets, capital structure and the method by which assets were acquired; and •they help investors evaluate and compare the results of our operations from period to period by removing the impact of our capital structure and asset base from our operating results.
We use the Non-GAAP Financial Measures:
•as measurements of our operating performance to assist us in comparing our
operating performance on a consistent basis;
•to allocate resources to enhance the financial performance of our business;
•to assess the value of a potential acquisition;
•to assess the value of a transformed operation's performance;
•to evaluate the effectiveness of our operational strategies; and
•to compare our operating performance to that of our competitors.We use certain Non-GAAP Financial Measures to compare the operating performance of each operation. These measures are useful in this regard because they do not include such costs as other expense, income taxes, depreciation and amortization expense, which may vary from period-to-period depending upon various factors, including the method used to finance operations, the amount of debt that we have incurred, whether an operation is owned or leased, the date of acquisition of a facility or business, and the tax law of the state in which a business unit operates.
We also establish compensation programs and bonuses for our leaders that are
partially based upon the achievement of Adjusted EBITDAR targets.
•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
•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 use the following Non-GAAP financial measures that we believe are useful to
investors as key valuation and operating performance measures:
EBITDAWe believe EBITDA is useful to investors in evaluating our operating performance because it helps investors evaluate and compare the results of our operations from period to period by removing the impact of our asset base (depreciation and amortization expense) from our operating results.
We calculate EBITDA as net income, adjusted for net losses attributable to
noncontrolling interest, before (a) other expense, net, (b) provision for income
taxes, and (c) depreciation and amortization.
Adjusted EBITDAWe adjust EBITDA when evaluating our performance because we believe that the exclusion of certain additional items described below provides useful supplemental information to investors regarding our ongoing operating performance, in the case of Adjusted EBITDA. We believe that the presentation of Adjusted EBITDA, when combined with EBITDA and GAAP net income attributable to The Ensign Group, Inc., is beneficial to an investor's complete understanding of our operating performance.
Adjusted EBITDA is EBITDA adjusted for non-core business items, which for the
reported periods includes, to the extent applicable:
•stock-based compensation expense;
•real estate transactions and other related costs;
•acquisition related costs;
•costs incurred related to new systems implementation;
•results related to operations not at full capacity; and
•gain on sale of assets.
Funds from Operations (FFO)We consider FFO to be a useful supplemental measure of the operating performance of Standard Bearer. Historical cost accounting for real estate assets in accordance with U.S. GAAP implicitly assumes that the value of real estate assets diminishes predictably over time as evidenced by the provision for depreciation. However, since real estate values have historically risen or fallen with market conditions, many real estate investors and analysts have considered presentations of operating results for real estate companies that use historical cost accounting to be insufficient. In response, the National Association of Real Estate Investment Trusts (NAREIT) created FFO as a supplemental measure of operating performance for REITs, which excludes historical cost depreciation from net income. We define (in accordance with the definition used by NAREIT) FFO to consist of Standard Bearer segment income, excluding depreciation and amortization related to real estate, gains or losses from the sale of real estate, insurance recoveries related to real estate and impairment of depreciable real estate assets. 63
--------------------------------------------------------------------------------Table of Contents VALUATION MEASURE: Adjusted EBITDAR We use Adjusted EBITDAR as one measure in determining the value of prospective acquisitions. It is also a commonly used measure by our management, research analysts and investors, to compare the enterprise value of different companies in the healthcare industry, without regard to differences in capital structures and leasing arrangements. Adjusted EBITDAR is a financial valuation measure that is not specified in GAAP. This measure is not displayed as a performance measure as it excludes rent expense, which is a normal and recurring operating expense.
The adjustments made and previously described in the computation of Adjusted
EBITDA are also made when computing Adjusted EBITDAR. We calculate Adjusted
EBITDAR by excluding rent-cost of services from Adjusted EBITDA.
We believe the use of Adjusted EBITDAR allows the investor to compare
operational results of companies who have operating and capital leases. A
significant portion of capital lease expenditures are recorded in interest,
whereas operating lease expenditures are recorded in rent expense.
The table below reconciles net income to EBITDA, Adjusted EBITDA and Adjusted
EBITDAR for the periods presented:
thousands)Net income $ 56,242 $ 48,344 $ 164,133 $ 148,764 Less: net income (loss) attributable to noncontrolling interests 63 1,063 (77) 2,852 Add: Other expense, net 1,832 1,461 9,991 2,867 Provision for income taxes 16,213 16,513 47,505 43,220 Depreciation and amortization 15,941 13,929 45,475 41,383 EBITDA $ 90,165 $ 79,184 $ 267,181 $ 233,382 Stock-based compensation 5,898 5,082 16,681 13,769 Real estate transactions and other related costs(a) - 287 - 458 Legal finding(b) 859 - 4,212 - Gain on sale of assets (900) - (3,467) (540) Results related to operations not at full capacity - - - 584 Acquisition related costs(c) 245 145 416 333 Costs incurred related to new systems 321 41 390 117
implementationRent related to items above - - - 38 Adjusted EBITDA $ 96,588 $ 84,739 $ 285,413 $ 248,141 Rent-cost of services 38,907 35,623 111,897 103,534 Less: rent related to items above - - - (38) Adjusted rent 38,907 35,623 111,897 103,496 Adjusted EBITDAR $ 135,495 $ 397,310
(a) Real estate transactions and other related costs include costs incurred
related to the formation of Standard Bearer and other real estate related
(b) Legal finding against our non-emergent transportation subsidiary.
(c) Costs incurred to acquire operations that are not capitalizable.
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Three Months Ended September 30, 2022 Compared to the Three Months Ended
September 30, 2021
Three Months Ended September 30, 2022Skilled services Standard Bearer All Other Eliminations Consolidated Total Revenue 739,318 18,732 31,844 (19,889) $ 770,005 Total expenses, including other expense, net 637,568 11,791 68,880 (19,889)
698,350Segment income (loss) 101,750 6,941 (37,036) -
71,655Gain from sale of real estate
800Income before provision for income taxes $ 72,455
Three Months Ended September 30, 2021Skilled Standard services Bearer All Other Eliminations Consolidated Total Revenue $ 642,075 $ 14,431 $ 26,059 $ (14,035) $ 668,530 Total expenses, including other expense, net 547,646 6,491 63,571 (14,035) 603,673 Segment income (loss) 94,429 7,940 (37,512) - 64,857 Income before provision for income taxes $ 64,857 Our total revenue increased $101.5 million, or 15.2%, compared to the three months ended September 30, 2021. The increase in revenue was primarily driven by an increase in occupancy from our skilled services operations, along with the impact of acquisitions. Total revenue from operations acquired on or subsequent to October 1, 2021 increased our consolidated revenue by $41.5 million during the three months ended September 30, 2022, when compared to the same period in 2021. In addition, we recorded $21.4 million of state relief revenue in the third quarter of 2022 compared to $19.2 million in the same period in 2021, which directly correlated to the additional COVID-19 related expenses incurred. All state relief revenue is included in Medicaid revenue.
REVENUEThe following table presents the skilled services revenue and key performance metrics by category during the three months ended September 30, 2022 and 2021: Three Months Ended September 30, 2022 2021 Change % Change TOTAL FACILITY RESULTS: (Dollars in thousands) Skilled services revenue $ 739,318 $ 642,075 $ 97,243 15.1 % Number of facilities at period end 222 208 14 6.7 % Number of campuses at period end* 26 25 1 4.0 % Actual patient days 1,846,699 1,665,967 180,732 10.8 % Occupancy percentage - Operational beds 75.7 % 73.5 % 2.2 % Skilled mix by nursing days 31.6 % 30.5 % 1.1 % Skilled mix by nursing revenue 51.6 % 50.7 % 0.9 % 65
--------------------------------------------------------------------------------Table of Contents Three Months Ended September 30, 2022 2021 Change % Change SAME FACILITY RESULTS:(1) (Dollars in thousands) Skilled services revenue $ 565,577 $ 523,888 $ 41,689 8.0 % Number of facilities at period end 167 167 - - % Number of campuses at period end* 20 20 - - % Actual patient days 1,380,368 1,338,875 41,493 3.1 % Occupancy percentage - Operational beds 76.8 % 74.4 % 2.4 % Skilled mix by nursing days 33.7 % 32.1 % 1.6 % Skilled mix by nursing revenue 53.7 % 52.3 % 1.4 %
Three Months Ended September 30,2022 2021 Change % Change TRANSITIONING FACILITY RESULTS:(2) (Dollars in thousands) Skilled services revenue $ 96,711 $ 86,599 $ 10,112 11.7 % Number of facilities at period end 27 27 - - % Number of campuses at period end* 5 5 - - % Actual patient days 255,334 238,614 16,720 7.0 % Occupancy percentage - Operational beds 76.0 % 70.7 % 5.3 % Skilled mix by nursing days 27.6 % 25.1 % 2.5 % Skilled mix by nursing revenue 47.8 % 44.8 % 3.0 % Three Months Ended September 30, 2022 2021 Change % Change RECENTLY ACQUIRED FACILITY RESULTS:(3) (Dollars in thousands) Skilled services revenue $ 77,030 $ 31,588 $ 45,442 NM Number of facilities at period end 28 14 14 NM Number of campuses at period end* 1 - 1 NM Actual patient days 210,997 88,478 122,519 NM Occupancy percentage - Operational beds 68.7 % 67.6 % NM Skilled mix by nursing days 22.8 % 20.9 % NM Skilled mix by nursing revenue 40.4 % 39.1 % NM *Campus represents a facility that offers both skilled nursing and senior living services. Revenue and expenses related to skilled nursing and senior living services have been allocated and recorded in the respective operating segment. Since the third quarter of 2021, we converted three skilled nursing facilities into campuses. (1)Same Facility results represent all facilities purchased prior to January 1, 2019. (2)Transitioning Facility results represent all facilities purchased from January 1, 2019 to December 31, 2020. (3)Recently Acquired Facility (Acquisitions) results represent all facilities purchased on or subsequent to January 1, 2021. Skilled services revenue increased $97.2 million, or 15.1%, compared to the three months ended September 30, 2021. The increases in skilled services revenue were across all payer types including increases in Medicaid revenue of $38.2 million, or 12.4%, Medicare revenue of $34.4 million, or 19.5%, managed care revenue of $17.7 million, or 15.4% and private revenue of $6.9 million or 16.3%. 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 third quarter of 2022, coupled with increases in skilled mix revenue. Our consolidated occupancy increased by 2.2% and skilled mix revenue increased by 0.9%, driven by higher acuity. 66 -------------------------------------------------------------------------------- Table of Contents Revenue in our Same Facilities increased $41.7 million, or 8.0% due to increased occupancy and revenue per patient day. Our diligent efforts to strengthen our partnership with various managed care organizations, hospitals and the local communities we operate in, increased our occupancy by 2.4%. Medicare and Managed care skilled days increased by 13.5% and 6.4%, respectively, resulting in an increase in Managed Care and Medicare revenue. Revenue generated by our Transitioning Facilities increased $10.1 million, or 11.7%, primarily due to improved occupancy growth of 5.3% and an increase in skilled mix days of 2.5% compared to the three months ended September 30, 2021. Managed care and Medicare days increased by 25.6% and 17.6%, respectively, demonstrating our ability to transition these healthcare operations toward higher acuity patients. Skilled services revenue generated by facilities purchased on or subsequent to January 1, 2021 (Recently Acquired Facilities) increased by approximately $45.4 million compared to the three months ended September 30, 2021. We acquired fifteen operations between October 1, 2021 and September 30, 2022 across five states. In the future, if we acquire additional turnaround or start-up operations, we expect to see lower occupancy rates and skilled mix, and these metrics are expected to vary from period to period based upon the maturity of the facilities within our portfolio. Historically, we have generally experienced lower occupancy rates, lower skilled mix at Recently Acquired Facilities and therefore, we anticipate generally lower overall occupancy during years of growth. The following table reflects the change in skilled nursing average daily revenue rates by payor source, excluding services that are not covered by the daily rate (1):
Three Months Ended September 30,Same Facility Transitioning Acquisitions Total 2022 2021 2022 2021 2022 2021 2022 2021 SKILLED NURSING AVERAGE DAILY REVENUE RATES: Medicare $ 683.41 $ 681.02 $ 682.17 $ 678.14 $ 674.84 $ 686.08 $ 682.41 $ 680.85 Managed care 515.22 499.97 475.86 474.71 476.14 501.81 508.13 497.19 Other skilled 572.41 537.81 443.25 424.74 467.63 563.10 552.31 530.24 Total skilled revenue 594.41 578.16 574.89 569.48 573.99 610.16 590.36 578.30 Medicaid 261.49 250.86 241.76 237.00 253.53 249.95 257.57 248.66 Private and other payors 255.31 238.37 226.23 222.79 228.40 262.04 248.01 237.00
Total skilled nursing revenue $ 372.99 $ 354.60 $ 331.81
$ 318.88 $ 324.39 $ 326.34 $ 361.74
(1) These rates exclude additional FMAP and other state relief funding and
include sequestration reversal of 2% in 2021.
The following table sets forth total cost of services for our Skilled services
segment for the periods indicated (dollars in thousands):
--------------------------------------------------------------------------------Table of Contents Standard Bearer Three Months Ended September 30, Change 2022 2021 $ % (Dollars in thousands) Rental revenue generated from third-party tenants $ 3,708 $ 3,421 $ 287 8.4 % Rental revenue generated from Ensign affiliated operations 15,024 11,010 4,014 36.5 TOTAL RENTAL REVENUE $ 18,732 $ 14,431 $ 4,301 29.8 % Segment income 6,941 7,940 (999) (12.6) Depreciation and amortization 5,561 4,389 1,172 26.7 FFO $ 12,502 $ 12,329 $ 173 1.4 % Rental revenue. Our rental revenue, including revenue generated from our affiliated facilities, increased by $4.3 million, or 29.8%, to $18.7 million, compared to the three months ended September 30, 2021. The increase in revenue is primarily attributable to 13 real estate purchases as well as annual rent increases since the three months ended September 30, 2021. FFO. Our FFO increased $0.2 million, or 1.4% to $12.5 million, compared to the three months ended September 30, 2021. The increase in rental revenue of $4.3 million is offset by interest expense of $2.3 million as well as management fee expense of $1.1 million associated with the intercompany agreements between Standard Bearer and the Service Center that started in January of 2022.
All Other RevenueOur other revenue increased by $5.8 million, or 22.2%, to $31.8 million, compared to the three months ended September 30, 2021. Other revenue for 2022 includes senior living revenue of $18.1 million and revenue from other ancillary services of $11.9 million and rental income of $1.8 million. The increase in other revenue is attributable to our senior living operations as our senior living occupancy rate rebounds from COVID-19.
Consolidated Financial ExpensesRent - cost of services. Our rent - cost of services as a percentage of total revenue decreased by 0.2% to 5.1%, primarily due to growth in revenue outpacing the increase in rent expense and as our operation expansions include the acquisition of the related real estate properties. General and administrative expense - General and administrative expense increased $0.7 million or 1.8%, to $39.2 million. This increase was primarily due to increases in employee wages and bonuses due to enhanced performance and growth. General and administrative expense as a percentage of revenue decreased by 0.7% to 5.1%, which demonstrates our refocused efforts on non-clinical spend management. Depreciation and amortization - Depreciation and amortization expense increased $2.0 million, or 14.4%, to $15.9 million. This increase was primarily related to the additional depreciation and amortization incurred as a result of our newly acquired operations and capital expenditures. Depreciation and amortization remained consistent at 2.1%, as a percentage of revenue. Other expense, net - Other expense, net as a percentage of revenue remained consistent at 0.2%. Other expense primarily includes interest expense related to our debt and gain or loss on the deferred compensation investment program. During the three months ended September 30, 2022, we recorded a loss on those investments of $1.1 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 22.4% for the three months ended September 30, 2022, compared to 25.5% for the same period in 2021. The effective tax rate for both periods is driven by the impact of excess tax benefits from stock-based compensation, partially offset by non-deductible expenses including non-deductible compensation. See Note 15, Income Taxes, in the Notes to the Unaudited Condensed Consolidated Financial Statements for further discussion. 69
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Nine Months Ended September 30, 2022 Compared to the Nine Months Ended
September 30, 2021
Nine Months Ended September 30, 2022Standard Skilled services Bearer All Other Eliminations Consolidated Total revenue $ 2,128,567 $ 53,523 $ 89,793 $ (55,947) $ 2,215,936 Total expenses, including other expense, net 1,826,295 32,844 204,373 (55,947) 2,007,565 Segment income (loss) 302,272 20,679 (114,580) - 208,371 Gain from sale of real estate 3,267 Income before provision for income taxes $ 211,638 Nine Months Ended September 30, 2021 Standard Skilled services Bearer All Other Eliminations Consolidated Total revenue $ 1,855,993
$ 42,714 $ 77,033 $ (41,421) $ 1,934,319
Total expenses, including other expense,
Skilled Services Segment
The following table presents the skilled services revenue and key performance
metrics by category during the nine months ended September 30, 2022 and 2021:
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Nine Months Ended September 30,2022 2021 Change % Change SAME FACILITY RESULTS:(1) (Dollars in thousands) Skilled services revenue $ 1,662,310 $ 1,546,468 $ 115,842 7.5 % Number of facilities at period end 167 167 - - % Number of campuses at period end* 20 20 - - % Actual patient days 4,050,302 3,922,904 127,398 3.2 % Occupancy percentage - Operational beds 75.9 % 73.5 % 2.4 % Skilled mix by nursing days 33.8 % 33.2 % 0.6 % Skilled mix by nursing revenue 54.0 % 53.8 % 0.2 % Nine Months Ended September 30, 2022 2021 Change % Change TRANSITIONING FACILITY RESULTS:(2) (Dollars in
thousands)Skilled services revenue $ 283,388 $ 247,486 $ 35,902 14.5 % Number of facilities at period end 27 27 - - % Number of campuses at period end* 5 5 - - % Actual patient days 744,013 684,166 59,847 8.7 % Occupancy percentage - Operational beds 74.3 % 68.4 % 5.9 % Skilled mix by nursing days 27.7 % 26.2 % 1.5 % Skilled mix by nursing revenue 47.7 % 46.3 % 1.4 % Nine Months Ended September 30, 2022 2021 Change % Change RECENTLY ACQUIRED FACILITY RESULTS:(3) (Dollars in
thousands)Skilled services revenue $ 182,869 $ 62,039 $ 120,830 NM Number of facilities at period end 28 14 14 NM Number of campuses at period end* 1 - 1 NM Actual patient days 493,375 168,204 325,171 NM
Occupancy percentage - Operational beds 69.5 % 66.1 %NM Skilled mix by nursing days 24.7 % 23.7 % NM Skilled mix by nursing revenue 43.5 % 44.0 % NM *Campus represents a facility that offers both skilled nursing and senior living services. Revenue and expenses related to skilled nursing and senior living services have been allocated and recorded in the respective operating segment. In 2022, we converted three skilled nursing facilities into campuses. (1)Same Facility results represent all facilities purchased prior to January 1, 2019. (2)Transitioning Facility results represent all facilities purchased from January 1, 2019 to December 31, 2020. (3)Recently Acquired Facility (Acquisitions) results represent all facilities purchased on or subsequent to January 1, 2021. Skilled services revenue increased $272.6 million, or 14.7%, compared to the nine months ended September 30, 2021. Of the $272.6 million increase, the primary changes were from increases in Medicaid custodial revenue of $106.9 million, or 14.5%, Medicare revenue of $73.0 million, or 13.6%, managed care revenue of $52.8 million, or 15.7%, private revenue of $21.6 million, or 18.5% and Medicaid skilled revenue of $18.3 million, or 14.3%. The increase in revenue was primarily driven by our consolidated occupancy and skilled mix days increasing by 2.5% and 0.3%, respectively, compared to the same period in the prior year. Revenue in our Same Facilities increased $115.8 million, or 7.5% due to increased occupancy and increase in skilled mix days. Our diligent efforts to strengthen our partnership with various managed care organizations, hospitals, and the local communities we operate in, as well as higher acuity, increased our occupancy by 2.4% to 75.9%. Managed care and Medicare skilled days increased by 6.7% and 5.6%, respectively, resulting in an increase in skilled mix revenue. 71 -------------------------------------------------------------------------------- Table of Contents Revenue generated by our Transitioning Facilities increased $35.9 million, or 14.5%, primarily due to improved occupancy growth of 5.9% and an increase in skilled mix days of 1.5%, compared to the nine months ended September 30, 2021, demonstrating our ability to transition these healthcare operations toward higher acuity patients. Skilled mix revenue increased by 1.4%, mainly from the increases in Managed care and Medicare days of 23.2% and 10.4%, respectively. Skilled services revenue generated by facilities purchased on or subsequent to January 1, 2021 (Recently Acquired Facilities) increased by approximately $120.8 million compared to the nine months ended September 30, 2021. We acquired fifteen operations between October 1, 2021 and September 30, 2022 across five states. In the future, if we acquire additional facilities that are underperforming and need to be turned around or invest in start-up operations, we expect to see lower occupancy rates and skilled mix and these metrics are expected to vary from period to period based upon the maturity of the facilities within our portfolio. Historically, we have generally experienced lower occupancy rates and lower skilled mix at Recently Acquired Facilities and therefore, we anticipate generally lower overall occupancy during years of growth. The following table reflects the change in skilled nursing average daily revenue rates by payor source, excluding services that are not covered by the daily rate (1):
Nine Months Ended September 30,Same Facility Transitioning Acquisitions Total 2022 2021 2022 2021 2022 2021 2022 2021 SKILLED NURSING AVERAGE DAILY REVENUE RATES Medicare $ 688.98 $ 685.48 $ 685.51 $ 679.22 $ 683.90 $ 722.82 $ 688.09 $ 685.78 Managed care 512.81 503.76 474.63 464.37 497.06 511.26 507.32 499.44 Other skilled 576.80 539.70 456.18 411.75 481.71 549.32 558.30 531.21 Total skilled revenue 596.16 584.80 576.75 569.56 582.05 630.29 592.79 584.19 Medicaid 260.92 250.81 244.67 235.08 248.85 246.91 257.20 248.20 Private and other payors 253.16 238.92 229.62 230.58 242.38 262.57 248.66 238.26
Total skilled nursing revenue $ 373.44 $ 360.42 $ 335.08
$ 322.23 $ 330.74 $ 338.85 $ 364.06
(1) These rates exclude additional FMAP and other state relief funding and
include sequestration reversal of 1% for the second quarter in 2022 and 2% for
the first quarter of 2022 and the nine months ended September 30, 2021.
The following table sets forth total cost of services for our skilled services
segment for the periods indicated (dollars in thousands):
--------------------------------------------------------------------------------Table of Contents Standard Bearer Nine Months Ended September 30, Change 2022 2021 $ % (Dollars in thousands) Rental revenue generated from third-party tenants $ 11,180 10,329 $ 851 8.2 % Rental revenue generated from Ensign affiliated operations 42,343 32,385 9,958 30.7 TOTAL RENTAL REVENUE $ 53,523 $ 42,714 $ 10,809 25.3 % Segment income 20,679 23,559 (2,880) (12.2) Depreciation and amortization 15,798 12,792 3,006 23.5 FFO $ 36,477 $ 36,351 $ 126 0.3 % Rental revenue. Our rental revenue, including revenue generated from our affiliated facilities, increased by $10.8 million, or 25.3% to $53.5 million, compared to the nine months ended September 30, 2021. The increase in revenue is primarily attributable to 13 real estate purchases as well as annual rent increases since the nine months ended September 30, 2021. FFO. Our FFO increased by 0.3% to $36.5 million, for the nine months ended September 30, 2022 compared to the same period in 2021. The increase in rental revenue of $10.8 million is offset by interest expense of $6.1 million as well as management fee expense of $3.2 million associated with the intercompany agreements between Standard Bearer and the Service Center starting in January of 2022. All Other Revenue Our other revenue increased by $12.8 million, or 16.6% to $89.8 million, compared to the nine months ended September 30, 2021. Other revenue for 2022 includes senior living revenue of $48.9 million and revenue from other ancillary services of $35.4 million and rental income of $5.5 million. The increase in other revenue is attributable to our senior living acquisitions as our senior living occupancy rate rebounds from COVID-19.
Consolidated Financial ExpensesRent - cost of services. Our rent - cost of services as a percentage of total revenue decreased by 0.4% to 5.0%, primarily due to the growth in revenue outpacing the increase in rent expense and as our operation expansions include the acquisition of the related real estate properties. General and administrative expense. General and administrative expense increased $6.3 million or 5.7%, to $116.0 million. This increase was primarily due to increases in wages and benefits due to enhanced performance and growth. General and administrative expense as a percentage of revenue decreased by 0.5% to 5.2%, which demonstrates our refocused efforts on non-clinical spend management. Depreciation and amortization. Depreciation and amortization expense increased $4.1 million, or 9.9%, to $45.5 million. This increase was primarily related to the additional depreciation and amortization incurred as a result of our newly acquired operations. Depreciation and amortization remained consistent at 2.1%, as a percentage of revenue. Other expense, net. Other expense, net as a percentage of revenue increased by 0.3%, to 0.5%. Other expense primarily includes interest expense related to our debt and gain or loss on the deferred compensation investments. During the nine months ended September 30, 2022, we recorded a loss on those investments of $5.7 million compared to a gain of $0.9 million during the nine months ended September 30, 2021. There is an offsetting reduction in expense split between cost of services and general and administrative expenses for both periods. Provision for income taxes. Our effective tax rate was 22.4% for the nine months ended September 30, 2022, compared to 22.5% for the same period in 2021. The effective tax rate for both periods is driven by the impact of excess tax benefits from stock-based compensation, partially offset by non-deductible expenses. See Note 15, Income Taxes, in the Notes to the Unaudited Condensed Consolidated Financial Statements for further discussion. 74 -------------------------------------------------------------------------------- Table of Contents 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 September 30, 2022 is impacted by cash generated from strong operational performance and increased acquisition and share repurchase activities. Historically, we have primarily financed the majority of our acquisitions through mortgages on our properties, our Revolving Credit Facility and cash generated from operations. Total capital expenditures for property and equipment were $59.7 million and $50.1 million for the nine months ended September 30, 2022 and 2021, respectively. We currently have approximately $70.0 million budgeted for renovation projects for 2022. We believe our current cash balances, our cash flow from operations and the amounts available for borrowing under our Revolving Credit Facility will be sufficient to cover our operating needs for at least the next 12 months.
We may, in the future, seek to raise additional capital to fund growth, capital
renovations, operations and other business activities, but such additional
capital may not be available on acceptable terms, on a timely basis, or at all.
The following table presents selected data from our condensed consolidated
statement of cash flows for the periods presented:
308,864 $ 304,62075
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Cash provided by operating activities is net income adjusted for certain
non-cash items and changes in operating assets and liabilities.
Investing cash flows consist primarily of capital expenditures, investment
activities, insurance proceeds and cash used for acquisitions.
The $85.9 million increase in cash used in investing activities for the nine
months ended September 30, 2022 compared to the same period in 2021, was
primarily due to an increase in cash used for expansions and capital
expenditures of $88.9 million offset by sale of assets.
Financing ActivitiesFinancing cash flows consist primarily of payment of dividends to stockholders, issuance and repayment of short-term and long-term debt, payment for share repurchases, repayment of the Medicare Accelerated and Advance Payment Program funds and sale of subsidiary shares. The $46.7 million decrease in cash used in financing activities for the nine months ended September 30, 2022 compared to the same period in 2021, was primarily due to $102.0 million of net proceeds and repayment of the Medicare Accelerated and Advance Payment Program funds in 2021 and $6.7 million receipt of proceeds from the sale of preferred shares and common stock of Standard Bearer in 2022. This is offset by $29.9 million of share repurchases as part of our stock repurchase program in 2022 and $31.4 million proceeds from HUD borrowings in the same period in 2021, that did not recur in 2022.
Credit Facility with a Lending Consortium Arranged by TruistOn 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. Borrowings are supported by a lending consortium arranged by Truist. The interest rates applicable to loans under the Revolving Credit Facility are, at our option, equal to either a base rate plus a margin ranging from 0.25% to 1.25% per annum or SOFR plus a margin range from 1.25% to 2.25% per annum, based on the Consolidated Total Net Debt to Consolidated EBITDA ratio (as defined in the Amended Credit Agreement). In addition, we will pay a commitment fee on the unused portion of the commitments that will range from 0.20% to 0.40% per annum, depending on the Consolidated Total Net Debt to Consolidated EBITDA ratio.
Mortgage Loans and Promissory NotesAs of September 30, 2022, 23 of our subsidiaries have mortgage loans insured with HUD for an aggregate amount of $154.3 million, which subjects these subsidiaries to HUD oversight and periodic inspections. The mortgage loans bear effective interest rates at a range of 3.1% to 4.2%, including fixed interest rates at a range of 2.4% to 3.3% per annum. Amounts borrowed under the mortgage loans may be prepaid, subject to prepayment fees of the principal balance on the date of prepayment. For the majority of the loans, the prepayment fee is 10% during the first three years and is reduced by 3% in the fourth year of the loan, and is reduced by 1% per year for years five through ten of the loan. There is no prepayment penalty after year ten. The term of the mortgage loans are 25 to 35 years. In addition to the HUD mortgage loans above, we have two promissory notes. The notes bear fixed interest rates of 6.3% and 5.3% per annum and the term of the notes are 10 months and 12 years, respectively. The 12 year note, which was used for an acquisition, is secured by the real property comprising the facility and the rent, issues and profits thereof, as well as all personal property used in the operation of the facility. 76
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Operating LeasesAs of September 30, 2022, 182 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. Forty-eight of our affiliated facilities, excluding the facilities that are operated under the Master Leases from CareTrust, are operated under eight separate master lease arrangements. Under these master leases, a breach at a single facility could subject one or more of the other affiliated facilities covered by the same master lease to the same default risk. Failure to comply with Medicare and Medicaid provider requirements is a default under several of our leases, master lease agreements and debt financing instruments. In addition, other potential defaults related to an individual facility may cause a default of an entire master lease portfolio and could trigger cross-default provisions in our outstanding debt arrangements and other leases. With an indivisible lease, it is difficult to restructure the composition of the portfolio or economic terms of the lease without the consent of the landlord.
U.S. Department of Justice Civil Investigative DemandOn May 31, 2018, we received a Civil Investigative Demand (CID) from the U.S. Department of Justice stating that it is investigating to determine whether we have violated the False Claims Act and/or the Anti-Kickback Statute with respect to the relationships between certain of our skilled nursing facilities and persons who served as medical directors, advisory board participants or other referral sources. The CID covered the period from October 3, 2013 through 2018, and was limited in scope to ten of our Southern California skilled nursing facilities. In October 2018, the Department of Justice made an additional request for information covering the period of January 1, 2011 through 2018, relating to the same topic. As a general matter, our operating entities maintain policies and procedures to promote compliance with the False Claims Act, the Anti-Kickback Statute, and other applicable regulatory requirements. We have fully cooperated with the U.S. Department of Justice and promptly responded to its requests for information; in April 2020, we were advised that the U.S. Department of Justice declined to intervene in any subsequent action based on or related to the subject matter of this investigation.
InflationWe have historically derived a substantial portion of our revenue from the Medicare program. We also derive revenue from state Medicaid and similar reimbursement programs. Payments under these programs generally provide for reimbursement levels that are adjusted for inflation annually based upon the state's fiscal year for the Medicaid programs and in each October for the Medicare program. These adjustments may not continue in the future, and even if received, such adjustments may not reflect the actual increase in our costs for providing healthcare services. Labor and supply expenses make up a substantial portion of our cost of services. Those expenses can be subject to increase in periods of rising inflation and when labor shortages occur in the marketplace. To date, we have generally been able to implement cost control measures or obtain increases in reimbursement sufficient to offset increases in these expenses. There can be no assurance that we will be able to anticipate fully or otherwise respond to any future inflationary pressures. 77
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Recent Accounting PronouncementsExcept 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. Recent Accounting Standards Adopted by the Company - In November 2021, the FASB issued ASU 2021-10 "Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance," which created FASB ASC Topic 832, Government Assistance (ASC 832). ASC 832 requires business entities to disclose information about certain government assistance they receive. We adopted this standard on January 1, 2022 and determined there was no material impact on our condensed consolidated financial statements. Accounting Standards Recently Issued but Not Yet Adopted by the Company - In February 2020, the FASB issued ASU 2020-04 "Reference Rate Reform (Topic 848)" which provides temporary, optional practical expedients and exceptions to enable a smoother transition to reference rates which are expected to replace LIBOR reference rates. Adoption of the provisions of ASU 2020-04 is optional. The amendments are effective for all entities from the beginning of the interim period that includes the issuance date of the ASU. An entity may elect to apply the amendments prospectively through December 31, 2022. On April 8, 2022, we entered into the Amended Credit Facility, which increased the revolving credit facility by $250.0 million to an aggregate principal amount of up to $600.0 million. Pursuant to the Amended Credit Agreement, we transitioned from LIBOR to SOFR as the applicable reference rate for borrowings under the Revolving Credit Facility. As part of the transition from LIBOR to SOFR reference rates, we determined there was no material impact on our condensed consolidated financial statements.