The Ensign Group
Annual Report 2017

Plain-text annual report

Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549_____________________________FORM 10-KxANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.For the fiscal year ended December 31, 2017.oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.For the transition period from to .Commission file number: 001-33757__________________________THE ENSIGN GROUP, INC.(Exact Name of Registrant as Specified in Its Charter)Delaware33-0861263(State or Other Jurisdiction of(I.R.S. EmployerIncorporation or Organization)Identification No.)27101 Puerta Real, Suite 450Mission Viejo, CA 92691(Address of Principal Executive Offices and Zip Code)(949) 487-9500(Registrant’s Telephone Number, Including Area Code)_____________________________Title of Each Class Name of Each Exchange on Which RegisteredCommon Stock, par value $0.001 per share NASDAQ Global Select MarketSecurities registered pursuant to Section 12(g) of the Act:NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. x Yes o NoIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes x NoIndicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o NoIndicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submittedand posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submitand post such files). x Yes o NoIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of theregistrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. oIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, smaller reporting company, or an emerging growthcompany. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.(Check one):Large accelerated filer xAccelerated filer oNon-accelerated filer o(Do not check if a smaller reporting company)Smaller reportingcompany oEmerging growthcompany oIf an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financialaccounting standards provided pursuant to Section 13(a) of the Exchange Act. oIndicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x NoThe aggregate market value of the registrant's common stock held by non-affiliates of the registrant, computed by reference to the closing price as of the last business day ofthe registrant's most recently completed second fiscal quarter, June 30, 2017, was approximately $780,000,000. Shares of Common Stock held by each executive officer, directorand each person owning more than 10% of the outstanding Common Stock of the registrant have been excluded in that such persons may be deemed to be affiliates of the registrant.This determination of affiliate status is not necessarily a conclusive determination for other purposes.As of February 5, 2018, 51,484,963 shares of the registrant’s common stock were outstanding.DOCUMENTS INCORPORATED BY REFERENCE:Part III of this Form 10-K incorporates information by reference from the Registrant's definitive proxy statement for the Registrant's 2017 Annual Meeting of Stockholdersto be filed within 120 days after the close of the fiscal year covered by this annual report. THE ENSIGN GROUP, INC.INDEX TO ANNUAL REPORT ON FORM 10-KFOR THE FISCAL YEAR ENDED DECEMBER 31, 2017TABLE OF CONTENTS PART I. Item 1.Business1 Item 1A.Risk Factors24 Item 1B.Unresolved Staff Comments60 Item 2.Properties60 Item 3.Legal Proceedings61 Item 4.Mine Safety Disclosures63 PART II. Item 5.Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities63 Item 6.Selected Financial Data65 Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations71 Item 7A.Quantitative and Qualitative Disclosures About Market Risk99 Item 8.Financial Statements and Supplementary Data100 Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure101 Item 9A.Controls and Procedures101 Item 9B.Other Information103 PART III. Item 10.Directors, Executive Officers and Corporate Governance103 Item 11.Executive Compensation103 Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters103 Item 13.Certain Relationships and Related Transactions and Director Independence103 Item 14.Principal Accountant Fees and Services103 PART IV. Item 15.Exhibits, Financial Statements and Schedules103 Item 16.Form 10-K Summary111 Signatures 112 EX-10.87 EX-10.88 EX-21.1 EX-23.1 EX-31.1 EX-31.2 EX-32.1 EX-32.2 EX-101 CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTSThis Annual Report on Form 10-K contains forward-looking statements, 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 andobjectives 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 ornegatives of these words. These statements are subject to the safe harbors created under the Securities Act of 1933 (Security Act) and the Securities ExchangeAct of 1934 (Exchange Act). These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that aredifficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result ofvarious factors, some of which are listed under the section “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K. Accordingly, you should notrely upon forward-looking statements as predictions of future events. These forward-looking statements speak only as of the date of this Annual Report, andare 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 otherwiserequired by law.As used in this Annual Report on Form 10-K, the words, "Ensign," Company," “we,” “our” and “us” refer to The Ensign Group, Inc. and its consolidatedsubsidiaries. All of our operating subsidiaries, the Service Center (defined below) and our wholly-owned captive insurance subsidiary (the Captive) areoperated by separate, wholly-owned, independent subsidiaries that have their own management, employees and assets. References herein to the consolidated“Company” and “its” assets and activities, as well as the use of the terms “we,” “us,” “our” and similar terms in this Annual Report is not meant to imply, norshould it be construed as meaning, that The Ensign Group, Inc. has direct operating assets, employees or revenue, or that any of the subsidiaries are operatedby The Ensign Group.The Ensign Group, Inc. is a holding company with no direct operating assets, employees or revenues. In addition, certain of our wholly-ownedindependent subsidiaries, collectively referred to 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. In addition,our wholly-owned captive insurance subsidiary, which we refer to as the Captive, provides some claims-made coverage to our operating subsidiaries forgeneral and professional liability, as well as for certain workers' compensation insurance liabilities.We were incorporated in 1999 in Delaware. The Service Center address is 27101 Puerta Real, Suite 450, Mission Viejo, CA 92691, and our telephonenumber is (949) 487-9500. Our corporate website is located at www.ensigngroup.net. The information contained in, or that can be accessed through, ourwebsite does not constitute a part of this Annual Report.EnsignTM is our United States trademark. All other trademarks and trade names appearing in this annual report are the property of their respectiveowners.PART I.Item 1. BusinessCompany OverviewWe are a provider of health care services across the post-acute care continuum, as well as other ancillary businesses located in Arizona, California,Colorado, Idaho, Iowa, Kansas, Nebraska, Nevada, Oklahoma, Oregon, South Carolina, Texas, Utah, Washington and Wisconsin. Our operating subsidiaries,each of which strives to be the service of choice in the community it serves, provide a broad spectrum of skilled nursing, assisted and independent living,home health and hospice and other ancillary services. As of December 31, 2017, we offered skilled nursing, assisted and independent living andrehabilitative care services through 230 skilled nursing and assisted and independent living facilities across 13 states. Of the 230 facilities, we owned 63 andoperated an additional 167 facilities under long-term lease arrangements, and had options to purchase 11 of those 167 facilities. Our home health and hospicebusiness provides home health, hospice and home care services from 46 agencies across eleven states.Our organizational structure is centered upon local leadership. We believe our organizational structure, which empowers leaders and staff at the locallevel, is unique within the healthcare services industry. Each of our leaders are highly dedicated individuals who are responsible for key operationaldecisions at their operations. Leaders and staff are trained and motivated to pursue superior clinical outcomes, high patient and family satisfaction, operatingefficiencies and financial performance at their operations.We encourage and empower our leaders and staff to make their operation the “operation of choice” in the community it serves. This means that ourleaders and staff are generally authorized to discern and address the unique needs and priorities of healthcare professionals, customers and other stakeholdersin the local community or market, and then work to create a superior service offering for, and reputation in, that particular community or market. We believethat our localized approach encourages prospective customers and referral sources to choose or recommend the operation. In addition, our leaders are enabledand motivated to share real-time operating data and otherwise benchmark clinical and operational performance against their peers in order to improve clinicalcare, enhance patient satisfaction and augment operational efficiencies, promoting the sharing of best practices.We view healthcare services primarily as a local business, influenced by personal relationships and community reputation. We believe our success islargely dependent upon our ability to build strong relationships with key stakeholders from the local healthcare community, based upon a solid foundationof reliably superior care. Accordingly, our brand strategy is focused on encouraging the leaders and staff of each operation to focus on clinical excellence,and promote their operation independently within their local community.Much of our historical growth can be attributed to our expertise in acquiring real estate or leasing both under-performing and performing post-acutecare operations and transforming them into market leaders in clinical quality, staff competency, employee loyalty and financial performance. We have alsoinvested in new business lines that are complementary to our existing businesses, such as ancillary services. We plan to continue to grow our revenue andearnings by:•continuing to grow our talent base and develop future leaders;•increasing the overall percentage or “mix” of higher-acuity patients;•focusing on organic growth and internal operating efficiencies;•continuing to acquire additional operations in existing and new markets;•expanding and renovating our existing operations, and•strategically investing in and integrating other post-acute care healthcare businesses.Company HistoryOur company was formed in 1999 with the goal of establishing a new level of quality care within the skilled nursing industry. The name “Ensign” issynonymous with a “flag” or a “standard,” and refers to our goal of setting the standard by which all others in our industry are measured. We believe thatthrough our efforts and leadership, we can foster a new level of patient care and professional competence at our operating subsidiaries, and set a new industrystandard for quality skilled nursing and rehabilitative care services.1We organize our operating subsidiaries into portfolio companies, which we believe has enabled us to maintain a local, field-driven organizationalstructure, attract additional qualified leadership talent, and to identify, acquire, and improve operations at a generally faster rate. Each of our portfoliocompanies has its own president. These presidents, who are experienced and proven leaders that are generally taken from the ranks of operational CEOs, serveas leadership resources within their own portfolio companies, and have the primary responsibility for recruiting qualified talent, finding potential acquisitiontargets, and identifying other internal and external growth opportunities. We believe this organizational structure has improved the quality of our recruitingand will continue to facilitate successful acquisitions.We have three reportable segments: (1) transitional and skilled services, which includes the operation of skilled nursing facilities; (2) assisted andindependent living services, which includes the operation of assisted and independent living facilities; and (3) home health and hospice services, whichincludes our home health, home care and hospice businesses. Our Chief Executive Officer, who is our chief operating decision maker, or CODM, reviewsfinancial information at the operating segment level. We also report an “all other” category that includes revenue from our mobile diagnostics and otherancillary operations. Our mobile diagnostics and other ancillary operations businesses are neither significant individually nor in aggregate and therefore donot constitute a reportable segment. Our reporting segments are business units that offer different services and that are managed separately to provide greatervisibility into those operations. For more information about our operating segments, as well as financial information, see Part II Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations and Note 7, Business Segments of the Notes to Consolidated Financial Statements.SegmentsTransitional and Skilled ServicesAs of December 31, 2017, our skilled nursing companies provided skilled nursing care at 181 operations, with 18,870 operational beds, in Arizona,California, Colorado, Idaho, Iowa, Kansas, Nebraska, Nevada, South Carolina, Texas, Utah, Washington and Wisconsin. Through our skilled nursingoperations, we provide short stay patients and long stay patients with a full range of medical, nursing, rehabilitative, pharmacy and routine services,including daily dietary, social and recreational services. We generate our revenue from Medicaid, private pay, managed care and Medicare payors. During theyear ended December 31, 2017, approximately 45.7% and 27.0% of our transitional and skilled services revenue was derived from Medicaid and Medicareprograms, respectively.Assisted and Independent Living ServicesWe provide assisted and independent living services at 70 operations, of which 21 are located on the same site location as our skilled nursing careoperations. As of December 31, 2017, we had 5,011 assisted and independent living units. Our assisted living companies located in Arizona, California,Colorado, Idaho, Iowa, Kansas, Nebraska, Nevada, Texas, Utah, Washington and Wisconsin, provide residential accommodations, activities, meals, security,housekeeping and assistance in the activities of daily living to seniors who are independent or who require some support, but not the level of nursing careprovided in a skilled nursing operation. Our independent living units are non-licensed independent living apartments in which residents are independent andrequire no support with the activities of daily living. We generate revenue at these units primarily from private pay sources, with a portion earned fromMedicaid or other state-specific programs. During the year ended December 31, 2017, approximately 77.7% of our assisted and independent living revenuewas derived from private pay sources.Home Health and Hospice ServicesHome HealthAs of December 31, 2017, we provided home health care services in Arizona, California, Colorado, Idaho, Iowa, Oklahoma, Oregon, Texas, Utah andWashington. Our home health care services generally consist of providing some combination of nursing, speech, occupational and physical therapists,medical social workers and certified home health aide services. Home health care is often a cost-effective solution for patients, and can also increase theirquality of life and allow them to receive quality medical care in the comfort and convenience of a familiar setting. We derive the majority of our home healthrevenue from Medicare and managed care organizations. During the year ended December 31, 2017, approximately 50.1% of our home health revenue wasderived from Medicare.Hospice2As of December 31, 2017, we provided hospice care services in Arizona, California, Colorado, Idaho, Iowa, Nevada, Oklahoma, Oregon, Texas, Utah andWashington. Hospice services focus on the physical, spiritual and psychosocial needs of terminally ill individuals and their families, and consists primarilyof palliative and clinical care, education and counseling. We derive the majority of our hospice revenue from Medicare reimbursement. During the yearended December 31, 2017, approximately 88.6% of our hospice revenue was derived from Medicare.OtherAs of December 31, 2017, we held a majority membership interest of ancillary operations located in Arizona, California, Colorado, Idaho, Texas, Utahand Washington. We have invested in and are exploring new business lines that are complementary to our existing transitional and skilled services; assistedand independent living services and home health and hospice businesses. These new business lines consist of mobile ancillary services, including digital x-ray, ultrasound, electrocardiograms, sub-acute services and patient transportation to people in their homes or at long-term care facilities. To date thesebusinesses are not meaningful contributors to our operating results.GrowthWe have an established track record of successful acquisitions. Much of our historical growth can be attributed to our expertise in acquiring real estateor leasing both under-performing and performing post-acute care operations and transforming them into market leaders in clinical quality, staff competency,employee loyalty and financial performance. With each acquisition, we apply our core operating expertise to improve these operations, both clinically andfinancially. In years where pricing has been high, we have focused on the integration and improvement of our existing operating subsidiaries while limitingour acquisitions to strategically situated properties.Over the last several years, our acquisition activity accelerated, allowing us to add 128 facilities between January 1, 2012 and December 31, 2017.From January 1, 2008 through December 31, 2017, we acquired 169 facilities, which added 12,434 operational skilled nursing beds and 4,433 assisted andindependent living units to our operating subsidiaries. The following table summarizes our growth through December 31, 2017: December 31, 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017Cumulative number of skilled nursing,assisted and independent living operations61 63 77 82 102 108 119(1)136 186(2)210 230Cumulative number of operational skillednursing beds6,436 6,635 8,250 8,548 9,787 10,215 10,949 12,379 14,925 17,724 18,870Cumulative number of assisted living andindependent living units578 578 578 791 1,509 1,677 1,968(1)2,285 4,298(2)4,450 5,011Number of home health, hospice and homecare agencies— — 1 3 7 10 16 25 32 39 46(1) Included in 2013 operational units are operational units of the three independent living facilities we transferred to CareTrust REIT, Inc. (CareTrust) as part of the spin-off transaction (the Spin-Off). Prior to the Spin-Off,the Company separated the healthcare operations from the independent living operations at two locations, resulting in two separate facilities and transferred the two separate facilities and one stand-alone independentfacility to CareTrust.(2) Included in 2010-2015 operational beds and number of operations are operational beds and operation of facilities we discontinued in 2016 and 2017. In the current and prior year, the number of operations andoperational beds do not include the closed facilities.New Market CEO and New Ventures Programs. In order to broaden our reach into new markets, and in an effort to provide existing leaders in ourcompany with the entrepreneurial opportunity and challenge of entering a new market and starting a new business, we established our New Market CEOprogram in 2006. Supported by our Service Center and other resources, a New Market CEO evaluates a target market, develops a comprehensive businessplan, and relocates to the target market to find talent and connect with other providers, regulators and the healthcare community in that market, with the goalof ultimately acquiring businesses and establishing an operating platform for future growth. In addition, this program includes other lines of business that areclosely related to the skilled nursing industry. For example, we entered into home health and hospice as part of this program. The New Ventures programencourages our local leaders to evaluate service offerings with the goal of establishing an operating platform in new markets and new businesses. We believethat this program will not only continue to drive growth, but will also provide a valuable training ground for our next generation of leaders, who will haveexperienced the challenges of growing and operating a new business.Acquisition History3The following table sets forth the location of our facilities and the number of operational beds and units located at our facilities as of December 31,2017: TX CA AZ WI UT CO WA ID NE KS IA SC NV TotalNumber of facilitiesSkilled nursingoperations43 39 23 2 16 9 9 6 4 — 4 4 1 160Assisted andindependentliving services4 6 6 19 1 5 1 3 1 — — — 3 49Campuses(1)4 3 1 — 1 1 — 1 2 6 2 — — 21Number of operational beds/unitsOperationalskilled nursingbeds5,634 4,1633,1801381,76376684154441354236842692 18,870Assisted andindependentliving units387 7351,2507581066189827430114231—311 5,011(1) Campus represents a facility that offers both skilled nursing and assisted and/or independently living services.As of December 31, 2017, we provided home health and hospice services through our 46 agencies in Arizona, California, Colorado, Idaho, Iowa,Nevada, Oklahoma, Oregon, Texas, Utah and Washington.During the year ended December 31, 2017, we continued to expand our operations through a combination of long-term leases and purchases, with theaddition of eight stand-alone skilled nursing operations, nine stand-alone assisted and independent living operations, one campus operation, three homehealth agencies, three hospice agencies and one home care agency. We did not acquire any material assets or assume any liabilities other than the tenant'spost-assumption rights and obligations under the long-term leases. We have also invested in ancillary services that are complementary to our existingtransitional and skilled services, assisted and independent living services, and home health and hospice businesses. The aggregate purchase price for theseacquisitions for the year ended December 31, 2017 was $89.7 million. The addition of these operations added 905 operational skilled nursing beds and 594assisted living units operated by our operating subsidiaries. We entered into a separate operations transfer agreement with the prior operator as part of eachtransaction.Our operating subsidiaries also opened four newly constructed stand-alone skilled nursing operations under long-term lease agreements, which added455 operational skilled nursing beds.Subsequent to December 31, 2017, we acquired two stand-alone assisted and independent living operations for an aggregate purchase price of $4.3million. The addition of these operations added 74 assisted living units operated by our Company's operating subsidiaries.For further discussion of our acquisitions, see Note 8, Acquisitions in the Notes to Consolidated Financial Statements.Quality of Care MeasuresSkilled NursingIn December 2008, the Centers for Medicare and Medicaid Services (CMS) introduced the Five-Star Quality Rating System to help consumers, theirfamilies and caregivers compare nursing homes more easily. The Five-Star Quality Rating System gives each skilled nursing operation a rating of betweenone and five stars in various categories. In cases of acquisitions, the previous operator's clinical ratings are included in our overall Five-Star Quality Rating.The prior operator's results will impact our rating until we have sufficient clinical measurements subsequent to the acquisition date. Generally we acquirefacilities with a 1 or 2-Star rating at the time we acquire them, which impacts our overall Five-Star Quality rating as a percentage of all our skilled nursingoperations. We believe compliance and quality outcomes are precursors to outstanding financial performance.Our star ratings starting in 2015 were impacted by changes in the CMS Five Star Quality Rating System requirements that were established on February20, 2015. These changes include the use of antipsychotics in calculating the star ratings, modified calculations for staffing levels and reflect higher standardsfor nursing homes to achieve a high rating on the quality measure dimension. In 2016, CMS added six new quality measures to the Nursing Home Five-StarQuality Ratings, including the rate of hospitalization, emergency room use, community discharge, improvements in function, independently worsened andanxiety or4hypnotic medication among nursing home residents. Since the revised standards for performance are more difficult to achieve, many nursing homesexperienced a lower quality measure rating based on new measurement standards rather than a change in the quality of care. In 2017, CMS issued a temporaryfreeze of the Health Inspection Five Star Ratings beginning in 2018 that will last approximately 12 months. The health inspection star rating forrecertification surveys and complaints conducted on or after November 28, 2017 will be frozen. This freeze could impact have a negative impact on our starrating in 2018. Because of these changes, we believe that it is not appropriate to compare our 2017, 2016 and 2015 star ratings with those that appeared inearlier years. In addition, our percentage of 4 and 5-Star Quality Rated skilled nursing facilities is also impacted by the number of newly acquired facilities.As mentioned above, generally we acquire facilities with a 1 or 2-Star rating.The table below summarizes the improvements we have made in these quality measures since 2012: As of December 31, 2012 2013 2014 2015 2016 2017Cumulative number of skilled nursing facilities(1)98 106 121 146 170 1814 and 5-Star Quality Rated skilled nursing facilities45 60 77 72 86 100Percentage of 4 and 5-Star Quality Rated skilled nursing facilities45.9% 56.6% 63.6% 49.3% 50.6% 55.2%(1) Cumulative number includes only skilled nursing facilities as of the end of the respective period as star rating reports are only applicable to skilled nursing facilities.Home HealthOn July 17, 2015, CMS announced Home Health Star Ratings for home health agencies (HHAs). All Medicare-certified HHAs are potentially eligible toreceive a Quality of Patient Care Star Rating. The Star Ratings include assessments of quality of patient care based on Medicare claims data and patientexperience of care. Currently, HHAs must have at least 20 complete episodes of data for each measure and have reported data for five of the nine measuresused in the calculation to have a Quality of Patient Care Star Rating computed. On December 14, 2017, CMS announced the influenza vaccination measurewould be removed from consideration in the Quality of Patient Care Star Rating beginning with the April 2018 Home Health Compare refresh, reducing thenumber of quality measures used from nine to eight. As of December 31, 2017, we had 15 agencies, or 65.2%, with a 4 or 5-Star rating and our average ratingwas 3.89, as compared to the industry average of 3.67.Industry TrendsThe post-acute care industry has evolved to meet the growing demand for post-acute and custodial healthcare services generated by an agingpopulation, increasing life expectancies and the trend toward shifting of patient care to lower cost settings. The industry has evolved in recent years, whichwe 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 United States continues to increase healthcare costs,often faster than the available funding from government-sponsored healthcare programs. In response, federal and state governments have adoptedcost-containment measures that encourage the treatment of patients in more cost-effective settings such as skilled nursing facilities, for which thestaffing 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 predominantlyby numerous local and regional providers. Due to the increasing demands from hospitals and insurance carriers to implement sophisticated andexpensive reporting systems, we believe this fragmentation provides significant acquisition and consolidation opportunities for us.•Improving Supply and Demand Balance. The number of skilled nursing facilities has declined modestly over the past several years. We expect thatthe supply and demand balance in the skilled nursing industry will continue to improve due to the shift of patient care to lower cost settings, anaging population and increasing life expectancies.•Increased Demand Driven by Aging Populations and Increased Life Expectancy. As life expectancy continues to increase in the United States andseniors account for a higher percentage of the total U.S. population, we believe the overall demand for skilled nursing services will increase. Atpresent, the primary market demographic for skilled nursing services is primarily individuals age 75 and older. According to the 2010 U.S. Census,there were over 40 million people in the United States in 2010 that are over 65 years old. The 2010 U.S. Census estimates this group is one of thefastest growing segments of the United States population and is expected to more than double between 2000 and 2030.•Accountable Care Organizations and Reimbursement Reforms. A significant goal of federal health care reform is to transform the delivery of healthcare by changing reimbursement for health care services to hold providers accountable5for the cost and quality of care provided. Medicare and many commercial third party payors are implementing Accountable Care Organization(ACO) models in which groups of providers share in the benefit and risk of providing care to an assigned group of individuals. Other reimbursementmethodology reforms include value-based purchasing, in which a portion of provider reimbursement is redistributed based on relative performanceon designated economic, clinical quality, and patient satisfaction metrics. In addition, CMS is implementing demonstration and mandatoryprograms to bundle acute care and post-acute care reimbursement to hold providers accountable for costs across a broader continuum of care. Thesereimbursement methodologies and similar programs are likely to continue and expand, both in public and commercial health plans. On April 26,2015, CMS announced its goal to have 30% of Medicare payments for quality and value through alternative payment models such as ACOs orbundled payments by 2016 and up to 50% by the end of 2018. In March 2016, CMS announced that its 30% target for 2016 was reached in January2016. On December 1, 2017, CMS finalized changes to the Comprehensive Care for Joint Replacement (CJR) Model, as well as the cancellation ofcare coordination through mandatory Episode Payments and Cardiac Rehabilitation Incentive Payment Model, and rescinded the regulationsgoverning these models. Through the final rule, CMS canceled the Episode Payment Models, which were scheduled to begin on January 1, 2018 andimplemented certain revisions to CJR, including giving certain hospitals a one-time option to choose whether to continue participation. Thechanges in the final rule allow the agency to engage providers in future voluntary efforts, including additional voluntary episode-based paymentmodels, but removes the mandatory episode payment models.We believe the post-acute industry has been and will continue to be impacted by several other trends. The use of long-term care insurance is increasingamong 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 averagefamily size, and the increased number of two-wage earner couples, more seniors are looking for alternatives outside the family for their care.Effects of Changing PricesMedicare reimbursement rates and procedures are subject to change from time to time, which could materially impact our revenue. Medicare reimbursesour skilled nursing operations under a PPS for certain inpatient covered services. Under the PPS, facilities are paid a predetermined amount per patient, perday, based on the anticipated costs of treating patients. The amount to be paid is determined by classifying each patient into a resource utilization group(RUG) category that is based upon each patient’s acuity level. As of October 1, 2010, the RUG categories were expanded from 53 to 66 with the introductionof minimum data set (MDS) 3.0. Should future changes in skilled nursing facility payments reduce rates or increase the standards for reaching certainreimbursement levels, our Medicare revenues could be reduced and/or our costs to provide those services could increase, with a corresponding adverseimpact on our financial condition or results of operations.Our Medicare reimbursement rates and procedures for our home health and hospice operations are based on the severity of the patient’s condition, hisor her service needs and other factors relating to the cost of providing services and supplies. Our home health rates and services are bundled into 60-dayepisodes of care. Payments can be adjusted for: (a) an outlier payment if our patient’s care was unusually costly (capped at 10% of total reimbursement perprovider number); (b) a low utilization payment adjustment (LUPA) if the number of visits during the episode was fewer than five; (c) a partial payment if ourpatient transferred to another provider or we received a patient from another provider before completing the episode; (d) a payment adjustment based uponthe level of therapy services required (with various incremental adjustments made for additional visits, and larger payment increases associated with the sixth,fourteenth and twentieth visit thresholds); (e) a payment adjustment if we are unable to perform periodic therapy assessments; (f) the number of episodes ofcare provided to a patient, regardless of whether the same home health provider provided care for the entire series of episodes; (g) changes in the base episodepayments established by the Medicare program; (h) adjustments to the base episode payments for case mix and geographic wages; and (i) recoveries ofoverpayments.Various healthcare reform provisions became law upon enactment of the Patient Protection and Affordable Care Act and the Healthcare Education andReconciliation Act (collectively, the ACA). The reforms contained in the ACA have affected our operating subsidiaries in some manner and are directed inlarge part at increased quality and cost reductions. Several of the reforms are very significant and could ultimately change the nature of our services, themethods of payment for our services and the underlying regulatory environment. These reforms include the possible modifications to the conditions ofqualification for payment, bundling of payments to cover both acute and post-acute care and the imposition of enrollment limitations on new providers. Therecent presidential and congressional elections in the United States could result in significant changes in, and uncertainty with respect to, legislation,regulation, implementation of Medicare and/or Medicaid, and government policy that could significantly impact our business and the health care industry.We continually monitor these developments in an effort to respond to the changing regulatory environment impacting our business.On October 4, 2016, CMS released a final rule that reforms the requirements for long-term care (LTC) facilities, specifically skilled nursing facilities(SNFs) and nursing facilities (NFs), to participate in the Medicare and Medicaid programs. The regulations have not been updated since 1991 and have beenrevised to improve quality of life, care and services in LTC facilities, optimize6resident safety, reflect current professional standards and improve the logical flow of the regulations. The regulations became effective November 28, 2016and are being implemented in three phases. The first phase was effective November 28, 2016, the second phase was effective November 28, 2017 and thethird phase becomes effective November 28, 2019.A few highlights from the new regulation include the following:•investigate and report all allegations of abusive conduct, and refrain from employing individuals who have had a disciplinary action takenagainst their professional license by a state licensure body as a result of a finding of abuse, neglect, mistreatment of residents ormisappropriation of their property;•document a transfer or discharge in the medical record and exchange certain information to a receiving provider or facility when a residentis transferred;•develop and implement a baseline care plan for each resident within 48 hours of their admission that includes instructions to provideeffective and person-centered care that meets professional standards of quality care;•develop and implement a discharge planning process that prepares residents to be active partners in post-discharge care;•provide the necessary care and services to attain or maintain the highest practicable physical, mental and psychosocial well-being;•add a competency requirement for determining the sufficiency of nursing staff;•require that a pharmacist reviews a resident’s medical chart during each monthly drug regiment review;•refrain from charging a Medicare resident for loss or damage of dentures;•provide each resident with a nourishing, palatable and well-balanced diet;•conduct, document and annually review a facility-wide assessment to determine what resources are necessary to care for its residents;•refrain from entering into a binding arbitration agreement until after a dispute arises between the parties;•develop, implement and maintain an effective comprehensive, data-driven quality assurance and performance improvement program;•develop an Infection Prevention and Control Program; and•require their operating organization have in effect a compliance and ethics program.CMS estimates that the average cost per facility for compliance with the new rule to be approximately $62,900 in the first year and approximately$55,000 in subsequent years. However, these amounts vary per organization. In addition to the monetary costs, these regulations may create complianceissues, as state regulators and surveyors interpret requirements that are less explicit. On June 8, 2017, CMS issued a proposed rule that would remove theprovisions prohibiting binding pre-dispute arbitration agreements, but would retain other provisions that protect the interests of LTC residents. On June 9, 2017, CMS issued revised requirements for emergency preparedness for Medicare and Medicaid participating providers, including long-termcare facilities, hospices, and home health agencies. The revised requirements update the conditions of participation for such providers. Specifically,outpatient facilities, such as home health agencies, are required to ensure that patients with limited mobility are addressed within the emergency plan; homehealth agencies are also required to develop and implement emergency preparedness policies and procedures that are reviewed and updated at least annuallyand each patient must have an individual plan; hospice-operated inpatient care facilities are required to provide subsistence needs for hospice employees andpatients and a means to shelter in place patients and employees who remain in the hospice; all hospices and home health agencies must implementprocedures to follow up with on duty staff and patients to determine services that are needed in the event that there is an interruption in services during or dueto an emergency; hospices must train their employees in emergency preparedness policies and long-term care facilities are required to share emergencypreparedness plans and policies with family members and resident representatives.7On September 16, 2016, CMS issued its final rule concerning emergency preparedness requirements for Medicare and Medicaid participating providers,specifically skilled nursing facilities (SNFs), nursing facilities (NFs), and intermediate care facilities for individuals with intellectual disabilities (ICF/IIDs).The rule is designed to ensure providers and suppliers have comprehensive and integrated emergency policies and procedures in place, in particular duringnatural and man-made disasters. Under the rule, facilities are required to 1) document risk assessment and emergency planning; 2) develop and implementpolicies and procedures based on that risk assessment; 3) develop and maintain an emergency preparedness communication plan in compliance with bothfederal and state law; and 4) develop and maintain an emergency preparedness training and testing program. The regulations outlined in the final rule mustbe implemented by November 15, 2017.On July 29, 2016, CMS issued its final rule laying out the performance standards relating to preventable hospital readmissions from skilled nursingfacilities. The final rule includes the SNF 30-day All Cause Readmission Measure which assesses the risk-standardized rate of all-cause, all condition,unplanned inpatient hospital readmissions for Medicare fee-for-service SNF patients within 30 days of discharge from admission to an inpatient prospectivepayment system hospital, CAH or psychiatric hospital. The final rule includes the SNF 30-Day Potentially Preventable Readmission Measure as the SNF allcondition risk adjusted potentially preventable hospital readmission measure. This measure assesses the facility-level risk-standardized rate of unplanned,potentially preventable hospital readmissions for SNF patients within 30 days of discharge from a prior admission to an IPPS hospital, CAH, or psychiatrichospital. Hospital readmissions include readmissions to a short-stay acute-care hospital or CAH, with a diagnosis considered to be unplanned and potentiallypreventable. This measure is claims-based, requiring no additional data collection or submission burden for SNFs.On December 20, 2016, the Centers for Medicare & Medicaid Services (CMS) issued the final rule for a new Cardiac Rehabilitation Incentive (CR)model, which includes mandatory bundled payment programs for an acute myocardial infarction (AMI) episode of care or a coronary artery bypass graft(CABG) episode of care, and modifications to the existing Comprehensive Care for Joint Replacement (CJR) model to include surgical hip/femur fracturetreatment episodes. The new mandatory cardiac programs mirror the Bundled Payments for Care Improvement (BPCI) and Comprehensive Care for JointReplacement (CJR) models in that actual episode payments will be retrospectively compared against a target price. Similar to CJR, participating hospitalswill be at risk for Medicare Part A and B payments in the inpatient admission and 90 days post-discharge. BPCI episodes would continue to take precedenceover episodes in the CJR program and in the new cardiac bundled payment program. The cardiac model will be mandatory in 98 randomly selectedgeographic areas and the hip/femur procedure model will be mandatory in the same 67 geographic areas that were selected for CJR. CMS is also providing“Cardiac Rehabilitation Incentive Payments”, which can be used by hospitals to facilitate cardiac rehabilitation plans and adherence. The incentive will beprovided to hospitals in 45 of the 98 geographic areas included in the mandatory bundled payment program and 45 geographic areas outside of the program.On May 19, 2017, CMS issued a final rule which delayed the effective date until May 20, 2017 and the start date was scheduled for January 1, 2018, and thefinal rule will continue for five performance years.On August 15, 2017, CMS proposed changes to the Comprehensive Care for Joint Replacement (CJR) Model, which included the cancellation of carecoordination through mandatory Episode Payments and Cardiac Rehabilitation Incentive Payment Model. On December 1, 2017, CMS issued a final rulewhich officially canceled the Episode Payment Models and Cardiac Rehabilitation Incentive Payment Model, rescinding the regulations governing thesemodels. Additionally, the final rule implemented certain revisions to the CJR program, including making participation voluntary for approximately half ofthe geographic areas, along with other technical refinements. These regulation changes are effective January 1, 2018.On January 9, 2018, CMS launched a new voluntary bundled payment called Bundled Payments for Care Improvement Advanced (BCPI Advanced).The Model Performance Period for BCPI Advanced commences on October 1, 2018 and runs through December 31, 2023. Under this bundled paymentmodel, participants can earn additional payment if all expenditures for a beneficiary’s episode of care are under a spending target that factors in quality. BPCIAdvanced Participants may receive payments for performance on 32 different clinical episodes, such as major joint replacement of the lower extremity(inpatient) and percutaneous coronary intervention (inpatient or outpatient). Participants bear financial risk, have payments under the model tied to qualityperformance, and are required to use Certified Electronic Health Record Technology. An episode model such as BPCI Advanced supports healthcareproviders who invest in practice innovation and care redesign to improve quality and reduce expenditures.Of note, BPCI Advanced will qualify as the first Advanced Alternative Payment Model (Advanced APM) under the Quality Payment Program. In 2015,Congress passed the Medicare Access and Chip Reauthorization Act or MACRA. MACRA requires CMS to implement a program called the Quality PaymentProgram or QPP, which changes the way physicians are paid who participate in Medicare. QPP creates two tracks for physician payment - the Merit-BasedIncentive Payment System or MIPS track and the Advanced APM track. Under MIPS, providers have to report a range of performance metrics and theirpayment amount is adjusted based on their performance. Under Advanced APMs, providers take on financial risk to earn the Advanced APM incentivepayment that they are participating in.8Skilled NursingCMS Payment Rules. In 2017, CMS proposed an alternative case-mix classification system for fiscal year 2018, named Resident Classification System,Version I (RCS-I). RCS-I would case-mix adjust for the following major cost categories: Physical therapy (PT), occupational therapy (OT), speech-languagepathology (SLP) services, nursing services and non-therapy ancillaries (NTAs). Thus, where RUG-IV consists of two case-mix adjusted components (therapyand nursing), RCS-I would create four (PT/OT, SLP, nursing, and NTA) for a more resident-centered case-mix adjustment. RCS-I would also maintain theexisting non-case-mix component to cover utilization of SNF resources that do not vary according to resident characteristics. For two of the case-mix-adjusted components, PT/OT and NTA, RCS-I includes variable per-diem payment adjustments that modify payment based on changes in utilization of theseservices over the course of a stay. The proposed model will compensate SNFs accurately based on the complexity of the particular beneficiaries they serveand the resources necessary in caring for those beneficiaries and addresses concerns about current incentives for SNFs to delivery therapy to beneficiariesbased on financial considerations, rather than the most effective course of treatment for beneficiaries. The proposed RCS-I classification model could improvethe SNF PPS by basing payments predominantly on clinical characteristics rather than service provision, thereby enhancing payment accuracy andstrengthening incentives for appropriate care. The proposed rule is expected to reduce payments associated with residents in the highest therapy RUG (RU)and increase payments associated with residents who receive extensive services or have high NTA costs. The proposed rule also simplifies the MDS structureand reduces labor needs. Additionally, it is estimated that RCS-I would result in higher payments associated with the following resident types: dualenrollment in Medicare and Medicaid, end-stage renal disease (ESRD), having a longer qualifying inpatient stay, diabetes, wound infections, and use of IVmedication.On July 31, 2017, CMS issued its final rule outlining fiscal year 2018 Medicare payment rates for skilled nursing facilities. Under the final rule, themarket basket index is revised and rebased by updating the base year from 2010 to 2014 and adding a new cost category for Installation, Maintenance, andRepair Services. The rule also includes revisions to the SNF Quality Reporting Program, including measure and standardized patient assessment data policies,as well as policies related to public display. In addition, it finalized policies for the Skilled Nursing Facility Value-Based Purchasing Program that will affectMedicare payment to SNFs beginning in fiscal year 2019 and clarification of the requirements regarding the composition of professionals for the surveyteam. The final rule uses a market basket percentage of 1% to update the federal rates, but if a SNF fails to submit quality reporting program requirementsthere will be a 2% reduction to the market basket update for the fiscal year involved. Thus, the increase in the proposed federal rates may increase the amountof our reimbursements for SNF services so long as we meet the reporting requirements. On July 29, 2016, CMS issued its final rule outlining fiscal year 2017 Medicare payment rates and quality programs for skilled nursing facilities. Thepolicies in the finalized rule continue to shift Medicare payments from volume to value. The aggregate payments to skilled nursing facilities increased by anet 2.4% for fiscal year 2017. This estimate increase reflected a 2.7% market basket increase, reduced by a 0.3% multi-factor productivity (MFP) adjustmentrequired by the Patient Protection and Affordable Care Act (ACA). This final rule also further defines the skilled nursing facilities Quality Reporting Programand clarifies the Value-Based Purchasing Program to establish performance standards, baseline and performance periods, performance scoring methodologyand feedback reports.The Value-Based Purchasing Program rewards skilled nursing facilities with incentive payments for the quality of care they give to people withMedicare. The final rule specifies the skilled nursing facility 30-day potentially preventable readmission measure, which assesses the facility-level riskstandardized rate of unplanned, potentially preventable hospital readmissions for skilled nursing facility patients within 30 days of discharge from a prioradmission to a hospital paid under the Inpatient Prospective Payment System, a critical access hospital, or a psychiatric hospital. There is also finalizedadditional policies related to the Value-Based Purchasing Program including: establishing performance standards; establishing baseline and performanceperiods; adopting a performance scoring methodology; and providing confidential feedback reports to the skilled nursing facilities. This SNF Value-BasedPurchasing Program will start in fiscal year 2019.On July 30, 2015, CMS issued its final rule outlining fiscal year 2016 Medicare payment rates for skilled nursing facilities. The aggregate payments toskilled nursing facilities increased by 1.2% for fiscal year 2016. This increase reflected a 2.3% market basket increase, reduced by a 0.6% point forecast erroradjustment and further reduced by 0.5% MFP adjustment required by the Patient Protection and Affordable Care Act (ACA). This final rule also identified anew skilled nursing facility value-based purchasing program and all-cause all-condition hospital readmission measure.Should future changes in PPS include further reduced rates or increased standards for reaching certain reimbursement levels, our Medicare revenuesderived from our affiliated skilled nursing facilities (including rehabilitation therapy services provided at our affiliated skilled nursing facilities) could bereduced, with a corresponding adverse impact on our financial condition or results of operations.9Home HealthOn November 1, 2017, CMS issued a final rule that became effective on January 1, 2018 and updated the calendar year 2018 Medicare payment ratesand the wage index for home health agencies serving Medicare beneficiaries. The rule also finalized proposals for the Home Health Value-Based Purchasing(HHVBP) Model and the Home Health Quality Reporting Program (HH QRP). Under the final rule. Medicare payments will be reduced by 0.4%. This decreasereflects the effects of a 1.0% home health payment update percentage; a -0.97% adjustment to the national, standardized 60-day episode payment rate toaccount for nominal case-mix growth for an impact of -0.9%; and the sunset of the rural add-on provision.On January 13, 2017, CMS issued a final rule that modernized the Home Health Conditions of Participation (CoPs). This rule is a continuation of CMS'seffort to improve quality of care while streamlining provider requirements to reduce unnecessary procedural requirements. The rule makes significantrevisions to the conditions currently in place, including (1) adding new conditions of participation related to quality assurance and performanceimprovement programs (QAPI) and infection control; and (2) expanding or revising requirements related to patient rights, comprehensive evaluations,coordination and care planning, home health aide training and supervision, and discharge and transfer summary and time frames. The new CoPs becameeffective on January 13, 2018.On October 31, 2016, CMS issued final payment changes to the Medicare HH PPS for calendar year 2017. Under this rule, Medicare payments werereduced by 0.7%. This decrease reflects a negative 0.97% adjustment to the national, standardized 60-day episode payment rate to account for nominal case-mix growth from 2012 through 2014; a 2.3% reduction in payments due to the final year of the four-year phase-in of the rebasing adjustments to the national,standardized 60-day episode payment rate, the national per-visit payment rates and the non-routine medical supplies (NRS) conversion factor; and the effectsof the revised fixed-dollar loss (FDL) ratio used in determining outlier payments; partially offset by the home health payment update percentage of 2.5%.On November 5, 2015, CMS issued final payment changes to the Medicare HH PPS for calendar year 2016. Under this rule, Medicare payments werereduced by 1.4%. This decrease reflects a 1.9% home health payment update percentage; a 0.9% decrease in payments due to the 0.97% payment reduction tothe national, standardized 60-day episode payment rate to account for nominal case-mix growth from 2012 through 2014; and a 2.4% decrease in paymentsdue to the third year of the four-year phase-in of the rebasing adjustments to the national, standardized 60-day episode payment rate, the national per-visitpayment rates, and the non-routine medical supplies (NRS) conversion factor. Along with the payment update, CMS is revising the ICD-10-CM translationlist and adding certain initial encounter codes to the HH PPS Grouper based upon revised ICD-10-CM coding guidance.Pursuant to the rule, CMS also implemented a Home Health Value-Based Purchasing model effective for calendar year 2016, in which all Medicare-certified home health agencies (HHAs) in selected states are required to participate. The model applied a payment reduction or increase to current Medicare-certified HHA payments, depending on quality performance, for all agencies delivering services within nine randomly-selected states. Payment adjustmentsare applied on an annual basis, beginning at 3.0% in the first payment adjustment year, 5.0% in the second payment adjustment year, 6.0% in the thirdpayment adjustment year and 8.0% in the final two payment adjustment years. The implementation of a home health value-based model resulted in a 1.4%decrease in Medicare payments to home health agencies across the industry.Lastly, CMS implemented a standardized cross-setting measure for calendar year 2016. The CoPs require home health agencies to submit OASISassessments, within 30 days of completing the assessment of the beneficiary, as a condition of payment and also for quality measurement purposes.Commencing on April 3, 2017, if the OASIS assessment is not found in the quality system upon receipt of a final claim for an HH episode and the receipt dateof the claim is more than 30 days after the assessment completion date, Medicare systems will deny the HH claim. Home health agencies that do not submitquality measure data to CMS incur a 2.0% reduction in their annual home health payment update percentage. Under the rule, all home health agencies arerequired to timely submit both Start of Care (initial assessment) or Resumption of Care OASIS assessment and a Transfer or Discharge OASIS assessment for aminimum of 70.0% of all patients with episodes of care occurring during the annual reporting period starting July 1, 2015 and ending June 30, 2016, 80% ofall patients with episodes occurring during the reporting period starting July 1, 2016 and ending June 30, 2017, and 90% for all episodes beginning on orafter July 1, 2017.HospiceOn August 1, 2017, CMS issued its final rule outlining the fiscal year 2018 Medicare payment rates, wage index and cap amount for hospices servingMedicare beneficiaries. The final rule uses a net market basket percentage increase of 1.0% to update the federal rates, as mandated by section 411(d) of theMACRA. Although, if a hospice fails to comply with quality reporting program requirements, there will be a 2.0% reduction to the market basket update forthe fiscal year involved. The hospice cap10amount for fiscal year 2018 is increased by 1.0% , which is equal to the 2017 cap amount updated by the fiscal year 2018 hospice payment update percentageof 1.0%. In addition, this rule discusses changes to the Hospice Quality Reporting Program (HQRP), including changes to the Consumer Assessment ofHealthcare Providers and Systems (CAHPS) hospice survey measures and plans for sharing HQRP data in fiscal year 2017.On July 29, 2016, CMS issued its final rule outlining fiscal year 2017 Medicare payment rates, wage index and cap amount for hospices servingMedicare beneficiaries. Under the final rule, there was a net 2.1% increase in hospice payments effective October 1, 2016. The hospice payment increase wasthe net result of 2.7% inpatient hospital market basket update, reduced by a 0.3% productivity adjustment and by a 0.3% adjustment set by the ACA. Thehospice cap amount for fiscal year 2017 increased by 2.1%, which is equal to the 2016 cap amount updated by the fiscal year 2017 hospice payment updatepercentage of 2.1%. In addition, this rule changes the HQRP requirements, including care surveys and two new quality measures that assess hospice staffvisits to patients and caregivers in the last three and seven days of life and the percentage of hospice patients who received care processes consistent withguidelines.On July 31, 2015, CMS issued its final rule outlining fiscal year 2016 Medicare payment rates and the wage index for hospices serving Medicarebeneficiaries. Under the final rule, there was a net 1.1% increase in payments effective October 1, 2015. The hospice payment increase was the net result of ahospice payment update to the hospice per diem rates of 2.1% (a “hospital market basket” increase of 2.4% minus 0.3% for reductions required by law) and1.2% decrease in payments to hospices due to updated wage data and the phase-out of its wage index budget neutrality adjustment factor (BNAF), offset bythe newly announced Core Based Statistical Areas (CBSA) delineation impact of 0.2%. The rule also created two different payment rates for routine homecare (RHC) that resulted in a higher base payment rate for the first 60 days of hospice care and a reduced base payment rate for 61 or more days of hospicecare and a Service Intensity Add-On (SIA) Payment for fiscal year 2016 and beyond in conjunction with the proposed RHC rates.Medicare Part B Therapy Cap. Some of our rehabilitation therapy revenue is paid by the Medicare Part B program under a fee schedule. Congress hasestablished annual caps that limit the amounts that can be paid (including deductible and coinsurance amounts) for rehabilitation therapy services renderedto any Medicare beneficiary under Medicare Part B. The Deficit Reduction Act of 2005 (DRA) added Sec. 1833(g)(5) of the Social Security Act and directedCMS to develop a process that allows exceptions for Medicare beneficiaries to therapy caps when continued therapy is deemed medically necessary.Annual limitations on beneficiary incurred expenses for outpatient therapy services under Medicare Part B are commonly referred to as “therapy caps.”All beneficiaries began a new cap year on January 1, 2017 since the therapy caps are determined on a calendar year basis. For physical therapy (PT) andspeech-language pathology services (SLP) combined, the limit on incurred expenses was $1,980 in 2017 compared to $1,960 in 2016. For occupationaltherapy (OT) services, the limit was $1,980 for 2017 compared to $1,960 in 2016. Deductible and coinsurance amounts paid by the beneficiary for therapyservices count toward the amount applied to the limit.An “exceptions process” to the therapy caps exists; however, manual policies relevant to the exceptions process apply only when exceptions to thetherapy caps are in effect. The therapy exception process, which under previous legislation was due to expire, was extended and the expected SGR of 21% tothe Physician Fee Screen for outpatient therapy services was repealed through the MACRA. Under the legislation, the therapy cap exception extends throughDecember 31, 2017. The application of the therapy caps, and related provisions, to outpatient hospitals is also extended until January 1, 2018.The Medicare Access to Rehabilitation Services Act of 2017 (S. 253/H.R. 807), which repeals the therapy cap has been introduced to Congress.Congress has not yet addressed a permanent fix of the therapy cap nor has final legislation been put in place to extend the exceptions process beyond 2017for Medicare beneficiaries to receive medically necessary therapy above the cap. Therefore, there is a hard cap of $2010 for PT/SLP services and $2010 forOT services in effect since January 1, 2018.A manual medical review process, as part of the therapy exceptions process, applies to therapy claims when a beneficiary’s incurred expenses exceed athreshold amount of $3,700 annually. Specifically, combined PT and SLP services that exceed $3,700 are subject to manual medical review, as well as OTservices that exceed $3,700. A beneficiary’s incurred expenses apply towards the manual medical review thresholds in the same manner as it applies to thetherapy caps. Manual medical review was in effect through a post-payment review system until March 31, 2015. On February 9, 2016, MACRA modified therequirement for manual medical review for services over the $3,700 therapy thresholds to eliminate the requirement for manual medical review of all claimsexceeding the thresholds and instead allows a targeted review process.Medicare Coverage Settlement Agreement. A proposed federal class action settlement was filed in federal district court on October 16, 2012 that wouldend the Medicare coverage standard for skilled nursing, home health and outpatient therapy services that a beneficiary's condition must be expected toimprove. The settlement was approved on January 24, 2013, which tasked CMS11with revising its Medicare Benefit Manual and numerous other policies, guidelines and instructions to ensure that Medicare coverage is available for skilledmaintenance services in the home health, skilled nursing and outpatient settings. CMS was also required to develop and implement a nationwide educationcampaign for all who make Medicare determinations to ensure that beneficiaries with chronic conditions are not denied coverage for critical services becausetheir underlying conditions will not improve, after which the members of the class were given the opportunity for re-review of their claims. The majorprovisions of this settlement agreement have been implemented by CMS, which could favorably impact Medicare coverage reimbursement for our services.However, health care providers may be subject to liability in the event they fail to appropriately adapt to the newly clarified reimbursement rules andconsequently overbill state Medicaid programs in connection with services rendered to dual-eligible Medicare patients (i.e., by not maximizing Medicarecoverage before billing Medicaid).Historically, adjustments to reimbursement under Medicare have had a significant effect on our revenue. For a discussion of historic adjustments andrecent changes to the Medicare program and related reimbursement rates, see Part II, Item 1A Risk Factors under the headings Risks Related to Our Businessand Industry - “Our revenue could be impacted by federal and state changes to reimbursement and other aspects of Medicaid and Medicare,” “Our futurerevenue, financial condition and results of operations could be impacted by continued cost containment pressures on Medicaid spending,” “We may not befully reimbursed for all services for which each facility bills through consolidated billing, which could adversely affect our revenue, financial condition andresults of operations” and “Reforms to the U.S. healthcare system will impose new requirements upon us and may lower our reimbursements.” The federalgovernment and state governments continue to focus on efforts to curb spending on healthcare programs such as Medicare and Medicaid. We are not able topredict the outcome of the legislative process. We also cannot predict the extent to which proposals will be adopted or, if adopted and implemented, whateffect, if any, such proposals and existing new legislation will have on us. Efforts to impose reduced allowances, greater discounts and more stringent costcontrols by government and other payors are expected to continue and could adversely affect our business, financial condition and results of operations.Payor SourcesWe derive revenue primarily from the Medicaid and Medicare programs, private pay patients and managed care payors. Medicaid typically coverspatients that require standard room and board services, and provides reimbursement rates that are generally lower than rates earned from other sources. Wemonitor our quality mix, which is the percentage of non-Medicaid revenue from each of our facilities, to measure the level received from each payor acrosseach of our business units. We intend to continue to focus on enhancing our care offerings to accommodate more high acuity patients.Medicaid. Medicaid is a state-administered program financed by state funds and matching federal funds. Medicaid programs are administered by thestates and their political subdivisions, and often go by state-specific names, such as Medi-Cal in California and the Arizona Healthcare Cost ContainmentSystem in Arizona. Medicaid programs generally provide health benefits for qualifying individuals, and may supplement Medicare benefits for financiallyneedy persons aged 65 and older. Medicaid reimbursement formulas are established by each state with the approval of the federal government in accordancewith federal guidelines. Seniors who enter skilled nursing facilities as private pay clients can become eligible for Medicaid once they have substantiallydepleted their assets. Medicaid is the largest source of funding for nursing home facilities.Medicaid reimburses home health and hospice providers, physicians, and certain other health care providers for care provided to certain low incomepatients. Reimbursement varies from state to state and is based upon a number of different systems, including cost-based, prospective payment and negotiatedrate systems. Rates are subject to statutory and regulatory changes and interpretations and rulings by individual state agencies.Medicare. Medicare is a federal program that provides healthcare benefits to individuals who are 65 years of age or older or are disabled. To achieveand maintain Medicare certification, a skilled nursing facility must sign a Medicare provider agreement and meet the CMS “Conditions of Participation” onan ongoing basis, as determined in periodic facility inspections or “surveys” conducted primarily by the state licensing agency in the state where the facilityis located. Medicare pays for inpatient skilled nursing facility services under the prospective payment system. The prospective payment for each beneficiaryis based upon the medical condition of and care needed by the beneficiary. Medicare skilled nursing facility coverage is limited to 100 days per episode ofillness for those beneficiaries who require daily care following discharge from an acute care hospital.The Medicare home health benefit is available both for patients who need care following discharge from a hospital and patients who suffer from chronicconditions that require ongoing but intermittent care. As a condition of participation under Medicare, beneficiaries must be homebound (meaning that thebeneficiary is unable to leave his/her home without a considerable and taxing effort), require intermittent skilled nursing, physical therapy or speech therapyservices, and receive treatment under a plan of care established and periodically reviewed by a physician. Medicare rates are based on the severity of thepatient’s12condition, his or her service needs and other factors relating to the cost of providing services and supplies, bundled into 60-day episodes of care. There is nolimit to the number of episodes a patient may receive as long as he or she remains Medicare eligible.The Medicare hospice benefit is also available to Medicare-eligible patients with terminal illnesses, certified by a physician, where life expectancy issix months or less. Medicare rates are based on standard prospective rates for delivering care over a base 90-day or 60-day period (90-day episodes of care forthe first two episodes and 60-day episodes of care for any subsequent episodes). Payments are based on daily rates for each day a beneficiary is enrolled in thehospice benefit. Rates are set based on specific levels of care, are adjusted by a wage index to reflect health care labor costs across the country and areestablished annually through Federal legislation. Medicare payments are subject to two fixed annual caps, which are assessed on a provider number basis.The annual caps per patient, known as hospice caps, are calculated and published by the Medicare fiscal intermediary on an annual basis and cover thetwelve month period from November 1 through October 31. The caps can be subject to annual and retroactive adjustments, which can cause providers to owemoney back to Medicare if such caps are exceeded.Managed Care and Private Insurance. Managed care patients consist of individuals who are insured by certain third-party entities, or who areMedicare beneficiaries who have assigned their Medicare benefits to a senior managed care organization plan. Another type of insurance, long-term careinsurance, is also becoming more widely available to consumers, but is not expected to contribute significantly to industry revenues in the near term.Private and Other Payors. Private and other payors consist primarily of individuals, family members or other third parties who directly pay for theservices we provide.Billing and Reimbursement. Our revenue from government payors, including Medicare and state Medicaid agencies, is subject to retroactiveadjustments in the form of claimed overpayments and underpayments based on rate adjustments, audits or asserted billing and reimbursement errors. Webelieve billing and reimbursement errors, disagreements, overpayments and underpayments are common in our industry, and we are regularly engaged withgovernment payors and their contractors in reviews, audits and appeals of our claims for reimbursement due to the subjectivity inherent in the processesrelated to patient diagnosis and care, recordkeeping, claims processing and other aspects of the patient service and reimbursement processes, and the errors ordisagreements those subjectivities can produce.We take seriously our responsibility to act appropriately under applicable laws and regulations, including Medicare and Medicaid billing andreimbursement laws and regulations. Accordingly, we employ accounting, reimbursement and compliance specialists who train, mentor and assist ourclerical, clinical and rehabilitation staffs in the preparation of claims and supporting documentation, regularly monitor billing and reimbursement practiceswithin our operating subsidiaries, and assist with the appeal of overpayment and recoupment claims generated by governmental, Medicare contractors andother auditors and reviewers. In addition, due to the potentially serious consequences that could arise from any impropriety in our billing and reimbursementprocesses, we investigate allegations of impropriety or irregularity relative thereto, and sometimes do so with the aid of outside auditors (other than ourindependent registered public accounting firm), attorneys and other professionals.Whether information about our billing and reimbursement processes is obtained from external sources or activities such as Medicare and Medicaidaudits or probe reviews, internal investigations, or our regular day-to-day monitoring and training activities, we collect and utilize such information toimprove our billing and reimbursement functions and the various processes related thereto. While, like other operators in our industry, we experience billingand reimbursement errors, disagreements and other effects of the inherent subjectivities in reimbursement processes on a regular basis, we believe that we arein substantial compliance with applicable Medicare and Medicaid reimbursement requirements. We continually strive to improve the efficiency and accuracyof all of our operational and business functions, including our billing and reimbursement processes.The following table sets forth our total revenue by payor source generated by each of our reportable segments and our "All Other" category and as apercentage of total revenue for the periods indicated (dollars in thousands):13 Year Ended December 31, 2017 Transitional andSkilled Services Assisted andIndependentLiving Services Home Health and HospiceServices All Other Home HealthServices HospiceServices Total Revenue Revenue % Medicaid $603,104 $30,469 $4,398 $6,832 $— $644,803 34.9% Medicare 417,870 — 36,592 61,422 — 515,884 27.9 Medicaid-skilled 102,875 — — — — 102,875 5.6 Subtotal 1,123,849 30,469 40,990 68,254 — 1,263,562 68.4 Managed care 281,563 — 21,058 765 — 303,386 16.4 Private and other 139,798 106,177 10,997 339 25,058(1)282,369 15.2 Total revenue $1,545,210 $136,646 $73,045 $69,358 $25,058 $1,849,317 100.0% (1) Private and other payors in our "All Other" category includes revenue from all payors generated in our other ancillary operations. Year Ended December 31, 2016 Transitional andSkilled Services Assisted andIndependentLiving Services Home Health and HospiceServices All Other Home HealthServices HospiceServices Total Revenue Revenue % Medicaid $521,063 $26,397 $4,131 $6,367 $— $557,958 33.7% Medicare 396,519 — 32,376 48,124 — 477,019 28.8 Medicaid-skilled 87,517 — — — — 87,517 5.3 Subtotal 1,005,099 26,397 36,507 54,491 — 1,122,494 67.8 Managed care 247,844 — 16,913 751 — 265,508 16.0 Private and other 121,860 97,239 6,906 245 40,612(1)266,862 16.2 Total revenue $1,374,803 $123,636 $60,326 $55,487 $40,612 $1,654,864 100.0% (1) Private and other payors in our "All Other" category includes revenue from all payors generated in our urgent care centers and other ancillary operations. Year Ended December 31, 2015 Transitional andSkilled Services Assisted andIndependentLiving Services Home Health and HospiceServices All Other Home HealthServices HospiceServices Total Revenue Revenue % Medicaid $430,368 $19,642 $3,598 $5,348 $— $458,956 34.2% Medicare 332,429 — 26,828 36,246 — 395,503 29.5 Medicaid-skilled 71,905 — — — — 71,905 5.4 Subtotal 834,702 19,642 30,426 41,594 — 926,364 69.1 Managed care 194,743 — 11,391 636 — 206,770 15.4 Private and other 96,943 68,487 6,138 171 36,953(1)208,692 15.5 Total revenue $1,126,388 $88,129 $47,955 $42,401 $36,953 $1,341,826 100.0% (1) Private and other payors in our "All Other" category includes revenue from all payors generated in our urgent care centers and other ancillary operations.Payor Sources as a Percentage of Skilled Nursing Services. We use both our skilled mix and quality mix as measures of the quality of reimbursementswe receive at our skilled nursing operations over various periods. The following table sets forth our percentage of skilled nursing patient days by payorsource:14 Year Ended December 31, 2017 2016 2015Percentage of Skilled Nursing Days: Medicare13.4% 14.4% 14.6%Managed care12.2 12.0 11.4Other skilled4.7 4.5 4.4Skilled mix30.3 30.9 30.4Private and other payors12.5 12.5 12.1Quality mix42.8 43.4 42.5Medicaid57.2 56.6 57.5Total skilled nursing100.0% 100.0% 100.0%Reimbursement for Specific ServicesReimbursement for Skilled Nursing Services. Skilled nursing facility revenue is primarily derived from Medicaid, Medicare, managed care and privatepayors. Our skilled nursing operations provide Medicaid-covered services to eligible individuals consisting of nursing care, room and board and socialservices. In addition, states may, at their option, cover other services such as physical, occupational and speech therapies.Reimbursement for Rehabilitation Therapy Services. Rehabilitation therapy revenue is primarily received from private pay, managed care andMedicare for services provided at skilled nursing operations and assisted living operations. The payments are based on negotiated patient per diem rates or anegotiated fee schedule based on the type of service rendered.Reimbursement for Assisted Living Services. Assisted living facility revenue is primarily derived from private pay patients at rates we establish basedupon the services we provide and market conditions in the area of operation. In addition, Medicaid or other state-specific programs in some states where weoperate supplement payments for board and care services provided in assisted living facilities.Reimbursement for Hospice Services. Hospice revenues are primarily derived from Medicare. We receive one of four predetermined rate categoriesbased on the level of care we furnish to the beneficiary. This payment is designed to include all of the services needed to manage the beneficiary's care. These rates are subject to annual adjustments based on inflation and geographic wage considerations. In its 2016 Final Rule, CMS established a two-tieredpayment system for routine home care services. Effective January 1, 2016, hospices are reimbursed at a higher rate for routine home care services providedfrom days 1 through 60 of a hospice episode of care and a lower rate for all subsequent days of service. CMS also provided for a Service Intensity Add-On,which increases payments for certain routine home care services provided by registered nurses and social workers to hospice patients during the final sevendays of life. We are subject to two limitations on Medicare payments for hospice services. First, we are subject to an inpatient cap. This cap limits the number ofdays that can be reimbursed at an inpatient care rate (both respite and general) to 20% of the total number of days of hospice care (both inpatient and in thehome) that we provide to Medicare beneficiaries. Payments for days in excess of this limit are paid at the routine home care rate, and we must reimburse thegovernment for any amounts received in excess of that rate.Second, hospices are subject to an aggregate payment cap. This cap amount is calculated annually by multiplying the number of beneficiaries electinghospice care during the year by a statutory amount that is indexed for inflation. For cap years ended on or after October 31, 2012, and all subsequent capyears, the hospice aggregate cap is calculated using the proportional method. Under the proportional method, the hospice shall include in its number ofMedicare beneficiaries only that fraction which represents the portion of a patient's total days of care in all hospices and all years that were spent in thathospice in that cap year, using the best data available at the time of the calculation. The whole and fractional shares of Medicare beneficiaries' time in a givencap year are then summed to compute the total number of Medicare beneficiaries served by that hospice in that cap year. The hospice's total Medicarebeneficiaries in a given cap year is multiplied by the Medicare per beneficiary cap amount, resulting in that hospice's aggregate cap, which is the allowableamount of total Medicare payments that hospice can receive for that cap year. If a hospice exceeds its aggregate cap, then the hospice must repay the excessback to Medicare. The Medicare cap amount is reduced proportionately for patients who transferred in and out of our hospice services.15Traditionally, the hospice inpatient and aggregate caps covered revenue received and services provided from November 1 to October 31. The 2017 capyear was an 11 month transition year with cap amounts calculated for the 11 month period from November 1, 2016 to September 30, 2017. BeginningOctober 1, 2017, CMS has changed the hospice inpatient and aggregate cap year to coincide with the fiscal year (October 1 to September 30). Reimbursement for Home Health Services. We derive substantially all of the revenue from our home health business from Medicare and managed caresources. Our home health care services generally consist of providing some combination of the services of registered nurses, speech, occupational andphysical therapists, medical social workers and certified home health aides. Home health care is often a cost-effective solution for patients, and can alsoincrease their quality of life and allow them to receive quality medical care in the comfort and convenience of a familiar setting.CompetitionThe post-acute care industry is highly competitive, and we expect that the industry will become increasingly competitive in the future. The industry ishighly fragmented and characterized by numerous local and regional providers, in addition to large national providers that have achieved geographicdiversity and economies of scale. Our operating subsidiaries also compete with inpatient rehabilitation facilities and long-term acute care hospitals.Competitiveness may vary significantly from location to location, depending upon factors such as the number of competing facilities, availability ofservices, expertise of staff, and the physical appearance and amenities of each location. We believe that the primary competitive factors in the post-acute careindustry are:•ability to attract and to retain qualified management and caregivers;•reputation and achievements of quality healthcare outcomes;•attractiveness and location of facilities;•the expertise and commitment of the facility management team and employees; and•community value, including amenities and ancillary services.We seek to compete effectively in each market by establishing a reputation within the local community as the “operation of choice.” This means thatthe operation leaders are generally free to discern and address the unique needs and priorities of healthcare professionals, customers and other stakeholders inthe local community or market, and then create a superior service offering and reputation for that particular community or market that is calculated toencourage prospective customers and referral sources to choose or recommend the operation.Increased competition could limit our ability to attract and retain patients, maintain or increase rates or to expand our business. Some of ourcompetitors have greater financial and other resources than we have, may have greater brand recognition and may be more established in their respectivecommunities than we are. Competing companies may also offer newer facilities or different programs or services than we offer, and may therefore attractindividuals who are currently patients of our facilities, potential patients of our facilities, or who are otherwise receiving our healthcare services. Othercompetitors may have lower expenses or other competitive advantages than us and, therefore, provide services at lower prices than we offer.There are few barriers to entry in the home health and hospice business in jurisdictions that do not require certificates of need or permits of approval.Our primary competition in these jurisdictions comes from local privately and publicly-owned and hospital-owned health care providers. We compete basedon the availability of personnel, the quality of services, expertise of visiting staff, and, in certain instances, on the price of our services. In addition, wecompete with a number of non-profit organizations that finance acquisitions and capital expenditures on a tax-exempt basis and charity-funded programs thatmay have strong ties to their local medical communities and receive charitable contributions that are unavailable to us.Our other services, such as assisted living facilities and other ancillary services, also compete with local, regional, and national companies. The primarycompetitive factors in these businesses are similar to those for our skilled nursing facilities and include reputation, cost of services, quality of clinicalservices, responsiveness to patient/resident needs, location and the ability to provide support in other areas such as third-party reimbursement, informationmanagement and patient recordkeeping.Our Competitive Strengths16We believe that we are well positioned to benefit from the ongoing changes within our industry. We believe that our ability to acquire, integrate andimprove our facilities is a direct result of the following key competitive strengths: Experienced and Dedicated Employees. We believe that our operating subsidiaries' employees are among the best in their respective industry. Webelieve each of our operating subsidiaries is led by an experienced and caring leadership team, including dedicated front-line care staff, who participatesdaily in the clinical and operational improvement of their individual operations. We have been successful in attracting, training, incentivizing and retaininga core group of outstanding business and clinical leaders to lead our operating subsidiaries. These leaders operate as separate local businesses. With broadlocal control, these talented leaders and their care staffs are able to quickly meet the needs of their patients and residents, employees and local communities,without waiting for permission to act or being bound to a “one-size-fits-all” corporate strategy. Unique Incentive Programs. We believe that our employee compensation programs are unique within the industry. Employee stock options andperformance bonuses, based on achieving target clinical quality, cultural, compliance and financial benchmarks, represent a significant component of totalcompensation for our operational leaders. We believe that these compensation programs assist us in encouraging our leaders and key employees to act with ashared ownership mentality. Furthermore, our leaders are motivated to help local operations within a defined “cluster” and "market," which is a group ofgeographically-proximate operations that share clinical best practices, real-time financial data and other resources and information. Staff and Leadership Development. We have a company-wide commitment to ongoing education, training and professional development. Accordingly,our operational leaders participate in regular training. Most participate in training sessions at Ensign University, our in-house educational system. Othertraining opportunities are generally offered on a monthly basis. Training and educational topics include leadership development, our values, updates onMedicaid and Medicare billing requirements, updates on new regulations or legislation, emerging healthcare service alternatives and other relevant clinical,business and industry specific coursework. Additionally, we encourage and provide ongoing education classes for our clinical staff to maintain licensing andincrease the breadth of their knowledge and expertise. We believe that our commitment to, and substantial investment in, ongoing education will furtherstrengthen the quality of our operational leaders and staff, and the quality of the care they provide to our patients and residents. Innovative Service Center Approach. We do not maintain a corporate headquarters; rather, we operate a Service Center to support the efforts of eachoperation. Our Service Center is a dedicated service organization that acts as a resource and provides centralized information technology, human resources,accounting, payroll, legal, risk management, educational and other centralized services, so that local leaders can focus on delivering top-quality care andefficient business operations. Our Service Center approach allows individual operations to function with the strength, synergies and economies of scale foundin larger organizations, but without what we believe are the disadvantages of a top-down management structure or corporate hierarchy. We believe ourService Center approach is unique within the industry, and allows us to preserve the “one-facility-at-a-time” focus and culture that has contributed to oursuccess.Proven Track Record of Successful Acquisitions. We have established a disciplined acquisition strategy that is focused on selectively acquiringoperations within our target markets. Our acquisition strategy is highly operations driven. Prospective leaders are included in the decision making processand compensated as these acquired operations reach pre-established clinical quality and financial benchmarks, helping to ensure that we only undertakeacquisitions that key leaders believe can become clinically sound and contribute to our financial performance.As of December 31, 2017, we have expanded to 230 facilities with 18,870 operational skilled nursing beds and 5,011 assisted and independent units,through both long-term leases and purchases. We believe our experience in acquiring these facilities and our demonstrated success in significantly improvingtheir operations enables us to consider a broad range of acquisition targets. In addition, we believe we have developed expertise in transitioning newly-acquired facilities to our unique organizational culture and operating systems, which enables us to acquire facilities with limited disruption to patients,residents and facility operating staff, while significantly improving quality of care. We have also constructed new facilities to target demand, which exists forhigh-end healthcare facilities when we determine that market conditions justify the cost of new construction in some of our markets.Reputation for Quality Care. We believe that we have achieved a reputation for high-quality and cost-effective care and services to our patients andresidents within the communities we serve. We believe that our achievement of quality outcomes enhances our reputation for quality, that when coupled withthe integrated services that we offer, allows us to attract patients that require more intensive and medically complex care and generally result in higherreimbursement rates than lower acuity patients.Community Focused Approach. We view our services primarily as a local, community-based business. Our local leadership-centered managementculture enables each operation's nursing and support staff and leaders to meet the unique needs of their17patients and local communities. We believe that our commitment to this “one-operation-at-a-time” philosophy helps to ensure that each operation, itspatients, their family members and the community will receive the individualized attention they need. By serving our patients, their families, the communityand our fellow healthcare professionals, we strive to make each individual facility the operation of choice in its local community.We further believe that when choosing a healthcare provider, consumers usually choose a person or people they know and trust, rather than acorporation or business. Therefore, rather than pursuing a traditional organization-wide branding strategy, we actively seek to develop the facility brand atthe local level, serving and marketing one-on-one to caregivers, our patients, their families, the community and our fellow healthcare professionals in thelocal market.Investment in Information Technology. We utilize information technology that enables our facility leaders to access, and to share with their peers, bothclinical and financial performance data in real time. Armed with relevant and current information, our operation leaders and their management teams are ableto share best practices and the latest information, adjust to challenges and opportunities on a timely basis, improve quality of care, mitigate risk and improveboth clinical outcomes and financial performance. We have also invested in specialized healthcare technology systems to assist our nursing and support staff.We have installed automated software and touch-screen interface systems in each facility to enable our clinical staff to more efficiently monitor and deliverpatient care and record patient information. We believe these systems have improved the quality of our medical and billing records, while improving theproductivity of our staff.Our Growth StrategyWe believe that the following strategies are primarily responsible for our growth to date, and will continue to drive the growth of our business:Grow Talent Base and Develop Future Leaders. Our primary growth strategy is to expand our talent base and develop future leaders. A key componentof our organizational culture is our belief that strong local leadership is a primary key to the success of each operation. While we believe that significantacquisition opportunities exist, we have generally followed a disciplined approach to growth that permits us to acquire an operation only when we believe,among other things, that we will have qualified leadership for that operation. To develop these leaders, we have a rigorous “CEO-in-Training Program” thatattracts proven business leaders from various industries and backgrounds, and provides them the knowledge and hands-on training they need to successfullylead one of our operating subsidiaries. We generally have between five and 30 prospective administrators progressing through the various stages of thistraining program, which is generally much more rigorous, hands-on and intensive than the minimum 1,000 hours of training mandated by the licensingrequirements of most states where we do business. Once administrators are licensed and assigned to an operation, they continue to learn and develop in ourfacility Chief Executive Officer Program, which facilitates the continued development of these talented business leaders into outstanding facility CEOs,through regular peer review, our Ensign University and on-the-job training.In addition, our Chief Operating Officer Program recruits and trains highly-qualified Directors of Nursing to lead the clinical programs in our skillednursing facilities. Working together with their facility CEO and/or administrator, other key facility leaders and front-line staff, these experienced nursesmanage delivery of care and other clinical personnel and programs to optimize both clinical outcomes and employee and patient satisfaction.Increase Mix of High Acuity Patients. Many skilled nursing facilities are serving an increasingly larger population of patients who require a high levelof skilled nursing and rehabilitative care, whom we refer to as high acuity patients, as a result of government and other payors seeking lower-cost alternativesto traditional acute-care hospitals. We generally receive higher reimbursement rates for providing care for these medically complex patients. In addition,many of these patients require therapy and other rehabilitative services, which we are able to provide as part of our integrated service offerings. Wheretherapy services are medically necessary and prescribed by a patient's physician or other appropriate healthcare professional, we generally receive additionalrevenue in connection with the provision of those services. By making these integrated services available to such patients, and maintaining establishedclinical standards in the delivery of those services, we are able to increase our overall revenues. We believe that we can continue to attract high acuitypatients and therapy patients to our facilities by maintaining and enhancing our reputation for quality care and continuing our community focused approach.Focus on Organic Growth and Internal Operating Efficiencies. We plan to continue to grow organically by focusing on increasing patient occupancywithin our existing facilities. Although some of the facilities we have acquired were in good physical and operating condition, the majority have beenclinically and financially troubled, with some facilities having had occupancy rates as low as 30% at the time of acquisition. Additionally, we believe thatincremental operating margins on the last 20% of our beds are significantly higher than on the first 80%, offering opportunities to improve financialperformance within our existing18facilities. Our overall occupancy is impacted significantly by the number of facilities acquired and the operational occupancy on the acquisition date.Therefore, consolidated occupancy will vary significantly based on these factors. Our average occupancy rates for our skilled nursing facilities for the yearsended December 31, 2017, 2016 and 2015 were 75.4%, 75.4% and 77.6%, respectively. Our average occupancy rates for our assisted and independent livingfacilities for the years ended December 31, 2017, 2016 and 2015 were 76.4%, 76.0%, and 75.3%, respectively. We also believe we can generate organic growth by improving operating efficiencies and the quality of care at the patient level. By focusing on staffdevelopment, clinical systems and the efficient delivery of quality patient care, we believe we are able to deliver higher quality care at lower costs than manyof our competitors. We also have achieved incremental occupancy and revenue growth by creating or expanding outpatient therapy programs in existing facilities.Physical, occupational and speech therapy services account for a significant portion of revenue in most of our skilled nursing facilities. By expandingtherapy programs to provide outpatient services in many markets, we are able to increase revenue while spreading the fixed costs of maintaining theseprograms over a larger patient base. Outpatient therapy has also proven to be an effective marketing tool, raising the visibility of our facilities in their localcommunities and enhancing the reputation of our facilities with short-stay rehabilitation patients.Add New Facilities and Expand Existing Facilities. A key element of our growth strategy includes the acquisition of new and existing facilities fromthird parties and the expansion and upgrade of current facilities. In the near term, we plan to take advantage of the fragmented skilled nursing industry byacquiring operations within select geographic markets and may consider the construction of new facilities. In addition, we have targeted facilities that webelieved were performing and operations that were underperforming, and where we believed we could improve service delivery, occupancy rates and cashflow. With experienced leaders in place at the community level, and demonstrated success in significantly improving operating conditions at acquiredfacilities, we believe that we are well positioned for continued growth. While the integration of underperforming facilities generally has a negative short-termeffect on overall operating margins, these facilities are typically accretive to earnings within 12 to 18 months following their acquisition. For the 147facilities that we acquired from 2001 through 2017, the aggregate EBITDAR (See Part II, Item 6 - Selected Financial Data) as a percentage of revenueimproved from 12.0% during the first full three months of operations to 13.4% during the thirteenth through fifteenth months of operations.Strategically Invest In and Integrate Other Post-Acute Care Healthcare Businesses. Another important element to our growth strategy includesacquiring new and existing home health, hospice and other post-acute care healthcare businesses. Since 2010, we have steadily expanded our home healthand hospice businesses through the acquisition of smaller third-party providers. Our strategy is to provide a more seamless experience to manage thetransition of care throughout the post-acute continuum. Our objective is to simultaneously improve patient outcomes and reduce costs to payers, ACOs andhospital systems. We believe that the same principles that have guided our skilled nursing and assisted living operations are transferable to these businesses,including reliance on experienced local leaders at the community level to focus on integrating these operations into the continuum of care services weprovide. Between 2009 and February 2018, we have acquired 22 hospice agencies, 24 home health and home care agencies, and we are well positioned forcontinued growth in these and other healthcare businesses. Labor The operation of our skilled nursing and assisted and independent living facilities, home health and hospice operations requires a large number ofhighly skilled healthcare professionals and support staff. At December 31, 2017, we had approximately 21,301 full-time equivalent employees who wereemployed by our Service Center and our operating subsidiaries. For the year ended December 31, 2017, approximately 60.0% of our total expenses werepayroll related. Periodically, market forces, which vary by region, require that we increase wages in excess of general inflation or in excess of increases inreimbursement rates we receive. We believe that we staff appropriately, focusing primarily on the acuity level and day-to-day needs of our patients andresidents. In most of the states where we operate, our skilled nursing facilities are subject to state mandated minimum staffing ratios, so our ability to reducecosts by decreasing staff, notwithstanding decreases in acuity or need, is limited and subject to government audits and penalties in some states. We seek tomanage our labor costs by improving staff retention, improving operating efficiencies, maintaining competitive wage rates and benefits and reducing relianceon overtime compensation and temporary nursing agency services.The healthcare industry as a whole has been experiencing shortages of qualified professional clinical staff. We believe that our ability to attract andretain qualified professional clinical staff stems from our ability to offer attractive wage and benefits packages, a high level of employee training, anempowered culture that provides incentives for individual efforts and a quality work environment.19Government RegulationThe types of laws and statutes affecting the regulatory landscape of the skilled nursing industry continue to expand. In addition to this changingregulatory environment, federal, state and local officials are increasingly focusing their efforts on the enforcement of these laws. In order to operate ourbusinesses 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, and safety and health standards set by the Occupational Safety and HealthAdministration (OSHA). Changes in the law or new interpretations of existing laws may have an adverse impact on our methods and costs of doing business.Our operating subsidiaries are also subject to various regulations and licensing requirements promulgated by state and local health and social serviceagencies and other regulatory authorities. Requirements vary from state to state and these requirements can affect, among other things, personnel educationand training, patient and personnel records, services, staffing levels, monitoring of patient wellness, patient furnishings, housekeeping services, dietaryrequirements, emergency plans and procedures, certification and licensing of staff prior to beginning employment, and patient rights. These laws andregulations could limit our ability to expand into new markets and to expand our services and facilities in existing markets.State Regulations. On March 24, 2011, the governor of California signed Assembly Bill 97 (AB 97), the budget trailer bill on health, into law. AB97 outlines significant cuts to state health and human services programs. Specifically, the law reduced provider payments by 10% for physicians,pharmacies, clinics, medical transportation, certain hospitals, home health, and nursing facilities. AB X1 19 Long Term Care was subsequently approved bythe governor on June 28, 2011. Federal approval was obtained on October 27, 2011. AB X1 19 limited the 10% payment reduction to skilled-nursingproviders to 14 months for the services provided on June 1, 2011 through July 31, 2012. The 10% reduction in provider payments was repaid by December31, 2012.Federal Health Care Reform. On April 16, 2015, the President signed MACRA into law. This law included a number of provisions, including (1)replacement of the Sustainable Growth Rate (SGR) formula used by Medicare to pay physicians with new systems for establishing annual payment rateupdates for physicians' services, (2) an extension of the outpatient therapy cap exception process until December 31, 2017; and (3) payment updates for post-acute providers at 1% after other adjustments required by the ACA for 2018. In addition, it increased premiums for Part B and Part D of Medicare forbeneficiaries with income above certain levels and made numerous other changes to Medicare and Medicaid.On February 20, 2015, CMS updated the Five Star Quality Rating System for nursing homes to include the use of antipsychotics in calculating the starratings, include modified calculations for staffing levels and the establishment of more exacting standards for nursing homes to achieve a high rating on thequality measure dimension. Since the standards for performance are more difficult to achieve, the number of our 4 and 5 star facilities could be reduced.On October 30, 2015, CMS released a final rule addressing, among other things, implementation of certain provisions of MACRA, including theimplementation of the new Merit-Based Incentive Payment System (MIPS) that streamlines multiple quality programs and Alternative Payment Models(APMs) that give bonus payments for participation in eligible APMs. The current Value-Based Payment Modifier program is set to expire in 2018, with thefirst MIPS adjustments to begin in 2019. The October 30, 2015 final rule added measures where gaps exist in the current Physician Quality Reporting System(PQRS), which is used by CMS to track the quality of care provided to Medicare beneficiaries. The final rule also excludes services furnished in SNFs fromthe definition of primary care services for purposes of the Shared Savings Program. The final rule could impact our revenue in the future.On February 2, 2016, CMS issued its final rule concerning face-to-face requirements for Medicaid home health services. Under the rule, the Medicaidhome health service definition was revised to be consistent with applicable sections of the ACA and MACRA. The rule also requires that for the initialordering of home health services, the physician must document the occurrence of a face-to-face encounter related to the primary reason the beneficiaryrequires home health services occurred no more than 90 days before or 30 days after the start of services. The final rule also requires that for the initialordering of certain medical equipment, the physician or authorized non-physician provider (NPP) must document a face-to-face encounter that is related tothe primary reason the beneficiary requires medical equipment which occur no more than six months prior to the start of services.On April 27, 2016, CMS added six new quality measures to its consumer-based Nursing Home Compare website. These quality measures include therate of rehospitalization, emergency room use, community discharge, improvements in function, independent worsening of ability to move, and useantianxiety or hypnotic medication among nursing home residents. Beginning in July 2016, CMS incorporated all of these measures, except for theantianxiety/hypnotic medication measure, into the calculation of the Nursing Home Five-Star Quality Ratings.20On January 13, 2017, CMS issued a Final Rule revising the conditions of participation for home health agencies serving Medicare beneficiaries. Therule makes significant revisions to the conditions currently in place, including (1) adding new conditions of participation related to quality assurance andperformance improvement programs; and (2) expanding or revising requirements related to patient rights, comprehensive evaluations, coordination and careplanning, home health aide training and supervision, and discharge and transfer summary and time frames. Without any contrary action by the newadministration, the new conditions were scheduled to be effective January 13, 2018. The Improving Medicare Post-Acute Care Transformation Act of 2014 (the IMPACT Act), which was signed into law on October 6, 2014, requires thesubmission of standardized assessment data for quality improvement, payment and discharge planning purposes across the spectrum of post-acute careproviders (PACs), including skilled nursing facilities and home health agencies. The IMPACT Act will require PACs to begin reporting: (1) standardizedpatient assessment data at admission and discharge by October 1, 2018 for post-acute care providers, including skilled nursing facilities, and by January 1,2019 for home health agencies; (2) new quality measures, including functional status, skin integrity, medication reconciliation, incidence of major falls, andpatient preference regarding treatment and discharge at various intervals between October 1, 2016 and January 1, 2019; and (3) resource use measures,including Medicare spending per beneficiary, discharge to community, and hospitalization rates of potentially preventable readmissions by October 1, 2016for post-acute care providers, including skilled nursing facilities and by January 1, 2017 for home health agencies. Failure to report such data when requiredwould subject a facility to a 2% reduction in market basket prices then in effect.The IMPACT Act further requires HHS and the Medicare Payment Advisory Commission (MedPAC), a commission chartered by Congress to advise iton Medicare payment issues, to study alternative PAC payment models, including payment based upon individual patient characteristics and not caresetting, with corresponding Congressional reports required based on such analysis. The IMPACT Act also included provisions impacting Medicare-certifiedhospices, including: (1) increasing survey frequency for Medicare-certified hospices to once every 36 months; (2) imposing a medical review process forfacilities with a high percentage of stays in excess of 180 days; and (3) updating the annual aggregate Medicare payment cap.On April 1, 2014, the President signed into law the Protecting Access to Medicare Act of 2014, which averted a 24% cut in Medicare payments tophysicians and other Part B providers until March 31, 2015. In addition, this law maintains the 0.5% update for such services through December 31, 2014 andprovides a 0.0% update to the 2015 Medicare Physician Fee Schedule (MPFS) through March 31, 2015. Among other things, this law provides the frameworkfor implementation of a value-based purchasing program for skilled nursing facilities. Under this legislation HHS is required to develop by October 1, 2016measures and performance standards regarding preventable hospital readmissions from skilled nursing facilities. Beginning October 1, 2018, HHS willwithhold 2% of Medicare payments to all skilled nursing facilities and distribute this pool of payment to skilled nursing facilities as incentive payments forpreventing readmissions to hospitals.On January 2, 2013, the President signed the American Taxpayer Relief Act of 2012 into law. This statute created a Commission on Long Term Care,the goal of which is to develop a plan for the establishment, implementation, and financing of a comprehensive, coordinated, and high-quality system thatensures the availability of long-term care services and support for individuals in need of such services and supports. Any implementation ofrecommendations from this commission may have an impact on coverage and payment for our services.On February 22, 2012, the President signed into law H.R. 3630, which among other things, delayed a cut in physician and Part B services. Inestablishing the funding for the law, payments to nursing facilities for patients' unpaid Medicare A co-insurance was reduced. The Deficit Reduction Act of2005 had previously limited reimbursement of bad debt to 70% on privately responsibile co-insurance. However, under H.R. 3630, this reimbursement willbe reduced to 65%.Further, prior to the introduction of H.R. 3630, we were reimbursed for 100% of bad debt related to dual-eligible Medicare patients' co-insurance. H.R.3630 will phase down the dual-eligible reimbursement over three years. Effective October 1, 2012, Medicare dual-eligible co-insurance reimbursementdecreased from 100% to 88%, with further rate reductions to 77% and 65% as of October 1, 2013 and 2014, respectively. Any reductions in Medicare orMedicaid reimbursement could materially adversely affect our profitability.On August 2, 2011, the President signed into law the Budget Control Act of 2011 (Budget Control Act), which raised the debt ceiling and put intoeffect a series of actions for deficit reduction. The Budget Control Act created a Congressional Joint Select Committee on Deficit Reduction (the Committee)that was tasked with proposing additional deficit reduction of at least $1.5 trillion over ten years. As the Committee was unable to achieve its targetedsavings, this regulation triggered automatic reductions in discretionary and mandatory spending, or budget sequestration, starting in 2013, includingreductions of not more than 2% to payments to Medicare providers. The Budget Control Act also requires Congress to vote on an amendment to theConstitution that would require a balanced budget.21On March 23, 2010, President Obama signed the ACA or the Affordable Care Act into law, which contained several sweeping changes to America’shealth insurance system. Among other reforms contained in ACA, many Medicare providers received reductions in their market basket updates. But ACAmade no reduction to the market basket update for skilled nursing facilities in fiscal years 2010 or 2011. However, under ACA, the skilled nursing facilitymarket basket update became subject to a full productivity adjustment beginning in fiscal year 2012. In addition, ACA enacted several reforms with respectto skilled nursing facilities and hospice organizations, including payment measures to realize significant savings of federal and state funds by deterring andprosecuting fraud and abuse in both the Medicare and Medicaid programs.Some key provisions of ACA include (i) enhanced civil monetary penalties, (ii) substantial and onerous transparency requirements for Medicare-participating nursing facilities, (iii) face-to-face encounter requirements applicable to home health agencies and hospices, (iv) expanded authority to suspendpayment if a provider is investigated for allegations or issues of fraud, (v) a requirement that overpayments for services provided to Medicare and Medicaidbeneficiaries be reported to the applicable payor within sixty days of identification of the overpayment or the date of the corresponding cost report, (vi)implementation of a value-based purchasing program for Medicare payments to skilled nursing facilities, (vii) implementation of a value-based purchasingprogram for home health services, (viii) implementation of a voluntary bundled payments pilot program (i.e., Bundled Payments for Care Improvement), and(ix) the creation of Accountable Care Organizations (ACOs).On June 28, 2012, the United States Supreme Court ruled that the enactment of ACA did not violate the Constitution of the United States. On June 25,2015, the United States Supreme Court ruled that the tax credits described in Section 36B of ACA are available to individuals who purchase health insuranceon an exchange created by the federal government. These rulings, taken together, permit the implementation of most of the provisions of ACA to proceed insubstantially the same form contemplated after ACA’s enactment. The provisions of ACA discussed above are only examples of federal health reformprovisions that we believe may have a material impact on the long-term care industry and on our business. However, the foregoing discussion is not intendedto constitute, nor does it constitute, an exhaustive review and discussion of ACA. It is possible that these and other provisions of ACA may be interpreted,clarified, or applied to our affiliated facilities or operating subsidiaries in a way that could have a material adverse impact on the results of operations.Regulations Regarding Our Facilities. Governmental agencies and other authorities periodically inspect our facilities to assess our compliance withvarious standards, rules and regulations. The robust regulatory and enforcement environment continues to impact healthcare providers, especially inconnection with responses to any alleged noncompliance identified in periodic surveys and other inspections by governmental authorities. Unannouncedsurveys or inspections generally occur at least annually, and may also follow a government agency's receipt of a complaint about a facility. We must passthese inspections to maintain our licensure under state law, to obtain or maintain certification under the Medicare and Medicaid programs, to continueparticipation in the Veterans Administration (VA) program at some facilities, and to comply with our provider contracts with managed care clients at manyfacilities. From time to time, we, like others in the healthcare industry, may receive notices from federal and state regulatory agencies alleging that we failedto substantially comply with applicable standards, rules or regulations. These notices may require us to take corrective action, may impose civil monetarypenalties for noncompliance, and may threaten or impose other operating restrictions on skilled nursing facilities such as admission holds, provisional skillednursing license or increased staffing requirements. If our facilities fail to comply with these directives or otherwise fail to comply substantially with licensureand certification laws, rules and regulations, we could lose our certification as a Medicare or Medicaid provider, or lose our state licenses to operate thefacilities.Regulations Protecting Against Fraud. Various complex federal and state laws exist which govern a wide array of referrals, relationships andarrangements, 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 (BBA) expanded the penalties forhealthcare fraud. Additionally, in connection with our involvement with federal healthcare reimbursement programs, the government or those acting on itsbehalf may bring an action under the False Claims Act (FCA), alleging that a healthcare provider has defrauded the government. These claimants may seektreble damages for false claims and payment of additional civil monetary penalties. The FCA allows a private individual with knowledge of fraud to bring aclaim on behalf of the federal government and earn a percentage of the federal government's recovery. Due to these “whistleblower” incentives, suits havebecome more frequent. Many states also have a false claim prohibition that mirrors or tracks the federal FCA.In May 2009, Congress passed the Fraud Enforcement and Recovery Act (FERA) of 2009 which made significant changes to the federal False ClaimsAct (FCA), expanding the types of activities subject to prosecution and whistleblower liability. Following changes by FERA, health-care providers facesignificant penalties for the knowing retention of government overpayments, even if no false claim was involved. Health-care providers can now be liable forknowingly and improperly avoiding or decreasing an obligation to pay money or property to the government. This includes the retention of any governmentoverpayment. The government can argue, therefore, that a FCA violation can occur without any affirmative fraudulent action or statement, as long22as it is knowingly improper. In addition, FERA extended protections against retaliation for whistleblowers, including protections not only for employees, butalso contractors and agents. Thus, there is no need for an employment relationship in order to qualify for protection against retaliation for whistleblowing.On January 2, 2013 the President signed the American Taxpayer Relief Act of 2012 into law. This statute lengthened the retrospective time period forwhich CMS can recover overpayments from health care providers, from three to five years following the year in which payment was made.Regulations Regarding Financial Arrangements. We are also subject to federal and state laws that regulate financial arrangement by healthcareproviders, such as the federal and state anti-kickback laws, the Stark laws, and various state referral laws. The federal anti-kickback laws and similar state lawsmake it unlawful for any person to pay, receive, offer, or solicit any benefit, directly or indirectly, for the referral or recommendation for products or serviceswhich are eligible for payment under federal healthcare programs, including Medicare and Medicaid. For the purposes of the anti-kickback law, a “federalhealthcare program” includes Medicare and Medicaid programs and any other plan or program that provides health benefits which are funded directly, inwhole or in part, by the United States government.The arrangements prohibited under these anti-kickback laws can involve nursing homes, hospitals, physicians and other healthcare providers, plans,suppliers and non-healthcare providers. These laws have been interpreted very broadly to include a number of practices and relationships between healthcareproviders and sources of patient referral. The scope of prohibited payments is very broad, including anything of value, whether offered directly or indirectly,in cash or in kind. Federal “safe harbor” regulations describe certain arrangements that will not be deemed to constitute violations of the anti-kickback law.Arrangements that do not comply with all of the strict requirements of a safe harbor are not necessarily illegal, but, due to the broad language of the statute,failure to comply with a safe harbor may increase the potential that a government agency or whistleblower will seek to investigate or challenge thearrangement. The safe harbors are narrow and do not cover a wide range of economic relationships.Violations of the federal anti-kickback laws can result in criminal penalties of up to $25,000 and five years imprisonment. Violations of the anti-kickback laws can also result in civil monetary penalties of up to $50,000 and an assessment of up to three times the total amount of remuneration offered,paid, solicited, or received. Violation of the anti-kickback laws may also result in an individual's or organization's exclusion from future participation inMedicare, Medicaid and other state and federal healthcare programs. Exclusion of us or any of our key employees from the Medicare or Medicaid programcould have a material adverse impact on our operations and financial condition.In addition to these regulations, we may face adverse consequences if we violate the federal Stark laws related to certain Medicare physician referrals.The Stark laws prohibit a physician from referring Medicare patients for certain designated health services where the physician has an ownership interest in orcompensation arrangement with the provider of the services, with limited exceptions. Also, any services furnished pursuant to a prohibited referral are noteligible for payment by the Medicare programs, and the provider is prohibited from billing any third party for such services. The Stark laws provide for theimposition of a civil monetary penalty of $15,000 per prohibited claim, and up to $100,000 for knowingly entering into certain prohibited cross-referralschemes, and potential exclusion from Medicare for any person who presents or causes to be presented a bill or claim the person knows or should know issubmitted in violation of the Stark laws. Such designated health services include physical therapy services; occupational therapy services; radiologyservices, including CT, MRI and ultrasound; durable medical equipment and services; radiation therapy services and supplies; parenteral and enteralnutrients, equipment and supplies; prosthetics, orthotics and prosthetic devices and supplies; home health services; outpatient prescription drugs; inpatientand outpatient hospital services; clinical laboratory services; and diagnostic and therapeutic nuclear medical services. Regulations Regarding Patient Record Confidentiality. We are also subject to laws and regulations enacted to protect the confidentiality of patienthealth information. For example, HHS has issued rules pursuant to HIPAA, which relate to the privacy of certain patient information. These rules govern ouruse and disclosure of protected health information. We have established policies and procedures to comply with HIPAA privacy and security requirements atour affiliated facilities and operating subsidiaries. We maintain a company-wide HIPAA compliance plan, which we believe complies with the HIPAA privacyand security regulations. The HIPAA privacy regulations and security regulations have and will continue to impose significant costs on our facilities in orderto comply with these standards. There are numerous other laws and legislative and regulatory initiatives at the federal and state levels addressing privacy andsecurity concerns. Our operations are also subject to any federal or state privacy-related laws that are more restrictive than the privacy regulations issuedunder HIPAA. These laws vary and could impose additional penalties for privacy and security breaches. Antitrust Laws. We are also subject to federal and state antitrust laws. Enforcement of the antitrust laws against healthcare providers is common, andantitrust liability may arise in a wide variety of circumstances, including third party contracting, physician23relations, joint venture, merger, affiliation and acquisition activities. In some respects, the application of federal and state antitrust laws to healthcare is stillevolving, and enforcement activity by federal and state agencies appears to be increasing. At various times, healthcare providers and insurance and managedcare organizations may be subject to an investigation by a governmental agency charged with the enforcement of antitrust laws, or may be subject toadministrative or judicial action by a federal or state agency or a private party. Violators of the antitrust laws could be subject to criminal and civilenforcement by federal and state agencies, as well as by private litigants.Environmental Matters Our business is subject to a variety of federal, state and local environmental laws and regulations. As a healthcare provider, we face regulatoryrequirements in areas of air and water quality control, medical and low-level radioactive waste management and disposal, asbestos management, response tomold and lead-based paint in our facilities and employee safety. As an owner or operator of our facilities, we also may be required to investigate and remediate hazardous substances that are located on and/or under theproperty, including any such substances that may have migrated off, or may have been discharged or transported from the property. Part of our operationsinvolves the handling, use, storage, transportation, disposal and discharge of medical, biological, infectious, toxic, flammable and other hazardous materials,wastes, pollutants or contaminants. In addition, we are sometimes unable to determine with certainty whether prior uses of our facilities and properties orsurrounding properties may have produced continuing environmental contamination or noncompliance, particularly where the timing or cost of making suchdeterminations is not deemed cost-effective. These activities, as well as the possible presence of such materials in, on and under our properties, may result indamage to individuals, property or the environment; may interrupt operations or increase costs; may result in legal liability, damages, injunctions or fines;may result in investigations, administrative proceedings, penalties or other governmental agency actions; and may not be covered by insurance.We believe that we are in material compliance with applicable environmental and occupational health and safety requirements. However, we cannotassure you that we will not encounter liabilities with respect to these regulations in the future, and such liabilities may result in material adverseconsequences to our operations or financial condition.Available Information We are subject to the reporting requirements under the Exchange Act. Consequently, we are required to file reports and information with the Securitiesand Exchange Commission (SEC), including reports on the following forms: annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports onForm 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. These reports and other informationconcerning our company may be accessed through the SEC's website at http://www.sec.gov.You may also find on our website at http://www.ensigngroup.net, electronic copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. Such filings areplaced on our website as soon as reasonably possible after they are filed with the SEC. All such filings are available free of charge. Information contained inour website is not deemed to be a part of this Annual Report.Item 1A. Risk FactorsSet forth below are certain risk factors that could harm our business, results of operations and financial condition. You should carefully read thefollowing risk factors, together with the financial statements, related notes and other information contained in this Annual Report on Form 10-K. ThisAnnual Report on Form 10-K contains forward-looking statements that contain risks and uncertainties. Please refer to the section entitled "CautionaryNote Regarding Forward-Looking Statements" on page 1 of this Annual Report on Form 10-K in connection with your consideration of the risk factors andother important factors that may affect future results described below.Risks Related to Our Business and IndustryOur revenue could be impacted by federal and state changes to reimbursement and other aspects of Medicaid and Medicare.We derived 40.5% and 39.0% of our revenue from the Medicaid program for the years ended December 31, 2017 and 2016, respectively. We derived27.9% and 28.8% of our revenue from the Medicare program for the years ended December 31, 2017 and 2016, respectively. If reimbursement rates underthese programs are reduced or fail to increase as quickly as our costs, or if24Table of Contentsthere are changes in the way these programs pay for services, our business and results of operations would be adversely affected. The services for which we arecurrently reimbursed by Medicaid and Medicare may not continue to be reimbursed at adequate levels or at all. Further limits on the scope of services beingreimbursed, delays or reductions in reimbursement or changes in other aspects of reimbursement could impact our revenue. For example, in the past, theenactment of the Deficit Reduction Act of 2005 (DRA), the Medicaid Voluntary Contribution and Provider-Specific Tax Amendments of 1991 and theBalanced Budget Act of 1997 (BBA) caused changes in government reimbursement systems, which, in some cases, made obtaining reimbursements moredifficult and costly and lowered or restricted reimbursement rates for some of our patients.The Medicaid and Medicare programs are subject to statutory and regulatory changes affecting base rates or basis of payment, retroactive rateadjustments, annual caps that limit the amount that can be paid (including deductible and coinsurance amounts) for rehabilitation therapy services renderedto Medicare beneficiaries, administrative or executive orders and government funding restrictions, all of which may materially adversely affect the rates andfrequency at which these programs reimburse us for our services. For example, the Medicaid Integrity Contractor (MIC) program is increasing the scrutinyplaced on Medicaid payments, and could result in recoupments of alleged overpayments in an effort to rein in Medicaid spending. Recent budget proposalsand legislation at both the federal and state levels have called for cuts in reimbursement for health care providers participating in the Medicare and Medicaidprograms. Enactment and implementation of measures to reduce or delay reimbursement could result in substantial reductions in our revenue andprofitability. Payors may disallow our requests for reimbursement based on determinations that certain costs are not reimbursable or reasonable because eitheradequate or additional documentation was not provided or because certain services were not covered or considered reasonably necessary. Additionally,revenue from these payors can be retroactively adjusted after a new examination during the claims settlement process or as a result of post-payment audits.New legislation and regulatory proposals could impose further limitations on government payments to healthcare providers.In addition, on October 1, 2010, the next generation of the Minimum Data Set (MDS) 3.0 was implemented, creating significant changes in themethodology for calculating the resource utilization group (RUG) category under Medicare Part A, most notably eliminating Section T. Because therapydoes not necessarily begin upon admission, MDS 2.0 and the RUGS-III system included a provision to capture therapy services that are scheduled to occurbut have not yet been provided in order to calculate a RUG level that better reflects the level of care the recipient would actually receive. This is eliminatedwith MDS 3.0, which creates a new category of assessment called the Medicare Short Stay Assessment. This assessment provides for calculation of arehabilitation RUG for patients discharged on or before day eight who received less than five days of therapy.On December 20, 2016, the Centers for Medicare & Medicaid Services (CMS) issued the final rule for a new Cardiac Rehabilitation Incentive (CR)model, which includes mandatory bundled payment programs for an acute myocardial infarction (AMI) episode of care or a coronary artery bypass graft(CABG) episode of care, and modifications to the existing Comprehensive Care for Joint Replacement (CJR) model to include surgical hip/femur fracturetreatment episodes. The new mandatory cardiac programs mirror the Bundled Payments for Care Improvement (BPCI) and Comprehensive Care for JointReplacement (CJR) models in that actual episode payments will be retrospectively compared against a target price. Similar to CJR, participating hospitalswill be at risk for Medicare Part A and B payments in the inpatient admission and 90 days post-discharge. BPCI episodes would continue to take precedenceover episodes in the CJR program and in the new cardiac bundled payment program. The cardiac model will be mandatory in 98 randomly selectedgeographic areas and the hip/femur procedure model will be mandatory in the same 67 geographic areas that were selected for CJR. CMS is also providing“Cardiac Rehabilitation Incentive Payments”, which can be used by hospitals to facilitate cardiac rehabilitation plans and adherence. The incentive will beprovided to hospitals in 45 of the 98 geographic areas included in the mandatory bundled payment program and 45 geographic areas outside of the program.On May 19, 2017, CMS issued a final rule which delayed the effective date until May 20, 2017 and the start date was scheduled for January 1, 2018, and thefinal rule will continue for five performance years.On November 16, 2015, the Centers for Medicare & Medicaid Services (CMS) issued the final rule for a new mandatory Comprehensive Care for JointReplacement (CJR) model focusing on coordinated, patient-centered care. Under this model, the hospital in which the hip or knee replacement takes place isaccountable for the costs and quality of care from the time of the surgery through 90 days after, or an “episode” of care. Depending on the hospital’s qualityand cost performance during the episode, the hospital either earns a financial reward or is required to repay Medicare for a portion of the costs. This paymentis intended to give hospitals an incentive to work with physicians, home health agencies and nursing facilities to make sure beneficiaries receive thecoordinated care they need with the goal of reducing avoidable hospitalizations and complications. This model initially covers 67 geographic areasthroughout the country and most hospitals in those regions are required to participate. Following the implementation of the CJR program on April 1, 2016,our Medicare revenues derived from our affiliated skilled nursing facilities and other post-acute services related to lower extremity joint replacement hospitaldischarges could be increased or decreased in those geographic areas identified by CMS for mandatory participation in the bundled payment program.On August 15, 2017, CMS proposed changes to the Comprehensive Care for Joint Replacement Model, which included the cancellation of carecoordination through mandatory Episode Payments and Cardiac Rehabilitation Incentive Payment Model.25Table of ContentsOn December 1, 2017, CMS issued a final rule which officially canceled the Episode Payment Models and Cardiac Rehabilitation Incentive Payment Model,rescinding the regulations governing these models. Additionally, the final rule implemented certain revisions to the CJR program, including makingparticipation voluntary for approximately half of the geographic areas, along with other technical refinements. These regulation changes are effective January1, 2018.On January 9, 2018, CMS launched a new voluntary bundled payment called Bundled Payments for Care Improvement Advanced (BCPI Advanced).The Model Performance Period for BCPI Advanced commences on October 1, 2018 and runs through December 31, 2023. Under this bundled paymentmodel, participants can earn additional payment if all expenditures for a beneficiary’s episode of care are under a spending target that factors in quality. BPCIAdvanced Participants may receive payments for performance on 32 different clinical episodes, such as major joint replacement of the lower extremity(inpatient) and percutaneous coronary intervention (inpatient or outpatient). Participants bear financial risk, have payments under the model tied to qualityperformance, and are required to use Certified Electronic Health Record Technology. An episode model such as BPCI Advanced supports healthcareproviders who invest in practice innovation and care redesign to improve quality and reduce expenditures.Of note, BPCI Advanced will qualify as the first Advanced Alternative Payment Model (Advanced APM) under the Quality Payment Program. In 2015,Congress passed the Medicare Access and Chip Reauthorization Act or MACRA. MACRA requires CMS to implement a program called the Quality PaymentProgram or QPP, which changes the way physicians are paid who participate in Medicare. QPP creates two tracks for physician payment - the Merit-BasedIncentive Payment System or MIPS track and the Advanced APM track. Under MIPS, providers have to report a range of performance metrics and theirpayment amount is adjusted based on their performance. Under Advanced APMs, providers take on financial risk to earn the Advanced APM incentivepayment that they are participating in.On October 1, 2015, International Classification of Diseases (ICD) 10 was implemented as the new medical coding system. Some of the main pointsinclude: Claims with antibiotic removal devices (ARDs) on or after October 1, 2015 must contain a valid ICD-10 code. CMS will reject MDS assessments if aSection I diagnosis code version does not apply for the ARD entered. Flexibility is being provided to physician providers with coding, but this flexibilitywill not be passed on to facility-based providers, including skilled nursing facilities that are providing Part B services.Various healthcare reform provisions became law upon enactment of the Patient Protection and Affordable Care Act and the Healthcare Education andReconciliation Act (collectively, the ACA). The reforms contained in the ACA have affected our operating subsidiaries in some manner and are directed inlarge part at increased quality and cost reductions. Several of the reforms are very significant and could ultimately change the nature of our services, themethods of payment for our services and the underlying regulatory environment. These reforms include the possible modifications to the conditions ofqualification for payment, bundling of payments to cover both acute and post-acute care and the imposition of enrollment limitations on new providers. Asdiscussed below under the heading “Our business may be materially impacted if certain aspects of the Affordable Care Act are amended, repealed, orsuccessfully challenged”, any further amendments or revisions to the ACA or its implementing regulations could materially impact our business.Skilled NursingIn 2017, CMS proposed an alternative case-mix classification system for fiscal year 2018, named Resident Classification System, Version I (RCS-I).RCS-I, would case-mix adjust for the following major cost categories: Physical therapy (PT), occupational therapy (OT), speech-language pathology (SLP)services, nursing services and non-therapy ancillaries (NTAs). Thus, where RUG-IV consists of two case-mix adjusted components (therapy and nursing),RCS-I would create four (PT/OT, SLP, nursing, and NTA) for a more resident-centered case-mix adjustment. RCS-I would also maintain the existing non-case-mix component to cover utilization of SNF resources that do not vary according to resident characteristics. For two of the case-mix-adjusted components,PT/OT and NTA, RCS-I includes variable per-diem payment adjustments that modify payment based on changes in utilization of these services over thecourse of a stay. The proposed model will compensate SNFs accurately based on the complexity of the particular beneficiaries they serve and the resourcesnecessary in caring for those beneficiaries and addresses concerns about current incentives for SNFs to delivery therapy to beneficiaries based on financialconsiderations, rather than the most effective course of treatment for beneficiaries. The proposed RCS-I classification model could improve the SNF PPS bybasing payments predominantly on clinical characteristics rather than service provision, thereby enhancing payment accuracy and strengthening incentivesfor appropriate care. The proposed rule is expected to reduce payments associated with residents in the highest therapy RUG (RU) and increase paymentsassociated with residents who receive extensive services or have high NTA costs. The proposed rule also simplifies the MDS structure and reduces laborneeds. Additionally, it is estimated that RCS-I would result in higher payments associated with the following resident types: dual enrollment in Medicare andMedicaid, end-stage renal disease (ESRD), having a longer qualifying inpatient stay, diabetes, wound infections, and use of IV medication.26Table of ContentsOn July 31, 2017, CMS issued its final rule outlining fiscal year 2018 Medicare payment rates for skilled nursing facilities. Under the final rule, themarket basket index is revised and rebased by updating the base year from 2010 to 2014 and adding a new cost category for Installation, Maintenance, andRepair Services. The rule also includes revisions to the SNF Quality Reporting Program, including measure and standardized patient assessment data policies,as well as policies related to public display. In addition, it finalized policies for the Skilled Nursing Facility Value-Based Purchasing Program that will affectMedicare payment to SNFs beginning in fiscal year 2019 and clarification of the requirements regarding the composition of professionals for the surveyteam. The final rule uses a market basket percentage of 1% to update the federal rates, but if a SNF fails to submit quality reporting program requirementsthere will be a 2% reduction to the market basket update. Thus, the increase in the federal rates may increase the amount of our reimbursements for SNFservices so long as we meet the reporting requirements.On July 29, 2016, CMS issued its final rule outlining fiscal year 2017 Medicare payment rates and quality programs for skilled nursing facilities. Thepolicies in the finalized rule continue to shift Medicare payments from volume to value. The aggregate payments to skilled nursing facilities increased by anet 2.4% for fiscal year 2017. This increase reflected a 2.7% market basket increase, reduced by a 0.3% multi-factor productivity (MFP) adjustment requiredby ACA. This final rule also further defines the skilled nursing facilities Quality Reporting Program and clarifies the Value-Based Purchasing Program toestablish performance standards, baseline and performance periods, performance scoring methodology and feedback reports.The Value-Based Purchasing Program final rule specifies the skilled nursing facility 30-day potentially preventable readmission measure, whichassesses the facility-level risk standardized rate of unplanned, potentially preventable hospital readmissions for skilled nursing facility patients within 30days of discharge from a prior admission to a hospital paid under the Inpatient Prospective Payment System, a critical access hospital, or a psychiatrichospital. There is also finalized additional policies related to the Value-Based Purchasing Program including: establishing performance standards;establishing baseline and performance periods; adopting a performance scoring methodology; and providing confidential feedback reports to the skillednursing facilities. This SNF Value-Based Purchasing Program will start in fiscal year 2019.On July 30, 2015, CMS published its final rule outlining fiscal year 2016 Medicare payment rates for skilled nursing facilities. The aggregate paymentsto skilled nursing facilities increased by 1.2% for fiscal year 2016. This increase reflected a 2.3% market basket increase, reduced by a 0.6% point forecasterror adjustment and further reduced by 0.5% MFP adjustment required by the Patient Protection and Affordable Care Act (ACA). This final rule alsoidentified a new skilled nursing facility value-based purchasing program and all-cause all-condition hospital readmission measure.Home HealthOn November 1, 2017, CMS issued a final rule that became effective on January 1, 2018 and updated the calendar year 2018 Medicare payment ratesand the wage index for home health agencies serving Medicare beneficiaries. The rule also finalized proposals for the Home Health Value-Based Purchasing(HHVBP) Model and the Home Health Quality Reporting Program (HH QRP). Under the final rule. Medicare payments will be reduced by 0.4%. This decreasereflects the effects of a 1.0% home health payment update percentage; a -0.97% adjustment to the national, standardized 60-day episode payment rate toaccount for nominal case-mix growth for an impact of -0.9%; and the sunset of the rural add-on provision.On January 13, 2017, CMS issued a final rule that modernized the Home Health Conditions of Participation (CoPs). This rule is a continuation of CMS'seffort to improve quality of care while streamlining provider requirements to reduce unnecessary procedural requirements. The rule makes significantrevisions to the conditions currently in place, including (1) adding new conditions of participation related to quality assurance and performanceimprovement programs (QAPI) and infection control; and (2) expanding or revising requirements related to patient rights, comprehensive evaluations,coordination and care planning, home health aide training and supervision, and discharge and transfer summary and time frames. The new CoPs becameeffective on January 13, 2018.On October 31, 2016, CMS issued final payment changes to the Medicare HH PPS for calendar year 2017. Under this rule, Medicare payments werereduced by 0.7%. This decrease reflects a negative 0.97% adjustment to the national, standardized 60-day episode payment rate to account for nominal case-mix growth from 2012 through 2014; a 2.3% reduction in payments due to the final year of the four-year phase-in of the rebasing adjustments to the national,standardized 60-day episode payment rate, the national per-visit payment rates and the non-routine medical supplies (NRS) conversion factor; and the effectsof the revised fixed-dollar loss (FDL) ratio used in determining outlier payments; partially offset by the home health payment update percentage of 2.5%.On November 5, 2015, CMS issued a final rule updating the Medicare HH PPS rates and wage index for calendar year 2016. In the final rule, CMSimplemented the third year of the four year phase-in of rebasing adjustments to the HH PPS payment rates27Table of Contentsas required by ACA. In addition, CMS decreased the national, standardized 60-day episode payment amount by 0.97% in each year for calendar years 2016,2017 and 2018.Pursuant to the rule, CMS also implemented a Home Health Value-Based Purchasing model effective for calendar year 2016, in which all Medicare-certified HHAs in selected states are required to participate. The model applied a payment reduction or increase to current Medicare-certified HHA payments,depending on quality performance, for all agencies delivering services within nine randomly-selected states. Payment adjustments are applied on an annualbasis, beginning at 3.0% in the first payment adjustment year, 5.0% in the second payment adjustment year, 6.0% in the third payment adjustment year and8.0% in the final two payment adjustment years. The implementation of a home health value-based model resulted in a 1.4% decrease in Medicare paymentsto home health agencies across the industry. Lastly, CMS implemented a standardized cross-setting measure for calendar year 2016. The CoPs require home health agencies to submit OASISassessments as a condition of payment and also for quality measurement purposes. Home health agencies that do not submit quality measure data to CMSincur a 2.0% reduction in their annual home health payment update percentage. Under the rule, all home health agencies are required to timely submit bothStart of Care (initial assessment) or Resumption of Care OASIS assessment and a Transfer or Discharge OASIS assessment for a minimum of 70.0% of allpatients with episodes of care occurring during the annual reporting period starting July 1, 2015 and ending June 30, 2016, 80% of all patients with episodesoccurring during the reporting period starting July 1, 2016 and ending June 30, 2017, and 90% for all episodes beginning on or after July 1, 2017.HospiceOn August 1, 2017, CMS issued its final rule outlining the fiscal year 2018 Medicare payment rates, wage index and cap amount for hospices servingMedicare beneficiaries. The final rule uses a net market basket percentage increase of 1.0% to update the federal rates, as mandated by section 411(d) of theMACRA. Although, if a hospice fails to comply with quality reporting program requirements, there will be a net 2.0% reduction to the market basket updatefor the fiscal year involved. The hospice cap amount for fiscal year 2018 is increased by 1.0%, which is equal to the 2017 cap amount updated by the fiscalyear 2018 hospice payment update percentage of 1.0%. In addition, this rule discusses changes to the Hospice Quality Reporting Program (HQRP), includingchanges to the Consumer Assessment of Healthcare Providers and Systems (CAHPS) hospice survey measures and plans for sharing HQRP data in fiscal year2017.On July 29, 2016, CMS issued its final rule outlining fiscal year 2017 Medicare payment rates, wage index and cap amount for hospices servingMedicare beneficiaries. Under the final rule, there was a net 2.1% increase in the hospices' payments effective October 1, 2016. The hospice payment increasewas the net result of 2.7% inpatient hospital market basket update, reduced by a 0.3% productivity adjustment and by a 0.3% adjustment set by the ACA. The hospice cap amount for fiscal year 2017 increased by 2.1%, which is equal to the 2016 cap amount updated by the fiscal year 2017 hospice paymentupdate percentage of 2.1%. In addition, this rule changes the hospice quality reporting program requirements, including care surveys and two new qualitymeasures that will assess hospice staff visits to patients and caregivers in the last three and seven days of life and the percentage of hospice patients whoreceived care processes consistent with guidelines.On July 31, 2015, CMS issued its final rule outlining fiscal year 2016 Medicare payment rates and the wage index for hospices serving Medicarebeneficiaries. Under the final rule, there was a net 1.1% increase in payments effective October 1, 2015. The hospice payment increase was the net result of ahospice payment update to the hospice per diem rates of 2.1% (a “hospital market basket” increase of 2.4% minus 0.3% for reductions required by law) and a1.2% decrease in payments to hospices due to updated wage data and the phase-out of its wage index budget neutrality adjustment factor (BNAF), offset bythe newly announced Core Based Statistical Areas (CBSA) delineation impact of 0.2%. The rule also created two different payment rates for routine homecare (RHC) that resulted in a higher base payment rate for the first 60 days of hospice care and a reduced base payment rate for 61 or more days of hospicecare and a Service Intensity Add-On (SIA) Payment for fiscal year 2016 and beyond in conjunction with the proposed RHC rates.On April 1, 2014, the President signed into law the Protecting Access to Medicare Act of 2014, which averted a 24% cut in Medicare payments tophysicians and other Part B providers until March 31, 2015. In addition, this law maintained the 0.5% update for such services through December 31, 2014and provides a 0.0% update to the 2015 Medicare Physician Fee Schedule (MPFS) through March 31, 2015. Among other things, this law provides theframework for implementation of a value-based purchasing program for skilled nursing facilities. Under this legislation HHS is required to develop byOctober 1, 2016 measures and performance standards regarding preventable hospital readmissions from skilled nursing facilities. Beginning October 1, 2018,HHS will withhold 2% of Medicare payments to all skilled nursing facilities and distribute this pool of payment to skilled nursing facilities as incentivepayments for preventing readmissions to hospitals.28Table of ContentsOn April 16, 2015, the President signed MACRA into law. This bill includes a number of provisions, including replacement of the Sustainable GrowthRate (SGR) formula used by Medicare to pay physicians with new systems for establishing annual payment rate updates for physicians' services. In addition,it increases premiums for Part B and Part D of Medicare for beneficiaries with income above certain levels and makes numerous other changes to Medicareand Medicaid.On October 30, 2015, CMS released a final rule (with comment period) addressing, among other things, implementation of certain provisions ofMACRA, including the implementation of the new Merit-Based Incentive Payment System (MIPS). The current Value-Based Payment Modifier program isset to expire in 2018, with MIPS to begin in 2019. The October 30, 2015 final rule added measures where gaps exist in the current Physician QualityReporting System (PQRS), which is used by CMS to track the quality of care provided to Medicare beneficiaries. The final rule also excludes servicesfurnished in SNFs from the definition of primary care services for purposes of the Shared Savings Program. The final rule could impact our revenue in thefuture.The Improving Medicare Post-Acute Care Transformation Act of 2014 (the IMPACT Act), which was signed into law on October 6, 2014, requires thesubmission of standardized assessment data for quality improvement, payment and discharge planning purposes across the spectrum of post-acute careproviders (PACs), including skilled nursing facilities and home health agencies. The IMPACT Act will require PACs to begin reporting: (1) standardizedpatient assessment data at admission and discharge by October 1, 2018 for post-acute care providers, including skilled nursing facilities by January 1, 2019for home health agencies; (2) new quality measures, including functional status, skin integrity, medication reconciliation, incidence of major falls, andpatient preference regarding treatment and discharge at various intervals between October 1, 2016 and January 1, 2019; and (3) resource use measures,including Medicare spending per beneficiary, discharge to community, and hospitalization rates of potentially preventable readmissions by October 1, 2016for post-acute care providers, including skilled nursing facilities and by January 1, 2017 for home health agencies. Failure to report such data when requiredwould subject a facility to a two percent reduction in market basket prices then in effect.The IMPACT Act further requires HHS and the Medicare Payment Advisory Commission (MedPAC), a commission chartered by Congress to advise iton Medicare payment issues, to study alternative PAC payment models, including payment based upon individual patient characteristics and not caresetting, with corresponding Congressional reports required based on such analysis. The IMPACT Act also included provisions impacting Medicare-certifiedhospices, including: (1) increasing survey frequency for Medicare-certified hospices to once every 36 months; (2) imposing a medical review process forfacilities with a high percentage of stays in excess of 180 days; and (3) updating the annual aggregate Medicare payment cap.On January 2, 2013 the President signed the American Taxpayer Relief Act of 2012 into law. This statute delayed significant cuts in Medicare rates forphysician services until December 31, 2013. The statute also created a Commission on Long-Term Care, the goal of which was to develop a plan for theestablishment, implementation, and financing of a comprehensive, coordinated, and high-quality system that ensures the availability of long-term careservices and supports for individuals in need of such services and supports.On February 22, 2012, the President signed into law H.R. 3630, which among other things, delayed a cut in physician and Part B services. Inestablishing the funding for the law, payments to nursing facilities for patients' unpaid Medicare A co-insurance was reduced. The Deficit Reduction Act of2005 had previously limited reimbursement of bad debt to 70% on privately responsibility co-insurance. However, under H.R. 3630, this reimbursement willbe reduced to 65%.Further, prior to the introduction of H.R. 3630, we were reimbursed for 100% of bad debt related to dual-eligible Medicare patients' co-insurance. H.R.3630 will phase down the dual-eligible reimbursement over three years. Effective October 1, 2012, Medicare dual-eligible co-insurance reimbursementdecreased from 100% to 88%, with further reductions to 77% and 65% as of October 1, 2013 and 2014, respectively. Any reductions in Medicare orMedicaid reimbursement could materially adversely affect our profitability.Our future revenue, financial condition and results of operations could be impacted by continued cost containment pressures on Medicaid spending.Medicaid, which is largely administered by the states, is a significant payor for our skilled nursing services. Rapidly increasing Medicaid spending,combined with slow state revenue growth, has led many states to institute measures aimed at controlling spending growth. For example, in February 2009, theCalifornia legislature approved a new budget to help relieve a $42 billion budget deficit. The budget package was signed after months of negotiation, duringwhich time California's governor declared a fiscal state of emergency in California. The new budget implemented spending cuts in several areas, includingMedi-Cal spending. Further, California initially had extended its cost-based Medi-Cal long-term care reimbursement system enacted through Assembly Bill1629 (A.B.1629) through the 2009-2010 and 2010-2011 rate years with a growth rate of up to five percent for both years. However, due to California's severebudget crisis, in July 2009, the State passed a budget-balancing proposal that eliminated this five percent growth cap by amending the current statute toprovide that, for the 2009-2010 and 2010-2011 rate years, the weighted29Table of Contentsaverage Medi-Cal reimbursement rate paid to long-term care facilities shall not exceed the weighted average Medi-Cal reimbursement rate for the 2008-2009rate year. In addition, the budget proposal increased the amounts that California nursing facilities will pay to Medi-Cal in quality assurance fees for the 2009-2010 and 2010-2011 rate years by including Medicare revenue in the calculation of the quality assurance fee that nursing facilities pay under A.B. 1629.Although overall reimbursement from Medi-Cal remained stable, individual facility rates varied.California's Governor signed the budget trailer into law in October 2010. Despite its enactment, these changes in reimbursement to long-term carefacilities were to be implemented retroactively to the beginning of the calendar quarter in which California submitted its request for federal approval of CMS.California’s Governor released a 2014-2015 budget that includes $1.2 billion in additional Medi-Cal funding. This proposal, however, would not eliminateretroactive rate cuts for hospital-based skilled nursing facilities.Because state legislatures control the amount of state funding for Medicaid programs, cuts or delays in approval of such funding by legislatures couldreduce the amount of, or cause a delay in, payment from Medicaid to skilled nursing facilities. Since a significant portion of our revenue is generated fromour skilled nursing operating subsidiaries in California, these budget reductions, if approved, could adversely affect our net patient service revenue andprofitability. We expect continuing cost containment pressures on Medicaid outlays for skilled nursing facilities, and any such decline could adversely affectour financial condition and results of operations.To generate funds to pay for the increasing costs of the Medicaid program, many states utilize financial arrangements such as provider taxes. Underprovider tax arrangements, states collect taxes or fees from healthcare providers and then return the revenue to these providers as Medicaid expenditures.Congress, however, has placed restrictions on states' use of provider tax and donation programs as a source of state matching funds. Under the MedicaidVoluntary Contribution and Provider-Specific Tax Amendments of 1991, the federal medical assistance percentage available to a state was reduced by thetotal amount of healthcare related taxes that the state imposed, unless certain requirements are met. The federal medical assistance percentage is not reducedif the state taxes are broad-based and not applied specifically to Medicaid reimbursed services. In addition, the healthcare providers receiving Medicaidreimbursement must be at risk for the amount of tax assessed and must not be guaranteed to receive reimbursement through the applicable state Medicaidprogram for the tax assessed. Lower Medicaid reimbursement rates would adversely affect our revenue, financial condition and results of operations.We may not be fully reimbursed for all services for which each facility bills through consolidated billing, which could adversely affect our revenue,financial condition and results of operations.Skilled nursing facilities are required to perform consolidated billing for certain items and services furnished to patients and residents. The consolidatedbilling requirement essentially confers on the skilled nursing facility itself the Medicare billing responsibility for the entire package of care that its patientsreceive in these situations. The BBA also affected skilled nursing facility payments by requiring that post-hospitalization skilled nursing services be“bundled” into the hospital's Diagnostic Related Group (DRG) payment in certain circumstances. Where this rule applies, the hospital and the skilled nursingfacility must, in effect, divide the payment which otherwise would have been paid to the hospital alone for the patient's treatment, and no additional funds arepaid by Medicare for skilled nursing care of the patient. At present, this provision applies to a limited number of DRGs, but already is apparently having anegative effect on skilled nursing facility utilization and payments, either because hospitals are finding it difficult to place patients in skilled nursingfacilities which will not be paid as before or because hospitals are reluctant to discharge the patients to skilled nursing facilities and lose part of theirpayment. This bundling requirement could be extended to more DRGs in the future, which would accentuate the negative impact on skilled nursing facilityutilization and payments. We may not be fully reimbursed for all services for which each facility bills through consolidated billing, which could adverselyaffect our revenue, financial condition and results of operations.Reforms to the U.S. healthcare system will impose new requirements upon us and may lower our reimbursements.ACA and the Health Care and Education Reconciliation Act of 2010 (the Reconciliation Act) include sweeping changes to how health care is paid forand furnished in the United States. As discussed below under the heading “-Our business may be materially impacted if certain aspects of the AffordableCare Act are amended, repealed, or successfully challenged”, any further amendments or revisions to ACA or its implementing regulations could materiallyimpact our business. The recent presidential and congressional elections in the United States could result in significant changes in, and uncertainty withrespect to, legislation, regulation, implementation of Medicare and/or Medicaid, and government policy that could significantly impact our business and thehealth care industry. We continually monitor these developments in an effort to respond to the changing regulatory environment impacting our business.30Table of ContentsACA, as modified by the Reconciliation Act, is projected to expand access to Medicaid for approximately 11 to 13 million additional people each yearbetween 2015-2024. It also reduces the projected growth of Medicare by $106 billion by 2020 by tying payments to providers more closely to qualityoutcomes. It also imposes new obligations on skilled nursing facilities, requiring them to disclose information regarding ownership, expenditures and certainother information. This information is disclosed on a website for comparison by members of the public.To address potential fraud and abuse in federal health care programs, including Medicare and Medicaid, ACA includes provider screening andenhanced oversight periods for new providers and suppliers, as well as enhanced penalties for submitting false claims. It also provides funding for enhancedanti-fraud activities. The new law imposes enrollment moratoria in elevated risk areas by requiring providers and suppliers to establish compliance programs.ACA also provides the federal government with expanded authority to suspend payment if a provider is investigated for allegations or issues of fraud. Section6402 of the ACA provides that Medicare and Medicaid payments may be suspended pending a “credible investigation of fraud,” unless the Secretary of HHSdetermines that good cause exists not to suspend payments. To the extent the Secretary applies this suspension of payments provision to one of our affiliatedfacilities for allegations of fraud, such a suspension could adversely affect our results of operations.Under ACA, HHS will establish, test and evaluate alternative payment methodologies for Medicare services through a five-year, national, voluntarypilot program starting in 2013. This program will provide incentives for providers to coordinate patient care across the continuum and to be jointlyaccountable for an entire episode of care centered around a hospitalization. HHS will develop qualifying provider payment methods that may includebundled payments and bids from entities for episodes of care. The bundled payment will cover the costs of acute care inpatient services; physicians’ servicesdelivered in and outside of an acute care hospital; outpatient hospital services including emergency department services; post-acute care services, includinghome health services, skilled nursing services; inpatient rehabilitation services; and inpatient hospital services. The payment methodology will includepayment for services, such as care coordination, medication reconciliation, discharge planning and transitional care services, and other patient-centeredactivities. Payments for items and services cannot result in spending more than would otherwise be expended for such entities if the pilot program was notimplemented. As with Medicare’s shared savings program discussed above, payment arrangements among providers on the backside of the bundled paymentmust take into account significant hurdles under the Anti-Kickback Statue, the Stark Law and the Civil Monetary Penalties Law.ACA attempts to improve the health care delivery system through incentives to enhance quality, improve beneficiary outcomes and increase value ofcare. One of these key delivery system reforms is the encouragement of Accountable Care Organizations (ACOs). ACOs will facilitate coordination andcooperation among providers to improve the quality of care for Medicare beneficiaries and reduce unnecessary costs. Participating ACOs that meet specifiedquality performance standards will be eligible to receive a share of any savings if the actual per capita expenditures of their assigned Medicare beneficiariesare a sufficient percentage below their specified benchmark amount. Quality performance standards will include measures in such categories as clinicalprocesses and outcomes of care, patient experience and utilization of services.We routinely receive Requests for Information (RFIs) from active referral and managed care networks asking for quality, rating, performance and otherinformation about our SNFs operating in the geographic areas that they are being serviced. The RFIs are used to evaluate which SNFs should be included ineach network of preferred providers. For those SNFs included in the network, the ACO and its associated providers may then recommend the SNF as a“preferred provider” to patients in need of skilled care. In the past, after responding to such RFIs, our SNFs have in some instances been rewarded withinclusion in a network of preferred providers, and in other instances have not been included. While referrals to a SNF in a preferred provider network willalways be subject to a patient’s freedom of choice, as well as the patient’s physician’s medical judgment as to which facility will best serve the patient’sneeds, the inclusion as a preferred provider in a network will likely result in an increase in overall admissions to that SNF. On the other hand, the failure to beincluded could result in some volume of patient admissions being shifted to other facilities that have been designated instead as preferred providers. As aresult, to the extent that one of our SNF is not included in a preferred provider network, our revenues and results of operations could be adversely affected.In addition, ACA required HHS to develop a plan to implement a value-based purchasing program for Medicare payments to skilled nursing facilities.HHS delivered a report to Congress outlining its plans for implementing this value-based purchasing program. The value-based purchasing program wouldprovide payment incentives for Medicare-participating skilled nursing facilities to improve the quality of care provided to Medicare beneficiaries. Amongthe most relevant factors in HHS' plans to implement value-based purchasing for skilled nursing facilities is the current Nursing Home Value-BasedPurchasing Demonstration Project, which concluded in 2012. HHS provided Congress with an outline of plans to implement a value-based purchasingprogram, and any permanent value-based purchasing program for skilled nursing facilities will be implemented after that evaluation.On October 4, 2016, CMS released a final rule that reforms the requirements for long-term care (LTC) facilities, specifically skilled nursing facilities(SNFs) and nursing facilities (NFs), to participate in the Medicare and Medicaid programs. The regulations31Table of Contentshave not been updated since 1991 and have been revised to improve quality of life, care and services in LTC facilities, optimize resident safety, reflectcurrent professional standards and improve the logical flow of the regulations. The regulations are effective November 28, 2016 and will be implemented inthree phases. The first phase was effective November 28, 2016, the second phase was effective November 28, 2017 and the third phase becomes effectiveNovember 28, 2019.A few highlights from the new regulation include the following:•investigate and report all allegations of abusive conduct, and refrain from employing individuals who have had a disciplinary action takenagainst their professional license by a state licensure body as a result of a finding of abuse, neglect, mistreatment of residents ormisappropriation of their property;•document a transfer or discharge in the medical record and exchange certain information to a receiving provider or facility when a residentis transferred;•develop and implement a baseline care plan for each resident within 48 hours of their admission that includes instructions to provideeffective and person-centered care that meets professional standards of quality care;•develop and implement a discharge planning process that prepares residents to be active partners in post-discharge care;•provide the necessary care and services to attain or maintain the highest practicable physical, mental and psychosocial well-being;•add a competency requirement for determining the sufficiency of nursing staff;•require that a pharmacist reviews a resident’s medical chart during each monthly drug regiment review;•refrain from charging a Medicare resident for loss or damage of dentures;•provide each resident with a nourishing, palatable and well-balanced diet;•conduct, document and annually review a facility-wide assessment to determine what resources are necessary to care for its residents;•refrain from entering into a binding arbitration agreement until after a dispute arises between the parties;•develop, implement and maintain an effective comprehensive, data-driven quality assurance and performance improvement program;•develop an Infection Prevention and Control Program; and•require their operating organization have in effect a compliance and ethics program.CMS estimates that the average cost per facility for compliance with the new rule to be approximately $62,900 in the first year and approximately$55,000 in subsequent years. However, these amounts vary per organization. In addition to the monetary costs, these regulations may create complianceissues, as state regulators and surveyors interpret requirements that are less explicit. On June 8, 2017, CMS issued a proposed rule that would remove theprovisions prohibiting binding pre-dispute arbitration agreements, but would retain other provisions that protect the interests of LTC residents.On June 9, 2017, CMS issued revised requirements for emergency preparedness for Medicare and Medicaid participating providers, including long-termcare facilities, hospices, and home health agencies. The revised requirements update the conditions of participation for such providers. Specifically,outpatient facilities, such as home health agencies, are required to ensure that patients with limited mobility are addressed within the emergency plan; homehealth agencies are also required to develop and implement emergency preparedness policies and procedures that are reviewed and updated at least annuallyand each patient must have an individual plan; hospice-operated inpatient care facilities are required to provide subsistence needs for hospice employees andpatients and a means to shelter in place patients and employees who remain in the hospice; all hospices and home health agencies must implementprocedures to follow up with on duty staff and patients to determine services that are needed in the event that there is an interruption in services during or dueto an emergency; hospices must train their employees in emergency preparedness policies and long-term care facilities are required to share emergencypreparedness plans and policies with family members and resident representatives.32Table of ContentsOn September 16, 2016, CMS issued its final rule concerning emergency preparedness requirements for Medicare and Medicaid participating providers,specifically skilled nursing facilities (SNFs), nursing facilities (NFs), and intermediate care facilities for individuals with intellectual disabilities (ICF/IIDs).The rule is designed to ensure providers and suppliers have comprehensive and integrated emergency policies and procedures in place, in particular duringnatural and man-made disasters. Under the rule, facilities are required to 1) document risk assessment and emergency planning; 2) develop and implementpolicies and procedures based on that risk assessment; 3) develop and maintain an emergency preparedness communication plan in compliance with bothfederal and state law; and 4) develop and maintain an emergency preparedness training and testing program. The regulations outlined in the final rule mustbe implemented by November 15, 2017.On July 29, 2016, CMS issued its final rule laying out the performance standards relating to preventable hospital readmissions from skilled nursingfacilities. The final rule includes the SNF 30-day All Cause Readmission Measure which assesses the risk-standardized rate of all-cause, all condition,unplanned inpatient hospital readmissions for Medicare fee-for-service SNF patients within 30 days of discharge from admission to an inpatient prospectivepayment system hospital, CAH or psychiatric hospital. The final rule includes the SNF 30-Day Potentially Preventable Readmission Measure as the SNF allcondition risk adjusted potentially preventable hospital readmission measure. This measure assesses the facility-level risk-standardized rate of unplanned,potentially preventable hospital readmissions for SNF patients within 30 days of discharge from a prior admission to an IPPS hospital, CAH, or psychiatrichospital. Hospital readmissions include readmissions to a short-stay acute-care hospital or CAH, with a diagnosis considered to be unplanned and potentiallypreventable. This measure is claims-based, requiring no additional data collection or submission burden for SNFs.In addition, the proposed rule states, beginning in 2019, the achievement performance standard for skilled nursing facilities for quality measuresspecified under the SNF Value Based Purchasing Program (SNF VBP) will be the 25th percentile of national SNF performance on the quality measure duringthe applicable baseline period. This will affect the value based incentive payments paid to skilled nursing facilities.On February 2, 2016, CMS issued its final rule concerning face-to-face requirements for Medicaid home health services. Under the rule, the Medicaidhome health service definition was revised consistent with applicable sections of the ACA and H.R. 2 Medicare Access and CHIP Reauthorization Act of2015 (MACRA). The rule also requires that for the initial ordering of home health services, the physician must document that a face-to-face encounter that isrelated to the primary reason the beneficiary requires home health services occurred no more than 90 days before or 30 days after the start of services. Thefinal rule also requires that for the initial ordering of certain medical equipment, the physician or authorized non-physician provider (NPP) must documentthat a face-to-face encounter that is related to the primary reason the beneficiary requires medical equipment occurred no more than 6 months prior to the startof services.On April 27, 2016, CMS added six new quality measures to its consumer-based Nursing Home Compare website. These quality measures include therate of rehospitalization, emergency room use, community discharge, improvements in function, independently worsened and antianxiety or hypnoticmedication among nursing home residents. Beginning in July 2016, CMS incorporates all of these measures, except for the antianxiety/hypnotic medicationmeasure, into the calculation of the Nursing Home Five-Star Quality Ratings.On July 6, 2015, CMS announced a proposal to launch Home Health Value-Based Purchasing model to test whether incentives for better care canimprove outcomes in the delivery of home health services. The model would apply a payment reduction or increase to current Medicare-certified home healthagency payments, depending on quality performance, for all agencies delivering services within nine randomly-selected states. Payment adjustments wouldbe applied on an annual basis, beginning at 5.0% in each of the first two payment adjustment years, 6.0% in the third payment adjustment year and 8.0% inthe final two payment adjustment years.On June 28, 2012, the United States Supreme Court ruled that the enactment of ACA did not violate the Constitution of the United States. This rulingpermits the implementation of most of the provisions of ACA to proceed. The provisions of ACA discussed above are only examples of federal health reformprovisions that we believe may have a material impact on the long-term care industry and on our business. However, the foregoing discussion is not intendedto constitute, nor does it constitute, an exhaustive review and discussion of ACA. It is possible that these and other provisions of ACA may be interpreted,clarified, or applied to our affiliated facilities or operating subsidiaries in a way that could have a material adverse impact on the results of operations.On April 1, 2014, the President signed into law the Protecting Access to Medicare Act of 2014 which, among other things, provides the framework forimplementation of a value-based purchasing program for skilled nursing facilities. Under this legislation HHS is required to develop by October 1, 2016measures and performance standards regarding preventable hospital readmissions from skilled nursing facilities. Beginning October 1, 2018, HHS willwithhold 2% of Medicare payments to all skilled nursing33Table of Contentsfacilities and distribute this pool of payment to skilled nursing facilities as incentive payments for preventing readmissions to hospitals.We cannot predict what effect these changes will have on our business, including the demand for our services or the amount of reimbursement availablefor those services. However, it is possible these new laws may lower reimbursement and adversely affect our business.The Affordable Care Act and its implementation could impact our business.In addition, the Affordable Care Act could result in sweeping changes to the existing U.S. system for the delivery and financing of health care. Thedetails for implementation of many of the requirements under the Affordable Care Act will depend on the promulgation of regulations by a number of federalgovernment agencies, including the HHS. It is impossible to predict the outcome of these changes, what many of the final requirements of the Health ReformLaw will be, and the net effect of those requirements on us. As such, we cannot predict the impact of the Affordable Care Act on our business, operations orfinancial performance.A significant goal of Federal health care reform is to transform the delivery of health care by changing reimbursement for health care services to holdproviders accountable for the cost and quality of care provided. Medicare and many commercial third party payors are implementing Accountable CareOrganization models in which groups of providers share in the benefit and risk of providing care to an assigned group of individuals at lower cost. Otherreimbursement methodology reforms include value-based purchasing, in which a portion of provider reimbursement is redistributed based on relativeperformance on designated economic, clinical quality, and patient satisfaction metrics. In addition, CMS is implementing programs to bundle acute care andpost-acute care reimbursement to hold providers accountable for costs across a broader continuum of care. These reimbursement methodologies and similarprograms are likely to continue and expand, both in public and commercial health plans. Providers who respond successfully to these trends and are able todeliver quality care at lower cost are likely to benefit financially.The Affordable Care Act and the programs implemented by the law may reduce reimbursements for our services and may impact the demand for theCompany’s products. In addition, various healthcare programs and regulations may be ultimately implemented at the federal or state level. Failure to respondsuccessfully to these trends could negatively impact our business, results of operations and/or financial condition. As discussed below under the heading“Our business may be materially impacted if certain aspects of the Affordable Care Act are amended, repealed, or successfully challenged”, any furtheramendments or revisions to ACA or its implementing regulations could materially impact our business.Our business may be materially impacted if certain aspects of the Affordable Care Act are amended, repealed, or successfully challenged.A number of lawsuits have been filed challenging various aspects of ACA and related regulations. In addition, the efficacy of ACA is the subject ofmuch debate among members of Congress and the public. The recent presidential and congressional elections in the United States could result in significantchanges in, and uncertainty with respect to, legislation, regulation, implementation of Medicare and/or Medicaid, and government policy that couldsignificantly impact our business and the health care industry. In the event that legal challenges are successful or ACA is repealed or materially amended,particularly any elements of ACA that are beneficial to our business or that cause changes in the health insurance industry, including reimbursement andcoverage by private, Medicare or Medicaid payers, our business, operating results and financial condition could be harmed. While it is not possible to predictwhether and when any such changes will occur, specific proposals discussed during and after the election, including a repeal or material amendment of ACA,could harm our business, operating results and financial condition. In addition, even if ACA is not amended or repealed, the President and the executivebranch of the federal government, as well as CMS and HHS have a significant impact on the implementation of the provisions of ACA, and the newadministration could make changes impacting the implementation and enforcement of ACA, which could harm our business, operating results and financialcondition. If we are slow or unable to adapt to any such changes, our business, operating results and financial condition could be adversely affected.Increased competition for, or a shortage of, nurses and other skilled personnel could increase our staffing and labor costs and subject us to monetary fines.Our success depends upon our ability to retain and attract nurses, Certified Nurse Assistants (CNAs) and therapists. Our success also depends upon ourability to retain and attract skilled management personnel who are responsible for the day-to-day operations of each of our affiliated facilities. Each facilityhas a facility leader responsible for the overall day-to-day operations of the facility, including quality of care, social services and financial performance.Depending upon the size of the facility, each facility leader is supported by facility staff that is directly responsible for day-to-day care of the patients andmarketing and34Table of Contentscommunity outreach programs. Other key positions supporting each facility may include individuals responsible for physical, occupational and speechtherapy, food service and maintenance. We compete with various healthcare service providers, including other skilled nursing providers, in retaining andattracting qualified and skilled personnel.We operate one or more affiliated skilled nursing facilities in the states of Arizona, California, Colorado, Idaho, Iowa, Kansas, Nebraska, Nevada, SouthCarolina, Texas, Utah, Washington and Wisconsin. With the exception of Utah, which follows federal regulations, each of these states has establishedminimum staffing requirements for facilities operating in that state. Failure to comply with these requirements can, among other things, jeopardize a facility'scompliance with the conditions of participation under relevant state and federal healthcare programs. In addition, if a facility is determined to be out ofcompliance with these requirements, it may be subject to a notice of deficiency, a citation, or a significant fine or litigation risk. Deficiencies (depending onthe level) may also result in the suspension of patient admissions and/or the termination of Medicaid participation, or the suspension, revocation ornonrenewal of the skilled nursing facility's license. If the federal or state governments were to issue regulations which materially change the way compliancewith the minimum staffing standard is calculated or enforced, our labor costs could increase and the current shortage of healthcare workers could impact usmore significantly.Increased competition for, or a shortage of, nurses or other trained personnel, or general inflationary pressures may require that we enhance our pay andbenefits packages to compete effectively for such personnel. We may not be able to offset such added costs by increasing the rates we charge to the patientsof our operating subsidiaries. Turnover rates and the magnitude of the shortage of nurses or other trained personnel vary substantially from facility to facility.An increase in costs associated with, or a shortage of, skilled nurses, could negatively impact our business. In addition, if we fail to attract and retain qualifiedand skilled personnel, our ability to conduct our business operations effectively would be harmed.We are subject to various government reviews, audits and investigations that could adversely affect our business, including an obligation to refundamounts previously paid to us, potential criminal charges, the imposition of fines, and/or the loss of our right to participate in Medicare and Medicaidprograms.As a result of our participation in the Medicaid and Medicare programs, we are subject to various governmental reviews, audits and investigations toverify our compliance with these programs and applicable laws and regulations. We are also subject to audits under various government programs, includingRecovery Audit Contractors (RAC), Zone Program Integrity Contractors (ZPIC), Program Safeguard Contractors (PSC) and Medicaid Integrity Contributors(MIC) programs, in which third party firms engaged by CMS conduct extensive reviews of claims data and medical and other records to identify potentialimproper payments under the Medicare programs. Private pay sources also reserve the right to conduct audits. We believe that billing and reimbursementerrors and disagreements are common in our industry. We are regularly engaged in reviews, audits and appeals of our claims for reimbursement due to thesubjectivities inherent in the process related to patient diagnosis and care, record keeping, claims processing and other aspects of the patient service andreimbursement processes, and the errors and disagreements those subjectivities can produce. An adverse review, audit or investigation could result in:•an obligation to refund amounts previously paid to us pursuant to the Medicare or Medicaid programs or from private payors, in amounts that couldbe material to our business;•state or federal agencies imposing fines, penalties and other sanctions on us;•loss of our right to participate in the Medicare or Medicaid programs or one or more private payor networks;•an increase in private litigation against us; and•damage to our reputation in various markets.In 2004, our Medicare fiscal intermediaries began to conduct selected reviews of claims previously submitted by and paid to some of our affiliatedfacilities. While we have always been subject to post-payment audits and reviews, more intensive “probe reviews” appear to be a permanent procedure withour fiscal intermediaries. All findings of overpayment from CMS contractors are eligible for appeal through the CMS defined continuum. With the exceptionof rare findings of overpayment related to objective errors in Medicare payment methodology or claims processing, the Organization utilizes all defenses atits disposal to demonstrate that the services provided meet all clinical and regulatory requirements for reimbursement.If the government or court were to conclude that such errors and deficiencies constituted criminal violations, or were to conclude that such errors anddeficiencies resulted in the submission of false claims to federal healthcare programs, or if it were to discover other problems in addition to the ones identifiedby the probe reviews that rose to actionable levels, we and certain of our officers might face potential criminal charges and/or civil claims, administrativesanctions and penalties for amounts that35Table of Contentscould be material to our business, results of operations and financial condition. In addition, we and/or some of the key personnel of our operating subsidiariescould be temporarily or permanently excluded from future participation in state and federal healthcare reimbursement programs such as Medicaid andMedicare. In any event, it is likely that a governmental investigation alone, regardless of its outcome, would divert material time, resources and attentionfrom our management team and our staff, and could have a materially detrimental impact on our results of operations during and after any such investigationor proceedings.In cases where claim and documentation review by any CMS contractor results in repeated poor performance, a facility can be subjected to protractedoversight. This oversight may include repeat education and re-probe, extended pre-payment review, referral to recovery audit or integrity contractors, orextrapolation of an error rate to other reimbursement outside of specifically reviewed claims. Sustained failure to demonstrate improvement towards meetingall claim filing and documentation requirements could ultimately lead to Medicare decertification. As of December 31, 2017, we had seven operatingsubsidiaries that had probes scheduled or in process, both pre- and post-payment.Public and government calls for increased survey and enforcement efforts toward long-term care facilities could result in increased scrutiny by state andfederal survey agencies. In addition, potential sanctions and remedies based upon alleged regulatory deficiencies could negatively affect our financialcondition and results of operations.CMS has undertaken several initiatives to increase or intensify Medicaid and Medicare survey and enforcement activities, including federal oversightof state actions. CMS is taking steps to focus more survey and enforcement efforts on facilities with findings of substandard care or repeat violations ofMedicaid and Medicare standards, and to identify multi-facility providers with patterns of noncompliance. In addition, HHS has adopted a rule that requiresCMS to charge user fees to healthcare facilities cited during regular certification, recertification or substantiated complaint surveys for deficiencies, whichrequire a revisit to assure that corrections have been made. CMS is also increasing its oversight of state survey agencies and requiring state agencies to useenforcement sanctions and remedies more promptly when substandard care or repeat violations are identified, to investigate complaints more promptly, andto survey facilities more consistently.The intensified and evolving enforcement environment impacts providers like us because of the increase in the scope or number of inspections orsurveys by governmental authorities and the severity of consequent citations for alleged failure to comply with regulatory requirements. We also divertpersonnel resources to respond to federal and state investigations and other enforcement actions. The diversion of these resources, including our managementteam, clinical and compliance staff, and others take away from the time and energy that these individuals could otherwise spend on routine operations. Asnoted, from time to time in the ordinary course of business, we receive deficiency reports from state and federal regulatory bodies resulting from suchinspections or surveys. The focus of these deficiency reports tends to vary from year to year. Although most inspection deficiencies are resolved through anagreed-upon plan of corrective action, the reviewing agency typically has the authority to take further action against a licensed or certified facility, whichcould result in the imposition of fines, imposition of a provisional or conditional license, suspension or revocation of a license, suspension or denial ofpayment for new admissions, loss of certification as a provider under state or federal healthcare programs, or imposition of other sanctions, including criminalpenalties. In the past, we have experienced inspection deficiencies that have resulted in the imposition of a provisional license and could experience theseresults in the future. We currently have no affiliated facilities operating under provisional licenses which were the result of inspection deficiencies.Furthermore, in some states, citations in one facility impact other facilities in the state. Revocation of a license at a given facility could therefore impairour ability to obtain new licenses or to renew existing licenses at other facilities, which may also trigger defaults or cross-defaults under our leases and ourcredit arrangements, or adversely affect our ability to operate or obtain financing in the future. If state or federal regulators were to determine, formally orotherwise, that one facility's regulatory history ought to impact another of our existing or prospective facilities, this could also increase costs, result inincreased scrutiny by state and federal survey agencies, and even impact our expansion plans. Therefore, our failure to comply with applicable legal andregulatory requirements in any single facility could negatively impact our financial condition and results of operations as a whole.When a facility is found to be deficient under state licensing and Medicaid and Medicare standards, sanctions may be threatened or imposed such asdenial of payment for new Medicaid and Medicare admissions, civil monetary penalties, focused state and federal oversight and even loss of eligibility forMedicaid and Medicare participation or state licensure. Sanctions such as denial of payment for new admissions often are scheduled to go into effect beforesurveyors return to verify compliance. Generally, if the surveyors confirm that the facility is in compliance upon their return, the sanctions never take effect.However, if they determine that the facility is not in compliance, the denial of payment goes into effect retroactive to the date given in the original notice.This possibility sometimes leaves affected operators, including us, with the difficult task of deciding whether to continue accepting patients after thepotential 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 ofcompliance, or simply refusing admissions from the potential denial of payment date until the facility is actually found to be in compliance. In the past, someof our affiliated facilities have36Table of Contentsbeen in denial of payment status due to findings of continued regulatory deficiencies, resulting in an actual loss of the revenue associated with the Medicareand Medicaid patients admitted after the denial of payment date. Additional sanctions could ensue and, if imposed, these sanctions, entailing variousremedies up to and including decertification, would further negatively affect our financial condition and results of operations. In 2016, we elected tovoluntarily close one operating subsidiary as a result of multiple regulatory deficiencies in order to avoid continued strain on our staff and other resourcesand to avoid restrictions on our ability to acquire new facilities or expand or operate existing facilities. In addition, from time to time, we have opted tovoluntarily stop accepting new patients pending completion of a new state survey, in order to avoid possible denial of payment for new admissions duringthe deficiency cure period, or simply to avoid straining staff and other resources while retraining staff, upgrading operating systems or making otheroperational improvements. If we elect to voluntary close any operations in the future or to opt to stop accepting new patients pending completion of a state orfederal survey, it could negatively impact our financial condition and results of operation. Facilities with otherwise acceptable regulatory histories generally are given an opportunity to correct deficiencies and continue their participation inthe Medicare and Medicaid programs by a certain date, usually within nine months, although where denial of payment remedies are asserted, such interimremedies go into effect much sooner. Facilities with deficiencies that immediately jeopardize patient health and safety and those that are classified as poorperforming facilities, however, are not generally given an opportunity to correct their deficiencies prior to the imposition of remedies and other enforcementactions. Moreover, facilities with poor regulatory histories continue to be classified by CMS as poor performing facilities notwithstanding any interveningchange in ownership, unless the new owner obtains a new Medicare provider agreement instead of assuming the facility's existing agreement. However, newowners (including us, historically) nearly always assume the existing Medicare provider agreement due to the difficulty and time delays generally associatedwith obtaining new Medicare certifications, especially in previously-certified locations with sub-par operating histories. Accordingly, facilities that havepoor regulatory histories before we acquire them and that develop new deficiencies after we acquire them are more likely to have sanctions imposed uponthem by CMS or state regulators. In addition, CMS has increased its focus on facilities with a history of serious quality of care problems through the specialfocus facility initiative. A facility's administrators and owners are notified when it is identified as a special focus facility. This information is also provided tothe general public. The special focus facility designation is based in part on the facility's compliance history typically dating before our acquisition of thefacility. Local state survey agencies recommend to CMS that facilities be placed on special focus status. A special focus facility receives heightened scrutinyand more frequent regulatory surveys. Failure to improve the quality of care can result in fines and termination from participation in Medicare and Medicaid.A facility “graduates” from the program once it demonstrates significant improvements in quality of care that are continued over time.We have received notices of potential sanctions and remedies based upon alleged regulatory deficiencies from time to time, and such sanctions havebeen imposed on some of our affiliated facilities. We have had several affiliated facilities placed on special focus facility status, due largely or entirely totheir respective regulatory histories prior to our acquisition of the operating subsidiaries, and have successfully graduated five operating subsidiaries from theprogram to date. We currently have one facility placed on special focus facility status. Other operating subsidiaries may be identified for such status in thefuture.Annual caps that limit the amounts that can be paid for outpatient therapy services rendered to any Medicare beneficiary may reduce our future revenueand profitability or cause us to incur losses.Some of our rehabilitation therapy revenue is paid by the Medicare Part B program under a fee schedule. Congress has established annual caps that limitthe amounts that can be paid (including deductible and coinsurance amounts) for rehabilitation therapy services rendered to any Medicare beneficiary underMedicare Part B. The BBA requires a combined cap for physical therapy and speech-language pathology and a separate cap for occupational therapy.The DRA directs CMS to create a process to allow exceptions to therapy caps for certain medically necessary services provided on or after January 1,2006 for patients with certain conditions or multiple complexities whose therapy services are reimbursed under Medicare Part B. A significant portion of thepatients in our affiliated skilled nursing facilities and patients served by our rehabilitation therapy programs whose therapy is reimbursed under MedicarePart B have qualified for the exceptions to these reimbursement caps. DRA added Section 1833(g)(5) of the Social Security Act and directed them to developa process that allows exceptions for Medicare beneficiaries to therapy caps when continued therapy is deemed medically necessary.The therapy cap exception has been reauthorized in a number of subsequent laws, including the Protecting Access to Medicare Act of 2014. Allbeneficiaries began a new cap year on January 1, 2017 since the therapy caps are determined on a calendar year basis. For physical therapy (PT) and speech-language pathology services (SLP) combined, the limit on incurred expenses is $1,980 in 2017 compared to $1,960 in 2016. For occupational therapy (OT)services, the limit is $1,980 in 2017 compared to $1,960 in 2016. Deductible and coinsurance amounts paid by the beneficiary for therapy services counttoward the amount applied to the limit.37Table of ContentsThe Multiple Procedure Payment Reduction (MPPR) continues at a 50% reduction applied to therapy procedure codes by reducing payments forpractice expense of the second and subsequent procedure codes when services provided under subsequent codes are provided on the same day. Theimplementation of MPPR includes 1) facilities that provide Medicare Part B speech-language pathology, occupational therapy, and physical therapy servicesand bill under the same provider number; and 2) providers in private practice, including speech-language pathologists, who perform and bill for multipleservices in a single day.The application of annual caps, or the discontinuation of exceptions to the annual caps, could have an adverse effect on our rehabilitation therapyrevenue. Most recently, the therapy cap exception was extended through December 31, 2017 pursuant to MACRA.Our hospice operating subsidiaries are subject to annual Medicare caps calculated by Medicare. If such caps were to be exceeded by any of our hospiceproviders, our business and consolidated financial condition, results of operations and cash flows could be materially adversely affected.With respect to our hospice operating subsidiaries, overall payments made by Medicare to each provider number are subject to an inpatient cap amountand an overall payment cap, which are calculated and published by the Medicare fiscal intermediary on an annual basis covering the period from October 1through September 30. If payments received by any one of our hospice provider numbers exceeds either of these caps, we are required to reimburse Medicarefor payments received in excess of the caps, which could have a material adverse effect on our business and consolidated financial condition, results ofoperations and cash flows. During the year ended December 31, 2017 we recorded $0.8 million of hospice cap expense.We are subject to extensive and complex federal and state government laws and regulations which could change at any time and increase our cost of doingbusiness and subject us to enforcement actions.We, along with other companies in the healthcare industry, are required to comply with extensive and complex laws and regulations at the federal, stateand local government levels relating to, among other things:•facility and professional licensure, certificates of need, permits and other government approvals;•adequacy and quality of healthcare services;•qualifications of healthcare and support personnel;•quality of medical equipment;•confidentiality, maintenance and security issues associated with medical records and claims processing;•relationships with physicians and other referral sources and recipients;•constraints on protective contractual provisions with patients and third-party payors;•operating policies and procedures;•certification of additional facilities by the Medicare program; and•payment for services.The laws and regulations governing our operations, along with the terms of participation in various government programs, regulate how we do business,the services we offer, and our interactions with patients and other healthcare providers. These laws and regulations are subject to frequent change. We believethat such regulations may increase in the future and we cannot predict the ultimate content, timing or impact on us of any healthcare reform legislation.Changes in existing laws or regulations, or the enactment of new laws or regulations, could negatively impact our business. If we fail to comply with theseapplicable laws and regulations, we could suffer civil or criminal penalties and other detrimental consequences, including denial of reimbursement,imposition of fines, temporary suspension of admission of new patients, suspension or decertification from the Medicaid and Medicare programs, restrictionson our ability to acquire new facilities or expand or operate existing facilities, the loss of our licenses to operate and the loss of our ability to participate infederal and state reimbursement programs.We are subject to federal and state laws, such as the federal False Claims Act, state false claims acts, the illegal remuneration provisions of the SocialSecurity Act, the federal anti-kickback laws, state anti-kickback laws, and the federal “Stark” laws, that govern financial and other arrangements amonghealthcare providers, their owners, vendors and referral sources, and that are intended to prevent healthcare fraud and abuse. Among other things, these lawsprohibit kickbacks, bribes and rebates, as well as other direct and indirect payments or fee-splitting arrangements that are designed to induce the referral ofpatients to a particular38Table of Contentsprovider for medical products or services payable by any federal healthcare program, and prohibit presenting a false or misleading claim for payment under afederal or state program. They also prohibit some physician self-referrals. Possible sanctions for violation of any of these restrictions or prohibitions includeloss of eligibility to participate in federal and state reimbursement programs and civil and criminal penalties. Changes in these laws could increase our cost ofdoing business. If we fail to comply, even inadvertently, with any of these requirements, we could be required to alter our operations, refund payments to thegovernment, enter into a corporate integrity agreement, deferred prosecution or similar agreements with state or federal government agencies, and becomesubject to significant civil and criminal penalties. For example, in April 2013, we announced that we reached a tentative settlement with the Department ofJustice (DOJ) regarding their investigation related to claims submitted to the Medicare program for rehabilitation services provided at skilled nursingfacilities in Southern California. As part of the settlement, we entered into a Corporate Integrity Agreement with the Office of Inspector General-HHS. Failureto comply with the terms of the Corporate Integrity Agreement could result in substantial civil or criminal penalties and being excluded from governmenthealth care programs, which could adversely affect our financial condition and results of operations.In May 2009, Congress passed the Fraud Enforcement and Recovery Act (FERA) of 2009 which made significant changes to the federal False ClaimsAct (FCA), expanding the types of activities subject to prosecution and whistleblower liability. Following changes by FERA, health care providers facesignificant penalties for known retention of government overpayments, even if no false claim was involved. Health care providers can now be liable forknowingly and improperly avoiding or decreasing an obligation to pay money or property to the government. This includes the retention of any governmentoverpayment. The government can argue, therefore, that a FCA violation can occur without any affirmative fraudulent action or statement, as long as it isknowingly improper. The ACA supplements FERA by imposing an affirmative obligation on health care providers to return an overpayment to CMS within60 days of “identification” or the date any corresponding cost report is due, whichever is later. On August 3, 2015, the U.S. District Court for the SouthernDistrict of New York held that the 60 day clock following “identification” of an overpayment begins to run when a provider is put on notice of a potentialoverpayment, rather than the moment when an overpayment is conclusively ascertained. On February 12, 2016, CMS published a final rule with respect toMedicare Parts A and B clarifying that providers have an obligation to proactively exercise “reasonable diligence,” and that the 60 day clock begins to runafter the reasonable diligence period has concluded, which may take at most 6 months from the from receipt of credible information, absent extraordinarycircumstances. Retention of any overpayment beyond this period may result in FCA liability. In addition, FERA extended protections against retaliation forwhistleblowers, including protections not only for employees, but also contractors and agents. Thus, there is no need for an employment relationship in orderto qualify for protection against retaliation for whistleblowing.We are also required to comply with state and federal laws governing the transmission, privacy and security of health information. The Health InsurancePortability and Accountability Act of 1996 (HIPAA) requires us to comply with certain standards for the use of individually identifiable health informationwithin our company, and the disclosure and electronic transmission of such information to third parties, such as payors, business associates and patients.These include standards for common electronic healthcare transactions and information, such as claim submission, plan eligibility determination, paymentinformation submission and the use of electronic signatures; unique identifiers for providers, employers and health plans; and the security and privacy ofindividually identifiable health information. In addition, some states have enacted comparable or, in some cases, more stringent privacy and security laws. Ifwe fail to comply with these state and federal laws, we could be subject to criminal penalties and civil sanctions and be forced to modify our policies andprocedures.On January 25, 2013, HHS promulgated new HIPAA privacy, security, and enforcement regulations, which increase significantly the penalties andenforcement practices of the Department regarding HIPAA violations. In addition, any breach of individually identifiable health information can result inobligations under HIPAA and state laws to notify patients, federal and state agencies, and in some cases media outlets, regarding the breach incident. Breachincidents and violations of HIPAA or state privacy and security laws could subject us to significant penalties, and could have a significant impact on ourbusiness. The new HIPAA regulations are effective as of March 26, 2013, and compliance was required by September 23, 2013.Our failure to obtain or renew required regulatory approvals or licenses or to comply with applicable regulatory requirements, the suspension orrevocation of our licenses or our disqualification from participation in federal and state reimbursement programs, or the imposition of other harshenforcement sanctions could increase our cost of doing business and expose us to potential sanctions. Furthermore, if we were to lose licenses or certificationsfor any of our affiliated facilities as a result of regulatory action or otherwise, we could be deemed to be in default under some of our agreements, includingagreements governing outstanding indebtedness and lease obligations.Increased civil and criminal enforcement efforts of government agencies against skilled nursing facilities could harm our business, and could preclude usfrom participating in federal healthcare programs.39Table of ContentsBoth federal and state government agencies have heightened and coordinated civil and criminal enforcement efforts as part of numerous ongoinginvestigations of healthcare companies and, in particular, skilled nursing facilities. The focus of these investigations includes, among other things:•cost reporting and billing practices;•quality of care;•financial relationships with referral sources; and•medical necessity of services provided.If any of our affiliated facilities is decertified or loses its licenses, our revenue, financial condition or results of operations would be adversely affected.In addition, the report of such issues at any of our affiliated facilities could harm our reputation for quality care and lead to a reduction in the patient referralsof our operating subsidiaries and ultimately a reduction in occupancy at these facilities. Also, responding to enforcement efforts would divert material time,resources and attention from our management team and our staff, and could have a materially detrimental impact on our results of operations during and afterany such investigation or proceedings, regardless of whether we prevail on the underlying claim.Federal law provides that practitioners, providers and related persons may not participate in most federal healthcare programs, including the Medicaidand Medicare programs, if the individual or entity has been convicted of a criminal offense related to the delivery of a product or service under theseprograms or if the individual or entity has been convicted under state or federal law of a criminal offense relating to neglect or abuse of patients in connectionwith the delivery of a healthcare product or service. Other individuals or entities may be, but are not required to be, excluded from such programs undercertain circumstances, including, but not limited to, the following:•medical necessity of services provided;•conviction related to fraud;•conviction relating to obstruction of an investigation;•conviction relating to a controlled substance;•licensure revocation or suspension;•exclusion or suspension from state or other federal healthcare programs;•filing claims for excessive charges or unnecessary services or failure to furnish medically necessary services;•ownership or control of an entity by an individual who has been excluded from the Medicaid or Medicare programs, against whom a civil monetarypenalty related to the Medicaid or Medicare programs has been assessed or who has been convicted of a criminal offense under federal healthcareprograms; and•the transfer of ownership or control interest in an entity to an immediate family or household member in anticipation of, or following, a conviction,assessment or exclusion from the Medicare or Medicaid programs.The OIG, among other priorities, is responsible for identifying and eliminating fraud, abuse and waste in certain federal healthcare programs. The OIGhas implemented a nationwide program of audits, inspections and investigations and from time to time issues “fraud alerts” to segments of the healthcareindustry on particular practices that are vulnerable to abuse. The fraud alerts inform healthcare providers of potentially abusive practices or transactions thatare subject to criminal activity and reportable to the OIG. An increasing level of resources has been devoted to the investigation of allegations of fraud andabuse in the Medicaid and Medicare programs, and federal and state regulatory authorities are taking an increasingly strict view of the requirements imposedon healthcare providers by the Social Security Act and Medicaid and Medicare programs. Although we have created a corporate compliance program that webelieve is consistent with the OIG guidelines, the OIG may modify its guidelines or interpret its guidelines in a manner inconsistent with our interpretation orthe OIG may ultimately determine that our corporate compliance program is insufficient.40Table of ContentsIn some circumstances, if one facility is convicted of abusive or fraudulent behavior, then other facilities under common control or ownership may bedecertified from participating in Medicaid or Medicare programs. Federal regulations prohibit any corporation or facility from participating in federalcontracts if it or its principals have been barred, suspended or declared ineligible from participating in federal contracts. In addition, some state regulationsprovide that all facilities under common control or ownership licensed within a state may be de-licensed if one or more of the facilities are de-licensed. If anyof our operating subsidiaries were decertified or excluded from participating in Medicaid or Medicare programs, our revenue would be adversely affected.The Office of the Inspector General or other regulatory authorities may choose to more closely scrutinize billing practices in areas where we operate orpropose to expand, which could result in an increase in regulatory monitoring and oversight, decreased reimbursement rates, or otherwise adversely affectour business, financial condition and results of operations.In March 2016, the OIG released a report entitled “Hospices Inappropriately Billed Medicare Over $250 Million for General Inpatient Care.” The reportanalyzed the results of a medical record review of 2012 hospice general inpatient care stays to estimate the percentage of such stays that were billedinappropriately, and found that hospices billed one-third of general inpatient stays inappropriately, costing Medicare $268 million in 2012. Consequently,the OIG recommended, and CMS concurred with such recommendations, that CMS (1) increase its oversight of hospice general inpatient stay claims andreview Part D payments for drugs for hospice beneficiaries; (2) ensure that a physician is involved in the decision to use general inpatient care; (3) conductprepayment reviews for lengthy general inpatient care stays; (4) increase surveyor efforts to ensure that hospices meet care planning requirements; (5)establish additional enforcement remedies for poor hospice performance; and (6) follow up on inappropriate general inpatient care stays.In September 2015, the OIG released a report entitled “The Medicare Payment System for Skilled Nursing Facilities Needs to Be Reevaluated.” Amongother things, the report used Medicare cost reports to compare Medicare payments to skilled nursing facilities’ costs for therapy over a ten year period, andfound that Medicare payments for therapy greatly exceeded skilled nursing facilities’ costs for therapy. The OIG recommended, and CMS concurred withsuch recommendations, that CMS evaluate the extent to which Medicare payment rates for therapy should be reduced, change the method for paying fortherapy, adjust Medicare payments to eliminate any increases that are unrelated to beneficiary characteristics, and strengthen oversight of Skilled NursingFacility billing.In January 2015, the OIG released a report entitled “Medicare Hospices Have Financial Incentives to Provide Care in Assisted Living Facilities.” Thereport analyzed all Medicare hospices claims from 2007 through 2012, and raised concerns about the financial incentives created by the current paymentsystem and the potential for hospices-especially for-profit hospices-to target beneficiaries in assisted living facilities because they may offer the hospices thegreatest financial gain. Accordingly, the report recommended that CMS reform payments to reduce the incentive for hospices to target beneficiaries withcertain diagnoses and those likely to have long stays, target certain hospices for review, develop and adopt claims-based measures of quality, make hospicedata publicly available for the beneficiaries, and provide additional information to hospices to educate them about how they compare to their peers. CMSconcurred with all five recommendations.In August 2012, the OIG released a report entitled “Inappropriate and Questionable Billing for Medicare Home Health Agencies.” The report analyzeddata from home health, inpatient hospital, and skilled nursing facilities claims from 2010 to identify inappropriate home health payments. The report foundthat in 2010, Medicare made overpayments largely in connection with three specific errors: overlapping with claims for inpatient hospital stays, overlappingwith claims for skilled nursing facility stays, or billing for services on dates after beneficiaries’ deaths. The report also concluded that home health agencieswith questionable billing were located mostly in Texas, Florida, California, and Michigan. The report recommended that CMS implement claims processingedits or improve existing edits to prevent inappropriate payments for the three specific errors referenced above, increase monitoring of billing for home healthservices, enforce and consider lowering the ten percent cap on the total outlier payments a home health agency may receive annually, consider imposing atemporary moratorium on new home health agency enrollments in Florida and Texas, and take appropriate action regarding the inappropriate paymentsidentified and home health agencies with questionable billing. CMS concurred with all five recommendations. Moratoria were subsequently put in place, andeffective January 29, 2016, extended on July 29, 2016, again on January 9, 2017 and again on July 28, 2017. A moratoria on new home health agencies andhome health agency sub-units were extended in various counties in Florida, Michigan, Texas, Illinois, Pennsylvania and New Jersey. Additionally, followingrecommendations made by the OIG in an April 2014 report entitled “Limited Compliance with Medicare’s Home Health Face-to-Face DocumentationRequirements,” CMS committed to implement a plan for oversight of home health agencies through Supplemental Medical Review Contractor audits ofevery home health agency in the country.In December 2010, the OIG released a report entitled “Questionable Billing by Skilled Nursing Facilities.” The report examined the billing practices ofskilled nursing facilities based on Medicare Part A claims from 2006 to 2008 and found, among41Table of Contentsother things, that for-profit skilled nursing facilities were more likely to bill for higher paying therapy RUGs, particularly in the ultra high therapy categories,than government and not-for-profit operators. It also found that for-profit skilled nursing facilities showed a higher incidence of patients using RUGs withhigher activities of daily living (ADL) scores, and had a “long” average length of stay among Part A beneficiaries, compared to their government and not-for-profit counterparts. The OIG recommended that CMS vigilantly monitor overall payments to skilled nursing facilities, adjust RUG rates annually, change themethod for determining how much therapy is needed to ensure appropriate payments and conduct additional reviews for skilled nursing operators that exceedcertain thresholds for higher paying therapy RUGs. CMS concurred with and agreed to take action on three of the four recommendations, declining only tochange the methodology for assessing a patient's therapy needs. The OIG issued a separate memorandum to CMS listing 384 specific facilities that the OIGhad identified as being in the top one percent for use of ultra high therapy, RUGs with high ADL scores, or “long” average lengths of stay, and CMS agreed toforward the list to the appropriate fiscal intermediaries or other contractors for follow up. Although we believe our therapy assessment and billing practicesare consistent with applicable law and CMS requirements, we cannot predict the extent to which the OIG's recommendations to CMS will be implementedand, what effect, if any, such proposals would have on us. Two of our affiliated facilities have been listed on the report. Our business model, like those ofsome other for-profit operators, is based in part on seeking out higher-acuity patients whom we believe are generally more profitable, and over time ouroverall patient mix has consistently shifted to higher-acuity and higher-RUGs patients in most facilities we operate. We also use specialized care-deliverysoftware that assists our caregivers in more accurately capturing and recording ADL services in order to, among other things, increase reimbursement to levelsappropriate for the care actually delivered. These efforts may place us under greater scrutiny with the OIG, CMS, our fiscal intermediaries, recovery auditcontractors and others, as well as other government agencies, unions, advocacy groups and others who seek to pursue their own mandates and agendas. In itsfiscal year 2014 work plan, OIG specifically stated that it will continue to study and report on questionable Part A and Part B billing practices amongstskilled nursing facilities.In addition, in its 2017 Work Plan, the OIG indicated that it will review compliance with various aspects which impact reimbursement to skilled nursing(SNF), home health, or hospice providers, including the documentation in support of the claims paid by Medicare. According to the 2017 Work Plan, priorOIG reviews found that SNFs are billing for higher levels of therapy than were provided or were reasonable or necessary and also that Medicare paymentswere not compliant with the requirement of a 3-day inpatient hospital stay within 30 days of a SNF admission. The OIG’s 2017 Work Plan provides that theOIG will review documentation at selected SNFs to determine if it meets the requirements for each particular RUG, compliance with SNF prospective paymentsystem requirements related to a 3-day qualifying inpatient hospital stay, and other billing documentation related to Medicare payments for hospice andhome health services to ensure they were made in accordance with Medicare requirements.Efforts by officials and others to make or advocate for any increase in regulatory monitoring and oversight, adversely change RUG rates, reducepayment rates, revise methodologies for assessing and treating patients, conduct more frequent or intense reviews of our treatment and billing practices, orimplement moratoria in areas where we operate or propose to expand, could reduce our reimbursement, increase our costs of doing business and otherwiseadversely affect our business, financial condition and results of operations.State efforts to regulate or deregulate the healthcare services industry or the construction or expansion of healthcare facilities could impair our ability toexpand our operations, or could result in increased competition.Some states require healthcare providers, including skilled nursing facilities, to obtain prior approval, known as a certificate of need, for:•the purchase, construction or expansion of healthcare facilities;•capital expenditures exceeding a prescribed amount; or•changes in services or bed capacity.In addition, other states that do not require certificates of need have effectively barred the expansion of existing facilities and the development of newones by placing partial or complete moratoria on the number of new Medicaid beds they will certify in certain areas or in the entire state. Other states haveestablished such stringent development standards and approval procedures for constructing new healthcare facilities that the construction of new facilities, orthe expansion or renovation of existing facilities, may become cost-prohibitive or extremely time-consuming. In addition, some states the acquisition of afacility being operated by a non-profit organization requires the approval of the state Attorney General.Our ability to acquire or construct new facilities or expand or provide new services at existing facilities would be adversely affected if we are unable toobtain the necessary approvals, if there are changes in the standards applicable to those approvals, or if we experience delays and increased expensesassociated with obtaining those approvals. We may not be able to obtain licensure,42Table of Contentscertificate of need approval, Medicaid certification, Attorney General approval or other necessary approvals for future expansion projects. Conversely, theelimination or reduction of state regulations that limit the construction, expansion or renovation of new or existing facilities could result in increasedcompetition to us or result in overbuilding of facilities in some of our markets. If overbuilding in the skilled nursing industry in the markets in which weoperate were to occur, it could reduce the occupancy rates of existing facilities and, in some cases, might reduce the private rates that we charge for ourservices.Changes in federal and state employment-related laws and regulations could increase our cost of doing business.Our operating subsidiaries are subject to a variety of federal and state employment-related laws and regulations, including, but not limited to, the U.S.Fair Labor Standards Act which governs such matters as minimum wages, overtime and other working conditions, the Americans with Disabilities Act (ADA)and similar state laws that provide civil rights protections to individuals with disabilities in the context of employment, public accommodations and otherareas, the National Labor Relations Act, regulations of the Equal Employment Opportunity Commission (EEOC), regulations of the Office of Civil Rights,regulations of state Attorneys General, family leave mandates and a variety of similar laws enacted by the federal and state governments that govern these andother employment law matters. Because labor represents such a large portion of our operating costs, changes in federal and state employment-related laws andregulations could increase our cost of doing business.The compliance costs associated with these laws and evolving regulations could be substantial. For example, all of our affiliated facilities are requiredto comply with the ADA. The ADA has separate compliance requirements for “public accommodations” and “commercial properties,” but generally requiresthat buildings be made accessible to people with disabilities. Compliance with ADA requirements could require removal of access barriers and non-compliance could result in imposition of government fines or an award of damages to private litigants. Further legislation may impose additional burdens orrestrictions with respect to access by disabled persons. In addition, federal proposals to introduce a system of mandated health insurance and flexible worktime and other similar initiatives could, if implemented, adversely affect our operations. We also may be subject to employee-related claims such as wrongfuldischarge, discrimination or violation of equal employment law. While we are insured for these types of claims, we could experience damages that are notcovered by our insurance policies or that exceed our insurance limits, and we may be required to pay such damages directly, which would negatively impactour cash flow from operations. Compliance with federal and state fair housing, fire, safety and other regulations may require us to make unanticipated expenditures, which could becostly to us.We must comply with the federal Fair Housing Act and similar state laws, which prohibit us from discriminating against individuals if it would causesuch individuals to face barriers in gaining residency in any of our affiliated facilities. Additionally, the Fair Housing Act and other similar state laws requirethat we advertise our services in such a way that we promote diversity and not limit it. We may be required, among other things, to change our marketingtechniques to comply with these requirements.In addition, we are required to operate our affiliated facilities in compliance with applicable fire and safety regulations, building codes and other landuse regulations and food licensing or certification requirements as they may be adopted by governmental agencies and bodies from time to time. Like otherhealthcare facilities, our affiliated skilled nursing facilities are subject to periodic surveys or inspections by governmental authorities to assess and assurecompliance with regulatory requirements. Surveys occur on a regular (often annual or biannual) schedule, and special surveys may result from a specificcomplaint filed by a patient, a family member or one of our competitors. We may be required to make substantial capital expenditures to comply with theserequirements.We depend largely upon reimbursement from third-party payors, and our revenue, financial condition and results of operations could be negativelyimpacted by any changes in the acuity mix of patients in our affiliated facilities as well as payor mix and payment methodologies.Our revenue is affected by the percentage of the patients of our operating subsidiaries who require a high level of skilled nursing and rehabilitative care,whom we refer to as high acuity patients, and by our mix of payment sources. Changes in the acuity level of patients we attract, as well as our payor mixamong Medicaid, Medicare, private payors and managed care companies, significantly affect our profitability because we generally receive higherreimbursement rates for high acuity patients and because the payors reimburse us at different rates. For the year ended December 31, 2017, 68.4% of ourrevenue was provided by government payors that reimburse us at predetermined rates, respectively. If our labor or other operating costs increase, we will beunable to recover such increased costs from government payors. Accordingly, if we fail to maintain our proportion of high acuity patients or if there is anysignificant increase in the percentage of the patients of our operating subsidiaries for whom we receive Medicaid reimbursement, our results of operationsmay be adversely affected.43Table of ContentsInitiatives undertaken by major insurers and managed care companies to contain healthcare costs may adversely affect our business. Among otherinitiatives, these payors attempt to control healthcare costs by contracting with healthcare providers to obtain services on a discounted basis. We believe thatthis trend will continue and may limit reimbursements for healthcare services. If insurers or managed care companies from whom we receive substantialpayments were to reduce the amounts they pay for services, we may lose patients if we choose not to renew our contracts with these insurers at lower rates.Compliance with state and federal employment, immigration, licensing and other laws could increase our cost of doing business.We have hired personnel, including skilled nurses and therapists, from outside the United States. If immigration laws are changed, or if new and morerestrictive government regulations proposed by the Department of Homeland Security are enacted, our access to qualified and skilled personnel may belimited.We operate in at least one state that requires us to verify employment eligibility using procedures and standards that exceed those required under federalForm I-9 and the statutes and regulations related thereto. Proposed federal regulations would extend similar requirements to all of the states in which ouraffiliated facilities operate. To the extent that such proposed regulations or similar measures become effective, and we are required by state or federalauthorities to verify work authorization or legal residence for current and prospective employees beyond existing Form I-9 requirements and other statutesand regulations currently in effect, it may make it more difficult for us to recruit, hire and/or retain qualified employees, may increase our risk of non-compliance with state and federal employment, immigration, licensing and other laws and regulations and could increase our cost of doing business.We are subject to litigation that could result in significant legal costs and large settlement amounts or damage awards.The skilled nursing business involves a significant risk of liability given the age and health of the patients and residents of our operating subsidiariesand the services we provide. We and others in our industry are subject to a large and increasing number of claims and lawsuits, including professionalliability claims, alleging that our services have resulted in personal injury, elder abuse, wrongful death or other related claims. The defense of these lawsuitshas in the past, and may in the future, result in significant legal costs, regardless of the outcome, and can result in large settlement amounts or damage awards.Plaintiffs tend to sue every healthcare provider who may have been involved in the patient's care and, accordingly, we respond to multiple lawsuits andclaims every year.In addition, plaintiffs' attorneys have become increasingly more aggressive in their pursuit of claims against healthcare providers, including skillednursing providers and other long-term care companies, and have employed a wide variety of advertising and publicity strategies. Among other things, thesestrategies include establishing their own Internet websites, paying for premium advertising space on other websites, paying Internet search engines tooptimize their plaintiff solicitation advertising so that it appears in advantageous positions on Internet search results, including results from searches for ourcompany and affiliated facilities, using newspaper, magazine and television ads targeted at customers of the healthcare industry generally, as well as atcustomers of specific providers, including us. From time to time, law firms claiming to specialize in long-term care litigation have named us, our affiliatedfacilities and other specific healthcare providers and facilities in their advertising and solicitation materials. These advertising and solicitation activitiescould result in more claims and litigation, which could increase our liability exposure and legal expenses, divert the time and attention of the personnel ofour operating subsidiaries from day-to-day business operations, and materially and adversely affect our financial condition and results of operations.Furthermore, to the extent the frequency and/or severity of losses from such claims and suits increases, our liability insurance premiums could increase and/oravailable insurance coverage levels could decline, which could materially and adversely affect our financial condition and results of operations.Healthcare litigation (including class action litigation) is common and is filed based upon a wide variety of claims and theories, and we are routinelysubjected to varying types of claims. One particular type of suit arises from alleged violations of state-established minimum staffing requirements for skillednursing facilities. Failure to meet these requirements can, among other things, jeopardize a facility's compliance with conditions of participation undercertain state and federal healthcare programs; it may also subject the facility to a notice of deficiency, a citation, civil monetary penalty, or litigation. Theseclass-action “staffing” suits have the potential to result in large jury verdicts and settlements, and have become more prevalent in the wake of a previoussubstantial jury award against one of our competitors. We expect the plaintiff's bar to continue to be aggressive in their pursuit of these staffing and similarclaims.We have in the past been subject to class action litigation involving claims of violations of various regulatory requirements. While we have been ableto settle these claims without a material ongoing adverse effect on our business, future claims could be brought that may materially affect our business,financial condition and results of operations. Other claims and suits, including class actions, continue to be filed against us and other companies in ourindustry. For example, there has been an increase in the number of wage and hour class action claims filed in several of the jurisdictions where we are present.Allegations typically include44Table of Contentsclaimed failures to permit or properly compensate for meal and rest periods, or failure to pay for time worked. If there were a significant increase in the numberof these claims or an increase in amounts owing should plaintiffs be successful in their prosecution of these claims, this could have a material adverse effectto our business, financial condition, results of operations and cash flows. In addition, we contract with a variety of landlords, lenders, vendors, suppliers,consultants and other individuals and businesses. These contracts typically contain covenants and default provisions. If the other party to one or more of ourcontracts were to allege that we have violated the contract terms, we could be subject to civil liabilities which could have a material adverse effect on ourfinancial condition and results of operations.Were litigation to be instituted against one or more of our subsidiaries, a successful plaintiff might attempt to hold us or another subsidiary liable for thealleged wrongdoing of the subsidiary principally targeted by the litigation. If a court in such litigation decided to disregard the corporate form, the resultingjudgment could increase our liability and adversely affect our financial condition and results of operations.On February 26, 2009, Congress reintroduced the Fairness in Nursing Home Arbitration Act of 2009. After failing to be enacted into law in the 110thCongress in 2008, the Fairness in Nursing Home Arbitration Act of 2009 was introduced in the 111th Congress and referred to the House and Senate judiciarycommittees in March 2009. The 111th Congress did not pass the bill and therefore has been cleared from the present agenda. This bill was reintroduced in the112th Congress as the Fairness in Nursing Home Arbitration Act of 2012, and was referred to the House Judiciary committee. If enacted, this bill wouldrequire, among other things, that agreements to arbitrate nursing home disputes be made after the dispute has arisen rather than before prospective patientsmove in, to prevent nursing home operators and prospective patients from mutually entering into a pre-admission pre-dispute arbitration agreement. We usearbitration agreements, which have generally been favored by the courts, to streamline the dispute resolution process and reduce our exposure to legal feesand excessive jury awards. If we are not able to secure pre-admission arbitration agreements, our litigation exposure and costs of defense in patient liabilityactions could increase, our liability insurance premiums could increase, and our business may be adversely affected.The U.S. Department of Justice has conducted an investigation into the billing and reimbursement processes of some of our operating subsidiaries, whichcould adversely affect our operations and financial condition.In October 2013, we entered into the Settlement Agreement with the DOJ pertaining to an investigation of certain of our operating subsidiaries. Pursuantto the Settlement Agreement, we made a single lump-sum remittance to the government in the amount of $48.0 million in October 2013. We have deniedengaging in any illegal conduct, and have agreed to the settlement amount without any admission of wrongdoing in order to resolve the allegations and toavoid the uncertainty and expense of protracted litigation.In connection with the settlement and effective as of October 1, 2013, we entered into a five-year corporate integrity agreement (the CIA) with the Officeof Inspector General-HHS. The CIA acknowledges the existence of our current compliance program, which is in accord with the Office of the InspectorGeneral (OIG)’s guidance related to an effective compliance program, and requires that we continue during the term of the CIA to maintain said complianceprogram designed to promote compliance with the statutes, regulations, and written directives of Medicare, Medicaid, and all other Federal health careprograms. We are also required to notify the Office of Inspector General-HHS in writing, of, among other things: (i) any ongoing government investigation orlegal proceeding involving an allegation that we have committed a crime or has engaged in fraudulent activities; (ii) any other matter that a reasonableperson would consider a probable violation of applicable criminal, civil, or administrative laws related to compliance with federal healthcare programs; and(iii) any change in location, sale, closing, purchase, or establishment of a new business unit or location related to items or services that may be reimbursed byFederal health care programs. We are also required to retain an Independent Review Organization (IRO) to review certain clinical documentation annually forthe term of the CIA. Our participation in federal healthcare programs is not currently affected by the Settlement Agreement or the CIA. In the event of an uncured materialbreach of the CIA, we could be excluded from participation in federal healthcare programs and/or subject to prosecution.If any additional litigation were to proceed in the future, and we are subjected to, alleged to be liable for, or agree to a settlement of, claims orobligations under federal Medicare statutes, the federal False Claims Act, or similar state and federal statutes and related regulations, our business, financialcondition and results of operations and cash flows could be materially and adversely affected and our stock price could be adversely impacted. Among otherthings, any settlement or litigation could involve the payment of substantial sums to settle any alleged civil violations, and may also include our assumptionof specific procedural and financial obligations going forward under a corporate integrity agreement and/or other arrangement with the government.45Table of ContentsWe conduct regular internal investigations into the care delivery, recordkeeping and billing processes of our operating subsidiaries. These reviewssometimes detect instances of noncompliance which we attempt to correct, which can decrease our revenue.As an operator of healthcare facilities, we have a program to help us comply with various requirements of federal and private healthcare programs. Ourcompliance program includes, among other things, (1) policies and procedures modeled after applicable laws, regulations, government manuals and industrypractices and customs that govern the clinical, reimbursement and operational aspects of our subsidiaries, (2) training about our compliance process for all ofthe employees of our operating subsidiaries, our directors and officers, and training about Medicare and Medicaid laws, fraud and abuse prevention, clinicalstandards and practices, and claim submission and reimbursement policies and procedures for appropriate employees, and (3) internal controls that monitor,for example, the accuracy of claims, reimbursement submissions, cost reports and source documents, provision of patient care, services, and supplies asrequired by applicable standards and laws, accuracy of clinical assessment and treatment documentation, and implementation of judicial and regulatoryrequirements (i.e., background checks, licensing and training).From time to time our systems and controls highlight potential compliance issues, which we investigate as they arise. Historically, we have, and wouldcontinue to do so in the future, initiated internal inquiries into possible recordkeeping and related irregularities at our affiliated skilled nursing facilities,which were detected by our internal compliance team in the course of its ongoing reviews.Through these internal inquiries, we have identified potential deficiencies in the assessment of and recordkeeping for small subsets of patients. We havealso identified and, at the conclusion of such investigations, assisted in implementing, targeted improvements in the assessment and recordkeeping practicesto make them consistent with the existing standards and policies applicable to our affiliated skilled nursing facilities in these areas. We continue to monitorthe measures implemented for effectiveness, and perform follow-up reviews to ensure compliance. Consistent with healthcare industry accounting practices,we record any charge for refunded payments against revenue in the period in which the claim adjustment becomes known.If additional reviews result in identification and quantification of additional amounts to be refunded, we would accrue additional liabilities for claimcosts and interest, and repay any amounts due in normal course. Furthermore, failure to refund overpayments within required time frames (as described ingreater detail above) could result in Federal False Claims Act (FCA) liability. If future investigations ultimately result in findings of significant billing andreimbursement noncompliance which could require us to record significant additional provisions or remit payments, our business, financial condition andresults of operations could be materially and adversely affected and our stock price could decline.We may be unable to complete future facility or business acquisitions at attractive prices or at all, which may adversely affect our revenue; we may alsoelect to dispose of underperforming or non-strategic operating subsidiaries, which would also decrease our revenue.To date, our revenue growth has been significantly impacted by our acquisition of new facilities and businesses. Subject to general market conditionsand the availability of essential resources and leadership within our company, we continue to seek both single-and multi-facility acquisition and businessacquisition opportunities that are consistent with our geographic, financial and operating objectives.We face competition for the acquisition of facilities and businesses and expect this competition to increase. Based upon factors such as our ability toidentify suitable acquisition candidates, the purchase price of the facilities, prevailing market conditions, the availability of leadership to manage newfacilities and our own willingness to take on new operations, the rate at which we have historically acquired facilities has fluctuated significantly. In thefuture, we anticipate the rate at which we may acquire facilities will continue to fluctuate, which may affect our revenue.We have also historically acquired a few facilities, either because they were included in larger, indivisible groups of facilities or under othercircumstances, which were or have proven to be non-strategic or less desirable, and we may consider disposing of such facilities or exchanging them forfacilities which are more desirable. To the extent we dispose of such a facility without simultaneously acquiring a facility in exchange, our revenues mightdecrease.We may not be able to successfully integrate acquired facilities and businesses into our operations, and we may not achieve the benefits we expect fromany of our facility acquisitions.We may not be able to successfully or efficiently integrate new acquisitions with our existing operating subsidiaries, culture and systems. The processof integrating acquisitions into our existing operations may result in unforeseen operating difficulties, divert management's attention from existingoperations, or require an unexpected commitment of staff and financial resources,46Table of Contentsand may ultimately be unsuccessful. Existing operations available for acquisition frequently serve or target different markets than those that we currentlyserve. We also may determine that renovations of acquired facilities and changes in staff and operating management personnel are necessary to successfullyintegrate those acquisitions into our existing operations. We may not be able to recover the costs incurred to reposition or renovate newly operatingsubsidiaries. The financial benefits we expect to realize from many of our acquisitions are largely dependent upon our ability to improve clinicalperformance, overcome regulatory deficiencies, rehabilitate or improve the reputation of the operations in the community, increase and maintain occupancy,control costs, and in some cases change the patient acuity mix. If we are unable to accomplish any of these objectives at the operating subsidiaries weacquire, we will not realize the anticipated benefits and we may experience lower than anticipated profits, or even losses.During the year ended December 31, 2017, we expanded our operations with the addition of twelve stand-alone skilled nursing operations, nine stand-alone assisted and independent living operations, one campus operation, three home health agencies, three hospice agencies and one home care agency witha total of 1,360 operational skilled nursing beds and 594 assisted living units. During the year ended December 31, 2016, we added to our operations18 stand-alone skilled nursing operations, seven post-acute care campuses, two home health agencies and five hospice agencies with a totalof 2,799 operational skilled nursing beds and 152 assisted living units. This growth has placed and will continue to place significant demands on our currentmanagement resources. Our ability to manage our growth effectively and to successfully integrate new acquisitions into our existing business will require usto continue to expand our operational, financial and management information systems and to continue to retain, attract, train, motivate and manage keyemployees, including facility-level leaders and our local directors of nursing. We may not be successful in attracting qualified individuals necessary forfuture acquisitions to be successful, and our management team may expend significant time and energy working to attract qualified personnel to managefacilities we may acquire in the future. Also, the newly acquired facilities may require us to spend significant time improving services that have historicallybeen substandard, and if we are unable to improve such facilities quickly enough, we may be subject to litigation and/or loss of licensure or certification. Ifwe are not able to successfully overcome these and other integration challenges, we may not achieve the benefits we expect from any of our facilityacquisitions, and our business may suffer.In undertaking acquisitions, we may be adversely impacted by costs, liabilities and regulatory issues that may adversely affect our operations.In undertaking acquisitions, we also may be adversely impacted by unforeseen liabilities attributable to the prior providers who operated thosefacilities, against whom we may have little or no recourse. Many facilities we have historically acquired were underperforming financially and had clinicaland regulatory issues prior to and at the time of acquisition. Even where we have improved operating subsidiaries and patient care at affiliated facilities thatwe have acquired, we still may face post-acquisition regulatory issues related to pre-acquisition events. These may include, without limitation, paymentrecoupment related to our predecessors' prior noncompliance, the imposition of fines, penalties, operational restrictions or special regulatory status. Further,we may incur post-acquisition compliance risk due to the difficulty or impossibility of immediately or quickly bringing non-compliant facilities into fullcompliance. Diligence materials pertaining to acquisition targets, especially the underperforming facilities that often represent the greatest opportunity forreturn, are often inadequate, inaccurate or impossible to obtain, sometimes requiring us to make acquisition decisions with incomplete information. Despiteour due diligence procedures, facilities that we have acquired or may acquire in the future may generate unexpectedly low returns, may cause us to incursubstantial losses, may require unexpected levels of management time, expenditures or other resources, or may otherwise not meet a risk profile that ourinvestors find acceptable. For example, in July of 2006 we acquired a facility that had a history of intermittent noncompliance. Although the affiliatedfacility had already been surveyed once by the local state survey agency after being acquired by us, and that survey would have met the heightenedrequirements of the special focus facility program, based upon the facility's compliance history prior to our acquisition, in January 2008, state officialsnevertheless recommended to CMS that the facility be placed on special focus facility status. In addition, in October of 2006, we acquired a facility whichhad a history of intermittent non-compliance. This affiliated facility was surveyed by the local state survey agency during the third quarter of 2008 andpassed the heightened survey requirements of the special focus facility program. Both affiliated facilities have successfully graduated from the Centers forMedicare and Medicaid Services' Special Focus program. We've had other affiliated facilities that have successfully graduated from the program. Otheraffiliated facilities may be identified for special focus status in the future.In addition, we might encounter unanticipated difficulties and expenditures relating to any of the acquired facilities, including contingent liabilities.For example, when we acquire a facility, we generally assume the facility's existing Medicare provider number for purposes of billing Medicare for services. IfCMS later determined that the prior owner of the facility had received overpayments from Medicare for the period of time during which it operated thefacility, or had incurred fines in connection with the operation of the facility, CMS could hold us liable for repayment of the overpayments or fines. If theprior operator is defunct or otherwise unable to reimburse us, we may be unable to recover these funds. We may be unable to improve every facility that weacquire. In addition, operation of these facilities may divert management time and attention from other operations and priorities,47Table of Contentsnegatively impact cash flows, result in adverse or unanticipated accounting charges, or otherwise damage other areas of our company if they are not timelyand adequately improved.We also incur regulatory risk in acquiring certain facilities due to the licensing, certification and other regulatory requirements affecting our right tooperate the acquired facilities. For example, in order to acquire facilities on a predictable schedule, or to acquire declining operations quickly to preventfurther pre-acquisition declines, we frequently acquire such facilities prior to receiving license approval or provider certification. We operate such facilities asthe interim manager for the outgoing licensee, assuming financial responsibility, among other obligations for the facility. To the extent that we may beunable or delayed in obtaining a license, we may need to operate the facility under a management agreement from the prior operator. Any inability inobtaining consent from the prior operator of a target acquisition to utilizing its license in this manner could impact our ability to acquire additional facilities.If we were subsequently denied licensure or certification for any reason, we might not realize the expected benefits of the acquisition and would likely incurunanticipated costs and other challenges which could cause our business to suffer.Termination of our patient admission agreements and the resulting vacancies in our affiliated facilities could cause revenue at our affiliated facilities todecline.Most state regulations governing skilled nursing and assisted living facilities require written patient admission agreements with each patient. Several ofthese regulations also require that each patient have the right to terminate the patient agreement for any reason and without prior notice. Consistent withthese regulations, all of our skilled nursing patient agreements allow patients to terminate their agreements without notice, and all of our assisted livingresident agreements allow patients to terminate their agreements upon thirty days' notice. Patients and residents terminate their agreements from time to timefor a variety of reasons, causing some fluctuations in our overall occupancy as patients and residents are admitted and discharged in normal course. If anunusual number of patients or residents elected to terminate their agreements within a short time, occupancy levels at our affiliated facilities could decline.As a result, beds may be unoccupied for a period of time, which would have a negative impact on our revenue, financial condition and results of operations.We face significant competition from other healthcare providers and may not be successful in attracting patients and residents to our affiliated facilities.The post-acute care industry is highly competitive, and we expect that our industry may become increasingly competitive in the future. Our affiliatedskilled nursing facilities compete primarily on a local and regional basis with many long-term care providers, from national and regional multi-facilityproviders that have substantially greater financial resources to small providers who operate a single nursing facility. We also compete with other skillednursing and assisted living facilities, and with inpatient rehabilitation facilities, long-term acute care hospitals, home healthcare and other similar servicesand care alternatives. Increased competition could limit our ability to attract and retain patients, attract and retain skilled personnel, maintain or increaseprivate pay and managed care rates or expand our business.We may not be successful in attracting patients to our operating subsidiaries, particularly Medicare, managed care, and private pay patients whogenerally come to us at higher reimbursement rates. Some of our competitors have greater financial and other resources than us, may have greater brandrecognition and may be more established in their respective communities than we are. Competing companies may also offer newer facilities or differentprograms or services than we do and may thereby attract current or potential patients. Other competitors may have lower expenses or other competitiveadvantages, and, therefore, present significant price competition for managed care and private pay patients. In addition, some of our competitors operate on anot-for-profit basis or as charitable organizations and have the ability to finance capital expenditures on a tax-exempt basis or through the receipt ofcharitable contributions, neither of which are available to us.If we do not achieve and maintain competitive quality of care ratings from CMS and private organizations engaged in similar monitoring activities, or ifthe frequency of CMS surveys and enforcement sanctions increases, our business may be negatively affected.CMS, as well as certain private organizations engaged in similar monitoring activities, provides comparative data available to the public on its web site,rating every skilled nursing facility operating in each state based upon quality-of-care indicators. These quality-of-care indicators include such measures aspercentages of patients with infections, bedsores and unplanned weight loss. In addition, CMS has undertaken an initiative to increase Medicaid andMedicare survey and enforcement activities, to focus more survey and enforcement efforts on facilities with findings of substandard care or repeat violationsof Medicaid and Medicare standards, and to require state agencies to use enforcement sanctions and remedies more promptly when substandard care or repeatviolations are identified. We have found a correlation between negative Medicaid and Medicare surveys and the incidence of48Table of Contentsprofessional liability litigation. From time to time, we experience a higher than normal number of negative survey findings in some of our affiliated facilities.In December 2008, CMS introduced the Five-Star Quality Rating System to help consumers, their families and caregivers compare nursing homes moreeasily. The Five-Star Quality Rating System gives each nursing home a rating of between one and five stars in various categories. In cases of acquisitions, theprevious operator's clinical ratings are included in our overall Five-Star Quality Rating. The prior operator's results will impact our rating until we havesufficient clinical measurements subsequent to the acquisition date. If we are unable to achieve quality of care ratings that are comparable or superior to thoseof our competitors, our ability to attract and retain patients could be adversely affected.On February 20, 2015, CMS modified the Five Star Quality Rating System for nursing homes to include the use of antipsychotics in calculating the starratings, modified calculations for staffing levels and reflect higher standards for nursing homes to achieve a high rating on the quality measure dimension. OnAugust 10, 2016, CMS modified the Five Star Quality Rating System for nursing homes to include five of the six new quality measures added April 27, 2016to its consumer-based Nursing Home Compare website as part of an initiative to broaden the quality of information available on that site. They include therate of rehospitalization, emergency room use, community discharge, improvements in function, and independently worsened ability to move. In 2017, CMSissued a temporary freeze of the Health Inspection Five Star Ratings beginning in 2018 that will last approximately 12 months. The health inspection starrating for recertification surveys and complaints conducted on or after November 28, 2017 will be frozen. The freeze of the Health Inspection Five StarRatings and the increase in the standards for performance on quality measures could reduce the number of our 4 and 5 star facilities.In July 17, 2015, CMS announced Home Health Star Ratings for home health agencies. All Medicare-certified HHAs are potentially eligible to receivea Quality of Patient Care Star Rating. The Star Ratings include assessments of quality of patient care based on Medicare claims data and patient experience ofcare. The Star Rating may impact patient choice of home health agencies and reimbursement from home health agencies, as a higher Star rating indicatesbetter patient care than a lower Star rating. A low Star rating may decrease the number of patients for Medicare reimbursement. On December 14, 2017, CMSannounced that the influenza vaccination measure would be removed from consideration in the Quality of Patient Care Star Rating beginning with the April2018 Home Health Compare refresh, reducing the number of quality measures used from nine to eight.In addition, CMS announced proposals to adopt new standards that home health agencies must comply with in order to participate in the Medicareprogram, including the strengthening of patient rights and communication requirements that focus on patient well-being.If we are unable to obtain insurance, or if insurance becomes more costly for us to obtain, our business may be adversely affected.It may become more difficult and costly for us to obtain coverage for resident care liabilities and other risks, including property and casualty insurance.For example, the following circumstances may adversely affect our ability to obtain insurance at favorable rates:•we experience higher-than-expected professional liability, property and casualty, or other types of claims or losses;•we receive survey deficiencies or citations of higher-than-normal scope or severity;•we acquire especially troubled operations or facilities that present unattractive risks to current or prospective insurers;•insurers tighten underwriting standards applicable to us or our industry; or•insurers or reinsurers are unable or unwilling to insure us or the industry at historical premiums and coverage levels.If any of these potential circumstances were to occur, our insurance carriers may require us to significantly increase our self-insured retention levels orpay substantially higher premiums for the same or reduced coverage for insurance, including workers compensation, property and casualty, automobile,employment practices liability, directors and officers liability, employee healthcare and general and professional liability coverages. In some states, the law prohibits or limits insurance coverage for the risk of punitive damages arising from professional liability and general liabilityclaims or litigation. Coverage for punitive damages is also excluded under some insurance policies. As a result, we may be liable for punitive damage awardsin these states that either are not covered or are in excess of our insurance49Table of Contentspolicy limits. Claims against us, regardless of their merit or eventual outcome, also could inhibit our ability to attract patients or expand our business, andcould require our management to devote time to matters unrelated to the day-to-day operation of our business.With few exceptions, workers' compensation and employee health insurance costs have also increased markedly in recent years. To partially offset theseincreases, we have increased the amounts of our self-insured retention (SIR) and deductibles in connection with general and professional liability claims. Wealso have implemented a self-insurance program for workers compensation in all states, except Washington and Texas, and elected non-subscriber status forworkers' compensation in Texas. In Washington, the insurance coverage is financed through premiums paid by the employers and employees. If we are unableto obtain insurance, or if insurance becomes more costly for us to obtain, or if the coverage levels we can economically obtain decline, our business may beadversely affected.Our self-insurance programs may expose us to significant and unexpected costs and losses.We have maintained general and professional liability insurance since 2002 and workers' compensation insurance since 2005 through a wholly-ownedsubsidiary insurance company, Standardbearer Insurance Company, Ltd. (Standardbearer), to insure our self-insurance reimbursements (SIR) and deductiblesas part of a continually evolving overall risk management strategy. We establish the insurance loss reserves based on an estimation process that usesinformation obtained from both company-specific and industry data. The estimation process requires us to continuously monitor and evaluate the life cycleof the claims. Using data obtained from this monitoring and our assumptions about emerging trends, we, along with an independent actuary, developinformation about the size of ultimate claims based on our historical experience and other available industry information. The most significant assumptionsused in the estimation process include determining the trend in costs, the expected cost of claims incurred but not reported and the expected costs to settle orpay damages with respect to unpaid claims. It is possible, however, that the actual liabilities may exceed our estimates of loss. We may also experience anunexpectedly large number of successful claims or claims that result in costs or liability significantly in excess of our projections. For these and other reasons,our self-insurance reserves could prove to be inadequate, resulting in liabilities in excess of our available insurance and self-insurance. If a successful claim ismade against us and it is not covered by our insurance or exceeds the insurance policy limits, our business may be negatively and materially impacted.Further, because our SIR under our general and professional liability and workers compensation programs applies on a per claim basis, there is no limitto the maximum number of claims or the total amount for which we could incur liability in any policy period.In May 2006, we began self-insuring our employee health benefits. With respect to our health benefits self-insurance, our reserves and premiums arecomputed based on a mix of company specific and general industry data that is not specific to our own company. Even with a combination of limitedcompany-specific loss data and general industry data, our loss reserves are based on actuarial estimates that may not correlate to actual loss experience in thefuture. Therefore, our reserves may prove to be insufficient and we may be exposed to significant and unexpected losses.The geographic concentration of our affiliated facilities could leave us vulnerable to an economic downturn, regulatory changes or acts of nature in thoseareas.Our affiliated facilities located in Arizona, California, and Texas account for the majority of our total revenue. As a result of this concentration, theconditions of local economies, changes in governmental rules, regulations and reimbursement rates or criteria, changes in demographics, state funding, actsof nature and other factors that may result in a decrease in demand and/or reimbursement for skilled nursing services in these states could have adisproportionately adverse effect on our revenue, costs and results of operations. Moreover, since 20.9% of our affiliated facilities are located in California,we are particularly susceptible to revenue loss, cost increase or damage caused by natural disasters such as fires, earthquakes or mudslides.In addition, our affiliated facilities in Iowa, Nebraska, Kansas, South Carolina, Washington and Texas are more susceptible to revenue loss, costincreases or damage caused by natural disasters including hurricanes, tornadoes and flooding. These acts of nature may cause disruption to us, the employeesof our operating subsidiaries and our affiliated facilities, which could have an adverse impact on the patients of our operating subsidiaries and our business.In order to provide care for the patients of our operating subsidiaries, we are dependent on consistent and reliable delivery of food, pharmaceuticals, utilitiesand other goods to our affiliated facilities, and the availability of employees to provide services at our affiliated facilities. If the delivery of goods or theability of employees to reach our affiliated facilities were interrupted in any material respect due to a natural disaster or other reasons, it would have asignificant impact on our affiliated facilities and our business. Furthermore, the impact, or impending threat, of a natural disaster may require that we evacuateone or more facilities, which would be costly and would involve risks, including potentially fatal risks, for the patients. The impact of disasters and similarevents is inherently uncertain. Such events50Table of Contentscould harm the patients and employees of our operating subsidiaries, severely damage or destroy one or more of our affiliated facilities, harm our business,reputation and financial performance, or otherwise cause our business to suffer in ways that we currently cannot predict.The actions of a national labor union that has pursued a negative publicity campaign criticizing our business in the past may adversely affect our revenueand our profitability.We continue to maintain our right to inform the employees of our operating subsidiaries about our views of the potential impact of unionization uponthe workplace generally and upon individual employees. With one exception, to our knowledge the staffs at our affiliated facilities that have beenapproached to unionize have uniformly rejected union organizing efforts. If employees decide to unionize, our cost of doing business could increase, and wecould experience contract delays, difficulty in adapting to a changing regulatory and economic environment, cultural conflicts between unionized and non-unionized employees, strikes and work stoppages, and we may conclude that affected facilities or operations would be uneconomical to continue operating.The unwillingness on the part of both our management and staff to accede to union demands for “neutrality” and other concessions has resulted in anegative labor campaign by at least one labor union, the Service Employees International Union. From 2002 to 2007, this union, and individuals andorganizations allied with or sympathetic to this union actively prosecuted a negative retaliatory publicity action, also known as a “corporate campaign,”against us and filed, promoted or participated in multiple legal actions against us. The union's campaign asserted, among other allegations, poor treatment ofpatients, inferior clinical services provided by the employees of our operating subsidiaries, poor treatment of the employees of our operating subsidiaries, andhealth code violations by our operating subsidiaries. In addition, the union has publicly mischaracterized actions taken by the DHS against us and ouraffiliated facilities. In numerous cases, the union's allegations created the false impression that violations and other events that occurred at facilities prior toour acquisition of those facilities were caused by us. Since a large component of our business involves acquiring underperforming and distressed facilities,and improving the quality of operations at these facilities, we may have been associated with the past poor performance of these facilities. To the extent thisunion or another elects to directly or indirectly prosecute a corporate campaign against us or any of our affiliated facilities, our business could be negativelyaffected.The Service Employees International Union has issued in the past, and may again issue in the future, public statements alleging that we or other for-profit skilled nursing operators have engaged in unfair, questionable or illegal practices in various areas, including staffing, patient care, patient evaluationand treatment, billing and other areas and activities related to the industry and our operating subsidiaries. We continue to anticipate similar criticisms,charges and other negative publicity from such sources on a regular basis, particularly in the current political environment and following the December 2010OIG report entitled “Questionable Billing by Skilled Nursing Facilities," described above in " The Office of the Inspector General or other organizations maychoose to more closely scrutinize the billing practices of for-profit skilled nursing facilities, which could result in an increase in regulatory monitoring andoversight, decreased reimbursement rates, or otherwise adversely affect our business, financial condition and results of operations." Two of our affiliatedfacilities have been listed on the report. Such reports provide unions and their allies with additional opportunities to make negative statements about, and toencourage regulators to seek investigatory and enforcement actions against, the industry in general and non-union operators like us specifically. Althoughwe believe that our operations and business practices substantially conform to applicable laws and regulations, we cannot predict the extent to which wemight be subject to adverse publicity or calls for increased regulatory scrutiny from union and union ally sources, or what effect, if any, such negativepublicity would have on us, but to the extent they are successful, our revenue may be reduced, our costs may be increased and our profitability and businesscould be adversely affected.This union has also in the past attempted to pressure hospitals, doctors, insurers and other healthcare providers and professionals to cease doingbusiness with or referring patients to us. If this union or another union is successful in convincing the patients of our operating subsidiaries, their families orour referral sources to reduce or cease doing business with us, our revenue may be reduced and our profitability could be adversely affected. Additionally, ifwe are unable to attract and retain qualified staff due to negative public relations efforts by this or other union organizations, our quality of service and ourrevenue and profits could decline. Our strategy for responding to union allegations involves clear public disclosure of the union's identity, activities andagenda, and rebuttals to its negative campaign.Our ability to respond to unions, however, may be limited by some state laws, which purport to make it illegal for any recipient of state funds topromote or deter union organizing. For example, such a state law passed by the California Legislature was successfully challenged on the grounds that it waspreempted by the National Labor Relations Act, only to have the challenge overturned by the Ninth Circuit in 2006 before being ultimately upheld by theUnited States Supreme Court in 2008. In addition, proposed legislation making it more difficult for employees and their supervisors to educate co-workersand oppose unionization, such as the proposed Employee Free Choice Act which would allow organizing on a single “card check” and without a secret ballotand similar changes to federal law, regulation and labor practice being advocated by unions and considered by Congress51Table of Contentsand the National Labor Relations Board, could make it more difficult to maintain union-free workplaces in our affiliated facilities. Further, the expeditedelection rules adopted by the National Labor Relations Board took effect on April 14, 2015 and make it far easier for unions to organize employees. Theseand similar laws have the potential to facilitate unionization procedures or hinder employer responses thereto, which may hinder our ability to opposeunionization efforts and negatively affect our business.Because we lease substantially all of our affiliated facilities, we could experience risks associated with leased property, including risks relating to leasetermination, lease extensions and special charges, which could adversely affect our business, financial position or results of operations.As of December 31, 2017, we leased 167 of our 230 affiliated facilities. Most of our leases are triple-net leases, which means that, in addition to rent, weare required to pay for the costs related to the property (including property taxes, insurance, and maintenance and repair costs). We are responsible for payingthese costs notwithstanding the fact that some of the benefits associated with paying these costs accrue to the landlords as owners of the associated facilities.Each lease provides that the landlord may terminate the lease for a number of reasons, including, subject to applicable cure periods, the default in anypayment of rent, taxes or other payment obligations or the breach of any other covenant or agreement in the lease. Termination of a lease could result in adefault under our debt agreements and could adversely affect our business, financial position or results of operations. There can be no assurance that we willbe able to comply with all of our obligations under the leases in the future.In 2017, we voluntarily discontinued operations at one of our skilled nursing facilities after determining that the facility could not competitivelyoperate in the marketplace without substantial investment renovating the building. After careful consideration, we determined that the costs to renovate thefacility would outweigh the future returns from the operation. As part of the arrangement, we remain obligated for lease payments and other obligation underthe lease agreement. We have in the past and may need to do so in the future continued to be obligated for lease payments and other obligations under theleases even if we decided to withdraw from those locations. We could incur special charges relating to the closing of such facilities including leasetermination costs, impairment charges and other special charges that would reduce our net income and could adversely affect our business, financialcondition and results of operations.Failure to generate sufficient cash flow to cover required payments or meet operating covenants under our long-term debt, mortgages and long-termoperating leases could result in defaults under such agreements and cross-defaults under other debt, mortgage or operating lease arrangements, whichcould harm our operating subsidiaries and cause us to lose facilities or experience foreclosures.We maintain a revolving credit facility with a lending consortium. As of December 31, 2017, our operating subsidiaries had $190.6 million outstandingunder our credit facility. On February 5, 2016, we amended our existing revolving credit facility to increase our aggregate principal amount available to$250.0 million. On July 19, 2016, we entered into the Second Amended Credit Facility to increase the aggregate principal amount up to $450.0 millioncomprised of a $300.0 million revolving credit facility and a $150.0 million term loan. In December 2017, seventeen of our subsidiaries entered intomortgage loans in the aggregate amount of $112.0 million under Department of Housing and Urban Development (HUD) insured loans. The terms of themortgage loans range from 30- or 35-years. We also had other outstanding indebtedness of approximately $13.4 million as of December 31, 2017 under otherHUD-insured loans and promissory note issued in connection with various acquisitions with maturity dates ranging from 2027 through 2052. Because thesemortgage loans are insured with HUD, our borrower subsidiaries under these loans are subject to HUD oversight and periodic inspections.In addition, we had $1.8 billion of future operating lease obligations as of December 31, 2017. We intend to continue financing our operatingsubsidiaries through mortgage financing, long-term operating leases and other types of financing, including borrowings under our lines of credit and futurecredit facilities we may obtain.We may not generate sufficient cash flow from operations to cover required interest, principal and lease payments. In addition, our outstanding creditfacilities and mortgage loans contain restrictive covenants and require us to maintain or satisfy specified coverage tests on a consolidated basis and on afacility or facilities basis. These restrictions and operating covenants include, among other things, requirements with respect to occupancy, debt servicecoverage, project yield, net leverage ratios, minimum interest coverage ratios and minimum asset coverage ratios. These restrictions may interfere with ourability to obtain additional advances under existing credit facilities or to obtain new financing or to engage in other business activities, which may inhibitour ability to grow our business and increase revenue.From time to time, the financial performance of one or more of our mortgaged facilities may not comply with the required operating covenants under theterms of the mortgage. Any non-payment, noncompliance or other default under our financing52Table of Contentsarrangements could, subject to cure provisions, cause the lender to foreclose upon the facility or facilities securing such indebtedness or, in the case of alease, cause the lessor to terminate the lease, each with a consequent loss of revenue and asset value to us or a loss of property. Furthermore, in many cases,indebtedness is secured by both a mortgage on one or more facilities, and a guaranty by us. In the event of a default under one of these scenarios, the lendercould avoid judicial procedures required to foreclose on real property by declaring all amounts outstanding under the guaranty immediately due andpayable, and requiring us to fulfill our obligations to make such payments. If any of these scenarios were to occur, our financial condition would be adverselyaffected. For tax purposes, a foreclosure on any of our properties would be treated as a sale of the property for a price equal to the outstanding balance of thedebt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognizetaxable income on foreclosure, but would not receive any cash proceeds, which would negatively impact our earnings and cash position. Further, because ourmortgages and operating leases generally contain cross-default and cross-collateralization provisions, a default by us related to one facility could affect asignificant number of other facilities and their corresponding financing arrangements and operating leases.Because our term loans, promissory notes, bonds, mortgages and lease obligations are fixed expenses and secured by specific assets, and because ourrevolving loan obligations are secured by virtually all of our assets, if reimbursement rates, patient acuity mix or occupancy levels decline, or if for anyreason we are unable to meet our loan or lease obligations, we may not be able to cover our costs and some or all of our assets may become at risk. Our abilityto make payments of principal and interest on our indebtedness and to make lease payments on our operating leases depends upon our future performance,which will be subject to general economic conditions, industry cycles and financial, business and other factors affecting our operating subsidiaries, many ofwhich are beyond our control. If we are unable to generate sufficient cash flow from operations in the future to service our debt or to make lease payments onour operating leases, we may be required, among other things, to seek additional financing in the debt or equity markets, refinance or restructure all or aportion of our indebtedness, sell selected assets, reduce or delay planned capital expenditures or delay or abandon desirable acquisitions. Such measuresmight not be sufficient to enable us to service our debt or to make lease payments on our operating leases. The failure to make required payments on our debtor operating leases or the delay or abandonment of our planned growth strategy could result in an adverse effect on our future ability to generate revenue andsustain profitability. In addition, any such financing, refinancing or sale of assets might not be available on terms that are economically favorable to us, or atall.As we expand our presence in the assisted living, home health or hospice industries, we would become subject to risks in a market in which we have limitedexperience.The majority of our affiliated facilities have historically been skilled nursing facilities. As we expand our presence in the assisted living, home healthand hospice services or other relevant healthcare service, our existing overall business model will continue to change and expose our company to risks in amarket in which we have limited experience. Although assisted living operating subsidiaries generally have lower costs and higher margins than skillednursing, they typically generate lower overall revenue than skilled nursing operating subsidiaries. In addition, assisted living revenue is derived primarilyfrom private payors as opposed to government reimbursement. In most states, skilled nursing, assisted living, home health and hospice care are regulated bydifferent agencies, and we have less experience with the agencies that regulate assisted living, home health and hospice care. In general, we believe thatassisted living is a more competitive industry than skilled nursing. As we expand our presence in the assisted living, home health and hospice services, andother ancillary services we expect that we will have to adjust certain elements of our existing business model, which could have an adverse effect on ourbusiness.If our referral sources fail to view us as an attractive skilled nursing provider, or if our referral sources otherwise refer fewer patients, our patient base maydecrease.We rely significantly on appropriate referrals from physicians, hospitals and other healthcare providers in the communities in which we deliver ourservices to attract appropriate residents and patients to our affiliated facilities. Our referral sources are not obligated to refer business to us and may referbusiness to other healthcare providers. We believe many of our referral sources refer business to us as a result of the quality of our patient care and our effortsto establish and build a relationship with our referral sources. If we lose, or fail to maintain, existing relationships with our referral resources, fail to developnew relationships, or if we are perceived by our referral sources as not providing high quality patient care, our occupancy rate and the quality of our patientmix could suffer. In addition, if any of our referral sources have a reduction in patients whom they can refer due to a decrease in their business, our occupancyrate and the quality of our patient mix could suffer.Our systems are subject to security breaches and other cybersecurity incidents.Our business is dependent on the proper functioning and availability of our computer systems and networks. While we have taken steps to protect thesafety and security of our information systems and the patient health information and other data maintained within those systems, we cannot assure you thatour safety and security measures and disaster recovery plan will prevent damage,53Table of Contentsinterruption or breach of our information systems and operations. Because the techniques used to obtain unauthorized access, disable or degrade service, orsabotage systems change frequently and may be difficult to detect, we may be unable to anticipate these techniques or implement adequate preventivemeasures. In addition, hardware, software or applications we develop or procure from third parties may contain defects in design or manufacture or otherproblems that could unexpectedly compromise the security of our information systems. Unauthorized parties may attempt to gain access to our systems orfacilities, or those of third parties with whom we do business, through fraud or other forms of deceiving our employees or contractors.On occasion, we have acquired additional information systems through our business acquisitions. We have upgraded and expanded our informationsystem capabilities and have committed significant resources to maintain, protect, enhance existing systems and develop new systems to keep pace withcontinuing changes in technology, evolving industry and regulatory standards, and changing customer preferences.We license certain third party software to support our operations and information systems. Our inability, or the inability of third party softwareproviders, to continue to maintain and upgrade our information systems and software could disrupt or reduce the efficiency of our operations. In addition,costs and potential problems and interruptions associated with the implementation of new or upgraded systems and technology or with maintenance oradequate support of existing systems also could disrupt or reduce the efficiency of our operations.A cyber security attack or other incident that bypasses our information systems security could cause a security breach which may lead to a materialdisruption to our information systems infrastructure or business and may involve a significant loss of business or patient health information. If a cybersecurity attack or other unauthorized attempt to access our systems or facilities were to be successful, it could result in the theft, destructions, loss,misappropriation or release of confidential information or intellectual property, and could cause operational or business delays that may materially impactour ability to provide various healthcare services. Any successful cyber security attack or other unauthorized attempt to access our systems or facilities alsocould result in negative publicity which could damage our reputation or brand with our patients, referral sources, payors or other third parties and couldsubject us to substantial penalties under HIPAA and other federal and state privacy laws, in addition to private litigation with those affected.Failure to maintain the security and functionality of our information systems and related software, or a failure to defend a cyber security attack or otherattempt to gain unauthorized access to our systems, facilities or patient health information could expose us to a number of adverse consequences, the vastmajority of which are not insurable, including but not limited to disruptions in our operations, regulatory and other civil and criminal penalties, fines,investigations and enforcement actions (including, but not limited to, those arising from the SEC, Federal Trade Commission, the OIG or state attorneysgeneral), fines, private litigation with those affected by the data breach, loss of customers, disputes with payors and increased operating expense, which eitherindividually or in the aggregate could have a material adverse effect on our business, financial position, results of operations and liquidity.We may need additional capital to fund our operating subsidiaries and finance our growth, and we may not be able to obtain it on terms acceptable to us,or at all, which may limit our ability to grow.Our ability to maintain and enhance our operating subsidiaries and equipment in a suitable condition to meet regulatory standards, operate efficientlyand remain competitive in our markets requires us to commit substantial resources to continued investment in our affiliated facilities and equipment. We aresometimes more aggressive than our competitors in capital spending to address issues that arise in connection with aging and obsolete facilities andequipment. In addition, continued expansion of our business through the acquisition of existing facilities, expansion of our existing facilities andconstruction of new facilities may require additional capital, particularly if we were to accelerate our acquisition and expansion plans. Financing may not beavailable to us or may be available to us only on terms that are not favorable. In addition, some of our outstanding indebtedness and long-term leases restrict,among other things, our ability to incur additional debt. If we are unable to raise additional funds or obtain additional funds on terms acceptable to us, wemay have to delay or abandon some or all of our growth strategies. Further, if additional funds are raised through the issuance of additional equity securities,the percentage ownership of our stockholders would be diluted. Any newly issued equity securities may have rights, preferences or privileges senior to thoseof our common stock.The condition of the financial markets, including volatility and deterioration in the capital and credit markets, could limit the availability of debt andequity financing sources to fund the capital and liquidity requirements of our business, as well as negatively impact or impair the value of our currentportfolio of cash, cash equivalents and investments, including U.S. Treasury securities and U.S.-backed investments.54Table of ContentsFinancial markets experienced significant disruptions from 2008 through 2010. These disruptions impacted liquidity in the debt markets, makingfinancing terms for borrowers less attractive and, in certain cases, significantly reducing the availability of certain types of debt financing. As a result of thesemarket conditions, the cost and availability of credit has been and may continue to be adversely affected by illiquid credit markets and wider credit spreads.Concern about the stability of the markets has led many lenders and institutional investors to reduce, and in some cases, cease to provide credit to borrowers.Further, our cash, cash equivalents and investments are held in a variety of interest-bearing instruments, including U.S. treasury securities. As a result ofthe uncertain domestic and global political, credit and financial market conditions, investments in these types of financial instruments pose risks arising fromliquidity and credit concerns. Given that future deterioration in the U.S. and global credit and financial markets is a possibility, no assurance can be madethat losses or significant deterioration in the fair value of our cash, cash equivalents, or investments will not occur. Uncertainty surrounding the tradingmarket for U.S. government securities or impairment of the U.S. government's ability to satisfy its obligations under such treasury securities could impact theliquidity or valuation of our current portfolio of cash, cash equivalents, and investments, a substantial portion of which were invested in U.S. treasurysecurities. Further, unless and until the current U.S. and global political, credit and financial market crisis has been sufficiently resolved, it may be difficultfor us to liquidate our investments prior to their maturity without incurring a loss, which would have a material adverse effect on our consolidated financialposition, results of operations or cash flows.Though we anticipate that the cash amounts generated internally, together with amounts available under the revolving credit facility portion of theCredit Facility, will be sufficient to implement our business plan for the foreseeable future, we may need additional capital if a substantial acquisition orother growth opportunity becomes available or if unexpected events occur or opportunities arise. We cannot assure you that additional capital will beavailable or available on terms favorable to us. If capital is not available, we may not be able to fund internal or external business expansion or respond tocompetitive pressures or other market conditions.Delays in reimbursement may cause liquidity problems.If we experience problems with our billing information systems or if issues arise with Medicare, Medicaid or other payors, we may encounter delays inour payment cycle. From time to time, we have experienced such delays as a result of government payors instituting planned reimbursement delays forbudget balancing purposes or as a result of prepayment reviews. For example, in January 2009, the State of California announced expected cash shortages inFebruary which impacted payments to Medi-Cal providers from late March through April. Medi-Cal had also delayed the release of the reimbursement rateswhich were announced in January 2010. These rate increases were put in place on a retrospective basis, effective August 1, 2009.Further, on March 24, 2011, the governor of California signed Assembly Bill 97 (AB 97), the budget trailer bill on health, into law. AB 97 outlinessignificant cuts to state health and human services programs. Specifically, the law reduced provider payments by 10% for physicians, pharmacies, clinics,medical transportation, certain hospitals, home health, and nursing facilities. AB X1 19 Long-Term Care was subsequently approved by the governor onJune 28, 2011. Federal approval was obtained on October 27, 2011. AB X1 19 limited the 10% payment reduction to skilled-nursing providers to 14 monthsfor the services provided on June 1, 2011 through July 31, 2012. The 10% reduction in provider payments was repaid by December 31, 2012. There can be noassurance that similar delays or reductions in our payment cycle of provider payments will not lead to material adverse consequences in the future.Compliance with the regulations of the Department of Housing and Urban Development may require us to make unanticipated expenditures which couldincrease our costs.Nineteen of our affiliated facilities are currently subject to regulatory agreements with HUD that give the Commissioner of HUD broad authority torequire us to be replaced as the operator of those facilities in the event that the Commissioner determines there are operational deficiencies at such facilitiesunder HUD regulations. In 2006, one of our HUD-insured mortgaged facilities did not pass its HUD inspection. Following an unsuccessful appeal of thedecision, we requested a re-inspection. The re-inspection occurred in the fourth quarter of 2009 and the facility passed its HUD re-inspection. Compliancewith HUD's requirements can often be difficult because these requirements are not always consistent with the requirements of other federal and state agencies.Appealing a failed inspection can be costly and time-consuming and, if we do not successfully remediate the failed inspection, we could be precluded fromobtaining HUD financing in the future or we may encounter limitations or prohibitions on our operation of HUD-insured facilities.Failure to comply with existing environmental laws could result in increased expenditures, litigation and potential loss to our business and in our assetvalue.55Table of ContentsOur operating subsidiaries are subject to regulations under various federal, state and local environmental laws, primarily those relating to the handling,storage, transportation, treatment and disposal of medical waste; the identification and warning of the presence of asbestos-containing materials in buildings,as well as the encapsulation or removal of such materials; and the presence of other substances in the indoor environment.Our affiliated facilities generate infectious or other hazardous medical waste due to the illness or physical condition of the patients. Each of ouraffiliated facilities has an agreement with a waste management company for the proper disposal of all infectious medical waste, but the use of a wastemanagement company does not immunize us from alleged violations of such laws for operating subsidiaries for which we are responsible even if carried outby a third party, nor does it immunize us from third-party claims for the cost to cleanup disposal sites at which such wastes have been disposed.Some of the affiliated facilities we lease, own or may acquire may have asbestos-containing materials. Federal regulations require building owners andthose exercising control over a building's management to identify and warn their employees and other employers operating in the building of potentialhazards posed by workplace exposure to installed asbestos-containing materials and potential asbestos-containing materials in their buildings. Significantfines can be assessed for violation of these regulations. Building owners and those exercising control over a building's management may be subject to anincreased risk of personal injury lawsuits. Federal, state and local laws and regulations also govern the removal, encapsulation, disturbance, handling anddisposal of asbestos-containing materials and potential asbestos-containing materials when such materials are in poor condition or in the event ofconstruction, remodeling, renovation or demolition of a building. Such laws may impose liability for improper handling or a release into the environment ofasbestos containing materials and potential asbestos-containing materials and may provide for fines to, and for third parties to seek recovery from, owners oroperators of real properties for personal injury or improper work exposure associated with asbestos-containing materials and potential asbestos-containingmaterials. The presence of asbestos-containing materials, or the failure to properly dispose of or remediate such materials, also may adversely affect ourability to attract and retain patients and staff, to borrow when using such property as collateral or to make improvements to such property.The presence of mold, lead-based paint, underground storage tanks, contaminants in drinking water, radon and/or other substances at any of theaffiliated facilities we lease, own or may acquire may lead to the incurrence of costs for remediation, mitigation or the implementation of an operations andmaintenance plan and may result in third party litigation for personal injury or property damage. Furthermore, in some circumstances, areas affected by moldmay be unusable for periods of time for repairs, and even after successful remediation, the known prior presence of extensive mold could adversely affect theability of a facility to retain or attract patients and staff and could adversely affect a facility's market value and ultimately could lead to the temporary orpermanent closure of the facility.If we fail to comply with applicable environmental laws, we would face increased expenditures in terms of fines and remediation of the underlyingproblems, potential litigation relating to exposure to such materials, and a potential decrease in value to our business and in the value of our underlyingassets.In addition, because environmental laws vary from state to state, expansion of our operating subsidiaries to states where we do not currently operatemay subject us to additional restrictions in the manner in which we operate our affiliated facilities.If we fail to safeguard the monies held in our patient trust funds, we will be required to reimburse such monies, and we may be subject to citations, finesand penalties.Each of our affiliated facilities is required by federal law to maintain a patient trust fund to safeguard certain assets of their residents and patients. If anymoney held in a patient trust fund is misappropriated, we are required to reimburse the patient trust fund for the amount of money that was misappropriated. Ifany monies held in our patient trust funds are misappropriated in the future and are unrecoverable, we will be required to reimburse such monies, and we maybe subject to citations, fines and penalties pursuant to federal and state laws.We are a holding company with no operations and rely upon our multiple independent operating subsidiaries to provide us with the funds necessary tomeet our financial obligations. Liabilities of any one or more of our subsidiaries could be imposed upon us or our other subsidiaries.We are a holding company with no direct operating assets, employees or revenues. Each of our affiliated facilities is operated through a separate,wholly-owned, independent subsidiary, which has its own management, employees and assets. Our principal assets are the equity interests we directly orindirectly hold in our multiple operating and real estate holding subsidiaries. As a result, we are dependent upon distributions from our subsidiaries togenerate the funds necessary to meet our financial obligations and pay dividends. Our subsidiaries are legally distinct from us and have no obligation tomake funds available to us. The ability of our subsidiaries to make distributions to us will depend substantially on their respective operating results and willbe subject56Table of Contentsto restrictions under, among other things, the laws of their jurisdiction of organization, which may limit the amount of funds available for distribution toinvestors or shareholders, agreements of those subsidiaries, the terms of our financing arrangements and the terms of any future financing arrangements of oursubsidiaries.Changes in federal and state income tax laws and regulations could adversely affect our provision for income taxes and estimated income tax liabilities.We are subject to both state and federal income taxes. Our effective tax rate could be adversely affected by changes in the mix of earnings in states withdifferent statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws and regulations, changes in our interpretationsof tax laws, including pending tax law changes. In addition, in certain cases more than one state in which we operate has indicated an intent to attempt to taxthe same assets and activities, which could result in double taxation if successful. Unanticipated changes in our tax rates or exposure to additional income taxliabilities could affect our profitability.The Tax Cuts and Jobs Act of 2017 (the Tax Cut) was approved by Congress and signed into law in December 2017. This legislation makes significantchanges to the U.S. Internal Revenue Code. Such changes include a reduction in the corporate tax rate and limitations on certain corporate deductions andcredits, among other changes. Certain of these changes could have a negative impact on our business. Moreover, further legislative and regulatory changesmay be more likely in the current political environment, particularly to the extent that Congress and the U.S. presidency are controlled by the same politicalparty and significant reform of the tax code has been described publicly as a legislative priority. Significant further changes to the tax code could have animpact on our business, financial condition and results of operations.We are subject to the continuous examination of our income tax returns by the Internal Revenue Service and other local, state and foreign taxauthorities. We regularly assess the likelihood of outcomes resulting from these examinations to determine the adequacy of our estimated income taxliabilities. The outcomes from these continuous examinations could adversely affect our provision for income taxes and estimated income tax liabilities.If the Spin-Off were to fail to qualify as a tax-free transaction for U.S. federal income tax purposes, we could be subject to significant tax liabilities and, incertain circumstances, we could be required to indemnify CareTrust for material taxes pursuant to indemnification obligations under the Tax MattersAgreement that we entered into with CareTrust.We received a private letter ruling from the Internal Revenue Services (IRS), which provides substantially to the effect that, on the basis of certain factspresented and representations and assumptions set forth in the request submitted to the IRS, the Spin-Off will qualify as tax-free under Sections 368(a)(1)(D)and 355 of the Internal Revenue Code (the IRS Ruling). The IRS Ruling does not address certain requirements for tax-free treatment of the Spin-Off underSection 355 of the Code, and we received tax opinions from our tax advisor and counsel, substantially to the effect that, with respect to such requirements onwhich the IRS will not rule, such requirements have been satisfied. The IRS Ruling, and the tax opinions that we received from our tax advisor and counsel,rely on, among other things, certain facts, representations, assumptions and undertakings, including those relating to the past and future conduct of our andCareTrust’s businesses, and the IRS Ruling and the tax opinions would not be valid if such facts, representations, assumptions and undertakings wereincorrect in any material respect. Notwithstanding the IRS Ruling and the tax opinions, the IRS could determine the Spin-Off should be treated as a taxabletransaction for U.S. federal income tax purposes if it determines any of the facts, representations, assumptions or undertakings that were included in therequest for the IRS Ruling are false or have been violated or if it disagrees with the conclusions in the opinions that are not covered by the IRS Ruling.If the Spin-Off ultimately is determined to be taxable, we would recognize taxable gain in an amount equal to the excess, if any, of the fair market valueof the shares of CareTrust common stock held by us on the distribution date over our tax basis in such shares. Such taxable gain and resulting tax liabilitywould be substantial.In addition, under the terms of the Tax Matters Agreement that we entered into with CareTrust in connection with the Spin-Off, we generally areresponsible for any taxes imposed on CareTrust that arise from the failure of the Spin-Off to qualify as tax-free for U.S. federal income tax purposes, within themeaning of Sections 368(a)(1)(D) and 355 of the Code, to the extent such failure to qualify is attributable to certain actions, events or transactions relating toour stock, assets or business, or a breach of the relevant representations or any covenants made by us in the Tax Matters Agreement, the materials submitted tothe IRS in connection with the request for the IRS Ruling or the representation letter provided in connection with the tax opinion relating to the Spin-Off.Our indemnification obligations to CareTrust and its subsidiaries, officers and directors are not limited by any maximum amount. If we are required toindemnify CareTrust under the circumstance set forth in the Tax Matters Agreement, we may be subject to substantial tax liabilities.57Table of ContentsIn connection with the Spin-Off, CareTrust will indemnify us and we will indemnify CareTrust for certain liabilities. There can be no assurance that theindemnities from CareTrust will be sufficient to insure us against the full amount of such liabilities, or that CareTrust’s ability to satisfy its indemnificationobligation will not be impaired in the future.Pursuant to the Separation and Distribution Agreement that we entered into with CareTrust in connection with the Spin-Off, the Tax Matters Agreementand other agreements we entered into in connection with the Spin-Off, CareTrust agreed to indemnify us for certain liabilities, and we agreed to indemnifyCareTrust for certain liabilities. However, third parties might seek to hold us responsible for liabilities that CareTrust agreed to retain under these agreements,and there can be no assurance that CareTrust will be able to fully satisfy its indemnification obligations under these agreements. Moreover, even if weultimately succeed in recovering from CareTrust any amounts for which we are held liable to a third party, we may be temporarily required to bear theselosses while seeking recovery from CareTrust. In addition, indemnities that we may be required to provide to CareTrust could be significant and couldadversely affect our business.Risks Related to Ownership of our Common StockWe may not be able to pay or maintain dividends and the failure to do so would adversely affect our stock price.Our ability to pay and maintain cash dividends is based on many factors, including our ability to make and finance acquisitions, our ability to negotiatefavorable lease and other contractual terms, anticipated operating cost levels, the level of demand for our beds, the rates we charge and actual results that mayvary substantially from estimates. Some of the factors are beyond our control and a change in any such factor could affect our ability to pay or maintaindividends. In addition, the revolving credit facility portion of the Credit Facility restricts our ability to pay dividends to stockholders if we receive noticethat we are in default under this agreement. The failure to pay or maintain dividends could adversely affect our stock price.The market price and trading volume of our common stock may be volatile, which could result in rapid and substantial losses for our stockholders.The market price of our common stock may be highly volatile and could be subject to wide fluctuations. In addition, the trading volume in our commonstock may fluctuate and cause significant price variations to occur. We cannot assure you that the market price of our common stock will not fluctuate ordecline significantly in the future. On some occasions in the past, when the market price of a stock has been volatile, holders of that stock have institutedsecurities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us due to volatility in themarket price of our common stock, we could incur substantial costs defending or settling the lawsuit. Such a lawsuit could also divert the time and attentionof our management from our business.Future offerings of debt or equity securities by us may adversely affect the market price of our common stock.In February 2015, we completed a common stock offering, issuing approximately 5.5 million shares at approximately $20.50 per share and used aportion of the net proceeds of the offering to pay off outstanding amounts under our credit facility.In the future, we may attempt to increase our capital resources by offering debt or additional equity securities, including commercial paper, medium-term notes, senior or subordinated notes, preferred shares or shares of our common stock. Upon liquidation, holders of our debt securities and preferred shares,and lenders with respect to other borrowings, would receive a distribution of our available assets prior to any distribution to the holders of our common stock.Additional equity offerings may dilute the economic and voting rights of our existing stockholders or reduce the market price of our common stock, or both.Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict orestimate the amount, timing or nature of our future offerings. Thus, holders of our common stock bear the risk of our future offerings reducing the market priceof our common stock and diluting their shareholdings in us. We also intend to continue to actively pursue acquisitions of facilities and may issue shares ofstock in connection with these acquisitions.Any shares issued in connection with our acquisitions, the exercise of outstanding stock options or otherwise would dilute the holdings of the investorswho purchase our shares.Failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could result in a restatement of our financialstatements, cause investors to lose confidence in our financial statements and our company and have a material adverse effect on our business and stockprice.58Table of ContentsWe produce our consolidated financial statements in accordance with the requirements of GAAP. Effective internal controls are necessary for us toprovide reliable financial reports to help mitigate the risk of fraud and to operate successfully as a publicly traded company. As a public company, we arerequired to document and test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, orSection 404, which requires annual management assessments of the effectiveness of our internal controls over financial reporting.Testing and maintaining internal controls can divert our management's attention from other matters that are important to our business. We may not beable to conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 or our independentregistered public accounting firm may not be able or willing to issue an unqualified report if we conclude that our internal controls over financial reportingare not effective. If either we are unable to conclude that we have effective internal controls over financial reporting or our independent registered publicaccounting firm is unable to provide us with an unqualified report as required by Section 404, investors could lose confidence in our reported financialinformation and our company, which could result in a decline in the market price of our common stock, and cause us to fail to meet our reporting obligationsin the future, which in turn could impact our ability to raise additional financing if needed in the future.Our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law contain provisions that could discouragetransactions resulting in a change in control, which may negatively affect the market price of our common stock.Our amended and restated certificate of incorporation and our amended and restated bylaws contain provisions that may enable our Board of Directorsto resist a change in control. These provisions may discourage, delay or prevent a change in the ownership of our company or a change in our management,even if doing so might be beneficial to our stockholders. In addition, these provisions could limit the price that investors would be willing to pay in thefuture for shares of our common stock. Such provisions set forth in our amended and restated certificate of incorporation or our amended and restated bylawsinclude:•our Board of Directors is authorized, without prior stockholder approval, to create and issue preferred stock, commonly referred to as “blank check”preferred stock, with rights senior to those of common stock;•advance notice requirements for stockholders to nominate individuals to serve on our Board of Directors or to submit proposals that can be actedupon at stockholder meetings;•our Board of Directors is classified so not all members of our board are elected at one time, which may make it more difficult for a person whoacquires control of a majority of our outstanding voting stock to replace our directors;•stockholder action by written consent is limited;•special meetings of the stockholders are permitted to be called only by the chairman of our Board of Directors, our chief executive officer or by amajority of our Board of Directors;•stockholders are not permitted to cumulate their votes for the election of directors;•newly created directorships resulting from an increase in the authorized number of directors or vacancies on our Board of Directors are filled only bymajority vote of the remaining directors;•our Board of Directors is expressly authorized to make, alter or repeal our bylaws; and•stockholders are permitted to amend our bylaws only upon receiving the affirmative vote of at least a majority of our outstanding common stock.We are also subject to the anti-takeover provisions of Section 203 of the General Corporation Law of the State of Delaware. Under these provisions, ifanyone becomes an “interested stockholder,” we may not enter into a “business combination” with that person for three years without special approval,which could discourage a third party from making a takeover offer and could delay or prevent a change of control. For purposes of Section 203, “interestedstockholder” means, generally, someone owning more than 15% or more of our outstanding voting stock or an affiliate of ours that owned 15% or more of ouroutstanding voting stock during the past three years, subject to certain exceptions as described in Section 203.These and other provisions in our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law could discourageacquisition proposals and make it more difficult or expensive for stockholders or potential acquirers59Table of Contentsto obtain control of our Board of Directors or initiate actions that are opposed by our then-current Board of Directors, including delaying or impeding amerger, tender offer or proxy contest involving us. Any delay or prevention of a change of control transaction or changes in our Board of Directors couldcause the market price of our common stock to decline.Item 1B. Unresolved Staff CommentsNone.Item 2. PropertiesService Center. We currently lease 29,829 square feet of office space in Mission Viejo, California for our Service Center pursuant to a lease that expiresin August 2019. We have two options to extend our lease term at this location for an additional five-year term for each option. In 2015, we expanded ourinformation technology department and entered into a lease of an office space of 4,972 square feet in Rancho Santa Margarita, California. The lease expiresin July 31, 2019. We have two options to extend our lease term at this location for an additional five-year term for each option.Facilities. As of December 31, 2017, we operated 230 affiliated facilities in Arizona, California, Colorado, Idaho, Iowa, Kansas, Nebraska, Nevada,South Carolina, Texas, Utah, Washington and Wisconsin, with the operational capacity to serve approximately 23,881 patients. As of December 31, 2017, weowned 63 of its 230 affiliated facilities and leased an additional 167 facilities through long-term lease arrangements, and had options to purchase 11 of those167 facilities. We currently do not manage any facilities for third parties, except on a short-term basis pending receipt of new operating licenses by ouroperating subsidiaries.The following table provides summary information regarding the number of operational beds at our skilled nursing and assisted and independent livingfacilities at December 31, 2017: TX CA AZ WI UT CO WA ID NE KS IA SC NV TotalNumber ofoperationalbeds/units Operationalskilled nursingbed5,634 4,163 3,180 138 1,763 766 841 544 413 542 368 426 92 18,870Assisted andindependentliving units387 735 1,250 758 106 618 98 274 301 142 31 — 311 5,011Leased without aPurchaseAgreement4,978 4,043 3,845 — 1,248 570 735 453 367 188 399 — 403 17,229PurchaseAgreement orLeased with aPurchase Option353 318 — — 130 125 — — — 325 — — — 1,251Owned690 537 585 896 491 689 204 365 347 171 — 426 — 5,401Home health and hospice agencies. As of December 31, 2016, we had 46 home health, hospice and home care agencies in Arizona, California,Colorado, Idaho, Iowa, Nevada, Oklahoma, Oregon, Texas, Utah and Washington.The following table provides summary information regarding the locations of our home health, home care and hospice agencies at December 31, 2017:60Table of ContentsState Home Health andHome Care Services Hospice ServicesArizona 2 4California(1) 5 3Colorado 1 1Idaho(1) 3 3Iowa 1 1Nevada — 1Oklahoma(1) 2 1Oregon 1 1Texas 2 3Utah(1) 3 3Washington(1) 4 1Total 24 22(1)Including a home health and a hospice agency that are located in the same locationItem 3. Legal ProceedingsRegulatory Matters — Laws and regulations governing Medicare and Medicaid programs are complex and subject tointerpretation. Compliance with such laws and regulations can be subject to future governmental review and interpretation and failure to comply can result insignificant regulatory action including fines, penalties, and exclusion from certain governmental programs. Included in these laws and regulations is theHealth Insurance Portability and Accountability Act of 1996 (“HIPAA”), which requires healthcare providers (among other things) to safeguard and keepconfidential protected health information. In late December 2016, we learned of a potential issue at one of our independent operating entities in Arizonawhich involved the limited and inadvertent disclosure of certain confidential information. The issue has been fully investigated, addressed and disclosed asrequired under HIPAA. We believe that we are presently in compliance in all material respects with all applicable laws and regulations.Cost-Containment Measures — Both government and private pay sources have instituted cost-containment measures designed to limit payments madeto providers of healthcare services, and there can be no assurance that future measures designed to limit payments made to providers will not adversely affectus.Indemnities — From time to time, we enter into certain types of contracts that contingently require us to indemnify parties against third-party claims.These contracts primarily include (i) certain real estate leases, under which we may be required to indemnify property owners or prior facility operators forpost-transfer environmental or other liabilities and other claims arising from our use of the applicable premises, (ii) operations transfer agreements, in whichwe agree to indemnify past operators of facilities we acquire against certain liabilities arising from the transfer of the operation and/or the operation thereofafter the transfer, (iii) certain lending agreements, under which we may be required to indemnify the lender against various claims and liabilities, and (iv)certain agreements with our officers, directors and employees, under which we may be required to indemnify such persons for liabilities arising out of theiremployment relationships. The terms of such obligations vary by contract and, in most instances, a specific or maximum dollar amount is not explicitlystated therein. Generally, amounts under these contracts cannot be reasonably estimated until a specific claim is asserted. Consequently, because no claimshave been asserted, no liabilities have been recorded for these obligations on our balance sheets for any of the periods presented.Litigation — We are party to various legal actions and administrative proceedings and are subject to various claims arising in the ordinary course ofbusiness, including claims that services provided to patients have resulted in injury or death and claims related to employment and commercial matters.Although we intend to vigorously defend ourselves in response to these claims, there can be no assurance that the outcomes of these matters will not have amaterial adverse effect on our results of operations and financial condition. In certain states in which we have or have had operations, insurance coverage forthe risk of punitive damages arising from general and professional liability litigation may not be available due to state law public policy prohibitions. Therecan be no assurance that we will not be liable for punitive damages awarded in litigation arising in states for which punitive damage insurance coverage isnot available.The skilled nursing and post-acute care industry is extremely regulated. As such, in the ordinary course of business, we are continuously subject to stateand federal regulatory scrutiny, supervision and control. Such regulatory scrutiny often includes61Table of Contentsinquiries, investigations, examinations, audits, site visits and surveys, some of which are non-routine. In addition to being subject to direct regulatoryoversight of state and federal regulatory agencies, the skilled nursing and post-acute care industry is also subject to regulatory requirements, which couldsubject us to civil, administrative or criminal fines, penalties or restitutionary relief, and reimbursement authorities could also seek the suspension orexclusion of the provider or individual from participation in their program. We believe that there has been, and will continue to be, an increase ingovernmental investigations of long-term care providers, particularly in the area of Medicare/Medicaid false claims, as well as an increase in enforcementactions resulting from these investigations. Adverse determinations in legal proceedings or governmental investigations, whether currently asserted or arisingin the future, could have a material adverse effect on our financial position, results of operations and cash flows.In addition to the potential lawsuits and claims described above, we are also subject to potential lawsuits under the Federal False Claims Act andcomparable state laws alleging submission of fraudulent claims for services to any healthcare program (such as Medicare) or payor. A violation may providethe basis for exclusion from federally-funded healthcare programs. Such exclusions could have a correlative negative impact on our financial performance.Some states, including California, Arizona and Texas, have enacted similar whistleblower and false claims laws and regulations. In addition, the DeficitReduction Act of 2005 created incentives for states to enact anti-fraud legislation modeled on the Federal False Claims Act. As such, we could face increasedscrutiny, potential liability and legal expenses and costs based on claims under state false claims acts in markets in which it does business.In May 2009, Congress passed the Fraud Enforcement and Recovery Act (FERA) of 2009 which made significant changes to the Federal False ClaimsAct (FCA), expanding the types of activities subject to prosecution and whistleblower liability. Following changes by FERA, health care providers facesignificant penalties for the knowing retention of government overpayments, even if no false claim was involved. Health care providers can now be liable forknowingly and improperly avoiding or decreasing an obligation to pay money or property to the government. This includes the retention of any governmentoverpayment. The government can argue, therefore, that a FCA violation can occur without any affirmative fraudulent action or statement, as long as it isknowingly improper. In addition, FERA extended protections against retaliation for whistleblowers, including protections not only for employees, but alsocontractors and agents. Thus, there is generally no need for an employment relationship in order to qualify for protection against retaliation forwhistleblowing.Healthcare litigation (including class action litigation) is common and is filed based upon a wide variety of claims and theories, and we are routinelysubjected to varying types of claims. One particular type of suit arises from alleged violations of minimum staffing requirements for skilled nursing facilitiesin those states which have enacted such requirements. Failure to meet these requirements can, among other things, jeopardize a facility's compliance withconditions of participation under certain state and federal healthcare programs; it may also subject the facility to a notice of deficiency, a citation, a civilmoney penalty, or litigation. These class-action “staffing” suits have the potential to result in large jury verdicts and settlements. We expect the plaintiffs' barto continue to be aggressive in their pursuit of these staffing and similar claims.Since 2011, we have been involved in a class action litigation claim alleging violations of state and federal wage and hour laws. In January 2017, weparticipated in an initial mediation session with plaintiffs' counsel. In March 2017, we were invited to engage in further mediation discussions to determine whether settlement in advance of a decision on classcertification was possible. In April 2017, we reached an agreement in principle to settle the subject class action litigation, without any admission of liabilityand subject to approval by the California Superior Court. Based upon the change in case status, we recorded an accrual for estimated probable losses of $11.0million, exclusive of legal fees, in the first quarter of 2017. In December 2017, we settled this class action lawsuit and the settlement was approved by theCourt. We funded the settlement in December 2017 in the amount of $11.0 million, and it will be distributed to the class members in Q1 of 2018.A class action staffing suit was previously filed against us and certain of our California affiliated facilities, alleging, among other things, violations ofcertain Health and Safety Code provisions and a violation of the Consumer Legal Remedies Act. In 2007, we settled this class action suit, and the settlementwas approved by the affected class and the Court. A second such class action staffing suit was filed in Los Angeles in 2010 and was resolved in a settlementand Court approval in 2012. Neither of the referenced lawsuits or settlements had a material ongoing adverse effect on our business, financial condition orresults of operations.Other claims and suits, including class actions, continue to be filed against us and other companies in the industry. For example, we have beensubjected to, and are currently involved in, class action litigation alleging violations of state and federal wage and hour law. If there were a significantincrease in the number of these claims or an increase in amounts owing should plaintiffs be successful in their prosecution of these claims, this couldmaterially adversely affect our business, financial condition, results of operations and cash flows.62Table of ContentsWe have in the past been subject to class action litigation involving claims of violations of various regulatory requirements. While we have been ableto settle these claims without a material ongoing adverse effect on our business, future claims could be brought that may materially affect our business,financial condition and results of operations. Other claims and suits continue to be filed against us and other companies in the industry. By way of recentexample, we defended a general/premise liability claim in San Luis Obispo, California, on behalf of an affiliated facility, involving an injury to a non-employee/contractor. Further, another one of the affiliated independent operating entities was sued on allegations of professional negligence, which claimwas recently settled. We do not expect that there will be any material ongoing adverse effect on our business, financial condition or results of operations inconnection with the resolution of these matters.Medicare Revenue Recoupments — We are subject to reviews relating to Medicare services, billings and potential overpayments resulting from RAC,ZPIC, PSC and MIC. As of December 31, 2017, seven of our operating subsidiaries had probes scheduled and in process, both pre- and post-payment. Weanticipate that these probe reviews will increase in frequency in the future. If a facility fails a probe review and subsequent re-probes, the facility could thenbe subject to extended pre-pay review or extrapolation of the identified error rate to all billing in the same time period. None of our operating subsidiaries arecurrently on extended prepayment review, although that may occur in the future.U.S. Government Inquiry — In late 2006, we learned that we might be the subject of an on-going criminal and civil investigation by the DOJ. This wasconfirmed in March 2007. The investigation was prompted by a whistleblower complaint and related primarily to claims submitted to the Medicare programfor rehabilitation services provided at certain skilled nursing facilities in Southern California. We resolved and settled the matter for $48.0 million in 2013. InOctober 2013, we executed a final settlement agreement with the Government and remitted full payment of $48.0 million. In addition, we executed acorporate integrity agreement with the Office of Inspector General HHS as part of the resolution.See additional description of our contingencies in Notes 15, Debt, 17, Leases and 19, Commitments and Contingencies inNotes to Consolidated Financial Statements.Item 4. Mine Safety DisclosuresNone.PART II.Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesMarket InformationOur common stock has been traded under the symbol “ENSG” on the NASDAQ Global Select Market since our initial public offering on November 8,2007. Prior to that time, there was no public market for our common stock. The following table shows the high and low sale prices for the common stock asreported by the NASDAQ Global Select Market for the periods indicated: High LowFiscal 2016 First Quarter$23.20 $17.60Second Quarter$23.86 $19.13Third Quarter$22.10 $17.87Fourth Quarter$23.18 $17.60Fiscal 2017 First Quarter$22.66 $16.76Second Quarter$22.24 $16.51Third Quarter$23.35 $18.75Fourth Quarter$24.78 $20.8163Table of ContentsDuring fiscal 2017, we declared aggregate cash dividends of $0.1725 per share of common stock, for a total of approximately $8.9 million. As ofFebruary 5, 2018, there were approximately 240 holders of record of our common stock.Notwithstanding anything to the contrary set forth in any of our filings under the Securities Act or the Exchange Act that might incorporate futurefilings, including this Annual Report on Form 10-K, in whole or in part, the Stock Performance Graph and supporting data which follows shall not bedeemed to be incorporated by reference into any such filings except to the extent that we specifically incorporate any such information into any such futurefilings.The graph below shows the cumulative total stockholder return of an investment of $100 (and the reinvestment of any dividends thereafter) onDecember 31, 2012 in (i) our common stock, (ii) the Skilled Nursing Facilities Peer Group 1 and (iii) the NASDAQ Market Index. Our stock price performanceshown in the graph below is not indicative of future stock price performance.COMPARISON OF 60 MONTH CUMULATIVE TOTAL RETURN*Among Ensign Group, the NASDAQ Composite Indexand a Peer Group*$100 invested on 12/31/12 in stock in index, including reinvestment of dividends.Fiscal year ending December 31. December 31, 201220132014201520162017The Ensign Group, Inc. $100.00$164.13$287.36$294.92$291.62$293.84NASDAQ Market Index$100.00$140.12$160.78$171.97$187.22$242.71Peer Group$100.00$124.32$178.08$160.68$178.50$132.03The current composition of the Skilled Nursing Facilities Peer Group 1, SIC Code 8051 is as follows:Diversicare Healthcare Services, Five Star Quality Care, Inc., National Healthcare Corporation, Genesis Healthcare, Inc., Regional Health Properties, and TheEnsign Group, Inc.Dividend PolicyThe following table summarizes common stock dividends declared to shareholders during the two most recent fiscal years:64Table of Contents Dividend perShare AggregateDividend Declared (in thousands)2016 First Quarter$0.0400 $2,026Second Quarter$0.0400 $2,034Third Quarter$0.0400 $2,042Fourth Quarter$0.0425 $2,1802017 First Quarter$0.0425 $2,171Second Quarter$0.0425 $2,178Third Quarter$0.0425 $2,189Fourth Quarter$0.0450 $2,329 We do not have a formal dividend policy but we currently intend to continue to pay regular quarterly dividends to the holders of our common stock.From 2002 to 2017, we paid aggregate annual dividends equal to approximately 5% to 18% of our net income, after adjusting for the class action lawsuit of$11.0 million in December 31, 2017 and charge related to the U.S. Government inquiry settlement of $33.0 million and $15.0 million in fiscal years endedDecember 31, 2013 and 2012, respectively. However, future dividends will continue to be at the discretion of our board of directors, and we may or may notcontinue to pay dividends at such rate. We expect that the payment of dividends will depend on many factors, including our results of operations, financialcondition and capital requirements, earnings, general business conditions, legal restrictions on the payment of dividends and other factors the Board ofDirectors deems relevant.The Credit Facility restricts our subsidiaries' and our ability to pay dividends to stockholders in excess of 20% of consolidated net income, or at all ifwe receive notice that we are in default under the facility. In addition, we are a holding company with no direct operating assets, employees or revenues. As aresult, we are dependent upon distributions from our independent operating subsidiaries to generate the funds necessary to meet our financial obligations andpay dividends. It is possible that in certain quarters, we may pay dividends that exceed our net income for such period as calculated in accordance withGAAP.Issuer Repurchases of Equity SecuritiesStock Repurchase Programs.On February 8, 2017, we announced that our Board of Directors authorized a stock repurchase program, under which wemay repurchase up to $30.0 million of our common stock under the program for a period of 12 months. Under this program, we are authorized to repurchaseour issued and outstanding common shares from time to time in open-market and privately negotiated transactions and block trades in accordance withfederal securities laws. The stock repurchase program expired on February 8, 2018. During the year ended December 31, 2017, we repurchased approximately0.4 million shares of our common stock for a total of $7.3 million.On November 4, 2015 and February 9, 2016, we announced that our Board of Directors authorized two stock repurchase programs, under which we mayrepurchase up to $15.0 million of our common stock under each program for a period of 12 months. During the first quarter of 2016, we repurchased 1.5million shares of our common stock for a total of $30.0 million and the repurchase programs expired upon the repurchase of the full authorized amount underthe plans.Item 6. Selected Financial DataAll share and per share amounts presented reflect a two-for-one stock split effected in December 2015.The financial data set forth below should be readin connection with Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and with our consolidatedfinancial statements and related notes thereto:65Table of Contents Year Ended December 31, 2017 2016 2015 2014 2013 (In thousands, except per share data)Revenue$1,849,317 $1,654,864 $1,341,826 $1,027,406 $904,556Expense: Cost of services1,497,703 1,341,814 1,067,694 822,669 725,989Charge related to U.S. Government inquiry— — — — 33,000Charge related to class action lawsuit11,000 — — — —(Gain)/losses related to divestitures (2)2,321 (11,225) — — —Rent - cost of services131,919 124,581 88,776 48,488 13,613General and administrative expense80,617 69,165 64,163 56,895 40,103Depreciation and amortization44,472 38,682 28,111 26,430 33,909Total expenses1,768,032 1,563,017 1,248,744 954,482 846,614Income from operations81,285 91,847 93,082 72,924 57,942Other income (expense): Interest expense(13,616) (7,136) (2,828) (12,976) (12,787)Interest income1,609 1,107 845 594 506Other expense, net(12,007) (6,029) (1,983) (12,382) (12,281)Income before provision for income taxes69,278 85,818 91,099 60,542 45,661Provision for income taxes28,445 32,975 35,182 26,801 20,003Income from continuing operations40,833 52,843 55,917 33,741 25,658Loss from discontinued operations— — — — (1,804)Net income$40,833 $52,843 $55,917 $33,741 $23,854Less: net income (loss) attributable to noncontrolling interests358 2,853 485 (2,209) (186)Net income attributable to The Ensign Group, Inc.$40,475 $49,990 $55,432 $35,950 $24,040Amounts attributable to The Ensign Group, Inc.: Income from continuing operations attributable to The Ensign Group,Inc.$40,475 $49,990 $55,432 $35,950 $25,844Loss from discontinued operations, net of income tax— — — — (1,804)Net income attributable to The Ensign Group, Inc.$40,475 $49,990 $55,432 $35,950 $24,040Net income per share: Basic: Income from continuing operations attributable to The EnsignGroup, Inc.$0.79 $0.99 $1.10 $0.80 $0.59Loss from discontinued operations (1)— — — — (0.04)Net income attributable to The Ensign Group, Inc.$0.79 $0.99 $1.10 $0.80 $0.55Diluted: Income from continuing operations attributable to The EnsignGroup, Inc.$0.77 $0.96 $1.06 $0.78 $0.58Loss from discontinued operations (1)— — — — (0.04)Net income attributable to The Ensign Group, Inc.$0.77 $0.96 $1.06 $0.78 $0.54Weighted average common shares outstanding Basic50,932 50,555 50,316 44,682 43,800Diluted52,829 52,133 52,210 46,190 44,728(1) On March 25, 2013, we agreed to terms to sell DRX, a national urgent care franchise system for approximately $8,000, adjusted for certain assets and liabilities. The asset sale waseffective on April 15, 2013. The sale resulted in a pre-tax loss of $2,837 for the year ended December 31, 2013. The assets acquired at the initial purchase of DRX, includingnoncontrolling interest, were recorded at fair value. The initial fair value was greater than total cash paid to acquire all interests in DRX and the subsequent sale price. The sale of DRXhas been accounted for as discontinued operations.(2) In 2016, we completed the sale of seventeen urgent care centers for an aggregate sale price of $41,492. As a result of the sale, we recognized a pretax gain of $19,160, which isincluded in operating income. The sale transactions did not meet the criteria of a discontinued operation as they do not represent a strategic shift that has or will have a major effect onour operations and financial results.66Table of Contents December 31, 2017 2016 2015 2014 2013 (In thousands, except per share data)Consolidated Balance Sheet Data: Cash and cash equivalents$42,337 $57,706 $41,569 $50,408 $65,755Working capital142,255 121,934 115,104 83,209 98,540Total assets1,102,433 1,001,025 747,759 493,916 716,315Long-term debt, less current maturities302,990 275,486 99,051 68,279 251,895Equity500,059 460,495 426,985 257,803 357,257Cash dividends declared per common share$0.1725 $0.1625 $0.1525 $0.1425 $0.1325 Year Ended December 31, 2017 2016 2015 (In thousands)Non-GAAP Financial Measures: Performance Metrics EBITDA$125,399 $127,676 $120,708Adjusted EBITDA169,276 150,098 135,248Valuation MetricAdjusted EBITDAR284,700 262,194 221,278______________________The following discussion includes references to EBITDA, Adjusted EBITDA and Adjusted EBITDAR which are non-GAAP financial measures(collectively, Non-GAAP Financial Measures). Regulation G, Conditions for Use of Non-GAAP Financial Measures, and other provisions of the ExchangeAct define and prescribe the conditions for use of certain non-GAAP financial information. These non-GAAP financial measures are used in addition to and inconjunction with results presented in accordance with GAAP. These non-GAAP financial measures should not be relied upon to the exclusion of GAAPfinancial measures. These non-GAAP financial measures reflect an additional way of viewing aspects of our operations that, when viewed with our GAAPresults and the accompanying reconciliations to corresponding GAAP financial measures, provide a more complete understanding of factors and trendsaffecting our business.We believe the presentation of Non-GAAP Financial Measures are useful to investors and other external users of our financial statements regarding ourresults 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 ourindustry without regard to items such as interest expense, net and depreciation and amortization, which can vary substantially from company tocompany 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 andasset base from our operating results.We use 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.67Table of ContentsWe typically use Non-GAAP Financial Measures to compare the operating performance of each operation. These measures are useful in this regardbecause they do not include such costs as net interest expense, income taxes, depreciation and amortization expense, which may vary from period-to-perioddepending upon various factors, including the method used to finance operations, the amount of debt that we have incurred, whether an operation is ownedor leased, the date of acquisition of a facility or business, and the tax law of the state in which a business unit operates.We also establish compensation programs and bonuses for our leaders that are partially based upon the achievement of Adjusted EBITDAR targets.Despite the importance of these measures in analyzing our underlying business, designing incentive compensation and for our goal setting, Non-GAAPFinancial Measures have no standardized meaning defined by GAAP. Therefore, our Non-GAAP Financial Measures have limitations as analytical tools, andthey should not be considered in isolation, or as a substitute for analysis of our results as reported in accordance with GAAP. Some of these limitations are:•they do not reflect our current or future cash requirements for capital expenditures or contractual commitments;•they do not reflect changes in, or cash requirements for, our working capital needs;•they do not reflect the net interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;•they do not reflect rent expenses, which are necessary to operate our leased operations, in the case of Adjusted EBITDAR;•they do not reflect any income tax payments we may be required to make;•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future,and do not reflect any cash requirements for such replacements; and•other companies in our industry may calculate these measures differently than we do, which may limit their usefulness as comparative measures.We compensate for these limitations by using them only to supplement net income on a basis prepared in accordance with GAAP in order to provide amore complete understanding of the factors and trends affecting our business.Management strongly encourages investors to review our consolidated financial statements in their entirety and to not rely on any single financialmeasure. Because these Non-GAAP Financial Measures are not standardized, it may not be possible to compare these financial measures with othercompanies’ Non-GAAP Financial Measures having the same or similar names. These Non-GAAP Financial Measures should not be considered a substitutefor, nor superior to, financial results and measures determined or calculated in accordance with GAAP. We strongly urge you to review the reconciliation ofincome from operations to the Non-GAAP Financial Measures in the table below, along with our consolidated financial statements and related notes includedelsewhere in this document.We use the following Non-GAAP Financial Measures that we believe are useful to investors as key valuation and operating performance measures:EBITDAWe believe EBITDA is useful to investors in evaluating our operating performance because it helps investors evaluate and compare the results of ouroperations 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 from continuing operations, adjusted for net losses attributable to noncontrolling interest, before (a) interestexpense, 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 usefulsupplemental information to investors regarding our ongoing operating performance, in the case68Table of Contentsof Adjusted EBITDA. We believe that the presentation of Adjusted EBITDA, when combined with EBITDA and GAAP net income (loss) attributable to TheEnsign 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:•legal costs and charges related to the settlement of class action lawsuits, insurance claims and the U.S. Government inquiry;•share-based compensation expense;•results related to closed operations and operations not at full capacity, including continued obligations and closing expenses;•results at facilities currently being constructed and other start-up operations;•bonus accrual as a result of the Tax Cut and Jobs Act (the Tax Act);•losses related to Hurricane Harvey and California fires on impacted operations;•operating results and gain on sale of urgent care centers (including the portion related to non-controlling interest);•charges related to the Spin-Off;•transaction-related costs;•professional fees costs fees including costs incurred to recognize income tax credits, tax reform impacts, adoption of the new revenue recognitionstandard and new systems implementation;•break-up fee received in connection with a public auction; and•impairment of goodwill.Adjusted EBITDAR We use Adjusted EBITDAR as one measure in determining the value of prospective acquisitions. It is also a commonly used measure by ourmanagement, research analysts and investors, to compare the enterprise value of different companies in the healthcare industry, without regard to differencesin capital structures and leasing arrangements. Adjusted EBITDAR is a financial valuation measure that is not specified in GAAP. This measure is notdisplayed 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. Wecalculate Adjusted EBITDAR by excluding rent-cost of services from Adjusted EBITDA.The table below reconciles net income to EBITDA, Adjusted EBITDA and Adjusted EBITDAR for the periods presented:69Table of Contents Year Ended December 31, 2017 2016 2015 2014 2013 (In thousands)Consolidated statements of income data: Net income$40,833 $52,843 $55,917 $33,741 $23,854Less: net income attributable to noncontrolling interests358 2,853 485 (2,209) (186)Loss from discontinued operations— — — — 1,804Interest expense, net12,007 6,029 1,983 12,382 12,281Provision for income taxes28,445 32,975 35,182 26,801 20,003Depreciation and amortization44,472 38,682 28,111 26,430 33,909EBITDA$125,399 $127,676 $120,708 $101,563 $92,037 Legal costs and charges related to the U.S. Government inquiry, classaction lawsuits and settlement of insurance claims(a)11,177 4,924 — — 35,622Share-based compensation expense(b)9,695 9,101 6,677 — —Results related to closed operations and operations not at full capacity,including continued obligations and closing expenses(c)4,632 8,705 — — —(Earnings)/losses related to facilities currently being constructed andother start-up operations(d)(3,261) 3,850 3,054 — 1,256Bonus accrual as a result of the Tax Act(e)3,100 — — — —Losses related to Hurricane Harvey and California fires on impactedoperations (f)1,242 — — — —Operating results and gain on sale of urgent care centers(g)— (18,893) (1,132) (389) 1,844Spin-Off charges including results at three independent living facilitiestransferred to CareTrust(h)— — — 8,904 4,050Transaction-related costs(i)717 1,102 1,397 672 288Costs incurred related to new systems implementation and professionalservice fee(j)80 1,148 2,817 138 145Breakup fee, net of costs, received in connection with a public auction(k)— — (1,019) — —Impairment of goodwill(l)— — — — 490Rent related to items(c),(d),(f),(g) and (h) above16,495 12,485 2,746 1,941 1,009Adjusted EBITDA$169,276 $150,098 $135,248 $112,829 $136,741Rent—cost of services131,919 124,581 88,776 48,488 13,613Less: rent related to items(c),(d),(f),(g) and (h) above(16,495) (12,485) (2,746) (1,941) (1,009)Adjusted EBITDAR$284,700 $262,194 $221,278 $159,376 $149,345______________________(a)Legal costs and charges incurred in connection with the settlement of the class action lawsuits, insurance claims in 2016 and investigation into the billing and reimbursementprocesses of some of our operating subsidiaries conducted by the DOJ in 2013.(b) Share-based compensation expense incurred during the years ended December 31, 2017, 2016 and 2015. Adjusted EBITDA and EBITDAR for the years ended December 31,2014 and 2013 did not include a non-GAAP adjustment related to share-based compensation expense of $5.2 million and $4.4 million, respectively. If adjusted for share-based compensation expense, Adjusted EBITDA for the years ended December 31, 2014 and 2013 would have been $118.0 million and $141.1 million, respectively, andAdjusted EBITDAR for the years ended December 31, 2014 and 2013 would have been $164.6 million and $153.7 million , respectively.(c)Represent results at closed operations and operations not at full capacity during the years ended December 31, 2017 and 2016, including the fair value of continuedobligation under the lease agreement and related closing expenses of $4.0 million and $7.9 million for the years ended December 31, 2017 and 2016, respectively. Includedin the year ended December 31, 2017 and 2016 results is the loss recovery of $1.3 million of certain losses related to a closed facility in prior year.(d)Represents results related to facilities currently being constructed and other start-up operations. This amount excludes rent, depreciation and interest expense.(e) Bonus accrual as a result of the Tax Act.(f)Losses related to Hurricane Harvey and California fires on impacted operations.(g)Operating results and gain on sale of urgent care centers. This amount excludes rent, depreciation, interest expense and the net loss attributable to the variable interest entityassociated with our urgent care business.(h)Spin-Off charges including results at three independent living facilities transferred to CareTrust in connection with the Spin-Off transaction. The Company completed theSpin-Off in 2014. In addition, the results during year ended December 31, 2013 did not include rent expense from CareTrust subsequent to the Spin-Off.70Table of Contents(i)Costs incurred to acquire operations which are not capitalizable.(j) Costs incurred related to new systems implementation and professional fees associated with income tax credits, tax reform impacts and adoption of the new revenue recognitionstandard; and expenses incurred in connection with the stock-split effected in December 2015.(k)Break-up fee, net of costs, received in connection with a public auction in which we were the priority bidder.(l) Impairment charges to goodwill for a skilled nursing facility in Utah during the year ended December 31, 2013.Item 7. Management's Discussion and Analysis of Financial Condition and Results of OperationsThe following discussion should be read in conjunction with the consolidated financial statements and accompanying notes, which appear elsewherein this Annual Report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materiallyfrom those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this AnnualReport. See Part I. Item 1A. Risk Factors and Cautionary Note Regarding Forward-Looking Statements.OverviewWe are a provider of health care services across the post-acute care continuum, as well as other ancillary businesses located in Arizona, California,Colorado, Idaho, Iowa, Kansas, Nebraska, Nevada, Oklahoma, Oregon, South Carolina, Texas, Utah, Washington and Wisconsin. Our operating subsidiaries,each of which strives to be the service of choice in the community it serves, provide a broad spectrum of skilled nursing, assisted living, home health andhospice and other ancillary services. As of December 31, 2017, we offered skilled nursing, assisted living and rehabilitative care services through 230 skillednursing and assisted living facilities across 13 states. Of the 230 facilities, we owned 63 and operated an additional 167 facilities under long-term leasearrangements, and had options to purchase 11 of those 167 facilities. Our home health and hospice business provides home health, hospice and home careservices from 46 agencies across eleven states.The following table summarizes our affiliated facilities and operational skilled nursing, assisted living and independent living beds by ownershipstatus as of December 31, 2017: Owned Leased (with aPurchaseOption) Leased (withouta PurchaseOption) TotalNumber of facilities63 11 156 230Percentage of total27.4% 4.8% 67.8% 100.0%Operational skilled nursing beds3,443 1,067 14,360 18,870Percentage of total18.2% 5.7% 76.1% 100.0%Assisted and independent living units1,958 184 2,869 5,011Percentage of total39.1% 3.7% 57.2% 100.0%Recent ActivitiesStock Repurchase Program - On February 8, 2017, we announced that our Board of Directors authorized a stock repurchase program, under which wemay repurchase up to $30.0 million of our common stock under the program for a period of 12 months. During the year ended December 31, 2017, werepurchased 0.4 million shares of our common stock for a total of $7.3 million.Sale and Lease Transaction - In March 2017, we entered into definitive agreements to sell the properties of two skilled nursing facilities and oneassisted living community. Upon closing the transaction, we leased the properties under a triple-net master lease with an initial 20-year term, with three 5-year optional extensions, at CPI-based annual escalators. The transaction closed in the second quarter of 2017. We received $38.0 million in proceeds. Werecognized a gain on the transaction of $13.2 million, which is deferred, and amortized over the life of the lease.Lease Terminations - During the first quarter of 2017, we terminated our lease obligations on four transitional care facilities that are currently underdevelopment and one newly constructed stand-alone skilled nursing operation. We recorded $1.2 million in lease termination costs and long-lived assetimpairment.Class action lawsuit - In the first quarter of 2017, we recorded an estimated liability of $11.0 million related to the pending settlement of a class actionlawsuit. We funded the settlement in the amount of $11.0 million in December 2017, and the settlement will be distributed to the class members in Q1 of2018.Closure of facility - In March 2017, we voluntarily discontinued operations at one of our skilled nursing facilities after determining that the facilitycannot competitively operate in the marketplace without substantial investment renovating the building.71Table of ContentsAfter careful consideration, we determined that the costs to renovate the facility could outweigh the future returns from the operation. As part of this closure,we entered into an agreement with our landlord allowing for the closure of the property as well as other provisions to allow our landlord to transfer theproperty and the licenses free and clear of the applicable master lease. We recorded a continued obligation liability under the lease and related closingexpenses of $2.8 million, including the present value of rental payments of approximately $2.7 million, which was recognized in the first quarter of 2017.Residents of the affected facility were transferred to local skilled nursing facilities.In the second quarter of 2017, we recovered $1.3 million of certain losses that were recorded in 2016 related to the closure of an operation. The lossrecovery was recorded as a gain in that period.HUD Mortgage Loans - In December 2017, seventeen of our subsidiaries entered into mortgage loans in the amount of $112.0 million. The mortgageloans are insured with HUD, which subjects these subsidiaries to HUD oversight and periodic inspections.The Tax Act - On December 22, 2017, President Trump signed into law H.R. 1, “An Act to provide for reconciliation pursuant to titles II and V of theconcurrent resolution on the budget for fiscal year 2018” (the Tax Act). The Tax Act provides for significant changes in the U.S. Internal Revenue Code of1986, as amended. The Tax Act contains provisions with separate effective dates but is generally effective for taxable years beginning after December 31,2017.The Tax Act had the following effects on our income tax expense for the year ended December 31, 2017:•Under Financial Accounting Standards Board Accounting Standards Codification (ASC) Topic 740, Income Taxes (ASC 740), we arerequired to revalue any deferred tax assets or liabilities in the period of enactment of change in tax rates. The Tax Act lowers the corporate income taxrate from 35% to 21%. We have estimated the impact of the revaluation of our deferred tax assets and liabilities, which resulted in a decrease to our netdeferred income tax asset by $3.9 million and is reflected as an increase in our income tax expense in our results for the year ended December 31, 2017.•The Tax Act is generally effective for tax years beginning on January 1, 2018. As such, the reduction in the corporate income tax rate from35% to 21% will be effective for the fiscal year ended December 31, 2018.The Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (“SAB 118”) on December 23, 2017. SAB 118 provides a one-yearmeasurement period from a registrant’s reporting period that includes the U.S. Tax Act’s enactment date to allow the registrant sufficient time to obtain,prepare and analyze information to complete the accounting required under ASC 740.The ultimate impact of the Tax Act on our reported results may differ from the estimates provided herein, possibly materially, due to, among otherthings, changes in interpretations and assumptions we have made, guidance that may be issued, and other actions we may take as a result of the Tax Actdifferent from that presently contemplated.Key Performance IndicatorsWe manage the fiscal aspects of our business by monitoring key performance indicators that affect our financial performance. These indicators and theirdefinitions include the following:Transitional and Skilled Services•Routine revenue. Routine revenue is generated by the contracted daily rate charged for all contractually inclusive skilled nursing services. Theinclusion of therapy and other ancillary treatments varies by payor source and by contract. Services provided outside of the routine contractualagreement are recorded separately as ancillary revenue, including Medicare Part B therapy services, and are not included in the routine revenuedefinition.•Skilled revenue. The amount of routine revenue generated from patients in the skilled nursing facilities who are receiving higher levels of care underMedicare, managed care, Medicaid, or other skilled reimbursement programs. The other skilled patients that are included in this populationrepresent very high acuity patients who are receiving high levels of nursing and ancillary services which are reimbursed by payors other thanMedicare or managed care. Skilled revenue excludes any revenue generated from our assisted living services.•Skilled mix. The amount of our skilled revenue as a percentage of our total routine revenue. Skilled mix (in days) represents the number of days ourMedicare, managed care, or other skilled patients are receiving services at the skilled nursing facilities divided by the total number of days patients(less days from assisted living services) from all payor sources are receiving services at the skilled nursing facilities for any given period (less daysfrom assisted living services).72Table of Contents•Quality mix. The amount of routine non-Medicaid revenue as a percentage of our total routine revenue. Quality mix (in days) represents the numberof days our non-Medicaid patients are receiving services at the skilled nursing facilities divided by the total number of days patients from all payorsources are receiving services at the skilled nursing facilities for any given period (less days from assisted living services).•Average daily rates. The routine revenue by payor source for a period at the skilled nursing facilities divided by actual patient days for that revenuesource for that given period.•Occupancy percentage (operational beds). The total number of patients occupying a bed in a skilled nursing facility as a percentage of the beds in afacility 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 operationalbeds associated with these facilities.Skilled and Quality Mix. Like most skilled nursing providers, we measure both patient days and revenue by payor. Medicare, managed care and otherskilled patients, whom we refer to as high acuity patients, typically require a higher level of skilled nursing and rehabilitative care. Accordingly, Medicareand managed care reimbursement rates are typically higher than from other payors. In most states, Medicaid reimbursement rates are generally the lowest ofall payor types. Changes in the payor mix can significantly affect our revenue and profitability.The following table summarizes our overall skilled mix and quality mix from our skilled nursing services for the periods indicated as a percentage ofour total routine revenue (less revenue from assisted living services) and as a percentage of total patient days (less days from assisted living services): Year Ended December 31, 2017 2016 2015Skilled Mix: Days30.3% 30.9% 30.4%Revenue51.1% 52.5% 52.6%Quality Mix: Days42.8% 43.4% 42.5%Revenue59.7% 61.0% 60.8%Occupancy. We define occupancy derived from our transitional and skilled services as the ratio of actual patient days (one patient day equals onepatient occupying one bed for one day) during any measurement period to the number of beds in facilities which are available for occupancy during themeasurement period. The number of licensed beds in a skilled nursing facility that are actually operational and available for occupancy may be less than thetotal official licensed bed capacity. This sometimes occurs due to the permanent dedication of bed space to alternative purposes, such as enhanced therapytreatment space or other desirable uses calculated to improve service offerings and/or operational efficiencies in a facility. In some cases, three- and four-bedwards have been reduced to two-bed rooms for resident comfort, and larger wards have been reduced to conform to changes in Medicare requirements. Thesebeds are seldom expected to be placed back into service. We believe that reporting occupancy based on operational beds is consistent with industry practicesand provides a more useful measure of actual occupancy performance from period to period.The following table summarizes our overall occupancy statistics for the periods indicated: Year Ended December 31, 2017 2016 2015Occupancy for transitional and skilled services: Operational beds at end of period18,870 17,724 14,925Available patient days6,699,025 6,125,902 4,991,886Actual patient days5,050,140 4,620,735 3,873,409Occupancy percentage (based on operational beds)75.4% 75.4% 77.6%Assisted and Independent Living Services73Table of Contents• Occupancy. We define occupancy derived from our assisted and independent living services as the ratio of actual number of days our units areoccupied during any measurement period to the number of units in facilities which are available for occupancy during the measurement period.• Average monthly revenue per unit. The revenue for a period at an assisted and independent living facility divided by actual occupied units for thatrevenue source for that given period. Year Ended December 31, 2017 2016 2015Occupancy for assisted and independent living services: Occupancy percentage (units)76.4% 76.0% 75.3%Average monthly revenue per unit$2,800 $2,746 $2,644Home Health and Hospice•Average Medicare revenue per completed episode. The average amount of revenue for each completed 60-day episode generated from patients whoare receiving care under Medicare reimbursement programs.•Average daily census. The average number of patients who are receiving hospice care as a percentage of total number of patient days.The following table summarizes our overall home health and hospice statistics for the periods indicated: Year Ended December 31, 20172016 2015Home health services: Average Medicare Revenue per Completed Episode$3,028 $2,986 $2,929Hospice services: Average Daily Census1,102 905 679SegmentsWe have three reportable segments: (1) transitional and skilled services, which includes the operation of skilled nursing facilities; (2) assisted andindependent living services, which includes the operation of assisted and independent living facilities; and (3) home health and hospice services, whichincludes our home health, home care and hospice businesses. Our Chief Executive Officer, who is our chief operating decision maker, or CODM, reviewsfinancial information at the operating segment level.We also report an “all other” category that includes revenue from our mobile diagnostics and other ancillary operations. Our mobile diagnostics andother ancillary operations businesses are neither significant individually nor in aggregate and therefore do not constitute a reportable segment. Our reportingsegments are business units that offer different services and that are managed separately to provide greater visibility into those operations.Revenue SourcesTransitional and Skilled ServicesWithin our skilled nursing operations, we generate our revenue from Medicaid, private pay, managed care and Medicare payors. We believe that ourskilled mix, which we define as the number of days our Medicare, managed care and other skilled patients are receiving services at our skilled nursingoperations divided by the total number of days patients are receiving services at our skilled nursing operations, from all payor sources (less days from assistedliving and independent living services) for any given period, is an important indicator of our success in attracting high-acuity patients because it representsthe 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 provides supplemental Medicaid payments for skilled nursing facilitiesthat are licensed to non-state government-owned entities such as county hospital districts. Several of our operating subsidiaries entered into transactions withseveral such hospital districts providing for the transfer of the licenses for74Table of Contentsthose skilled nursing facilities to the hospital districts. Each affected operating subsidiary agreement between the hospital district and our subsidiary isterminable by either party to fully restore the prior license status.Assisted and Independent Living Services.Within our assisted and independent living operations, we generate revenue primarily from private pay sources, with a portion earned from Medicaid or otherstate-specific programs.Home Health and Hospice ServicesHome Health. We provided home health care in Arizona, California, Colorado, Idaho, Iowa, Oklahoma, Oregon, Texas, Utah and Washington as ofDecember 31, 2017. We derive the majority of our revenue from our home health business from Medicare and managed care. The payment is adjusted fordifferences between estimated and actual payment amounts, an inability to obtain appropriate billing documentation or authorizations acceptable to thepayor and other reasons unrelated to credit risk. The home health prospective payment system (PPS) provides home health agencies with payments for each60-day episode of care for each beneficiary. If a beneficiary is still eligible for care after the end of the first episode, a second episode can begin. There are nolimits to the number of episodes a beneficiary who remains eligible for the home health benefit can receive. While payment for each episode is adjusted toreflect the beneficiary’s health condition and needs, a special outlier provision exists to ensure appropriate payment for those beneficiaries that have the mostexpensive care needs. The payment under the Medicare program is also adjusted for certain variables including, but not limited to: (a) a low utilizationpayment adjustment if the number of visits was fewer than five; (b) a partial payment if the patient transferred to another provider or the Company received apatient from another provider before completing the episode; (c) a payment adjustment based upon the level of therapy services required; (d) the number ofepisodes of care provided to a patient, regardless of whether the same home health provider provided care for the entire series of episodes; (e) changes in thebase episode payments established by the Medicare program; (f) adjustments to the base episode payments for case mix and geographic wages; and (g)recoveries of overpayments.Hospice. As of December 31, 2017, we provided hospice care in Arizona, California, Colorado, Idaho, Iowa, Nevada, Oklahoma, Oregon, Texas, Utahand Washington. We derive the majority of the revenue from our hospice business from Medicare reimbursement. The estimated payment rates are daily ratesfor each of the levels of care we deliver. The payment is adjusted for an inability to obtain appropriate billing documentation or authorizations acceptable tothe payor and other reasons unrelated to credit risk. Additionally, as Medicare hospice revenue is subject to an inpatient cap limit and an overall paymentcap, we monitor our provider numbers and estimate amounts due back to Medicare if a cap has been exceeded.Beginning January 1, 2016, the Centers for Medicare & Medicaid Services (CMS) provided for two separate payment rates for routine care: paymentsfor the first 60 days of care and care beyond 60 days. In addition to the two routine rates, Medicare is also reimbursing for a service intensity add-on (SIA).The SIA is based on visits made in the last seven days of life by a registered nurse (RN) or medical social worker (MSW) for patients in a routine level of care.OtherAs of December 31, 2017, we held majority membership interests in our other ancillary operations. Payment for these services varies and is based uponthe service provided. The payment is adjusted for an inability to obtain appropriate billing documentation or authorizations acceptable to the payor andother reasons unrelated to credit risk. We have historically operated urgent care clinics in Colorado and Washington. Our urgent care centers provided dailyaccess to healthcare for minor injuries and illnesses, including x-ray and lab services, all from convenient neighborhood locations with no appointments. In2016, we completed the sale of all our urgent care centers.Primary Components of ExpenseCost of Services (exclusive of rent and depreciation and amortization shown separately). Our cost of services represents the costs of operating ouroperating subsidiaries, which primarily consists of payroll and related benefits, supplies, purchased services, and ancillary expenses such as the cost ofpharmacy and therapy services provided to patients. Cost of services also includes the cost of general and professional liability insurance and other generalcost of services with respect to our operations.Facility Rent - Cost of Services. Rent - cost of services consists solely of base minimum rent amounts payable under lease agreements to third-partyowners of the operating subsidiaries that we operate but do not own and does not include taxes, insurance, impounds, capital reserves or other chargespayable under the applicable lease agreements.75Table of ContentsGeneral and Administrative Expense. General and administrative expense consists primarily of payroll and related benefits and travel expenses for ourService Center personnel, including training and other operational support. General and administrative expense also includes professional fees (includingaccounting and legal fees), costs relating to our information systems, stock-based compensation and rent for our Service Center offices. Depreciation and Amortization. Property and equipment are recorded at their original historical cost. Depreciation is computed using the straight-linemethod over the estimated useful lives of the depreciable assets. The following is a summary of the depreciable lives of our depreciable assets:Buildings and improvementsMinimum of three years to a maximum of 57 years, generally 45 yearsLeasehold improvementsShorter of the lease term or estimated useful life, generally 5 to 15 yearsFurniture and equipment3 to 10 yearsCritical Accounting PoliciesOur discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have beenprepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP). The preparation of these financial statements and related disclosuresrequires us to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis wereview our judgments and estimates, including but not limited to those related to doubtful accounts, income taxes, stock compensation, intangible assets andloss contingencies. We base our estimates and judgments upon our historical experience, knowledge of current conditions and our belief of what could occurin the future considering available information, including assumptions that we believe to be reasonable under the circumstances. By their nature, theseestimates and judgments are subject to an inherent degree of uncertainty, and actual results could differ materially from the amounts reported. The followingsummarizes our critical accounting policies, defined as those policies that we believe: (a) are the most important to the portrayal of our financial conditionand results of operations; and (b) require management's most subjective or complex judgments, often as a result of the need to make estimates about theeffects of matters that are inherently uncertain.Revenue RecognitionWe recognize revenue when the following four conditions have been met: (i) there is persuasive evidence that an arrangement exists; (ii) delivery hasoccurred or service has been rendered; (iii) the price is fixed or determinable; and (iv) collection is reasonably assured. Our revenue is derived primarily fromproviding healthcare services to patients and is recognized on the date services are provided at amounts billable to the individual. For reimbursementarrangements with third-party payors, including Medicaid, Medicare and private insurers, revenue is recorded based on contractually agreed-upon amountson a per patient basis.Revenue from the Medicare and Medicaid programs accounted for 68.4%, 67.8%and 69.1% of our consolidated total revenue for the years endedDecember 31, 2017, 2016 and 2015, respectively. We record revenue from these governmental and managed care programs as services are performed at theirexpected net realizable amounts under these programs. Our revenue from governmental and managed care programs is subject to audit and retroactiveadjustment by governmental and third-party agencies. Consistent with healthcare industry accounting practices, any changes to these governmental revenueestimates are recorded in the period the change or adjustment becomes known based on final settlement. We recorded adjustments to revenue which were notmaterial to our consolidated revenue for the years ended December 31, 2017, 2016 and 2015.Our service specific revenue recognition policies are as follows:Skilled Nursing RevenueOur revenue is derived primarily from providing long-term healthcare services to patients and is recognized on the date services are provided atamounts billable to individual patients. For patients under reimbursement arrangements with third-party payors, including Medicaid, Medicare and privateinsurers, revenue is recorded based on contractually agreed-upon amounts, rates on a per patient, daily basis, or as services are performed.Assisted and Independent Living RevenueOur revenue is recorded when services are rendered on the date services are provided at amounts billable to individual residents and consists of fees forbasic housing and assisted living care. Residency agreements are generally for a term of 30 days, with resident fees billed monthly in advance. For patientsunder reimbursement arrangements with Medicaid, revenue is recorded76Table of Contentsbased on contractually agreed-upon amounts or rate on a per resident, daily basis or as services are provided. Revenue for certain ancillary charges isrecognized as services are provided, and such fees are billed monthly in arrears.Home Health RevenueMedicare RevenueNet service revenue is recorded under the Medicare prospective payment system based on a 60-day episode payment rate that is subject to adjustmentbased on certain variables including, but not limited to: (a) an outlier payment if patient care was unusually costly; (b) a low utilization payment adjustmentif the number of visits was fewer than five; (c) a partial payment if the patient transferred to another provider or we received a patient from another providerbefore completing the episode; (d) a payment adjustment based upon the level of therapy services required; (e) the number of episodes of care provided to apatient, regardless of whether the same home health provider provided care for the entire series of episodes; (f) changes in the base episode paymentsestablished by the Medicare program; (g) adjustments to the base episode payments for case mix and geographic wages; and (h) recoveries of overpayments.We make adjustments to Medicare revenue on completed episodes to reflect differences between estimated and actual payment amounts, an inability toobtain appropriate billing documentation or authorizations acceptable to the payor and other reasons unrelated to credit risk. Therefore, we believe reportednet service revenue and patient accounts receivable will be the net amounts to be realized from Medicare for services rendered.In addition to revenue recognized on completed episodes, we also recognize a portion of revenue associated with episodes in progress. Episodes inprogress are 60-day episodes of care that begin during the reporting period, but were not completed as of the end of the period. As such, we estimate revenueand recognize it on a daily basis. The primary factors underlying this estimate are the number of episodes in progress at the end of the reporting period,expected Medicare revenue per episode and our estimate of the average percentage complete based on visits performed.Non-Medicare RevenueEpisodic Based Revenue - We recognize revenue in a similar manner as we recognize Medicare revenue for episodic-based rates that are paid by otherinsurance carriers, including Medicare Advantage programs; however, these rates can vary based upon the negotiated terms.Non-episodic Based Revenue - Revenue is recorded on an accrual basis based upon the date of service at amounts equal to its established or estimatedper-visit rates, as applicable.Hospice RevenueRevenue is recorded on an accrual basis based upon the date of service at amounts equal to the estimated payment rates. The estimated payment ratesare daily rates for each of the levels of care we deliver. We make adjustments to revenue for an inability to obtain appropriate billing documentation orauthorizations acceptable to the payor and other reasons unrelated to credit risk. Additionally, as Medicare hospice revenue is subject to an inpatient caplimit and an overall payment cap, we monitor our provider numbers and estimate amounts due back to Medicare if a cap has been exceeded. We record theseadjustments as a reduction to revenue and increases to other accrued liabilities.Accounts Receivable and Allowance for Doubtful AccountsAccounts receivable consist primarily of amounts due from Medicare and Medicaid programs, other government programs, managed care health plansand private payor sources. Estimated provisions for doubtful accounts are recorded to the extent it is probable that a portion or all of a particular account willnot be collected.In evaluating the collectability of accounts receivable, we consider a number of factors, including the age of the accounts, changes in collectionpatterns, the composition of patient accounts by payor type and the status of ongoing disputes with third-party payors. On an annual basis, the historicalcollection percentages are reviewed by payor and by state and are updated to reflect recent collection experience. In order to determine the appropriatereserve rate percentages which ultimately establish the allowance, we analyze historical cash collection patterns by payor and by state. The percentagesapplied to the aged receivable balances are based on our historical experience and time limits, if any, for managed care, Medicare, Medicaid and other payors.We periodically refine our estimates of the allowance for doubtful accounts based on experience with the estimation process and changes in circumstances.Self-Insurance77Table of ContentsWe are partially self-insured for general and professional liability up to a base amount per claim (the self-insured retention) with an aggregate, one-timedeductible above this limit. Losses beyond these amounts are insured through third-party policies with coverage limits per claim, per location and on anaggregate basis for the Company. Starting on January 1, 2017, the combined self-insured retention was $0.5 million per claim, subject to an additional one-time deductible of $0.8 million for California affiliated operations and a separate, one-time, deductible of $1.0 million for non-California operations. For allaffiliated operations, except those located in Colorado, the third-party coverage above these limits was $1.0 million per claim, $3.0 million per operation,with a $5.0 million blanket aggregate limit and an additional state-specific aggregate where required by state law. In Colorado, the third-party coverageabove these limits was $1.0 million per claim and $3.0 million per operation, which is independent of the aforementioned blanket aggregate limits that applyoutside of Colorado.The self-insured retention and deductible limits for general and professional liability and workers' compensation for all states (except Texas andWashington for workers' compensation) are self-insured through the Captive, the related assets and liabilities of which are included in the accompanyingconsolidated balance sheets. The Captive is subject to certain statutory requirements as an insurance provider. These requirements include, but are notlimited to, maintaining statutory capital.Our policy is to accrue amounts equal to the actuarially estimated costs to settle open claims of insureds, as well as an estimate of the cost of insuredclaims that have been incurred but not reported. We develop information about the size of the ultimate claims based on historical experience, current industryinformation and actuarial analysis, and evaluates the estimates for claim loss exposure on a quarterly basis.Our operating subsidiaries are self-insured for workers’ compensation in California. To protect itself against loss exposure in California with this policy,we have purchased individual specific excess insurance coverage that insures individual claims that exceed $0.5 million per occurrence. In Texas, theoperating subsidiaries have elected non-subscriber status for workers’ compensation claims and, effective February 1, 2011, we have purchased individualstop-loss coverage that insures individual claims that exceed $0.8 million per occurrence. As of July 1, 2014, our operating subsidiaries in all other states,with the exception of Washington, are under a loss sensitive plan that insures individual claims that exceed $0.4 million per occurrence. In Washington, theoperating subsidiaries' coverage is financed through premiums paid by the employers and employees. The claims and pay benefits are managed through astate insurance pool. Outside of California, Texas and Washington, we have purchased insurance coverage that insures individual claims that exceed $0.4million per accident. In all states except Washington, we accrue amounts equal to the estimated costs to settle open claims, as well as an estimate of the costof claims that have been incurred but not reported. We use actuarial valuations to estimate the liability based on historical experience and industryinformation.We self-fund medical (including prescription drugs) and dental healthcare benefits to the majority of our employees. We are fully liable for all financialand legal aspects of these benefit plans. To protect our company against loss exposure with this policy, we have purchased individual stop-loss insurancecoverage that insures individual claims that exceed $0.3 million for each covered person with an additional one-time aggregate individual stop lossdeductible of $0.1 million. Beginning 2016, our policy does not include the additional one-time aggregate individual stop loss deductible of $0.1 million.We believe that adequate provision has been made in the Financial Statements for liabilities that may arise out of patient care, workers’ compensation,healthcare benefits and related services provided to date. The amount of our reserves was determined based on an estimation process that uses informationobtained from both company-specific and industry data. This estimation process requires us to continuously monitor and evaluate the life cycle of the claims.Using data obtained from this monitoring and our assumptions about emerging trends, we, with the assistance of an independent actuary, developinformation about the size of ultimate claims based on our historical experience and other available industry information. The most significant assumptionsused in the estimation process include determining the trend in costs, the expected cost of claims incurred but not reported and the expected costs to settle orpay damage awards with respect to unpaid claims. The self-insured liabilities are based upon estimates, and while we believe that the estimates of loss arereasonable, the ultimate liability may be in excess of or less than the recorded amounts. Due to the inherent volatility of actuarially determined loss estimates,it is reasonably possible that we could experience changes in estimated losses that could be material to net income. If our actual liability exceeds its estimatesof loss, our future earnings, cash flows and financial condition would be adversely affected.Leases and Leasehold ImprovementsAt the inception of each lease, we perform an evaluation to determine whether the lease should be classified as an operating or capital lease. We recordrent expense for operating leases that contain scheduled rent increases on a straight-line basis over the term of the lease. The lease term used for straight-linerent expense is calculated from the date we are given control of the leased premises through the end of the lease term. The lease term used for this evaluationalso provides the basis for establishing depreciable lives for buildings subject to lease and leasehold improvements, as well as the period over which werecord straight-line rent expense.78Table of ContentsBusiness CombinationsOur acquisition strategy is to purchase or lease operating subsidiaries that are complementary to our current affiliated facilities, accretive to our businessor otherwise advance our strategy. The results of all of our operating subsidiaries are included in the accompanying Financial Statements subsequent to thedate of acquisition. Acquisitions are typically paid for in cash and are accounted for using the acquisition method of accounting. We account for businesscombinations using the purchase method of accounting and, accordingly, the assets and liabilities of the acquired entities are recorded at their estimated fairvalues at the acquisition date. Goodwill represents the excess of the purchase price over the fair value of net assets, including the amount assigned toidentifiable intangible assets. Given the time it takes to obtain pertinent information to finalize the acquired company’s balance sheet, the initial fair valuemight not be finalized at the time of the reported period. Accordingly, it is not uncommon for the initial estimates to be subsequently revised.In accounting for business combinations, we are required to record the assets and liabilities of the acquired business at fair value. In developingestimates of fair values for long-lived assets, we utilize a variety of factors including market data, cash flows, growth rates, and replacement costs.Determining the fair value for specifically identified intangible assets involves significant judgment, estimates and projections related to the valuation to beapplied to intangible assets such as favorable leases, customer relationships, Medicare licenses, and trade names. The subjective nature of management’sassumptions increases the risk associated with estimates surrounding the projected performance of the acquired entity. Additionally, as we amortize finite-lived acquired intangible assets over time, the purchase accounting allocation directly impacts the amortization expense recorded on the financialstatements.Income TaxesDeferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of our assets andliabilities at tax rates in effect when such temporary differences are expected to reverse. We generally expect to fully utilize our deferred tax assets; however,when necessary, we record a valuation allowance to reduce our net deferred tax assets to the amount that is more likely than not to be realized.In determining the need for a valuation allowance or the need for and magnitude of liabilities for uncertain tax positions, we make certain estimates andassumptions. These estimates and assumptions are based on, among other things, knowledge of operations, markets, historical trends and likely futurechanges and, when appropriate, the opinions of advisors with knowledge and expertise in certain fields. Due to certain risks associated with our estimates andassumptions, actual results could differ.The Tax Act increased our income tax expense by $3.9 million for the year ended December 31, 2017. The Tax Act will decrease the corporate incometax rate from 35.0% to 21.0% beginning on January 1, 2018. We expect meaningful benefits from this reduction to continue from its enactment in futureperiods.Recent Accounting PronouncementsExcept for rules and interpretive releases of the SEC under authority of federal securities laws and a limited number of grandfathered standards, theFinancial Accounting Standards Board (FASB) ASC is the sole source of authoritative GAAP literature recognized by the FASB and applicable to us. Wehave reviewed the FASB issued Accounting Standards Update (ASU) accounting pronouncements and interpretations thereof that have effectiveness datesduring the periods reported and in future periods. For any new pronouncements announced, we consider whether the new pronouncements could alterprevious generally accepted accounting principles and determine whether any new or modified principles will have a material impact on our reportedfinancial position or operations in the near term. The applicability of any standard is subject to the formal review of our financial management and certainstandards are under consideration.Recent Accounting Standards Adopted by the CompanyIn March 2016, the FASB issued a new standard to simplify several aspects the accounting for employee share-based payment transactions, whichincludes the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. Thenew standard was effective for us in the first quarter of fiscal year 2017. Under the previous guidance, excess tax benefits and deficiencies from share-basedcompensation arrangements were recorded in equity when the awards vested or were settled. The new guidance requires prospective recognition of excess taxbenefits and deficiencies in the income statement, resulting in the recognition of excess tax benefits of income tax expense, rather than in paid-in-capital, netof tax, of $3.4 million, for the year ended December 31, 2017.79Table of ContentsIn addition, under the new guidance, excess income tax benefits from share-based compensation arrangements are classified as cash flow fromoperations, rather than as cash flow from financing activities. We have elected to apply the cash flow classification guidance prospectively, resulting in anincrease to operating cash flow for the year ended December 31, 2017, and the prior year period has not been adjusted.We have also elected to continue to estimate the expected forfeitures rather than electing to account for forfeitures as they occur. Finally, the adoptionof the guidance requires excess tax benefits and deficiencies to be prospectively excluded from assumed future proceeds in the calculation of diluted shares,resulting in an increase in diluted weighted average shares outstanding.Accounting Standards Recently Issued But Not Yet Adopted by the CompanyIn May 2017, the FASB issued amended authoritative guidance to provide guidance on types of changes to the terms or conditions of share-basedpayments awards to which an entity would be required to apply modification accounting under ASC 718. This guidance is effective for annual and interimperiods beginning after December 15, 2017, which will be our fiscal year 2018, with early adoption permitted in certain cases. The adoption of this standardis not expected to have a material impact on our consolidated financial statements.In January 2017, the FASB issued amended authoritative guidance to clarify the definition of a business and reduce diversity in practice related to theevaluation of whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The new provisions provide the requirementsneeded for an integrated set of assets and activities (the set) to be a business and also establish a practical way to determine when a set is not a business. TheASU provides a screen to determine when an integrated set of assets and activities is not a business. The more robust framework helps entities to narrow thedefinition of outputs created by the set and align it with how outputs are described in the new revenue standard. This guidance is effective for annual andinterim periods beginning after December 15, 2017, which will be our fiscal year 2018, with early adoption permitted in certain cases. The new guidance isrequired to be applied on a prospective basis. The effect of the implementation will depend upon the nature of our future acquisitions.In January 2017, the FASB issued amended authoritative guidance to simplify and reduce the cost and complexity of the goodwill impairment test. Thenew provisions eliminate step 2 from the goodwill impairment test and shifts the concept of impairment from a measure of loss when comparing the impliedfair value of goodwill to its carrying amount to comparing the fair value of a reporting unit with its carrying amount. The Board also eliminated therequirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment or step 2 of the goodwill impairment test. Thenew guidance does not amend the optional qualitative assessment of goodwill impairment. This guidance is effective for annual periods beginning afterDecember 15, 2019, which will be our fiscal year 2020, with early adoption permitted. The adoption of this standard is not expected to have a material impacton our consolidated financial statements.In October 2016, the FASB issued amended authoritative guidance to require companies to recognize the income tax consequences of an intra-entitytransfer of an asset, other than inventory, when the transfer occurs. The amendments will be effective for our fiscal year beginning January 1, 2018. The newguidance is required to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginningof the period of adoption. The adoption of this standard is not expected to have a material impact on our consolidated financial statements based on ourhistorical activity. Furthermore, the actual impact of implementation will largely depend on future intra-entity asset transfers, if any.In August 2016, the FASB issued amended authoritative guidance to reduce the diversity in practice related to the presentation and classification ofcertain cash receipts and cash payments in the statement of cash flows. The new provisions target cash flow issues related to (i) debt prepayment or debtextinguishment costs, (ii) settlement of debt instruments with coupon rates that are insignificant relative to effective interest rates, (iii) contingentconsideration payments made after a business combination, (iv) proceeds from settlement of insurance claims, (v) proceeds from the settlement of corporate-owned life insurance and bank-owned life insurance policies, (vi) distributions received from equity method investees, (vii) beneficial interests insecuritization transactions and (viii) separately identifiable cash flows and application of the predominance principle. This guidance will be effective forfiscal years beginning after December 15, 2017, which will be our fiscal year 2018, with early adoption permitted. The adoption of this standard is notexpected to have a material impact on our consolidated financial statements.In February 2016, the FASB issued amended authoritative guidance on accounting for leases. The new provisions require that a lessee of operatingleases recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right touse the underlying asset for the lease term. The lease liability will be equal to the present value of lease payments, with the right-of-use asset based upon thelease liability. The classification criteria for distinguishing between finance (or capital) leases and operating leases are substantially similar to the previouslease guidance, but with no explicit bright lines. As such, operating leases will result in straight-line rent expense similar to current practice. For short termleases80Table of Contents(term of 12 months or less), a lessee is permitted to make an accounting election not to recognize lease assets and lease liabilities, which would generallyresult in lease expense being recognized on a straight-line basis over the lease term. This guidance applies to all entities and is effective for annual periodsbeginning after December 15, 2018, which will be our fiscal year 2019, with early adoption permitted. We are currently evaluating the impact this guidancewill have on our consolidated financial statements but expect this adoption will result in a significant increase in the assets and liabilities on ourconsolidated balance sheets.In January 2016, the FASB issued amended authoritative guidance which makes targeted improvements for financial instruments. The new provisionsimpact certain aspects of recognition, measurement, presentation and disclosure requirements of financial instruments. Specifically, the guidance will (1)require equity investments to be measured at fair value with changes in fair value recognized in net income, (2) simplify the impairment assessment of equityinvestments without readily determinable fair values, (3) eliminate the requirement to disclose the method and assumptions used to estimate fair value forfinancial instruments measured at amortized cost, and (4) require separate presentation of financial assets and financial liabilities by measurement category.The guidance is effective for annual and interim periods beginning after December 15, 2017, which will be our fiscal year 2018. Early adoption is notpermitted. The adoption of this standard is not expected to have a material impact on our consolidated financial statements.In March 2016, the FASB issued its standard to amend the principal-versus-agent implementation guidance and illustrations in the Board’s new revenuestandard, which includes accounting implication related to (1) determining the appropriate unit of account under the revenue standard’s principal-versus-agent guidance and (2) applying the indicators of whether an entity is a principal or an agent in accordance with the revenue standard’s control principle. Theguidance will be effective for fiscal years beginning after December 15, 2017, which will be our fiscal year 2018. The guidance has the same effective date asthe new revenue standard and we are required to adopt the guidance by using the same transition method we would use to adopt the new revenue standard.Our evaluation of the adoption method and impact to the consolidated financial statements is performed concurrently with the new revenue standard below.In May 2014, the FASB and International Accounting Standards Board issued their final standard on revenue from contracts with customers thatoutlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The new standard supersedes mostcurrent revenue recognition guidance, including industry-specific guidance, and may be applied retrospectively to each period presented (full retrospectivemethod) or retrospectively with the cumulative effect recognized in beginning retained earnings as of the date of adoption (modified retrospective method).In July 2015, the FASB formally deferred for one year the effective date of the new revenue standard and decided to permit entities to early adopt thestandard. In December 2016, the FASB made certain technical corrections to further clarify the core revenue recognition principles, primarily in response tofeedback from several sources, including the FASB/IASB Transition Resource Group. The guidance will be effective for fiscal years beginning afterDecember 15, 2017, which will be our fiscal year 2018. We initiated an adoption plan in fiscal year 2015, beginning with preliminary evaluation of thestandard, and subsequently performed additional analysis of revenue streams and transactions under the new standard. In particular, we performed analysisinto the application of the portfolio approach as a practical expedient to group patient contracts with similar characteristics, such that revenue for a givenportfolio would not be materially different than if it were evaluated on a contract-by-contract basis. The adoption plan has been completed and the impact tothe consolidated financial statements for periods subsequent to adoption is not material. As part of the impact assessment, we evaluated any variableconsideration, potential constraints on the estimate of variable consideration, and significant financing components, in particular as it related to third partysettlements. We anticipate that for periods subsequent to adoption, the majority of what is currently classified as bad debt expense under operating expenseswill be treated as an implicit price concession factored into net revenue, consistent with the intent of the standard. The new standard also requires enhanceddisclosures related to the disaggregation of revenue, information about contract balances, and other disclosures about contracts with customers, includingrevenue recognition policies to identify performance obligations and significant judgments in measurement and recognition. We adopted the new revenuestandard as of January 1, 2018 using the modified retrospective method and the adoption did not have a material impact. 81Table of ContentsResults of OperationsThe following table sets forth details of our revenue, expenses and earnings as a percentage of total revenue for the periods indicated: Year Ended December 31, 20172016 2015Revenue100.0 % 100.0 % 100.0 %Expense: Cost of services81.0 81.1 79.6Charge related to class action lawsuit (Note 19)0.6 — —(Gains)/losses related to divestitures (Note 7 and 17)0.1 (0.7) —Rent—cost of services (Note 17)7.1 7.5 6.6General and administrative expense4.4 4.2 4.8Depreciation and amortization2.4 2.3 2.1Total expenses95.6 94.4 93.1Income from operations4.4 5.6 6.9Other income (expense): Interest expense(0.7) (0.4) (0.2)Interest income0.1 0.1 0.1Other expense, net(0.6) (0.3) (0.1)Income before provision for income taxes3.8 5.3 6.8Provision for income taxes1.5 2.0 2.6Net income2.3 3.3 4.2Less: net income attributable to noncontrolling interests0.1 0.2 —Net income attributable to The Ensign Group, Inc.2.2 % 3.1 % 4.2 %Year Ended December 31, 2017 Compared to the Year Ended December 31, 2016Revenue Year Ended December 31, 2017 2016 Revenue Dollars RevenuePercentage Revenue Dollars RevenuePercentage (Dollars in thousands)Transitional and skilled services $1,545,21083.6%$1,374,80383.1%Assisted and independent living services 136,6467.4123,6367.5Home health and hospice services: Home health 73,0453.960,3263.6Hospice 69,3583.855,4873.4Total home health and hospice services 142,4037.7115,8137.0All other (1) 25,0581.340,6122.4Total revenue $1,849,317100.0%$1,654,864100.0%(1) Includes revenue from services generated in our other ancillary services for the year ended December 31, 2017 and 2016 and urgent care centers for the year ended December31, 2016.Our consolidated revenue increased $194.5 million, or 11.8% in fiscal year 2017. Our transitional and skilled services revenue increased by $170.4million, or 12.4%, mainly attributable to the increase in patient days, revenue per patient day and the impact of acquisitions. Our assisted and independentliving services increased by $13.0 million, or 10.5%, mainly due to the increase in average monthly revenue per unit and occupancy compared to the prioryear period, coupled with the impact of82Table of Contentsacquisitions. Our home health and hospice services revenue increased by $26.6 million, or 23.0%, mainly due to an increase in volume in existing agenciescombined with new acquisitions. Revenue from operations acquired on or subsequent to January 1, 2016 increased our consolidated revenue by $156.4million in 2017 when comparing to 2016. Consolidated revenue for the year ended December 31, 2016 included $24.8 million of revenue related to urgentcare centers that we sold in the third and fourth quarter of 2016.Transitional and Skilled ServicesThe following table presents the transitional and skilled services revenue and key performance metrics by category in fiscal 2017 and 2016: Year Ended December 31, 2017 2016 (Dollars in thousands) Change % ChangeTotal Facility Results: Transitional and skilled revenue$1,545,210$1,374,803$170,40712.4 %Number of facilities at period end160149117.4 %Number of campuses at period end*2121—— %Actual patient days5,050,1404,620,735429,4059.3 %Occupancy percentage — Operational beds75.4%75.4% — %Skilled mix by nursing days30.3%30.9% (0.6)%Skilled mix by nursing revenue51.1%52.5% (1.4)% Year Ended December 31, 2017 2016 (Dollars in thousands) Change % ChangeSame Facility Results(1): Transitional and skilled revenue$975,203$942,854$32,3493.4 %Number of facilities at period end9393—— %Number of campuses at period end*1111—— %Actual patient days3,083,2923,099,764(16,472)(0.5)%Occupancy percentage — Operational beds78.4%78.1% 0.3 %Skilled mix by nursing days30.0%29.8% 0.2 %Skilled mix by nursing revenue50.8%51.3% (0.5)% Year Ended December 31, 2017 2016 (Dollars in thousands) Change % ChangeTransitioning Facility Results(2): Transitional and skilled revenue$310,545$292,360$18,1856.2 %Number of facilities at period end3737—— %Number of campuses at period end*33—— %Actual patient days988,246963,76024,4862.5 %Occupancy percentage — Operational beds74.2%71.4% 2.8 %Skilled mix by nursing days35.5%36.5% (1.0)%Skilled mix by nursing revenue54.3%56.8% (2.5)%83Table of Contents Year Ended December 31, 2017 2016 (Dollars in thousands) Change % ChangeRecently Acquired Facility Results(3): Transitional and skilled revenue$257,594$134,828$122,766 NMNumber of facilities at period end301812 NMNumber of campuses at period end*761 NMActual patient days973,027536,495436,532 NMOccupancy percentage — Operational beds68.5%71.4% NMSkilled mix by nursing days25.8%27.5% NMSkilled mix by nursing revenue48.0%52.4% NM Year Ended December 31, 2017 2016 (Dollars in thousands) Change % ChangeFacility Closed Results(4): Skilled nursing revenue$1,868$4,761$(2,893) NMActual patient days5,57520,716(15,141) NMOccupancy percentage — Operational beds34.3%37.5% NMSkilled mix by nursing days46.7%20.1% NMSkilled mix by nursing revenue71.5%42.0% NM__________________* Campus represents a facility that offers both skilled nursing, assisted and/or independent living services. Revenue and expenses related to skilled nursing, assisted and independentliving services have been allocated and recorded in the respective reportable segment.(1)Same Facility results represent all facilities purchased prior to January 1, 2014.(2)Transitioning Facility results represents all facilities purchased from January 1, 2014 to December 31, 2015.(3)Recently Acquired Facility (Acquisitions) results represent all facilities purchased on or subsequent to January 1, 2016.(4)Facility Closed results represents closed operations during 2017 and 2016, which were excluded from Recently Acquired results for the years ended December 31, 2017 and2016, for comparison purposes.Transitional and skilled services revenue increased $170.4 million, or 12.4% in fiscal year 2017. Of the $170.4 million increase, Medicare and managed carerevenue increased $55.1 million, or 8.5%, Medicaid custodial revenue increased $82.0 million, or 15.7%, private and other revenue increased $17.9 million,or 14.7%, and Medicaid skilled revenue increased $15.4 million, or 17.5%.Transitional and skilled services revenue generated by Same Facilities increased $32.3 million, or 3.4%, on a comparable basis. The following is adescription of notable comparable revenue changes:•Our Medicaid revenue, including Medicaid skilled revenue, increased by $32.1 million, or 7.4%, mainly driven by an increase in Medicaiddays. We also experienced an increase in Medicaid revenue per patient day as a result of our participation in the quality improvement programsand the supplemental programs in various states.•Our managed care revenue increased by $13.1 million, or 8.4%, due to an increase in managed care days and an increase in managed carerevenue per patient day.•Our Medicare revenue decreased by $10.6 million, or 4.0%, primarily due to a decrease in Medicare days, partially offset by an increase inMedicare revenue per patient day.•In addition, our Same Facilities patient days decreased compared to fiscal 2016 due to evacuations and subsequent structural work damaged byHurricane Harvey and California fires. All evacuation orders were lifted and our operations re-opened in the fourth quarter of 2017. We alsocurrently have one operation undergoing structural renovations and is expected to re-open in the second quarter of 2018.Transitional and skilled services revenue generated by Transitioning Facilities increased $18.2 million, or 6.2%. This is due to increases in total patientdays and revenue per patient day of 2.5% and 3.6%, respectively.Transitional and skilled services revenue generated by Recently Acquired Facilities increased by approximately $122.8 million mainly due to thirty-seven operations we acquired between January 1, 2016 and December 31, 2017 in seven states.84Table of ContentsHistorically, we have generally experienced lower occupancy rates, lower skilled mix and quality mix at Recently Acquired Facilities and therefore, weanticipate generally lower overall occupancy during years of growth for our turnaround acquisitions. In the future, if we acquire additional turnaroundoperations into our overall portfolio, we expect this trend to continue. Accordingly, we anticipate our overall occupancy will vary from period to periodbased upon the maturity of the facilities within our portfolio.The following table reflects the change in the skilled nursing average daily revenue rates by payor source, excluding services that are not covered bythe daily rate: Year Ended December 31, Same Facility Transitioning Acquisitions Total 2017 2016 2017 2016 2017 2016 2017 2016Skilled Nursing Average DailyRevenue Rates: Medicare$601.53$583.21$548.09$528.65$506.27$486.45$569.77$556.89Managed care445.73428.13445.45438.21414.34401.22440.55428.53Other skilled483.23468.59369.82369.59449.89—451.16441.86Total skilled revenue518.82505.95470.65462.84468.89457.58499.51490.18Medicaid217.22205.82215.49201.24172.02154.73208.24198.92Private and other payors212.72197.11233.26208.11191.16167.15209.72197.87Total skilled nursing revenue$307.47$294.12$307.77$297.20$252.02$240.27$296.84$288.93Our Medicare daily rates at Same Facilities and Transitioning Facilities increased by 3.1% and 3.7%, respectively. The increase is attributable to themandated 1.0% market basket percentage that became effective in October 2017, which was preceded by a 2.4% net market basket increase that went intoeffect in October 2016, compared to a net market basket increase of 1.2%, which went into effect in October 2015. In addition, the increase in Medicare dailyrates was the result of continuous shift towards higher acuity patients.Our average Medicaid rates increased 4.7% primarily due to our participation in supplemental Medicaid payment programs and quality improvementprograms in various states.Payor Sources as a Percentage of Skilled Nursing Services. We use both our skilled mix and quality mix as measures of the quality ofreimbursements we receive at our affiliated skilled nursing facilities over various periods. The following tables set forth our percentage of skilled nursingpatient revenue and days by payor source: Year Ended December 31, Same Facility Transitioning Acquisitions Total 2017 2016 2017 2016 2017 2016 2017 2016Percentage of SkilledNursing Revenue: Medicare25.1%27.2%24.3%25.5%30.5%36.8%25.8%27.8%Managed care17.216.422.024.116.915.618.117.9Other skilled8.57.78.07.20.6—7.26.8Skilled mix50.851.354.356.848.052.451.152.5Private and other payors8.08.57.06.213.412.78.68.5Quality mix58.859.861.363.061.465.159.761.0Medicaid41.240.238.737.038.634.940.339.0Total skilled nursing100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%85Table of Contents Year Ended December 31, Same Facility Transitioning Acquisitions Total 2017 2016 2017 2016 2017 2016 2017 2016Percentage of SkilledNursing Days: Medicare12.8%13.7%13.6%14.3%15.2%18.2%13.4%14.4%Managed care11.811.315.216.310.39.312.212.0Other skilled5.44.86.75.90.3—4.74.5Skilled mix30.029.835.536.525.827.530.330.9Private and other payors11.912.69.38.917.718.412.512.5Quality mix41.942.444.845.443.545.942.843.4Medicaid58.157.655.254.656.554.157.256.6Total skilled nursing100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%Assisted and Independent Living Services Year Ended December 31, 2017 2016 (Dollars in thousands) Change % ChangeRevenue$136,646$123,636$13,01010.5%Number of facilities at period end4940922.5%Number of campuses at period end2121——%Occupancy percentage (units)76.4%76.0% 0.4%Average monthly revenue per unit$2,800$2,746$542.0%Assisted and independent living revenue of $136.6 million increased 10.5% on a comparable basis primarily due to an increase in average monthlyrevenue per unit of 2.0% and occupancy of 0.4%, coupled with revenue generated from the addition of sixteen assisted and independent living operations infive states between January 1, 2016 and December 31, 2017.Home Health and Hospice Services Year Ended December 31, 2017 2016 Change % Change (Dollars in thousands) Home health and hospice revenue Home health services$73,045$60,326$12,71921.1%Hospice services69,35855,48713,87125.0Total home health and hospice revenue$142,403$115,813$26,59023.0%Home health services:Average Medicare Revenue per Completed Episode$3,028$2,986$421.4%Hospice services:Average Daily Census1,10290519721.8%Home health and hospice revenue increased $26.6 million, or 23.0%. Of the $26.6 million increase, Medicare and managed care revenue increased$21.7 million, or 22.1%. The increase in revenue is primarily due to the increase in volume and average daily census in existing agencies, coupled with theaddition of eleven home health and hospice operations in eight states between January 1, 2016 and December 31, 2017.Cost of ServicesThe following table sets forth total cost of services by each of our reportable segments and our "All Other" category for the periods indicated (dollars inthousands):86Table of Contents Cost of Services Transitional andSkilled Services Assisted andIndependent LivingServices Home Health andHospice All Other TotalYear Ended December 31, 2017 $1,267,169 $89,626 $119,765 $21,143 $1,497,703Year Ended December 31, 2016 $1,130,691 $78,872 $96,753 $35,498 $1,341,814Consolidated cost of services increased $155.9 million, or 11.6% compared to fiscal 2016.Transitional and Skilled Services Year Ended December 31, % 2017 2016 Change Change (Dollars in thousands) Cost of service dollars $1,267,169 $1,130,691 $136,478 12.1 %Revenue percentage 82.0% 82.2% (0.2)%Cost of services related to our transitional and skilled services segment increased $136.5 million, or 12.1%, due primarily to additional costs atRecently Acquired Facilities of $99.1 million and organic operational growth. Cost of services as a percentage of revenue decreased to 82.0%, mainly due tothe decrease in bad debt expense and ancillary costs, offset by an increase in wage and health insurance costs.Assisted and Independent Living Services Year Ended December 31, % 2017 2016 Change Change (Dollars in thousands) Cost of service dollars $89,626 $78,872 $10,754 13.6%Revenue percentage 65.6% 63.8% 1.8%Cost of services related to our assisted and independent living services segment increased $10.8 million, or 13.6%, primarily due to recently acquiredoperations and organic operational growth. Cost of services as a percentage of total revenue increased by 1.8% as a result of the increase in wage and healthinsurance costs.Home Health and Hospice Services Year Ended December 31, % 2017 2016 Change Change (Dollars in thousands) Cost of service dollars $119,765 $96,753 $23,012 23.8%Revenue percentage 84.1% 83.5% 0.6%Cost of services related to our home health and hospice services segment increased $23.0 million, or 23.8% due to newly acquired operations andorganic operational growth. Cost of services as a percentage of total revenue increased by 0.6% primarily due to costs related to health insurance costs,contract therapy and bad debt expenses.Charge related to class action lawsuit. We recorded a liability of $11.0 million in fiscal 2017 related to the settlement of a class action lawsuit. Similarcharges did not occur for 2016.(Gains)/losses related to operational closures. We recorded a loss of $4.0 million related to the closure of operations and lease terminations in fiscal2017. This amount is offset by the recovery of $1.3 million of certain losses that were recorded related to the closure of an operation in 2016. In fiscal 2016,we recorded $7.9 million of losses related to the closure of operations and a gain on the sale of three urgent care centers of $19.2 million.Rent — Cost of Services. Our rent — cost of services as a percentage of total revenue decreased by 0.4% to 7.1% in fiscal 2017 primarily due to theacquisition of real estate of fifteen assisted living operations in the fourth quarter of 2016 that were87Table of Contentspreviously operated under long-term leases, partially offset by the additional rent expense as a result of the sale-leaseback transaction and new leases fornewly opened and acquired operations.General and Administrative Expense. Our general and administrative expense rate increased by 0.2% to 4.4%, mainly due to the additional bonusaccrual related to the Tax Cut. Without the bonus accrual, general and administration expense as a percentage of revenue would have been 4.2%, which isconsistent with prior year.Depreciation and Amortization. Depreciation and amortization expense increased $5.8 million, or 15.0%, to $44.5 million. This increase was primarilyrelated to the additional depreciation and amortization incurred as a result of our newly acquired operations. Of the depreciation and amortization atRecently Acquired Facilities for the year ended December 31, 2017, $0.7 million represented amortization expense of patient base intangible assets which areamortized over four to eight months. Depreciation and amortization expense increased as a percentage of revenue by 0.1% to 2.4%.Other Expense, net. Other expense, net increased $6.0 million to $12.0 million. Other expense as a percentage of revenue increased by 0.3% to 0.6%due to interest expense incurred related to additional borrowings under our credit facility.Provision for Income Taxes. Our effective tax rate was 41.1% for the year ended December 31, 2017 compared to 38.4% for the same period in 2016.The higher effective tax rate reflects the impact of the Tax Act from our revaluation of our net deferred tax assets of $3.9 million and increases in certain non-taxable and non-deductible items, offset by a tax benefit from share-based payment awards recorded in income tax expense resulting from our adoption ofASU 2016-09, Improvements to Employee Share-Based Payment Accounting: Topic 710, effective January 1, 2017. See Note 2 and Note 14 in the Notes tothe Consolidated Financial Statements for further discussion.Year Ended December 31, 2016 Compared to the Year Ended December 31, 2015Revenue Year Ended December 31, 2016 2015 RevenueDollars RevenuePercentage RevenueDollars RevenuePercentage (Dollars in thousands)Transitional and skilled services $1,374,803 83.1% $1,126,38883.9%Assisted and independent living services 123,636 7.5 88,1296.6Home health and hospice services: Home health 60,326 3.6 47,9553.6Hospice 55,487 3.4 42,4013.2Total home health and hospice services 115,813 7.0 90,3566.8All other (1) 40,612 2.4 36,9532.7Total revenue $1,654,864 100.0% $1,341,826100.0%(1) Includes revenue from services generated in our other ancillary services and our urgent care centers for the years ended December 31, 2016 and 2015.Our consolidated revenue increased $313.0 million, or 23.3%. Our transitional and skilled services revenue increased by $248.4 million, or 22.1%,mainly attributable to the increase in patient days, revenue per patient day and the impacts of acquisitions. Our assisted and independent living servicesincreased by $35.5 million, or 40.3%, mainly due to the increase in occupancy and average monthly revenue per unit compared to the prior year period. Ourhome health and hospice services revenue increased by $25.5 million, or 28.2%, mainly due to an increase in volume and average daily census in existingagencies combined with acquisitions. Revenue from acquisitions increased consolidated revenue by $271.4 million in 2016 when comparing to 2015.Transitional and Skilled Services88Table of ContentsThe following table presents the transitional and skilled services revenue and key performance metrics by category in fiscal 2016 and 2015: Year Ended December 31, 2016 2015 (Dollars in thousands) Change % ChangeTotal Facility Results: Transitional and skilled revenue$1,374,803 $1,126,388 $248,41522.1 %Number of facilities at period end149 131 1813.7 %Number of campuses at period end*21 15 640.0 %Actual patient days4,620,735 3,873,409 747,32619.3 %Occupancy percentage — Operational beds75.4% 77.6% (2.2)%Skilled mix by nursing days30.9% 30.4% 0.5 %Skilled mix by nursing revenue52.5% 52.6% (0.1)% Year Ended December 31, 2016 2015 (Dollars in thousands) Change % ChangeSame Facility Results(1): Transitional and skilled revenue$898,385 $871,450 $26,9353.1 %Number of facilities at period end85 85 —— %Number of campuses at period end*12 12 —— %Actual patient days2,930,232 2,964,185 (33,953)(1.1)%Occupancy percentage — Operational beds78.4% 79.9% (1.5)%Skilled mix by nursing days30.1% 30.2% (0.1)%Skilled mix by nursing revenue51.3% 52.5% (1.2)% Year Ended December 31, 2016 2015 (Dollars in thousands) Change % ChangeTransitioning Facility Results(2): Transitional and skilled revenue$173,559 $164,128 $9,4315.7%Number of facilities at period end23 23 ——%Actual patient days578,178 569,801 8,3771.5%Occupancy percentage — Operational beds72.9% 71.8% 1.1%Skilled mix by nursing days33.4% 32.2% 1.2%Skilled mix by nursing revenue55.4% 54.7% 0.7% Year Ended December 31, 2016 2015 (Dollars in thousands) Change % ChangeRecently Acquired Facility Results(3): Transitional and skilled revenue$302,237 $83,693 $218,544 NMNumber of facilities at period end41 22 19 NMNumber of campuses at period end*9 3 6 NMActual patient days1,109,081 303,686 805,395 NMOccupancy percentage — Operational beds69.7% 69.1% NMSkilled mix by nursing days31.7% 30.9% NMSkilled mix by nursing revenue54.4% 51.3% NM89Table of Contents Year Ended December 31, 2016 2015 (Dollars in thousands) Change % ChangeFacility Closed Results(4): Skilled nursing revenue$622 $7,117 $(6,495) NMActual patient days3,244 35,737 (32,493) NMOccupancy percentage — Operational beds70.7% 71.5% NMSkilled mix by nursing days9.6%12.7% NMSkilled mix by nursing revenue14.9%26.9% NM__________________* Campus represents a facility that offers both skilled nursing, assisted and/or independent living services. Revenue and expenses related to skilled nursing, assisted and independentliving services have been allocated and recorded in the respective reportable segment.(1)Same Facility results represent all facilities purchased prior to January 1, 2013.(2)Transitioning Facility results represents all facilities purchased from January 1, 2013 to December 31, 2014.(3)Recently Acquired Facility (Acquisitions) results represent all facilities purchased on or subsequent to January 1, 2015.(4)Facility Closed represents the result of one facility closed during the first quarter of 2016. These results were excluded from Same Facility results for the year endedDecember 31, 2015 for comparison purposes.Transitional and skilled services revenue increased $248.4 million, or 22.1%. Of the $248.4 million increase, Medicare and managed care revenue increased$117.2 million, or 22.2%, Medicaid custodial revenue increased $90.7 million, or 21.1%, private and other revenue increased $24.9 million, or 25.7%, andMedicaid skilled revenue increased $15.6 million, or 21.7%.Transitional and skilled services revenue generated by Same Facilities increased $26.9 million, or 3.1%, on a comparable basis. The following is adescription of notable comparable revenue changes:•Our Medicaid revenue, including Medicaid skilled revenue, increased by $24.5 million, or 6.2%, which was driven by a 6.6% increase inMedicaid revenue per patient day driven by our participation in quality improvement and the supplemental programs, coupled with the add-onto the reimbursement rate in California. These increases in revenue per patient day are partially offset by a 0.7% decrease in Medicaid days.•Our managed care revenue increased by $8.2 million, or 5.9%, as a result of a 4.7% increase in managed care days as well as a 1.2% increase inmanaged care revenue per patient day.•Our Medicare revenue decreased by $11.6 million, or 4.4%, primarily due to a 9.8% decrease in Medicare days, partially offset by a 3.8%increase in Medicare revenue per patient day.Transitional and skilled services revenue generated by Transitioning Facilities increased $9.4 million, or 5.7%. This is due to increases in total patientdays of 1.5%, consisting of a 7.6% increase in managed care days, a 2.0% increase in Medicaid days and a 1.7% increase in Medicare days from the prioryear. Revenue per patient day increased by 4.1%, consisting of a 2.0% increase in Medicare, a 5.5% increase in Medicaid and a 1.7% increase in managedcare revenue per patient day.Transitional and skilled services revenue generated by Recently Acquired Facilities increased by approximately $218.5 million. Between January 1,2015 and December 31, 2016, we have acquired 50 facilities in eight states.Historically, we have generally experienced lower occupancy rates, lower skilled mix and quality mix at Recently Acquired Facilities and therefore, weanticipate generally lower overall occupancy during years of growth for our turnaround acquisitions. In the future, if we acquire additional turnaroundoperations into our overall portfolio, we expect this trend to continue. Accordingly, we anticipate our overall occupancy will vary from quarter to quarterbased upon the maturity of the facilities within our portfolio. In 2016, our metrics for Recently Acquired Facilities include strategic acquisitions that havehigher occupancy rates, higher skilled mix days and skilled mix revenue.The following table reflects the change in the skilled nursing average daily revenue rates by payor source, excluding services that are not covered bythe daily rate:90Table of Contents Year Ended December 31, Same Facility Transitioning Acquisitions Total 2016 2015 2016 2015 2016 2015 2016 2015Skilled Nursing Average DailyRevenue Rates: Medicare$586.51 $565.20 $566.32 $555.33 $491.49 $475.51 $556.89 $555.50Managed care424.70 419.83 468.01 460.21 409.95 414.14 428.53 427.16Other skilled469.31 456.62 351.10 330.83 386.66 431.42 441.86 436.41Total skilled revenue506.09 497.24 486.30 478.11 452.55 449.07 490.18 490.07Medicaid208.41 195.44 195.57 185.31 174.45 188.54 198.92 193.04Private and other payors204.33 190.12 198.11 199.83 182.50 198.94 197.87 192.04Total skilled nursing revenue$297.83 $285.92 $292.88 $281.25 $263.74 $270.38 $288.93 $283.31Medicare daily rates at Same Facilities and Transitioning Facilities increased by 3.8%. The increase was attributable to a 2.4% net market basketincrease, which went into effect in October 2016, compared to a net market basket increase of 1.2%, which went into effect in October 2015. In addition, theincrease in Medicare daily rates was impacted by the continuous shift towards higher acuity patients.The average Medicaid rates increased 3.0% primarily due to increases in rates in various states, supplemental Medicaid payments received from thesupplemental payment programs in various states, the quality improvement program and the add-on to the reimbursement rate in California.Payor Sources as a Percentage of Skilled Nursing Services. We use both our skilled mix and quality mix as measures of the quality ofreimbursements we receive at our affiliated skilled nursing facilities over various periods. The following tables set forth our percentage of skilled nursingpatient revenue and days by payor source: Year Ended December 31, Same Facility Transitioning Acquisitions Total 2016 2015 2016 2015 2016 2015 2016 2015Percentage of SkilledNursing Revenue: Medicare27.2% 29.6% 23.4% 23.9% 32.2% 29.1% 27.8% 28.6%Managed care16.1 15.7 26.1 25.6 18.5 16.5 17.9 17.2Other skilled8.0 7.2 5.9 5.2 3.7 5.7 6.8 6.8Skilled mix51.352.5 55.454.7 54.451.3 52.552.6Private and other payors8.3 8.0 7.2 8.3 9.7 9.8 8.5 8.2Quality mix59.660.562.663.064.161.161.060.8Medicaid40.4 39.5 37.4 37.0 35.9 38.9 39.0 39.2Total skilled nursing100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%91Table of Contents Year Ended December 31, Same Facility Transitioning Acquisitions Total 2016 2015 2016 2015 2016 2015 2016 2015Percentage of SkilledNursing Days: Medicare13.7% 14.9% 12.1% 12.1% 17.3% 16.6% 14.4% 14.6%Managed care11.3 10.7 16.3 15.6 11.9 10.7 12.0 11.4Other skilled5.1 4.6 5.0 4.5 2.5 3.6 4.5 4.4Skilled mix30.130.2 33.432.2 31.730.9 30.930.4Private and other payors12.3 12.0 10.6 11.7 14.0 13.3 12.5 12.1Quality mix42.442.244.043.945.744.243.442.5Medicaid57.6 57.8 56.0 56.1 54.3 55.8 56.6 57.5Total skilled nursing100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%Assisted and Independent Living Services Year Ended December 31, 2016 2015 (Dollars in thousands) Change % ChangeRevenue$123,636 $88,129 $35,50740.3%Number of facilities at period end40 40 ——%Number of campuses at period end21 15 640.0%Occupancy percentage (units)76.0% 75.3% 0.7%Average monthly revenue per unit$2,746 $2,644 $1023.9%Assisted and independent living revenue increased $35.5 million, or 40.3%. The increase in revenue is primarily due to the increase in average monthlyrevenue per unit of 3.9% and occupancy of 0.7%, coupled with the addition of 14 assisted and independent living operations in four states between January1, 2015 and December 31, 2016.Home Health and Hospice Services Year Ended December 31, 2016 2015 Change % Change (Dollars in thousands) Home health and hospice revenue Home health services$60,326 $47,955 $12,371 25.8%Hospice services55,487 42,401 13,086 30.9Total home health and hospice revenue$115,813 $90,356 $25,457 28.2%Home health services: Average Medicare Revenue per Completed Episode$2,986 $2,929 $57 1.9%Hospice services: Average Daily Census905 679 226 33.3%Home health and hospice revenue increased $25.5 million, or 28.2%. Of the $25.5 million increase, Medicare and managed care revenue increased$23.1 million, or 30.7%. The increase in revenue is primarily due to the increase in volume, average daily census and average Medicare revenue percompleted episode in existing agencies, coupled with the addition of eight home health, hospice and home care operations in seven states between January 1,2015 and December 31, 2016.Cost of ServicesThe following table sets forth our total cost of services by each of our reportable segments and our "All Other" category for the periods indicated(dollars in thousands):92Table of Contents Cost of Services Transitional andSkilled Services Assisted andIndependent LivingServices Home Health andHospice All Other TotalYear Ended December 31, 2016 $1,130,691 $78,872 $96,753 $35,498 $1,341,814Year Ended December 31, 2015 $902,352 $57,396 $74,557 $33,389 $1,067,694Consolidated cost of services increased $274.1 million, or 25.7%, compared to fiscal year 2015 primarily due to acquisitions.Transitional and Skilled Services Year Ended December 31, % 2016 2015 Change Change (Dollars in thousands) Cost of service dollars $1,130,691 $902,352 $228,339 25.3%Revenue percentage 82.2% 80.1% 2.1%Cost of services related to our transitional and skilled services segment increased $228.3 million, or 25.3%, due to additional costs at RecentlyAcquired Facilities of $188.8 million and organic operational growth. Cost of service as a percentage of revenue increased to 82.2%. The main componentsof the increase are start-up costs related to newly constructed post-acute care campuses, additional costs related to our new labor management system roll-outand increases in health, general and professional liability costs of $21.0 million from the change in claims experience. In addition, our provision for doubtfulaccounts increased by $8.0 million. Same Facilities cost of services increased due to an increase in health, general and professional liability costs of $12.5million, partially offset by the decrease in worker compensation costs of $2.2 million.Assisted and Independent Living Services Year Ended December 31, % 2016 2015 Change Change (Dollars in thousands) Cost of service dollars $78,872 $57,396 $21,476 37.4 %Revenue percentage 63.8% 65.1% (1.3)%Cost of services related to our assisted and independent living services segment increased $21.5 million, or 37.4%, primarily due to organic operationalgrowth. The largest component of cost of services is labor expenses. Cost of services as a percentage of total revenue decreased by 1.3% as a result ofreduction in labor costs.Home Health and Hospice Services Year Ended December 31, % 2016 2015 Change Change (Dollars in thousands) Cost of service dollars $96,753 $74,557 $22,196 29.8%Revenue percentage 83.5% 82.5% 1.0%Cost of services related to our home health and hospice services segment increased $22.2 million, or 29.8% due to additional costs at agencies acquiredduring 2016 of $12.4 million and organic operational growth. Cost of services as a percentage of total revenue increased by 1.0% primarily due to costsrelated to start-up and transitioning operations. We have generally experienced higher costs due to the addition of resources at our newly acquired and start-up agencies.Gain related to divestitures. We recorded a gain of $19.2 million relate to the sale of our urgent care centers in 2016. The gain is partially offset by thecharges of $7.9 million related to the closure of one facility in February 2016. The charges represent the present value of rental payments of $6.5million related to our continued obligation liability under the lease and related closing expenses. Similar charges and gains did not occur in 2015.93Table of ContentsRent — Cost of Services. Rent — cost of services increased $35.8 million, or 40.3%, to $124.6 million. Rent - cost of service as a percentage of totalrevenue increased by 0.9% to 7.5%. The additional increase in rent was primarily due to new leases for newly opened and acquired operations.General and Administrative Expense. General and administrative expense increased by $5.0 million, or 7.8%, to $69.2 million. The increase wasprimarily due to our operational growth during 2016, coupled with an increase in expenses incurred to acquire new operations and additional share-basedcompensation expense related to the new management subsidiary equity plan that was implemented in the second quarter of 2016, offset by a reduction inincentives. In addition, general and administrative expense as a percentage of revenue decreased as a percentage of revenue by 0.6% to 4.2%.Depreciation and Amortization. Depreciation and amortization expense increased $10.6 million, or 37.6%, to $38.7 million. Depreciation andamortization expense increased as a percentage of total revenue by 0.2% to 2.3%. This increase was primarily related to the additional depreciation andamortization incurred as a result of our newly acquired operations of $6.2 million. Of the increase at Recently Acquired Facilities, $1.6 million representedamortization expense of patient base intangible assets which are amortized over four to eight months.Other Expense, net. Other expense, net increased $4.0 million to $6.0 million. Other expense as a percentage of revenue increased by 0.2% to 0.3%. Theincrease is due to interest expense incurred related to additional borrowings under the credit facility.Provision for Income Taxes. The provision for income taxes is based upon our annual reported income for each respective accounting period andincludes the effect of certain non-taxable and non-deductible items. Our effective tax rate was 38.4% for the year ended December 31, 2016 compared to38.6% for the same period in 2015. The effective tax rate was consistent with the prior year.Liquidity and Capital ResourcesOur primary sources of liquidity have historically been derived from our cash flows from operations and long-term debt secured by our real propertyand our revolving credit facilities.Historically, we have financed the majority of our acquisitions primarily by financing our operating subsidiaries through mortgages, our revolvingcredit facility, and cash generated from operations. Cash paid for business acquisitions was $89.6 million, $64.3 million and $110.8 million for the yearsended December 31, 2017, 2016 and 2015, respectively. Total capital expenditures for property and equipment were $57.2 million, $65.7 million and $60.0million for the years ended December 31, 2017, 2016 and 2015, respectively. We currently have approximately $60.0 million budgeted for renovationprojects for 2018. We believe our current cash balances, our cash flow from operations and the amounts available under our credit facility will be sufficient tocover 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 additionalcapital may not be available on acceptable terms, on a timely basis, or at all.Our cash and cash equivalents as of December 31, 2017 consisted of bank term deposits, money market funds and U.S. Treasury bill relatedinvestments. In addition, as of December 31, 2017, we held debt security investments of approximately $41.8 million, which were split between AA, A andBBB+ rated securities. Our market risk exposure is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates. Theprimary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments withoutsignificantly increasing risk. Due to the low risk profile of our investment portfolio, an immediate 10% change in interest rates would not have a materialeffect on the fair market value of our portfolio. Accordingly, we would not expect our operating results or cash flows to be affected to any significant degreeby the effect of a sudden change in market interest rates on our securities portfolio.The following table presents selected data from our consolidated statement of cash flows for the periods presented:94Table of Contents Year Ended December 31, 2017 2016 2015 (In thousands)Net cash provided by operating activities$72,952 $73,888 $33,369Net cash used in investing activities(106,593) (210,636) (168,538)Net cash provided by financing activities18,272 152,885 126,330Net (decrease)/increase in cash and cash equivalents(15,369) 16,137 (8,839)Cash and cash equivalents at beginning of period57,706 41,569 50,408Cash and cash equivalents at end of period$42,337 $57,706 $41,569Year Ended December 31, 2017 Compared to Year Ended December 31, 2016Our net cash provided by operating activities for the year ended December 31, 2017 decreased by $0.9 million. The decrease was primarily due to thesettlement of class action lawsuit of $11 million and timing of payments of other operating assets and liabilities such as prepaid income taxes andprepayment expenses to take advantage of the Tax Act, offset by various payments and collections. Operating activities for the year ended December 31,2016 include the gain on sale of urgent care centers of $19.2 million. Similar gains did not occur in 2017.Our net cash used in investing activities for the year ended December 31, 2017 decreased by $104.0 million. In fiscal 2016, we acquired the real estateof fifteen assisted living operations of $120.2 million. We also decreased our spending in capital expenditures by $8.5 million in fiscal 2017, coupled withcash proceeds we received from the sale-leaseback transaction of $38.0 million. These are partially offset by the increase business acquisitions of $25.3million.Our net cash provided by financing activities decreased by $134.6 million. This decrease was primarily due to the decrease in net long-term debtproceeds of $152.6 million during the year ended December 31, 2017 compared to December 31, 2016. This reduction is offset by a decrease in repurchasesof common stock of $22.7 million when comparing the year ended December 31, 2017 to the year ended December 31, 2016.Year Ended December 31, 2016 Compared to Year Ended December 31, 2015Our net cash provided by operating activities for the year ended December 31, 2016 increased by $40.5 million. The increase was primarily due to thetiming in accounts receivable collections and payments of the other operating assets and liabilities such as accounts payable and other accrued expenses.Operating activities for the year ended December 31, 2016 include the gain on sale of urgent care centers of $19.2 million. Similar gains did not occur in2015.Our net cash used in investing activities for the year ended December 31, 2016 increased by $42.1 million. The increase was primarily the result of theincrease in purchases of business and asset acquisitions of $73.6 million, partially offset by the cash received from the sale of the urgent care centers of $40.7million. In addition, capital expenditures increased by $5.7 million. The increase in capital expenditures in 2016 resulted from our continued investments inconnection with constructing new facilities in existing and new markets and our continued investment in expanding and renovating our existing operations.Our net cash provided by financing activities increased by $26.6 million. This increase was primarily due to the receipt of $510.0 million in borrowingproceeds from our amendment of the credit facilities during the year ended December 31, 2016, partially offset by an increase in long-term debt repaymentsof $345.1 million and by the repurchases of common stock of $30.0 million.Principal Debt Obligations and Capital ExpendituresTotal long-term debt obligations, net of debt discount, outstanding as of the end of each fiscal year were as follows: December 31, 2013 2014 2015 2016 2017 (In thousands)Credit facilities and term loans$193,189 $65,000 $85,000 $270,125 $190,625Mortgage loan and promissory notes66,117 3,390 14,671 14,032 125,394Total$259,306 $68,390 $99,671 $284,157 $316,01995Table of ContentsThe following table represents our cumulative growth from 2010 to the present: December 31, 2010 2011 2012 2013 2014 2015 2016 2017Cumulative number of skilled nursing,assisted and independent living facilities82 102 108 119 136 186 210 230Cumulative number of home health, homecare and hospice agencies3 7 10 16 25 32 39 46Credit Facility with a Lending Consortium Arranged by SunTrustWe maintain a credit facility with a lending consortium arranged by SunTrust (as amended to date, the Credit Facility). We originally entered into theCredit Facility in an aggregate principal amount of $150.0 million in May 2014. Under the Credit Facility, we could seek to obtain incremental revolving orterm loans in an aggregate amount not to exceed $75.0 million. Loans made under the Credit Facility are not subject to interim amortization. We are notrequired to repay any loans under the Credit Facility prior to maturity, other than to the extent the outstanding borrowings exceed the aggregatecommitments under the Credit Facility.On February 5, 2016, we amended our existing revolving credit facility to increase our aggregate principal amount available to $250.0 million (theAmended Credit Facility). Under the Amended Credit Facility, we may seek to obtain incremental revolving or term loans in an aggregate amount not toexceed $150.0 million. The interest rates applicable to loans under the Amended Credit Facility are, at our option, equal to either a base rate plus a marginranging from 0.75% to 1.75% per annum or LIBOR plus a margin ranging from 1.75% to 2.75% per annum, based on the Consolidated Total Net Debt toConsolidated EBITDA ratio (as defined in the agreement). In addition, we will pay a commitment fee on the unused portion of the commitments under theAmended Credit Facility that will range from 0.3% to 0.5% per annum, depending on the Consolidated Total Net Debt to Consolidated EBITDA ratio of theCompany and our subsidiaries. We are permitted to prepay all or any portion of the loans under the Amended Credit Facility prior to maturity withoutpremium or penalty, subject to reimbursement of any LIBOR breakage costs of the lenders.On July 19, 2016, we entered into the second amendment to the credit facility (Second Amended Credit Facility), which amended the existing creditagreement to increase the aggregate principal amount up to $450.0 million. The Second Amended Credit Facility comprised of a $300.0 million revolvingcredit facility and a $150.0 million term loan. Borrowings under the term loan portion of the Second Amended Credit Facility will mature on February 5,2021 and amortize in equal quarterly installments, in an aggregate annual amount equal to 5.0% per annum of the original principal amount. The interestrates and commitment fee applicable to the Second Amended Credit Facility are similar to the Amended Credit Facility discussed below. Except as set forthin the Second Amended Credit Facility, all other terms and conditions of the Amended Credit Facility remained in full force and effect as described below.The Credit Facility is guaranteed, jointly and severally, by certain of our wholly owned subsidiaries, and is secured by a pledge of stock of our materialoperating subsidiaries as well as a first lien on substantially all of our personal property. The Credit Facility contains customary covenants that, among otherthings, restrict, subject to certain exceptions, the ability of the Company and our operating subsidiaries to grant liens on their assets, incur indebtedness, sellassets, make investments, engage in acquisitions, mergers or consolidations, amend certain material agreements and pay certain dividends and other restrictedpayments. Under the Credit Facility, we must comply with financial maintenance covenants to be tested quarterly, consisting of a maximum ConsolidatedTotal Net Debt to Consolidated EBITDA ratio (which shall be increased to 3.50:1.00 for the first fiscal quarter and the immediate following three fiscalquarters), and a minimum interest/rent coverage ratio (which cannot be below 1.50:1.00). The majority of lenders can require that we and our operatingsubsidiaries mortgage certain of our real property assets to secure the credit facility if an event of default occurs, the Consolidated Total Net Debt toConsolidated EBITDA ratio is above 2.75:1.00 for two consecutive fiscal quarters, or our liquidity is equal or less than 10% of the Aggregate RevolvingCommitment Amount (as defined in the agreement) for ten consecutive business days, provided that such mortgages will no longer be required if the event ofdefault is cured, the Consolidated Total Net Debt to Consolidated EBITDA ratio is below 2.75:1.00 for two consecutive fiscal quarters, or our liquidity isabove 10% of the Aggregate Revolving Commitment Amount (as defined in the agreement) or ninety consecutive days, as applicable. As of December 31,2017, our operating subsidiaries had $190.6 million outstanding under the Credit Facility. The outstanding balance on the on the term loan was $140.6million, of which $7.5 million is classified as short-term and the remaining $133.1 million is classified as long-term. The outstanding balance on therevolving Credit Facility was $50.0 million, which is classified as long-term. We were in compliance with all loan covenants as of December 31, 2017.96Table of ContentsAs of February 2, 2018, there was approximately $195.6 million outstanding under the Credit Facility.Mortgage Loans and Promissory NoteDuring the fourth quarter of 2017, seventeen of our subsidiaries entered into mortgage loans in the aggregate amount of $112.0 million. The mortgageloans are insured with Department of Housing and Urban Development (HUD), which subjects these subsidiaries to HUD oversight and periodic inspections.The mortgage loans and note bear fixed interest rates of 3.3% per annum. Amounts borrowed under the mortgage loans may be prepaid, subject toprepayment fees of the principal balance on the date of prepayment. During the first three years, the prepayment fee is 10% and is reduced by 3% in the fourthyear of the loan, and reduced by 1.0% per year for years five through ten of the loan. There is no prepayment penalty after year ten. The term of the mortgageloans are 30 to 35-years. The borrowings were arranged by Lancaster Pollard Mortgage Company, LLC, and insured by HUD. Loan proceeds were used to paydown previously drawn amounts on our revolving line of credit. In addition to refinancing existing borrowings, the proceeds of the HUD-insured debt helpedused to fund acquisitions, to renovate and upgrade existing and future facilities, to cover working capital needs and for other business purposes.In addition to the HUD mortgage loans above, we have outstanding indebtedness under mortgage loans insured with HUD and promissory note issuedin connection with various acquisitions. These mortgage loans and note bear fixed interest rates between 2.6% and 5.3% per annum. Amounts borrowedunder the mortgage loans may be prepaid starting after the second anniversary of the notes subject to prepayment fees of the principal balance on the date ofprepayment. These prepayment fees are reduced by 1.0% per year for years three through eleven of the loan. There is no prepayment penalty after year eleven.The terms of the mortgage loans and note are between 12 and 33 years. The mortgage loans and note are secured by the real property comprising the facilitiesand the rents, issues and profits thereof, as well as all personal property used in the operation of the facilities.As of December 31, 2017, our operating subsidiaries had $125.4 million outstanding under the mortgage loans and note, of which $2.4 million isclassified as short-term and the remaining $123.0 million is classified as long-term.Contractual Obligations, Commitments and ContingenciesThe following table sets forth our principal contractual obligations and commitments as of December 31, 2017, including the future periods in whichpayments are expected: 2018 2019 2020 2021 2022 Thereafter Total (In thousands) Operating lease obligations $135,841 $135,395 $135,149 $134,942 $133,446 $1,080,348 $1,755,121Long-term debt obligations $9,939 $10,106 $10,203 $170,926 $2,904 $111,941 $316,019Interest payments on long-term debt $9,397 $9,159 $8,783 $4,328 $3,837 $59,982 $95,486Total $155,177 $154,660 $154,135 $310,196 $140,187 $1,252,271 $2,166,626Not included in the table above are our actuarially determined self-insured general and professional malpractice liability, workers' compensation andmedical (including prescription drugs) and dental healthcare obligations which are broken out between current and long-term liabilities in our financialstatements included in this Annual Report.We lease from CareTrust REIT, Inc. (CareTrust) real property associated with 92 affiliated skilled nursing, assisted living and independent livingfacilities used in our operations under the Master Leases as a result of the tax free spin-off (Spin-Off). The Master Leases consist of multiple leases, each withits own pool of properties, that have varying maturities and diversity in property geography. Under each master lease, our individual subsidiaries that operatethose properties are the tenants and CareTrust's individual subsidiaries that own the properties subject to the Master Leases are the landlords. The rentstructure under the Master Leases includes a fixed component, subject to annual escalation equal to the lesser of the percentage change in the Consumer PriceIndex (but not less than zero) or 2.5%.We do not have the ability to terminate the obligations under a Master Lease prior to its expiration without CareTrust’s consent. If a Master Lease isterminated prior to its expiration other than with CareTrust’s consent, we may be liable for damages and incur charges such as continued payment of rentthrough the end of the lease term and as well as maintenance and repair costs for the leased property.The Master Leases arrangement is commonly known as a triple-net lease. Accordingly, in addition to rent, we are required to pay the following: (1) allimpositions and taxes levied on or with respect to the leased properties (other than taxes on the income97Table of Contentsof the lessor), (2) all utilities and other services necessary or appropriate for the leased properties and the business conducted on the leased properties, (3) allinsurance required in connection with the leased properties and the business conducted on the leased properties, (4) all facility maintenance and repair costsand (5) all fees in connection with any licenses or authorizations necessary or appropriate for the leased properties and the business conducted on the leasedproperties. Total rent expense under the Master Leases was approximately $57.2 million, $56.3 million and $56.0 million for the years ended December 31,2017, 2016 and 2015, respectively.At our option, the Master Leases may be extended for two or three five-year renewal terms beyond the initial term, on the same terms and conditions. Ifwe 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 MasterLease.Among other things, under the Master Leases, we must maintain compliance with specified financial covenants measured on a quarterly basis, includinga portfolio coverage ratio and a minimum rent coverage ratio. The Master Leases also include certain reporting, legal and authorization requirements. As ofDecember 31, 2017, we were in compliance with the Master Leases' covenants.We also lease certain affiliated facilities and our administrative offices under non-cancelable operating leases, most of which have initial lease termsranging from five to 20 years. We have entered into multiple lease agreements with various landlords to operate newly constructed state-of-the-art, full-service healthcare resorts upon completion of construction. The term of each lease is 15 years with two five-year renewal options and is subject to annualescalation equal to the percentage change in the Consumer Price Index with a stated cap percentage. In addition, we lease certain of our equipment undernon-cancelable operating leases with initial terms ranging from three to five years. Most of these leases contain renewal options, certain of which involve rentincreases. Total rent expense, inclusive of straight-line rent adjustments and rent associated with the Master Leases noted above, was $132.9 million, $125.2million and $89.3 million for the years ended December 31, 2017, 2016 and 2015, respectively.Twenty-five of our affiliated facilities, excluding the facilities that are operated under the Master Leases from CareTrust, are operated under six separatemaster lease arrangements. Under these master leases, a breach at a single facility could subject one or more of the other affiliated facilities covered by thesame 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 entiremaster lease portfolio and could trigger cross-default provisions in our outstanding debt arrangements and other leases. With an indivisible lease, it isdifficult to restructure the composition of the portfolio or economic terms of the lease without the consent of the landlord.In March 2017, we voluntarily discontinued operations at one of our skilled nursing facilities after determining that the facility could notcompetitively operate in the marketplace without substantial investment renovating the building. After careful consideration, we determined that the coststo renovate the facility could outweigh the future returns from the operation. As part of this closure, we entered into an agreement with our landlord allowingfor the closure of the property as well as other provisions to allow our landlord to transfer the property and the licenses free and clear of the applicable masterlease. This arrangement does not impact the rent expense paid in 2017, or expected to be paid in future periods, and has no material impact on our leasecoverage ratios under the Master Leases. We recorded a continued obligation liability under the lease and related closing expenses of $2.8 million,including the present value of rental payments of approximately $2.7 million. Residents of the affected facility were transferred to local skilled nursingfacilities.During the first quarter of 2016, we voluntarily discontinued operations in one of our skilled nursing facilities in order to preserve the overall ability toserve the residents in surrounding counties after careful consideration and some clinical survey challenges. As part of this closure, we entered into anagreement with our landlord allowing for the closure of the property as well as other provisions to allow our landlord to transfer the property and the licensesfree and clear of the applicable master lease. This arrangement does not impact the rental payments and has no material impact on our lease coverage ratiosunder the Master Leases. We recorded a continued obligation liability under the lease and related closing expenses of $7.9 million, including the presentvalue of rental payments of approximately $6.5 million, which was recognized in 2016. During fiscal 2017, we recovered $1.3 million of certain losses thatwere recorded in 2016 related to the closure of the operation. The loss recovery was recorded as a gain in the second quarter of 2017.In March 2017, we entered into definitive agreements to sell the properties of two skilled nursing facilities and one assisted living community. Thetransaction closed in the second quarter of 2017. Upon closing the transaction, we leased the properties under a triple-net master lease with an initial 20-yearterm, with three 5-year optional extensions, at CPI-based annual escalators. We received $38.0 million in proceeds. The carrying value for the sale was $24.8million. Under applicable accounting guidance, the master lease was classified as an operating lease. We recognized a deferred gain on the transaction of$13.2 million in the second quarter of 2017 that is amortized over the life of the lease.98Table of ContentsDuring the first quarter of 2017, we terminated our lease obligations on four transitional care facilities that are currently under development and onenewly constructed stand-alone skilled nursing operation. We recorded $1.2 million in lease termination costs and long-lived asset impairment.Class Action LawsuitSince 2011, we have been involved in a class action litigation claim alleging violations of state and federal wage and hour laws. In January 2017, weparticipated in an initial mediation session with plaintiffs' counsel. In March 2017, we were invited to engage in further mediation discussions to determine whether settlement in advance of a determination on classcertification was possible. In April 2017, we reached an agreement in principle to settle the subject class action litigation, without any admission of liabilityand subject to approval by the California Superior Court. Based upon the recent change in case status, we recorded an accrual for estimated probable lossesof $11.0 million in the first quarter of 2017. In December 2017, we settled this class action lawsuit and the settlement was approved by the Court. We made alump-sum payment in the amount of $11.0 million in December 2017.U.S. Government InquiryIn late 2006, we learned that we might be the subject of an on-going criminal and civil investigation by the DOJ. This was confirmed in March 2007.The investigation was prompted by a whistleblower complaint and related primarily to claims submitted to the Medicare program for rehabilitation servicesprovided at skilled nursing facilities in Southern California. We resolved and settled the matter for $48.0 million in 2013. In October 2013, we and thegovernment executed a final settlement agreement in accordance with the April 2013 agreement and we remitted full payment of $48.0 million. In addition,we executed a five-year corporate integrity agreement with the Office of Inspector General HHS as part of the resolution.See additional description of our contingencies in Notes 15, Debt, 17, Leases and 19, Commitments and Contingencies in Notes to ConsolidatedFinancial Statements.InflationWe have historically derived a substantial portion of our revenue from the Medicare program. We also derive revenue from state Medicaid and similarreimbursement programs. Payments under these programs generally provide for reimbursement levels that are adjusted for inflation annually based upon thestate’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 ifreceived, 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 inflationand when labor shortages occur in the marketplace. To date, we have generally been able to implement cost control measures or obtain increases inreimbursement sufficient to offset increases in these expenses. We may not be successful in offsetting future cost increases.Off-Balance Sheet ArrangementsDuring the year ended December 31, 2017, we increased the letters of credit by $4.0 million. As of December 31, 2017, we had approximately $6.3million on our credit facility of borrowing capacity pledged as collateral to secure outstanding letters of credit.Item 7A. Quantitative and Qualitative Disclosures about Market RiskInterest Rate Risk. We are exposed to risks associated with market changes in interest rates. Our credit facility exposes us to variability in interestpayments due to changes in LIBOR interest rates. We manage our exposure to this market risk by monitoring available financing alternatives. Our mortgagesand promissory notes require principal and interest payments through maturity pursuant to amortization schedules.Our mortgages generally contain provisions that allow us to make repayments earlier than the stated maturity date. In some cases, we are not allowed tomake early repayment prior to a cutoff date. Where prepayment is permitted, we are generally allowed to make prepayments only at a premium which is oftendesigned to preserve a stated yield to the note holder. These prepayment rights may afford us opportunities to mitigate the risk of refinancing our debts atmaturity at higher rates by refinancing prior to maturity.99Table of ContentsOn July 19, 2016, we entered into the Second Amended Credit Facility with a lending consortium arranged by SunTrust to make available a creditfacility consisting of a $300.0 million revolving line of credit and a $150.0 million term loan component. Borrowings under the term loan portion of thecredit facility mature on February 5, 2021 and amortize in equal quarterly installments, in an aggregate annual amount equal to 5.0% per annum of theoriginal principal amount. The interest rates, at our option, are equal to either a base rate plus a premium or LIBOR plus a premium. In addition, we aresubject to pay a commitment fee on the unused portion of the commitments under the credit facility discussed in Item 7 of this Annual Report under theheading “Liquidity and Capital Resources.” Our exposure to fluctuations in interest rates may increase or decrease in the future with increases or decreases inthe outstanding amount under the credit facility. As of December 31, 2017, our operating subsidiaries had $190.6 million outstanding under the creditfacility. The outstanding balance on the on the term loan was $140.6 million, of which $7.5 million is classified as short-term and the remaining $133.1million is classified as long-term. The outstanding balance on the revolving credit facility was $50.0 million, which is classified as long-term.Our cash and cash equivalents as of December 31, 2017 consisted of bank term deposits, money market funds and U.S. Treasury bill relatedinvestments. In addition, as of December 31, 2017, we held debt security investments of approximately $41.8 million, which were split between AA, A, andBBB+ rated securities. Our market risk exposure is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates. Theprimary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments withoutsignificantly increasing risk. Due to the low risk profile of our investment portfolio, an immediate 10% change in interest rates would not have a materialeffect on the fair market value of our portfolio. Accordingly, we would not expect our operating results or cash flows to be affected to any significant degreeby the effect of a sudden change in market interest rates on our securities portfolio.The above only incorporates those exposures that exist as of December 31, 2017 and does not consider those exposures or positions which could ariseafter that date. If we diversify our investment portfolio into securities and other investment alternatives, we may face increased risk and exposures as a resultof interest risk and the securities markets in general.Item 8. Financial Statements and Supplementary DataQuarterly Financial Data (Unaudited)The following table presents our unaudited quarterly consolidated results of operations for each of the eight quarters in the two-year period endedDecember 31, 2017. The unaudited quarterly consolidated information has been derived from our unaudited quarterly financial statements on Forms 10-Q,which were prepared on the same basis as our audited consolidated financial statements. You should read the following table presenting our quarterlyconsolidated results of operations in conjunction with our audited consolidated financial statements and the related notes included elsewhere in this AnnualReport on Form 10-K. The operating results for any quarter are not necessarily indicative of the operating results for any future period. Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31, 2017 2017 2017 2017 2016 2016 2016 2016 (In thousands, except per share data)Revenue$487,705 $471,594 $448,279 $441,739 $433,048 $428,065 $410,517 $383,234Cost of services393,727 381,544 366,946 355,486 355,997 348,971 330,538 306,308Total expenses461,562 446,035 426,248 434,187 397,365 408,025 390,708 366,919Income from operations26,143 25,559 22,031 7,552 35,683 20,040 19,809 16,315Net income$11,222 $14,275 $12,380 $2,956 $21,006 $11,184 $11,363 $9,290Income attributable to noncontrolling interests16 63 163 116 2,669 29 37 118Net income attributable to The Ensign Group, Inc.$11,206 $14,212 $12,217 $2,840 $18,337 $11,155 $11,326 $9,172Net income per share attributable to The EnsignGroup, Inc. Basic$0.22 $0.28 $0.24 $0.06 $0.36 $0.22 $0.23 $0.18Diluted$0.21 $0.27 $0.23 $0.05 $0.35 $0.21 $0.22 $0.18Weighted average common shares outstanding: Basic51,250 50,911 50,705 50,767 50,724 50,541 50,274 50,679Diluted53,176 52,828 52,548 52,633 52,231 52,045 51,931 52,334100Table of ContentsThe additional information required by this Item 8 is incorporated herein by reference to the financial statements set forth in Item 15 of this report,Exhibits, Financial Statements and Schedules.Item 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosuresNone.Item 9A. Controls and Procedures(a) Conclusion Regarding the Effectiveness of Disclosure Controls and ProceduresThe Company maintains disclosure controls and procedures that are designed to ensure that information we are required to disclose in reports that wefile or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and ExchangeCommission rules and forms. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controlsand procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours aredesigned to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls andprocedures.In connection with the preparation of this Annual Report on Form 10-K our management evaluated, with the participation of our Chief ExecutiveOfficer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgatedunder the Exchange Act, and to ensure that information required to be disclosed is accumulated and communicated to our management, including ourprincipal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our ChiefExecutive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the periodcovered by this Annual Report on Form 10-K.(b) Management's Report on Internal Control over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f)promulgated under the Exchange Act. Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because ofits inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectivenessto future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our internalcontrol over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control -Integrated Framework (2013). Based on our evaluation, our management concluded that our internal control over financial reporting was effective as of theend of the period covered by this Annual Report on Form 10-K.Our independent registered public accounting firm, Deloitte & Touche LLP, has audited the consolidated financial statements included in this AnnualReport on Form 10-K and, as part of their audit, has issued an audit report, included herein, on the effectiveness of our internal control over financialreporting. Their report is set forth below.(c) Changes in Internal Control over Financial ReportingThere were no changes in our internal control over financial reporting, as defined in Rule 13a-15(f) promulgated under the Exchange Act, that occurredduring the fourth quarter of fiscal 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.(d) Report of Independent Registered Accounting FirmTo the shareholders and the Board of Directors ofThe Ensign Group, Inc.Mission Viejo, California101Table of ContentsOpinion on Internal Control over Financial ReportingWe have audited the internal control over financial reporting of The Ensign Group, Inc. and subsidiaries (the “Company”) as of December 31, 2017, based oncriteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, basedon criteria established in Internal Control - Integrated Framework (2013) issued by COSO.We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidatedfinancial statements as of and for the year ended December 31, 2017, of the Company and our report dated February 8, 2018, expressed an unqualifiedopinion on those financial statements.Basis for OpinionThe Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Ourresponsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firmregistered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and theapplicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operatingeffectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. Webelieve that our audit provides a reasonable basis for our opinion.Definition and Limitations of Internal Control over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate./s/ DELOITTE & TOUCHE LLPCosta Mesa, California February 8, 2018102Table of ContentsItem 9B. Other InformationNone.PART III.Item 10. Directors, Executive Officers and Corporate GovernanceThe information required by this Item is hereby incorporated by reference to our definitive proxy statement for the 2018 Annual Meeting ofStockholders.We have adopted a code of ethics and business conduct that applies to all employees, including employees of our subsidiaries, as well as each memberof our Board of Directors. The code of ethics and business conduct is available at our website at www.ensigngroup.net under the Investor Relations section.We intend to satisfy any disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of the code of ethics byposting such information on our website, at the address specified above.Item 11. Executive CompensationThe information required by this Item is hereby incorporated by reference to our definitive proxy statement for the 2018 Annual Meeting ofStockholders.Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe information required by this Item is hereby incorporated by reference to our definitive proxy statement for the 2018 Annual Meeting ofStockholders.Item 13. Certain Relationships and Related Transactions, and Director IndependenceThe information required by this Item is hereby incorporated by reference to our definitive proxy statement for the 2018 Annual Meeting ofStockholders.Item 14. Principal Accountant Fees and ServicesThe information required by this Item is hereby incorporated by reference to our definitive proxy statement for the 2018 Annual Meeting ofStockholders.PART IV.Item 15. Exhibits, Financial Statements and SchedulesThe following documents are filed as a part of this report:(a) (1) Financial Statements: The Financial Statements described in Part II. Item 8 and beginning on page 113 are filed as part of this report. (a) (2) Financial Statement Schedule: Schedule II: Valuation and Qualifying Accounts, immediately following the financial statements included in this Annual Report.(a) (3) Exhibits: The following exhibits are filed with this Report or incorporated by reference:103Table of ContentsExhibit File Exhibit Filing FiledNo. Exhibit Description* Form No. No. Date Herewith2.1 Separation and Distribution Agreement, dated as of May 23, 2014, by andbetween The Ensign Group, Inc. and CareTrust REIT, Inc. 8-K 001-33757 2.1 6/5/2014 3.1 Fifth Amended and Restated Certificate of Incorporation of The EnsignGroup, Inc., filed with the Delaware Secretary of State on November 15,2007 10-Q 001-33757 3.1 12/21/2007 3.2 Amendment to the Amended and Restated Bylaws, dated August 5, 2014 8-K 001-33757 3.2 8/8/2014 3.3 Amended and Restated Bylaws of The Ensign Group, Inc. 10-Q 001-33757 3.2 12/21/2007 3.4 Certificate of Designation, Preferences and Rights of Series A JuniorParticipating Preferred Stock, as filed with the Secretary of State of theState of Delaware on November 7, 2013 8-K 001-33757 3.1 11/7/2013 3.5 Certificate of Elimination of Series A Junior Participating Preferred Stock 8-K 001-33757 3.1 6/5/2014 4.1 Specimen common stock certificate S-1 333-142897 4.1 10/5/2007 10.1+The Ensign Group, Inc. 2001 Stock Option, Deferred Stock and RestrictedStock Plan, form of Stock Option Grant Notice for Executive Officers andDirectors, stock option agreement and form of restricted stock agreementfor Executive Officers and Directors S-1 333-142897 10.1 7/26/2007 10.2+The Ensign Group, Inc. 2005 Stock Incentive Plan, form of NonqualifiedStock Option Award for Executive Officers and Directors, and form ofrestricted stock agreement for Executive Officers and Directors S-1 333-142897 10.2 7/26/2007 10.3+The Ensign Group, Inc. 2007 Omnibus Incentive Plan S-1 333-142897 10.3 10/5/2007 10.4+Amendment to The Ensign Group, Inc. 2007 Omnibus Incentive Plan 8-K 001-33757 99.2 7/28/2009 10.5+Form of 2007 Omnibus Incentive Plan Notice of Grant of Stock Options;and form of Non-Incentive Stock Option Award Terms and Conditions S-1 333-142797 10.4 10/5/2007 10.6+Form of 2007 Omnibus Incentive Plan Restricted Stock Agreement S-1 333-142897 10.5 10/5/2007 10.7+Form of Indemnification Agreement entered into between The EnsignGroup, Inc. and its directors, officers and certain key employees S-1 333-142897 10.6 10/5/2007 10.8 Fourth Amended and Restated Loan Agreement, dated as of November 10,2009, by and among certain subsidiaries of The Ensign Group, Inc. asBorrowers, and General Electric Capital Corporation as Agent and Lender 8-K 001-33757 10.1 11/17/2009 10.9 Consolidated, Amended and Restated Promissory Note, dated as ofDecember 29, 2006, in the original principal amount of $64,692,111.67,by certain subsidiaries of The Ensign Group, Inc. in favor of GeneralElectric Capital Corporation S-1 333-142897 10.8 7/26/2007 10.10 Third Amended and Restated Guaranty of Payment and Performance, datedas of December 29, 2006, by The Ensign Group, Inc. as Guarantor andGeneral Electric Capital Corporation as Agent and Lender, under whichGuarantor guarantees the payment and performance of the obligations ofcertain of Guarantor's subsidiaries under the Third Amended and RestatedLoan Agreement S-1 333-142897 10.9 7/26/2007 104Table of ContentsExhibit File Exhibit Filing FiledNo.Exhibit Description* Form No. No. Date Herewith10.11Form of Amended and Restated Deed of Trust, Assignment of Rents, SecurityAgreement and Fixture Financing Statement, dated as of June 30, 2006 (filedagainst Desert Terrace Nursing Center, Desert Sky Nursing Home, HighlandManor Health and Rehabilitation Center and North Mountain Medical andRehabilitation Center), by and among Terrace Holdings AZ LLC, Sky HoldingsAZ LLC, Ensign Highland LLC and Valley Health Holdings LLC as Grantors,Chicago Title Insurance Company as Trustee, and General Electric CapitalCorporation as Beneficiary and Schedule of Material Differences therein S-1 333-142897 10.10 7/26/2007 10.12Deed of Trust, Assignment of Rents, Security Agreement and Fixture FinancingStatement, dated as of June 30, 2006 (filed against Park Manor), by and amongPlaza Health Holdings LLC as Grantor, Chicago Title Insurance Company asTrustee, and General Electric Capital Corporation as Beneficiary S-1 333-142897 10.11 7/26/2007 10.13Deed of Trust, Assignment of Rents, Security Agreement and Fixture FinancingStatement, dated as of June 30, 2006 (filed against Catalina Care andRehabilitation Center), by and among Rillito Holdings LLC as Grantor,Chicago Title Insurance Company as Trustee, and General Electric CapitalCorporation as Beneficiary S-1 333-142897 10.12 7/26/2007 10.14Deed of Trust, Assignment of Rents, Security Agreement and Fixture FinancingStatement, dated as of October 16, 2006 (filed against Park View Gardens atMontgomery), by and among Mountainview Communitycare LLC as Grantor,Chicago Title Insurance Company as Trustee, and General Electric CapitalCorporation as Beneficiary S-1 333-142897 10.13 7/26/2007 10.15Deed of Trust, Assignment of Rents, Security Agreement and Fixture FinancingStatement, dated as of October 16, 2006 (filed against Sabino CanyonRehabilitation and Care Center), by and among Meadowbrook HealthAssociates LLC as Grantor, Chicago Title Insurance Company as Trustee andGeneral Electric Capital Corporation as Beneficiary S-1 333-142897 10.14 7/26/2007 10.16Form of Deed of Trust, Assignment of Rents, Security Agreement and FixtureFinancing Statement, dated as of December 29, 2006 (filed against Upland Careand Rehabilitation Center and Camarillo Care Center), by and among CedarAvenue Holdings LLC and Granada Investments LLC as Grantors, ChicagoTitle Insurance Company as Trustee and General Electric Capital Corporationas Beneficiary and Schedule of Material Differences therein S-1 333-142897 10.15 7/26/2007 10.17Form of First Amendment to (Amended and Restated) Deed of Trust,Assignment of Rents, Security Agreement and Fixture Financing Statement,dated as of December 29, 2006 (filed against Desert Terrace Nursing Center,Desert Sky Nursing Home, Highland Manor Health and Rehabilitation Center,North Mountain Medical and Rehabilitation Center, Catalina Care andRehabilitation Center, Park Manor, Park View Gardens at Montgomery, SabinoCanyon Rehabilitation and Care Center), by and among Terrace Holdings AZLLC, Sky Holdings AZ LLC, Ensign Highland LLC, Valley Health HoldingsLLC, Rillito Holdings LLC, Plaza Health Holdings LLC, MountainviewCommunitycare LLC and Meadowbrook Health Associates LLC as Grantors,Chicago Title Insurance Company as Trustee, and General Electric CapitalCorporation as Beneficiary and Schedule of Material Differences therein S-1 333-142897 10.16 7/26/2007 10.18Amended and Restated Loan and Security Agreement, dated as of March 25,2004, by and among The Ensign Group, Inc. and certain of its subsidiaries asBorrower, and General Electric Capital Corporation as Agent and Lender S-1 333-142897 10.19 5/14/2007 105Table of ContentsExhibit File Exhibit Filing FiledNo.Exhibit Description* Form No. No. Date Herewith10.19Amendment No. 1, dated as of December 3, 2004, to the Amended andRestated Loan and Security Agreement, by and among The Ensign Group, Inc.and certain of its subsidiaries as Borrower, and General Electric CapitalCorporation as Lender S-1 333-142897 10.20 5/14/2007 10.20Second Amended and Restated Revolving Credit Note, dated as of December3, 2004, in the original principal amount of $20,000,000, by The EnsignGroup, Inc. and certain of its subsidiaries in favor of General Electric CapitalCorporation S-1 333-142897 10.19 7/26/2007 10.21Amendment No. 2, dated as of March 25, 2007, to the Amended and RestatedLoan and Security Agreement, by and among The Ensign Group, Inc. andcertain of its subsidiaries as Borrower, and General Electric CapitalCorporation as Lender S-1 333-142897 10.22 5/14/2007 10.22Amendment No. 3, dated as of June 22, 2007, to the Amended and RestatedLoan and Security Agreement, by and among The Ensign Group, Inc. andcertain of its subsidiaries as Borrower and General Electric CapitalCorporation as Lender S-1 333-142897 10.21 7/26/2007 10.23Amendment No. 4, dated as of August 1, 2007, to the Amended and RestatedLoan and Security Agreement, by and among The Ensign Group, Inc. andcertain of its subsidiaries as Borrowers and General Electric CapitalCorporation as Lender S-1 333-142897 10.42 8/17/2007 10.24Amendment No. 5, dated September 13, 2007, to the Amended and RestatedLoan and Security Agreement, by and among The Ensign Group, Inc. andcertain of its subsidiaries as Borrowers and General Electric CapitalCorporation as Lender S-1 333-142897 10.43 10/5/2007 10.25Revolving Credit Note, dated as of September 13, 2007, in the originalprincipal amount of $5,000,000 by The Ensign Group, Inc. and certain of itssubsidiaries in favor of General Electric Capital Corporation S-1 333-142897 10.44 10/5/2007 10.26Commitment Letter, dated October 3, 2007, from General Electric CapitalCorporation to The Ensign Group, Inc., setting forth the general terms andconditions of the proposed amendment to the revolving credit facility, whichwill increase the available credit thereunder to $50.0 million S-1 333-142897 10.46 10/5/2007 10.27Amendment No. 6, dated November 19, 2007, to the Amended and RestatedLoan and Security Agreement, by and among The Ensign Group, Inc. andcertain of its subsidiaries as Borrowers and General Electric CapitalCorporation as Lender 8-K 001-33757 10.1 11/21/2007 10.28Amendment No. 7, dated December 21, 2007, to the Amended and RestatedLoan and Security Agreement, by and among The Ensign Group, Inc. andcertain of its subsidiaries as Borrowers and General Electric CapitalCorporation as Lender 8-K 001-33757 10.1 12/27/2007 10.29Amendment No. 1 and Joinder Agreement to Second Amended and RestatedLoan and Security Agreement, by certain subsidiaries of The Ensign Group,Inc. as Borrower and General Electric Capital Corporation as Lender 8-K 001-33757 10.1 2/9/2009 10.30Second Amended and Restated Revolving Credit Note, dated February 4,2009, by certain subsidiaries of The Ensign Group, Inc. as Borrowers for thebenefit of General Electric Capital Corporation as Lender 8-K 001-33757 10.2 2/9/2009 10.31Amended and Restated Revolving Credit Note, dated February 21, 2008, bycertain subsidiaries of The Ensign Group, Inc. as Borrowers for the benefit ofGeneral Electric Capital Corporation as Lender 8-K 001-33757 10.2 2/27/2008 10.32Ensign Guaranty, dated February 21, 2008, between The Ensign Group, Inc. asGuarantor and General Electric Capital Corporation as Lender 8-K 001-33757 10.3 2/27/2008 106Table of ContentsExhibit File Exhibit Filing FiledNo.Exhibit Description* Form No. No. Date Herewith10.33Holding Company Guaranty, dated February 21, 2008, by and among TheEnsign Group, Inc. and certain of its subsidiaries as Guarantors and GeneralElectric Capital Corporation as Lender 8-K 001-33757 10.4 2/27/2008 10.34Pacific Care Center Loan Agreement, dated as of August 6, 1998, by andbetween G&L Hoquiam, LLC as Borrower and GMAC Commercial MortgageCorporation as Lender (later assumed by Cherry Health Holdings, Inc. asBorrower and Wells Fargo Bank, N.A. as Lender) S-1 333-142897 10.23 5/14/2007 10.35Deed of Trust and Security Agreement, dated as of August 6, 1998, by andamong G&L Hoquiam, LLC as Grantor, Ticor Title Insurance Company asTrustee and GMAC Commercial Mortgage Corporation as Beneficiary S-1 333-142897 10.24 7/26/2007 10.36Promissory Note, dated as of August 6, 1998, in the original principal amountof $2,475,000, by G&L Hoquiam, LLC in favor of GMAC CommercialMortgage Corporation S-1 333-142897 10.25 7/26/2007 10.37Loan Assumption Agreement, by and among G&L Hoquiam, LLC as PriorOwner; G&L Realty Partnership, L.P. as Prior Guarantor; Cherry HealthHoldings, Inc. as Borrower; and Wells Fargo Bank, N.A., the Trustee forGMAC Commercial Mortgage Securities, Inc., as Lender S-1 333-142897 10.26 5/14/2007 10.38Exceptions to Nonrecourse Guaranty, dated as of October 2006, by TheEnsign Group, Inc. as Guarantor and Wells Fargo Bank, N.A. as Trustee forGMAC Commercial Mortgage Securities, Inc., under which Guarantorguarantees full and prompt payment of all amounts due and owing by CherryHealth Holdings, Inc. under the Promissory Note S-1 333-142897 10.22 7/26/2007 10.39Deed of Trust with Assignment of Rents, dated as of January 30, 2001, by andamong Ensign Southland LLC as Trustor, Brian E. Callahan as Trustee andContinental Wingate Associates, Inc. as Beneficiary S-1 333-142897 10.27 7/26/2007 10.40Deed of Trust Note, dated as of January 30, 2001, in the original principalamount of $7,455,100, by Ensign Southland, LLC in favor of ContinentalWingate Associates, Inc. S-1 333-142897 10.28 5/14/2007 10.41Security Agreement, dated as of January 30, 2001, by and between EnsignSouthland, LLC and Continental Wingate Associates, Inc. S-1 333-142897 10.29 5/14/2007 10.42Master Lease Agreement, dated July 3, 2003, between Adipiscor LLC asLessee and LTC Partners VI, L.P., Coronado Corporation and Park VillaCorporation collectively as Lessor S-1 333-142897 10.30 5/14/2007 10.43Lease Guaranty, dated July 3, 2003, between The Ensign Group, Inc. asGuarantor and LTC Partners VI, L.P., Coronado Corporation and Park VillaCorporation collectively as Lessor, under which Guarantor guarantees thepayment and performance of Adipiscor LLC's obligations under the MasterLease Agreement S-1 333-142897 10.31 5/14/2007 10.44Master Lease Agreement, dated September 30, 2003, between PermunitumLLC as Lessee, Vista Woods Health Associates LLC, City Heights HealthAssociates LLC, and Claremont Foothills Health Associates LLC asSublessees, and OHI Asset (CA), LLC as Lessor S-1 333-142897 10.32 5/14/2007 10.45Lease Guaranty, dated September 30, 2003, between The Ensign Group, Inc.as Guarantor and OHI Asset (CA), LLC as Lessor, under which Guarantorguarantees the payment and performance of Permunitum LLC's obligationsunder the Master Lease Agreement S-1 333-142897 10.33 5/14/2007 107Table of ContentsExhibit File Exhibit Filing FiledNo.Exhibit Description* Form No. No. Date Herewith10.46Lease Guaranty, dated September 30, 2003, between Vista Woods HealthAssociates LLC, City Heights Health Associates LLC and Claremont FoothillsHealth Associates LLC as Guarantors and OHI Asset (CA), LLC as Lessor,under which Guarantors guarantee the payment and performance ofPermunitum LLC's obligations under the Master Lease Agreement S-1 333-142897 10.34 5/14/2007 10.47Master Lease Agreement, dated January 31, 2003, between MoeniumHoldings LLC as Lessee and Healthcare Property Investors, Inc., d/b/a in theState of Arizona as HC Properties, Inc., and Healthcare Investors IIIcollectively as Lessor S-1 333-142897 10.35 5/14/2007 10.48Lease Guaranty, between The Ensign Group, Inc. as Guarantor and HealthcareProperty Investors, Inc. as Owner, under which Guarantor guarantees thepayment and performance of Moenium Holdings LLC's obligations under theMaster Lease Agreement S-1 333-142897 10.36 5/14/2007 10.49First Amendment to Master Lease Agreement, dated May 27, 2003, betweenMoenium Holdings LLC as Lessee and Healthcare Property Investors, Inc.,d/b/a in the State of Arizona as HC Properties, Inc., and HealthcareInvestors III collectively as Lessor S-1 333-142897 10.37 5/14/2007 10.50Second Amendment to Master Lease Agreement, dated October 31. 2004,between Moenium Holdings LLC as Lessee and Healthcare PropertyInvestors, Inc., d/b/a in the State of Arizona as HC Properties, Inc., andHealthcare Investors III collectively as Lessor S-1 333-142897 10.38 5/14/2007 10.51Lease Agreement, by and between Mission Ridge Associates LLC as Landlordand Ensign Facility Services, Inc. as Tenant; and Guaranty of Lease, datedAugust 2, 2003, by The Ensign Group, Inc. as Guarantor in favor of Landlord,under which Guarantor guarantees Tenant's obligations under the LeaseAgreement S-1 333-142897 10.39 5/14/2007 10.52First Amendment to Lease Agreement dated January 15, 2004, by andbetween Mission Ridge Associates LLC as Landlord and Ensign FacilityServices, Inc. as Tenant S-1 333-142897 10.40 5/14/2007 10.53Second Amendment to Lease Agreement dated December 13, 2007, by andbetween Mission Ridge Associates LLC as Landlord and Ensign FacilityServices, Inc. as Tenant; and Reaffirmation of Guaranty of Lease, datedDecember 13, 2007, by The Ensign Group, Inc. as Guarantor in favor ofLandlord, under which Guarantor reaffirms its guaranty of Tenants obligationsunder the Lease Agreement 10-K 001-33757 10.52 3/6/2008 10.54Third Amendment to Lease Agreement dated February 21, 2008, by andbetween Mission Ridge Associates LLC as Landlord and Ensign FacilityServices, Inc. as Tenant 10-K 001-33757 10.54 2/17/2010 10.55Fourth Amendment to Lease Agreement dated July 15, 2009, by and betweenMission Ridge Associates LLC as Landlord and Ensign Facility Services, Inc.as Tenant 10-K 001-33757 10.55 2/17/2010 10.56Form of Independent Consulting and Centralized Services Agreementbetween Ensign Facility Services, Inc. and certain of its subsidiaries S-1 333-142897 10.41 5/14/2007 10.57Form of Health Insurance Benefit Agreement pursuant to which certainsubsidiaries of The Ensign Group, Inc. participate in the Medicare program S-1 333-142897 10.48 10/19/2007 10.58Form of Medi-Cal Provider Agreement pursuant to which certain subsidiariesof The Ensign Group, Inc. participate in the California Medicaid program S-1 333-142897 10.49 10/19/2007 10.59Form of Provider Participation Agreement pursuant to which certainsubsidiaries of The Ensign Group, Inc. participate in the Arizona Medicaidprogram S-1 333-142897 10.50 10/19/2007 108Table of ContentsExhibit File Exhibit Filing FiledNo.Exhibit Description* Form No. No. Date Herewith10.60Form of Contract to Provide Nursing Facility Services under the TexasMedical Assistance Program pursuant to which certain subsidiaries of TheEnsign Group, Inc. participate in the Texas Medicaid program S-1 333-142897 10.51 10/19/2007 10.61Form of Client Service Contract pursuant to which certain subsidiaries of TheEnsign Group, Inc. participate in the Washington Medicaid program S-1 333-142897 10.52 10/19/2007 10.62Form of Provider Agreement for Medicaid and UMAP pursuant to whichcertain subsidiaries of The Ensign Group, Inc. participate in the UtahMedicaid program S-1 333-142897 10.53 10/19/2007 10.63Form of Medicaid Provider Agreement pursuant to which a subsidiary of TheEnsign Group, Inc. participates in the Idaho Medicaid program S-1 333-142897 10.54 10/19/2007 10.64Six Project Promissory Note dated as of November 10, 2009, in the originalprincipal amount of $40,000,000, by certain subsidiaries of the Ensign Group,Inc. in favor of General Electric Capital Corporation 8-K 001-33757 10.2 11/17/2009 10.65Note, dated December 31, 2010 by certain subsidiaries of the Company. 8-K 001-33757 10.1 1/6/2011 10.66Revolving Credit and Term Loan Agreement, dated as of July 15, 2011,among the Ensign Group, Inc. and the several banks and other financialinstitutions and lenders from time to time party thereto (the "Lenders") andSunTrust Bank, in its capacity as administrative agent for the Lenders, asissuing bank and as swingline lender. 8-K 001-33757 10.1 7/19/2011 10.67Commercial Deeds of Trust, Security Agreements, Assignment of Leases andRents and Future Filing, dated as of February 17, 2012, made by certainsubsidiaries of the Company for the benefit of RBS Asset Finance, Inc. 8-K. 8-K 001-33757 10.1 2/22/2012 10.68First Amendment to Revolving Credit and Term Loan Agreement, dated as ofOctober 27, 2011, among The Ensign Group, Inc. and the several banks andother financial institutions and lenders from time to time party thereto (the"Lenders") and SunTrust Bank, in its capacity as administrative agent for theLenders, as issuing bank and as swingline lender. 10-K 001-33757 10.70 2/13/2013 10.69Second Amendment to Revolving Credit and Term Loan Agreement, dated asof April 30, 2012, among The Ensign Group, Inc. and the several banks andother financial institutions and lenders from time to time party thereto (the"Lenders") and SunTrust Bank, in its capacity as administrative agent for theLenders, as issuing bank and as swingline lender. 10-K 001-33757 10.71 2/13/2013 10.70Third Amendment to Revolving Credit and Term Loan Agreement, dated as ofFebruary 1, 2013, among The Ensign Group, Inc. and the several banks andother financial institutions and lenders from time to time party thereto (the"Lenders") and SunTrust Bank, in its capacity as administrative agent for theLenders, as issuing bank and as swingline lender. 8-K 001-33757 10.1 2/6/2013 10.71Fourth Amendment to Revolving Credit and Term Loan Agreement, dated asof April 16, 2013, among the Ensign Group, Inc. and the several banks andother financial institutions and lenders from time to time party thereto(the"Lenders") and SunTrust Bank, in its capacity as administrative agent fort heLenders, as issuing bank and as swingline lender. 8-K 001-33757 10.1 4/22/2013 109Table of ContentsExhibit File Exhibit Filing FiledNo.Exhibit Description* Form No. No. Date Herewith10.72Corporate Integrity Agreement between the Office of Inspector General of theDepartment of Health and Human Services and The Ensign Group, Inc. datedOctober 1, 2013. 10-K 001-33757 10.74 2/13/2014 10.73Settlement agreement dated October 1, 2013, entered into among the UnitedStates of America, acting through the United States Department of Justice andon behalf of the Office of Inspector General ("OIG-HHS") of the Department ofHealth and Human Services ("HHS") (collectively the "United States") and theCompany. 8-K 001-33757 10.75 5/8/2014 10.74Form of Master Lease by and among certain subsidiaries of The Ensign Group,Inc. and certain subsidiaries of CareTrust REIT, Inc. 8-K 001-33757 10.1 6/5/2014 10.75Form of Guaranty of Master Lease by The Ensign Group, Inc. in favor ofcertain subsidiaries of CareTrust REIT, Inc., as landlords under the MasterLeases 8-K 001-33757 10.2 6/5/2014 10.76Opportunities Agreement, dated as of May 30, 2014, by and between TheEnsign Group, Inc. and CareTrust REIT, Inc. 8-K 001-33757 10.3 6/5/2014 10.77Transition Services Agreement, dated as of May 30, 2014, by and betweenThe Ensign Group, Inc. and CareTrust REIT, Inc. 8-K 001-33757 10.4 6/5/2014 10.78Tax Matters Agreement, dated as of May 30, 2014, by and between TheEnsign Group, Inc. and CareTrust REIT, Inc. 8-K 001-33757 10.5 6/5/2014 10.79Employee Matters Agreement, dated as of May 30, 2014, by and between TheEnsign Group, Inc. and CareTrust REIT, Inc. 8-K 001-33757 10.6 6/5/2014 10.80Contribution Agreement, dated as of May 30, 2014, by and among CTRPartnership L.P., CareTrust GP, LLC, CareTrust REIT, Inc. and The EnsignGroup, Inc. 8-K 001-33757 10.7 6/5/2014 10.81Credit Agreement, dated as of May 30, 2014, by and among The EnsignGroup, Inc., SunTrust Bank, as administrative agent, and the lenders partythereto 8-K 001-33757 10.8 6/5/2014 10.82Amended and Restated Credit Agreement as of February 5, 2016, by andamong The Ensign Group, Inc., SunTrust Bank, as administrative agent, andthe lenders party thereto 8-K 001-33757 10.1 2/8/2016 10.83Second Amended Credit Agreement as of July 19, 2016, by and among TheEnsign Group, Inc., SunTrust Bank, as administrative agent, and the lendersparty thereto 8-K 001-33757 10.1 7/25/2016 10.84Cornerstone Healthcare, Inc. 2016 Omnibus Incentive 10-Q 001-33757 10.2 8/1/2016 10.85Cornerstone Healthcare, Inc. Stockholders Agreement 10-Q 001-33757 10.3 8/1/2016 10.86The Ensign Group, Inc. 2017 Omnibus Incentive Plan DEF14A 001-33757 A 4/13/2017 10.87Form of 2017 Omnibus Incentive Plan Notice of Grant of Stock Options; andform of Non-Incentive Stock Option Award Terms and Conditions X10.88Form of 2017 Omnibus Incentive Plan Restricted Stock Agreement X10.89Form of U.S. Department of Housing and Urban Development HealthcareFacility Note and schedule of individual subsidiary loans, by and among TheEnsign Group, Inc.'s subsidiaries listed therein and U.S. Department ofHousing and Urban Development 8-K 001-33757 10.1 1/3/2018 10.90Form of U.S. Department of Housing and Urban Development SecurityInstrument/Mortgage/Deed of Trust 8-K 001-33757 10.2 1/3/2018 110Table of ContentsExhibit File Exhibit Filing FiledNo.Exhibit Description* Form No. No. Date Herewith21.1Subsidiaries of The Ensign Group, Inc., as amended X23.1Consent of Deloitte & Touche LLP X31.1Certification of Chief Executive Officer pursuant to Section 302 of theSarbanes-Oxley Act of 2002 X31.2Certification of Chief Financial Officer pursuant to Section 302 of theSarbanes-Oxley Act of 2002 X32.1Certification of Chief Executive Officer pursuant to Section 906 of theSarbanes-Oxley Act of 2002 X32.2Certification of Chief Financial Officer pursuant to Section 906 of theSarbanes-Oxley Act of 2002 X101Interactive data file (furnished electronically herewith pursuant to Rule 406Tof Regulations S-T) +Indicates management contract or compensatory plan. *Documents not filed herewith are incorporated by reference to the prior filings identified in the table above. Item 16. Form 10-K SummaryNot applicable111Table of ContentsSIGNATURESPursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized. THE ENSIGN GROUP, INC. February 8, 2018BY: /s/ SUZANNE D. SNAPPER Suzanne D. Snapper Chief Financial Officer (Principal Financial Officer and DulyAuthorized Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of theRegistrant in the capacities and on the dates indicated.Signature Title Date /s/ CHRISTOPHER R. CHRISTENSEN Chief Executive Officer, President and Director (principal executiveofficer) February 8, 2018Christopher R. Christensen /s/ SUZANNE D. SNAPPER Chief Financial Officer (principal financial and accounting officer) February 8, 2018Suzanne D. Snapper /s/ ROY E. CHRISTENSEN Chairman of the Board February 8, 2018Roy E. Christensen /s/ MALENE S. DAVIS Director February 8, 2018Malene S. Davis /s/ JOHN G. NACKEL Director February 8, 2018John G. Nackel /s/ DAREN J. SHAW Director February 8, 2018Daren J. Shaw /s/ LEE A. DANIELS Director February 8, 2018Lee A. Daniels /s/ BARRY M. SMITH Director February 8, 2018Barry M. Smith 112Table of ContentsTHE ENSIGN GROUP, INC.INDEX TO CONSOLIDATED FINANCIAL STATEMENTSAND FINANCIAL STATEMENT SCHEDULESReport of Independent Registered Public Accounting Firm114Consolidated Financial Statements: Consolidated Balance Sheets as of December 31, 2017 and 2016115Consolidated Statements of Income for the Years Ended December 31, 2017, 2016 and 2015116Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2017, 2016 and 2015117Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015118Notes to Consolidated Financial Statements120113Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors ofThe Ensign Group, Inc.Mission Viejo, CaliforniaOpinion on the Financial StatementsWe have audited the accompanying consolidated balance sheets of The Ensign Group, Inc. and subsidiaries (the "Company") as of December 31, 2017 and2016, the related consolidated statements of income, stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2017,and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, thefinancial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in theperiod ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company'sinternal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued bythe Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 8, 2018, expressed an unqualified opinion on theCompany's internal control over financial reporting.Basis for OpinionThese financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financialstatements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Companyin accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing proceduresto assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also includedevaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financialstatements. We believe that our audits provide a reasonable basis for our opinion./s/ DELOITTE & TOUCHE LLPCosta Mesa, CaliforniaFebruary 8, 2018We have served as the Company's auditor since 1999.114THE ENSIGN GROUP, INC.CONSOLIDATED BALANCE SHEETS December 31, 2017 2016 (In thousands, except par values)Assets Current assets: Cash and cash equivalents$42,337$57,706Accounts receivable—less allowance for doubtful accounts of $43,961 and $39,791 at December 31, 2017 and2016, respectively265,068244,433Investments—current13,09211,550Prepaid income taxes19,447302Prepaid expenses and other current assets28,13219,871Total current assets368,076333,862Property and equipment, net537,084484,498Insurance subsidiary deposits and investments28,68523,634Escrow deposits2281,582Deferred tax assets12,74523,073Restricted and other assets16,50112,614Intangible assets, net32,80335,076Goodwill81,06267,100Other indefinite-lived intangibles25,24919,586Total assets$1,102,433$1,001,025Liabilities and equity Current liabilities: Accounts payable$39,043$38,991Accrued wages and related liabilities90,50884,686Accrued self-insurance liabilities—current22,51621,359Other accrued liabilities63,81558,763Current maturities of long-term debt9,9398,129Total current liabilities225,821211,928Long-term debt—less current maturities302,990275,486Accrued self-insurance liabilities—less current portion50,22043,992Deferred rent and other long-term liabilities11,2689,124Deferred gain related to sale-leaseback (Note 17)12,075—Total liabilities602,374 540,530 Commitments and contingencies (Notes 15, 17 and 19) Equity: Ensign Group, Inc. stockholders' equity: Common stock; $0.001 par value; 75,000 shares authorized; 53,675 and 51,360 shares issued andoutstanding at December 31, 2017, respectively, and 52,787 and 50,838 shares issued and outstanding atDecember 31, 2016, respectively (Note 3)53 52Additional paid-in capital (Note 3)266,058 252,493Retained earnings264,691 235,021Common stock in treasury, at cost, 1,932 and 1,520 shares at December 31, 2017 and 2016, respectively(Note 3)(38,405) (31,117)Total Ensign Group, Inc. stockholders' equity492,397 456,449Non-controlling interest7,662 4,046Total equity500,059460,495Total liabilities and equity$1,102,433 $1,001,025See accompanying notes to consolidated financial statements.115Table of ContentsTHE ENSIGN GROUP, INC.CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31, 201720162015 (In thousands, except per share data)Revenue$1,849,317$1,654,864$1,341,826Expense:Cost of services1,497,7031,341,8141,067,694Charge related to class action lawsuit (Note 19)11,000——(Gains)/losses related to divestitures (Note 7 and 17)2,321(11,225)—Rent—cost of services (Note 17)131,919124,58188,776General and administrative expense80,61769,16564,163Depreciation and amortization44,47238,68228,111Total expenses1,768,0321,563,0171,248,744Income from operations81,28591,84793,082Other income (expense):Interest expense(13,616)(7,136)(2,828)Interest income1,6091,107845Other expense, net(12,007)(6,029)(1,983)Income before provision for income taxes69,27885,81891,099Provision for income taxes28,44532,97535,182Net income40,83352,84355,917Less: net income attributable to noncontrolling interests3582,853485Net income attributable to The Ensign Group, Inc.$40,475$49,990$55,432Net income per share attributable to The Ensign Group, Inc.: Basic$0.79$0.99$1.10Diluted$0.77$0.96$1.06Weighted average common shares outstanding: Basic50,93250,55550,316Diluted52,82952,13352,210 Dividends per share$0.1725$0.1625$0.1525See accompanying notes to consolidated financial statements.116Table of ContentsTHE ENSIGN GROUP, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Common Stock Additional Paid-In Capital RetainedEarnings Treasury Stock Non-ControllingInterest Shares Amount Shares Amount Total (In thousands)Balance - January 1, 201522,591 $22 $114,293 $145,846 150 $(1,310) $(1,048) $257,803Issuance of common stock to employees and directorsresulting from the exercise of stock options and grant ofstock awards255 — 2,443 — (27) 87 — 2,530Issuance of restricted stock to employees105 — 1,892 — — — — 1,892Issuance of common stock through public offering, netof issuance costs2,734 3 106,117 — — — — 106,120Dividends declared— — (7,858) — — — (7,858)Employee stock award compensation— — 6,677 — — — — 6,677Excess tax benefit from share-based compensation— — 3,680 — — — — 3,680Stock issued to effect stock split25,685 26 (26) — — — — —Noncontrolling interest assumed related to acquisition— — — — — — 224 224Net income attributable to noncontrolling interest— — — — — — 485 485Net income attributable to the Ensign Group, Inc.— — — 55,432 — — — 55,432Balance - December 31, 201551,370 $51 $235,076 $193,420 123 $(1,223) $(339) $426,985Issuance of common stock to employees and directorsresulting from the exercise of stock options and grant ofstock awards668 1 4,045 — (55) 106 — 4,152Issuance of restricted stock to employees252 — 2,517 — — — — 2,517Repurchase of common stock (Note 3)(1,452) 1,452 (30,000) — (30,000)Dividends declared— — — (8,282) — — — (8,282)Employee stock award compensation— — 7,776 — — — — 7,776Excess tax benefit from share-based compensation— — 3,079 — — — — 3,079Noncontrolling interest attributable to subsidiary equityplan (Note 16)— — — (107) — — 1,432 1,325Noncontrolling interest assumed related to acquisition— — — — — — 100 100Net income attributable to noncontrolling interest— — — — — — 2,853 2,853Net income attributable to the Ensign Group, Inc.— — — 49,990 — — — 49,990Balance - December 31, 201650,838 $52 $252,493 $235,021 1,520 $(31,117) $4,046 $460,495Issuance of common stock to employees and directorsresulting from the exercise of stock options and grant ofstock awards807 1 5,127 — — — — 5,128Issuance of restricted stock to employees127 — 146 — — — — 146Repurchase of common stock (Note 3)(412) — — — 412 (7,288) — (7,288)Dividends declared— — — (8,867) — — — (8,867)Employee stock award compensation— — 8,331 — — — — 8,331Acquisition of noncontrolling interest, net of tax— — (39) — — — (44) (83)Noncontrolling interest attributable to subsidiary equityplan (Note 16)— — — (1,938) — — 3,302 1,364Net income attributable to noncontrolling interest— — — — — — 358 358Net income attributable to the Ensign Group, Inc.— — — 40,475 — — — 40,475Balance - December 31, 201751,360 $53 $266,058 $264,691 1,932 $(38,405) $7,662 $500,059See accompanying notes to consolidated financial statements.117Table of ContentsTHE ENSIGN GROUP, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands) Year Ended December 31, 20172016 2015Cash flows from operating activities: Net income$40,833 $52,843 $55,917Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization44,472 38,682 28,111Amortization of deferred financing fees1,039 825 591Amortization of deferred gain on sale-leaseback(421) — —Impairment of long-lived assets111 137 —Write-off of deferred financing fees— 321 —Deferred income taxes10,329 (2,208) 1,251Provision for doubtful accounts31,023 28,512 19,802Share-based compensation9,695 9,101 6,677Excess tax benefit from share-based compensation (Note 2)— (3,079) (3,680)Insurance proceeds received for damage to property477 — —Gain on disposition of intangibles, property and equipment278 164 205Gain on sale of urgent care centers— (19,160) —Change in operating assets and liabilities Accounts receivable(52,301) (63,617) (100,324)Prepaid income taxes(19,145) 7,839 (5,149)Prepaid expenses and other assets(9,380) (1,465) (10,340)Insurance subsidiary deposits and investments(6,592) (467) (10,785)Liabilities related to operational closures (Note 7 and 17)2,210 7,205 —Accounts payable3,329 577 1,780Accrued wages and related liabilities5,822 (4,978) 22,178Income taxes payable(1,182) 987 —Other accrued liabilities5,777 12,588 21,403Accrued self-insurance liabilities6,095 8,125 5,418Deferred rent liability483 956 314Net cash provided by operating activities72,95273,888 33,369Cash flows from investing activities: Purchase of property and equipment(57,166) (65,699) (60,018)Cash payments for business acquisitions(89,565) (64,310) (110,802)Cash payments for asset acquisitions(195) (120,935) (17,750)Escrow deposits(228) (1,582) (400)Escrow deposits used to fund business acquisitions1,582 400 16,153Use of restricted cash— — 5,082Cash received from sale of urgent care centers and franchising businesses, net of note receivable— 40,734 2,000Cash proceeds from sale-leaseback38,000 — —Cash proceeds from the sale of fixed assets and insurance proceeds3,215 391 10Restricted and other assets(2,236) 365 (2,813)Net cash used in investing activities(106,593)(210,636) (168,538)Cash flows from financing activities: Proceeds from revolving credit facility and other debt (Note 15)1,022,015 844,000 334,000Payments on revolving credit facility and other debt (Note 15)(990,154) (659,514) (314,417)Proceeds from common stock offering (Note 3)— — 112,078Issuance costs in connection with common stock offering (Note 3)— — (5,961)Issuance of treasury stock upon exercise of options— 106 87Issuance of common stock upon exercise of options5,274 6,563 4,337Repurchase of shares of common stock (Note 3)(7,288) (30,000) —Dividends paid(8,717) (8,173) (7,494)Excess tax benefit from share-based compensation (Note 2)— 3,181 3,700Purchase of non-controlling interest(83) — —Payments of deferred financing costs(2,775) (3,278) —Net cash provided by financing activities18,272152,885 126,330Net (decrease)/increase in cash and cash equivalents(15,369) 16,137 (8,839)Cash and cash equivalents beginning of period57,70641,569 50,408Cash and cash equivalents end of period$42,337 $57,706 $41,569See accompanying notes to consolidated financial statements.118Table of ContentsTHE ENSIGN GROUP, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued) Year Ended December 31, 2017 2016 2015Supplemental disclosures of cash flow information: Cash paid during the period for: Interest$13,284 $6,428 $2,773Income taxes$38,382 $23,163 $35,490Non-cash financing and investing activity: Accrued capital expenditures$3,550 $6,828 $4,171Note receivable from sale of urgent care centers and franchising business$— $700 $—Favorable lease included in the fair value of assets acquisitions$— $7,190 $—Refundable deposits assumed as part of business acquisition$— $— $3,488Debt assumed as part of asset acquisition$— $— $11,699See accompanying notes to consolidated financial statements.119Table of ContentsTHE ENSIGN GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars and shares in thousands, except per share data)1. DESCRIPTION OF BUSINESSThe Company - The Ensign Group, Inc. (collectively, Ensign or the Company), is a holding company with no direct operating assets, employees orrevenue. The Company, through its operating subsidiaries, is a provider of health care services across the post-acute care continuum, as well as other ancillarybusinesses. As of December 31, 2017, the Company operated 230 facilities, 46 home health, hospice and home care agencies and other ancillary operationslocated in Arizona, California, Colorado, Idaho, Iowa, Kansas, Nebraska, Nevada, Oklahoma, Oregon, South Carolina, Texas, Utah, Washington andWisconsin. The Company's operating subsidiaries, each of which strives to be the operation of choice in the community it serves, provide a broad spectrum ofskilled nursing, assisted living, home health, home care, hospice and other ancillary services. The Company's operating subsidiaries have a collectivecapacity of approximately 18,900 operational skilled nursing beds and 5,000 assisted living and independent living units. As of December 31, 2017, theCompany owned 63 of its 230 affiliated facilities and leased an additional 167 facilities through long-term lease arrangements and had options to purchase11 of those 167 facilities. As of December 31, 2016, the Company owned 50 of its 210 affiliated facilities and leased an additional 160 facilities throughlong-term lease arrangements, and had options to purchase nine of those 160 facilities.Certain of the Company’s wholly-owned independent subsidiaries, collectively referred to as the Service Center, provide certain accounting, payroll,human resources, information technology, legal, risk management and other centralized services to the other operating subsidiaries through contractualrelationships with such subsidiaries. The Company also has a wholly-owned captive insurance subsidiary (the Captive) that provides some claims-madecoverage to the Company’s operating subsidiaries for general and professional liability, as well as coverage for certain workers’ compensation insuranceliabilities.Each of the Company's affiliated operations are operated by separate, wholly-owned, independent subsidiaries that have their own management,employees and assets. References herein to the consolidated “Company” and “its” assets and activities in this Annual Report is not meant to imply, norshould it be construed as meaning, that The Ensign Group, Inc. has direct operating assets, employees or revenue, or that any of the subsidiaries, are operatedby The Ensign Group, Inc.2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESBasis of Presentation — The accompanying consolidated financial statements (Financial Statements) have been prepared in accordance withaccounting principles generally accepted in the United States (GAAP). The Company is the sole member or shareholder of various consolidated limitedliability companies and corporations established to operate various acquired skilled nursing and assisted living operations, home health, hospice and homecare operations, and related ancillary services. All intercompany transactions and balances have been eliminated in consolidation. The consolidated financialstatements include the accounts of all entities controlled by the Company through its ownership of a majority voting interest. The Company presentsnoncontrolling interest within the equity section of its consolidated balance sheets. The Company presents the amount of consolidated net income that isattributable to The Ensign Group, Inc. and the noncontrolling interest in its consolidated statements of income.The consolidated financial statements include the accounts of all entities controlled by the Company through its ownership of a majority votinginterest and the accounts of any variable interest entities (VIEs) where the Company is subject to a majority of the risk of loss from the VIE's activities, orentitled to receive a majority of the entity's residual returns, or both. The Company assesses the requirements related to the consolidation of VIEs, including aqualitative assessment of power and economics that considers which entity has the power to direct the activities that "most significantly impact" the VIE'seconomic performance and has the obligation to absorb losses of, or the right to receive benefits that could be potentially significant to, the VIE. TheCompany's relationship with variable interest entities was not material during the year ended December 31, 2017.In 2016, the Company completed the sale of its urgent care centers for an aggregate purchase price of $41,492. The sale transactions do not meet thecriteria of discontinued operations as they do not represent a strategic shift that has, or will have, a major effect on the Company’s operations and financialresults.Estimates and Assumptions — The preparation of Financial Statements in conformity with GAAP requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Financial Statementsand the reported amounts of revenue and expenses during the reporting periods. The most significant estimates in the Company’s Financial Statements relateto revenue, allowance for doubtful accounts, intangible120Table of ContentsTHE ENSIGN GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)assets and goodwill, impairment of long-lived assets, general and professional liability, workers' compensation and healthcare claims included in accruedself-insurance liabilities, and income taxes. Actual results could differ from those estimates.Fair Value of Financial Instruments —The Company’s financial instruments consist principally of cash and cash equivalents, debt securityinvestments, accounts receivable, insurance subsidiary deposits, accounts payable and borrowings. The Company believes all of the financial instruments’recorded values approximate fair values because of their nature or respective short durations.Revenue Recognition — The Company recognizes revenue when the following four conditions have been met: (i) there is persuasive evidence that anarrangement exists; (ii) delivery has occurred or service has been rendered; (iii) the price is fixed or determinable; and (iv) collection is reasonably assured.The Company's revenue is derived primarily from providing healthcare services to patients and is recognized on the date services are provided at amountsbillable to the individual. For reimbursement arrangements with third-party payors, including Medicaid, Medicare and private insurers, revenue is recordedbased on contractually agreed-upon amounts on a per patient basis.Revenue from the Medicare and Medicaid programs accounted for 68.4%, 67.8% and 69.1% of the Company's revenue for the years ended December31, 2017, 2016 and 2015, respectively. The Company records revenue from these governmental and managed care programs as services are performed at theirexpected net realizable amounts under these programs. The Company’s revenue from governmental and managed care programs is subject to audit andretroactive adjustment by governmental and third-party agencies. Consistent with healthcare industry accounting practices, any changes to thesegovernmental revenue estimates are recorded in the period the change or adjustment becomes known based on final settlement. The Company recordedadjustments to revenue which were not material to the Company's consolidated revenue or Financial Statements for the years ended December 31, 2017, 2016and 2015.The Company’s service specific revenue recognition policies are as follows:Skilled Nursing RevenueThe Company’s revenue is derived primarily from providing long-term healthcare services to patients and is recognized on the date services areprovided at amounts billable to individual patients. For patients under reimbursement arrangements with third-party payors, including Medicaid, Medicareand private insurers, revenue is recorded based on contractually agreed-upon amounts or rate on a per patient, daily basis or as services are performed.Assisted and Independent Living RevenueThe Company's revenue is recorded when services are rendered on the date services are provided at amounts billable to individual residents and consistsof fees for basic housing and assisted living care. Residency agreements are generally for a term of 30 days, with resident fees billed monthly in advance. Forpatients under reimbursement arrangements with Medicaid, revenue is recorded based on contractually agreed-upon amounts or rate on a per resident, dailybasis or as services rendered. Revenue for certain ancillary charges is recognized as services are provided, and such fees are billed monthly in arrears.Home Health RevenueMedicare RevenueNet service revenue is recorded under the Medicare prospective payment system based on a 60-day episode payment rate that is subject to adjustmentbased on certain variables including, but not limited to: (a) an outlier payment if patient care was unusually costly; (b) a low utilization payment adjustmentif the number of visits was fewer than five; (c) a partial payment if the patient transferred to another provider or the Company received a patient from anotherprovider before completing the episode; (d) a payment adjustment based upon the level of therapy services required; (e) the number of episodes of careprovided to a patient, regardless of whether the same home health provider provided care for the entire series of episodes; (f) changes in the base episodepayments established by the Medicare program; (g) adjustments to the base episode payments for case mix and geographic wages; and (h) recoveries ofoverpayments.The Company makes adjustments to Medicare revenue on completed episodes to reflect differences between estimated and actual payment amounts, aninability to obtain appropriate billing documentation or authorizations acceptable to the payor and other reasons unrelated to credit risk. Therefore, theCompany believes that its reported net service revenue and patient accounts receivable will be the net amounts to be realized from Medicare for servicesrendered.121Table of ContentsTHE ENSIGN GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)In addition to revenue recognized on completed episodes, the Company also recognizes a portion of revenue associated with episodes in progress.Episodes in progress are 60-day episodes of care that begin during the reporting period, but were not completed as of the end of the period. As such, theCompany estimates revenue and recognizes it on a daily basis. The primary factors underlying this estimate are the number of episodes in progress at the endof the reporting period, expected Medicare revenue per episode and its estimate of the average percentage complete based on visits performed.Non-Medicare RevenueEpisodic Based Revenue - The Company recognizes revenue in a similar manner as it recognizes Medicare revenue for episodic-based rates that are paidby other insurance carriers, including Medicare Advantage programs; however, these rates can vary based upon the negotiated terms.Non-episodic Based Revenue - Revenue is recorded on an accrual basis based upon the date of service at amounts equal to its established or estimatedper-visit rates, as applicable.Hospice RevenueRevenue is recorded on an accrual basis based upon the date of service at amounts equal to the estimated payment rates. The estimated payment ratesare daily rates for each of the levels of care the Company delivers. The Company makes adjustments to revenue for an inability to obtain appropriate billingdocumentation or authorizations acceptable to the payor and other reasons unrelated to credit risk. Additionally, as Medicare hospice revenue is subject to aninpatient cap limit and an overall payment cap, the Company monitors its provider numbers and estimates amounts due back to Medicare if a cap has beenexceeded. The Company records these adjustments as a reduction to revenue and increases to other accrued liabilities.Accounts Receivable and Allowance for Doubtful Accounts — Accounts receivable consist primarily of amounts due from Medicare and Medicaidprograms, other government programs, managed care health plans and private payor sources. Estimated provisions for doubtful accounts are recorded to theextent it is probable that a portion or all of a particular account will not be collected.In evaluating the collectability of accounts receivable, the Company considers a number of factors, including the age of the accounts, changes incollection patterns, the composition of patient accounts by payor type and the status of ongoing disputes with third-party payors. On an annual basis, thehistorical collection percentages are reviewed by payor and by state and are updated to reflect the recent collection experience of the Company. In order todetermine the appropriate reserve rate percentages which ultimately establish the allowance, the Company analyzes historical cash collection patterns bypayor and by state. The percentages applied to the aged receivable balances are based on the Company’s historical experience and time limits, if any, formanaged care, Medicare, Medicaid and other payors. The Company periodically refines its estimates of the allowance for doubtful accounts based onexperience with the estimation process and changes in circumstances.Cash and Cash Equivalents — Cash and cash equivalents consist of bank term deposits, money market funds and treasury bill related investments withoriginal maturities of three months or less at time of purchase and therefore approximate fair value. The fair value of money market funds is determined basedon “Level 1” inputs, which consist of unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets.The Company places its cash and short-term investments with high credit quality financial institutions.Insurance Subsidiary Deposits and Investments — The Company's captive insurance subsidiary cash and cash equivalents, deposits and investmentsare designated to support long-term insurance subsidiary liabilities and have been classified as short-term and long-term assets based on the timing ofexpected future payments of the Company's captive insurance liabilities. The majority of these deposits and investments are currently held in AA, A andBBB+ rated debt security investments and the remainder is held in a bank account with a high credit quality financial institution. See further discussion atNote 5, Fair Value Measurements.The Company evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic ormarket conditions warrant such an evaluation. If securities are in an unrealized loss position, the Company considers the extent and duration of theunrealized loss, and the financial condition and near-term prospects of the issuer. The Company also assesses whether it intends to sell, or it is more likelythan not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regardingintent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For the yearsended December 31, 2016 and 2017, the Company did not recognize any OTTI for its investments.Property and Equipment — Property and equipment are initially recorded at their historical cost. Repairs and maintenance are expensed as incurred.Depreciation is computed using the straight-line method over the estimated useful lives of the depreciable122Table of ContentsTHE ENSIGN GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)assets (ranging from three to 59 years). Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or theremaining lease term.Impairment of Long-Lived Assets — The Company reviews the carrying value of long-lived assets that are held and used in the Company’s operatingsubsidiaries for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.Recoverability of these assets is determined based upon expected undiscounted future net cash flows from the operating subsidiaries to which the assetsrelate, utilizing management’s best estimate, appropriate assumptions, and projections at the time. If the carrying value is determined to be unrecoverablefrom future operating cash flows, the asset is deemed impaired and an impairment loss would be recognized to the extent the carrying value exceeded theestimated fair value of the asset. The Company estimates the fair value of assets based on the estimated future discounted cash flows of the asset. Managementhas evaluated its long-lived assets and recorded an impairment charge of $111 and $137 related to the closure of facilities during the years ended December31, 2017 and 2016, respectively. The Company did not identify any asset impairment during the year ended December 31, 2015.Leases and Leasehold Improvements - At the inception of each lease, the Company performs an evaluation to determine whether the lease should beclassified as an operating or capital lease. The Company records rent expense for operating leases that contain scheduled rent increases on a straight-linebasis over the term of the lease. The lease term used for straight-line rent expense is calculated from the date the Company is given control of the leasedpremises through the end of the lease term. The lease term used for this evaluation also provides the basis for establishing depreciable lives for buildingssubject to lease and leasehold improvements, as well as the period over which the Company records straight-line rent expense.Intangible Assets and Goodwill — Definite-lived intangible assets consist primarily of favorable leases, lease acquisition costs, patient base, facilitytrade names and customer relationships. Favorable leases and lease acquisition costs are amortized over the life of the lease of the facility. Patient base isamortized over a period of four to eight months, depending on the classification of the patients and the level of occupancy in a new acquisition on theacquisition date. Trade names at affiliated facilities are amortized over 30 years and customer relationships are amortized over a period of up to 20 years.The Company's indefinite-lived intangible assets consist of trade names and Medicare and Medicaid licenses. The Company tests indefinite-livedintangible assets for impairment on an annual basis or more frequently if events or changes in circumstances indicate that the carrying amount of theintangible asset may not be recoverable. The Company did not identify any asset impairment during the years ended December 31, 2017, 2016 and 2015.Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations. Goodwill is subjectto annual testing for impairment. In addition, goodwill is tested for impairment if events occur or circumstances change that would reduce the fair value of areporting unit below its carrying amount. The Company performs its annual test for impairment during the fourth quarter of each year. See further discussionat Note 11, Goodwill and Other Indefinite-Lived Intangible Assets.Deferred Rent - Deferred rent represents rental expense, determined on a straight-line basis over the life of the related lease, in excess of actual rentpayments.Self-Insurance — The Company is partially self-insured for general and professional liability up to a base amount per claim (the self-insured retention)with an aggregate, one-time deductible above this limit. Losses beyond these amounts are insured through third-party policies with coverage limits per claim,per location and on an aggregate basis for the Company. Starting on January 1, 2017, the combined self-insured retention was $500 per claim, subject to anadditional one-time deductible of $750 for California affiliated operations and a separate, one-time, deductible of $1,000 for non-California operations. Forall affiliated operations, except those located in Colorado, the third-party coverage above these limits was $1,000 per claim, $3,000 per operation, with a$5,000 blanket aggregate limit and an additional state-specific aggregate where required by state law. In Colorado, the third-party coverage above theselimits was $1,000 per claim and $3,000 per operation, which is independent of the aforementioned blanket aggregate limits that apply outside of Colorado.The self-insured retention and deductible limits for general and professional liability and workers' compensation for all states (except Texas andWashington for workers' compensation) are self-insured through the Captive, the related assets and liabilities of which are included in the accompanyingconsolidated balance sheets. The Captive is subject to certain statutory requirements as an insurance provider. These requirements include, but are notlimited to, maintaining statutory capital.The Company’s policy is to accrue amounts equal to the actuarially estimated costs to settle open claims of insureds, as well as an estimate of the costof insured claims that have been incurred but not reported. The Company develops information about123Table of ContentsTHE ENSIGN GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)the size of the ultimate claims based on historical experience, current industry information and actuarial analysis, and evaluates the estimates for claim lossexposure on a quarterly basis. The Company’s operating subsidiaries are self-insured for workers’ compensation in California. To protect itself against loss exposure in Californiawith this policy, the Company has purchased individual specific excess insurance coverage that insures individual claims that exceed $500 per occurrence.In Texas, the operating subsidiaries have elected non-subscriber status for workers’ compensation claims and, effective February 1, 2011, the Company haspurchased individual stop-loss coverage that insures individual claims that exceed $750 per occurrence. As of July 1, 2014, the Company’s operatingsubsidiaries in all other states, with the exception of Washington, are under a loss sensitive plan that insures individual claims that exceed $350 peroccurrence. In Washington, the operating subsidiaries' coverage is financed through premiums paid by the employers and employees. The claims and paybenefits are managed through a state insurance pool. Outside of California, Texas and Washington, the Company has purchased insurance coverage thatinsures individual claims that exceed $350 per accident. In all states except Washington, the Company accrues amounts equal to the estimated costs to settleopen claims, as well as an estimate of the cost of claims that have been incurred but not reported. The Company uses actuarial valuations to estimate theliability based on historical experience and industry information.In addition, the Company has recorded an asset and equal liability of $5,394 and $4,104 at December 31, 2017 and 2016, respectively, in order topresent the ultimate costs of malpractice and workers' compensation claims and the anticipated insurance recoveries on a gross basis. See Note 12, Restrictedand Other Assets.The Company self-funds medical (including prescription drugs) and dental healthcare benefits to the majority of its employees. The Company is fullyliable for all financial and legal aspects of these benefit plans. To protect itself against loss exposure with this policy, the Company has purchased individualstop-loss insurance coverage that insures individual claims that exceed $300 for each covered person with an additional one-time aggregate individual stoploss deductible of $75. Beginning 2016, the Company's policy does not include the additional one-time aggregate individual stop loss deductible of $75.The Company believes that adequate provision has been made in the Financial Statements for liabilities that may arise out of patient care, workers’compensation, healthcare benefits and related services provided to date. The amount of the Company’s reserves was determined based on an estimationprocess that uses information obtained from both company-specific and industry data. This estimation process requires the Company to continuously monitorand evaluate the life cycle of the claims. Using data obtained from this monitoring and the Company’s assumptions about emerging trends, the Company,with the assistance of an independent actuary, develops information about the size of ultimate claims based on the Company’s historical experience andother available industry information. The most significant assumptions used in the estimation process include determining the trend in costs, the expectedcost of claims incurred but not reported and the expected costs to settle or pay damage awards with respect to unpaid claims. The self-insured liabilities arebased upon estimates, and while management believes that the estimates of loss are reasonable, the ultimate liability may be in excess of or less than therecorded amounts. Due to the inherent volatility of actuarially determined loss estimates, it is reasonably possible that the Company could experiencechanges in estimated losses that could be material to net income. If the Company’s actual liability exceeds its estimates of loss, its future earnings, cash flowsand financial condition would be adversely affected.Income Taxes — Deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis ofthe Company’s assets and liabilities at tax rates in effect when such temporary differences are expected to reverse. The Company generally expects to fullyutilize its deferred tax assets; however, when necessary, the Company records a valuation allowance to reduce its net deferred tax assets to the amount that ismore likely than not to be realized.In determining the need for a valuation allowance or the need for and magnitude of liabilities for uncertain tax positions, the Company makes certainestimates and assumptions. These estimates and assumptions are based on, among other things, knowledge of operations, markets, historical trends and likelyfuture changes and, when appropriate, the opinions of advisors with knowledge and expertise in certain fields. Due to certain risks associated with theCompany’s estimates and assumptions, actual results could differ.The Tax Cuts and Jobs Act (the Tax Act), which was enacted in December 2017, increased the Company's income tax expense by $3,915 for the yearended December 31, 2017. The Tax Act will decrease the corporate income tax rate from 35.0% to 21.0% beginning on January 1, 2018. The Companyexpects meaningful benefits from this reduction to continue from its enactment in future periods. See Note 14, Income Taxes for further detail.Noncontrolling Interest — The noncontrolling interest in a subsidiary is initially recognized at estimated fair value on the acquisition date and ispresented within total equity in the Company's consolidated balance sheets. The Company presents the noncontrolling interest and the amount ofconsolidated net income attributable to The Ensign Group, Inc. in its consolidated124Table of ContentsTHE ENSIGN GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)statements of income and net income per share is calculated based on net income attributable to The Ensign Group, Inc.'s stockholders. The carrying amountof the noncontrolling interest is adjusted based on an allocation of subsidiary earnings based on ownership interest.Share-Based Compensation — The Company measures and recognizes compensation expense for all share-based payment awards made to employeesand directors including employee stock options based on estimated fair values, ratably over the requisite service period of the award. Net income has beenreduced as a result of the recognition of the fair value of all stock options and restricted stock awards issued, the amount of which is contingent upon thenumber of future grants and other variables.Recent Accounting Pronouncements — Except for rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority offederal securities laws and a limited number of grandfathered standards, the Financial Accounting Standards Board (FASB) Accounting StandardsCodification (ASC) is the sole source of authoritative GAAP literature recognized by the FASB and applicable to the Company. For any new pronouncementsannounced, the Company considers whether the new pronouncements could alter previous generally accepted accounting principles and determines whetherany new or modified principles will have a material impact on the Company's reported financial position or operations in the near term. The applicability ofany standard is subject to the formal review of the Company's financial management and certain standards are under consideration.Recent Accounting Standards Adopted by the CompanyIn March 2016, the FASB issued a new standard to simplify several aspects of the accounting for employee share-based payment transactions, whichincludes the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. Thenew standard was effective for the Company in the first quarter of fiscal year 2017. Under the previous guidance, excess tax benefits and deficiencies fromshare-based compensation arrangements were recorded in equity when the awards vested or were settled. The new guidance requires prospective recognitionof excess tax benefits and deficiencies in the income statement, resulting in the recognition of excess tax benefits in income tax expense, of $3,423, ratherthan in paid-in-capital, for the year ended December 31, 2017.In addition, under the new guidance, excess income tax benefits from share-based compensation arrangements are classified as cash flow fromoperations, rather than as cash flow from financing activities. The Company has elected to apply the cash flow classification guidance prospectively,resulting in an increase to operating cash flow for the year ended December 31, 2017 and the prior year period has not been adjusted.The Company has also elected to continue to estimate the expected forfeitures rather than electing to account for forfeitures as they occur. Finally, theadoption of the guidance requires excess tax benefits and deficiencies to be prospectively excluded from assumed future proceeds in the calculation ofdiluted shares, resulting in an increase in diluted weighted average shares outstanding.Accounting Standards Recently Issued But Not Yet Adopted by the CompanyIn May 2017, the FASB issued amended authoritative guidance to provide guidance on types of changes to the terms or conditions of share-basedpayments awards to which an entity would be required to apply modification accounting under ASC 718. This guidance is effective for annual and interimperiods beginning after December 15, 2017, which will be the Company's fiscal year 2018, with early adoption permitted in certain cases. The adoption ofthis standard is not expected to have a material impact on the Company's consolidated financial statements.In January 2017, the FASB issued amended authoritative guidance to clarify the definition of a business and reduce diversity in practice related to theevaluation of whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The new provisions provide the requirementsneeded for an integrated set of assets and activities (the set) to be a business and also establish a practical way to determine when a set is not a business. TheASU provides a screen to determine when an integrated set of assets and activities is not a business. The more robust framework helps entities to narrow thedefinition of outputs created by the set and align it with how outputs are described in the new revenue standard. This guidance is effective for annual andinterim periods beginning after December 15, 2017, which will be the Company's fiscal year 2018, with early adoption permitted in certain cases. The newguidance is required to be applied on a prospective basis. The effect of the implementation will depend upon the nature of the Company's future acquisitions.In January 2017, the FASB issued amended authoritative guidance to simplify and reduce the cost and complexity of the goodwill impairment test. Thenew provisions eliminate step 2 from the goodwill impairment test and shifts the concept of impairment from a measure of loss when comparing the impliedfair value of goodwill to its carrying amount to comparing the fair value of a reporting unit with its carrying amount. The Board also eliminated therequirements for any reporting unit with a125Table of ContentsTHE ENSIGN GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)zero or negative carrying amount to perform a qualitative assessment or step 2 of the goodwill impairment test. The new guidance does not amend theoptional qualitative assessment of goodwill impairment. This guidance is effective for annual periods beginning after December 15, 2019, which will be theCompany's fiscal year 2020, with early adoption permitted. The adoption of this standard is not expected to have a material impact on the Company'sconsolidated financial statements.In October 2016, the FASB issued amended authoritative guidance to require companies to recognize the income tax consequences of an intra-entitytransfer of an asset, other than inventory, when the transfer occurs. The amendments will be effective for the Company’s fiscal year beginning January 1,2018. The new guidance is required to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as ofthe beginning of the period of adoption. The adoption of this standard is not expected to have a material impact on the Company's consolidated financialstatements based on the Company's historical activity. Furthermore, the actual impact of implementation will largely depend on future intra-entity assettransfers, if any.In August 2016, the FASB issued amended authoritative guidance to reduce the diversity in practice related to the presentation and classification ofcertain cash receipts and cash payments in the statement of cash flows. The new provisions target cash flow issues related to (i) debt prepayment or debtextinguishment costs, (ii) settlement of debt instruments with coupon rates that are insignificant relative to effective interest rates, (iii) contingentconsideration payments made after a business combination, (iv) proceeds from settlement of insurance claims, (v) proceeds from the settlement of corporate-owned life insurance and bank-owned life insurance policies, (vi) distributions received from equity method investees, (vii) beneficial interests insecuritization transactions and (viii) separately identifiable cash flows and application of the predominance principle. This guidance will be effective forfiscal years beginning after December 15, 2017, which will be the Company's fiscal year 2018, with early adoption permitted. The adoption of this standard isnot expected to have a material impact on the Company’s consolidated financial statements.In February 2016, the FASB issued amended authoritative guidance on accounting for leases. The new provisions require that a lessee of operatingleases recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right touse the underlying asset for the lease term. The lease liability will be equal to the present value of lease payments, with the right-of-use asset based upon thelease liability. The classification criteria for distinguishing between finance (or capital) leases and operating leases are substantially similar to the previouslease guidance, but with no explicit bright lines. As such, operating leases will result in straight-line rent expense similar to current practice. For short termleases (term of 12 months or less), a lessee is permitted to make an accounting election not to recognize lease assets and lease liabilities, which wouldgenerally result in lease expense being recognized on a straight-line basis over the lease term. This guidance applies to all entities and is effective for annualperiods beginning after December 15, 2018, which will be the Company's fiscal year 2019, with early adoption permitted. The Company is currentlyevaluating the impact this guidance will have on its consolidated financial statements but expects this adoption will result in a significant increase in theassets and liabilities on its consolidated balance sheets.In January 2016, the FASB issued amended authoritative guidance which makes targeted improvements for financial instruments. The new provisionsimpact certain aspects of recognition, measurement, presentation and disclosure requirements of financial instruments. Specifically, the guidance will (1)require equity investments to be measured at fair value with changes in fair value recognized in net income, (2) simplify the impairment assessment of equityinvestments without readily determinable fair values, (3) eliminate the requirement to disclose the method and assumptions used to estimate fair value forfinancial instruments measured at amortized cost, and (4) require separate presentation of financial assets and financial liabilities by measurement category.The guidance is effective for annual and interim periods beginning after December 15, 2017, which will be the Company's fiscal year 2018. Early adoption isnot permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.In March 2016, the FASB issued its standard to amend the principal-versus-agent implementation guidance and illustrations in the Board’s new revenuestandard, which includes accounting implication related to (1) determining the appropriate unit of account under the revenue standard’s principal-versus-agent guidance and (2) applying the indicators of whether an entity is a principal or an agent in accordance with the revenue standard’s control principle. Theguidance will be effective for fiscal years beginning after December 15, 2017, which will be the Company's fiscal year 2018. The guidance has the sameeffective date as the new revenue standard and the Company is required to adopt the guidance by using the same transition method it would use to adopt thenew revenue standard. The Company's evaluation of the adoption method and impact to the consolidated financial statements is performed concurrently withthe new revenue standard below.In May 2014, the FASB and International Accounting Standards Board issued their final standard on revenue from contracts with customers thatoutlines a single comprehensive model for entities to use in accounting for revenue arising from contracts126Table of ContentsTHE ENSIGN GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)with customers. The new standard supersedes most current revenue recognition guidance, including industry-specific guidance, and may be appliedretrospectively to each period presented (full retrospective method) or retrospectively with the cumulative effect recognized in beginning retained earningsas of the date of adoption (modified retrospective method). In July 2015, the FASB formally deferred for one year the effective date of the new revenuestandard and decided to permit entities to early adopt the standard. In December 2016, the FASB made certain technical corrections to further clarify the corerevenue recognition principles, primarily in response to feedback from several sources, including the FASB/IASB Transition Resource Group. The guidancewill be effective for fiscal years beginning after December 15, 2017, which will be the Company's fiscal year 2018. The Company initiated an adoption planin fiscal year 2015, beginning with preliminary evaluation of the standard, and subsequently performed additional analysis of revenue streams andtransactions under the new standard. In particular, the Company performed analysis into the application of the portfolio approach as a practical expedient togroup patient contracts with similar characteristics, such that revenue for a given portfolio would not be materially different than if it were evaluated on acontract-by-contract basis. The adoption plan has been completed and the impact to the consolidated financial statements for periods subsequent to adoptionis not material. As part of the impact assessment, the Company evaluated any variable consideration, potential constraints on the estimate of variableconsideration, and significant financing components, in particular as it related to third party settlements. The Company anticipates that for periodssubsequent to adoption, the majority of what is currently classified as bad debt expense under operating expenses will be treated as an implicit priceconcession factored into net revenue, consistent with the intent of the standard. The new standard also requires enhanced disclosures related to thedisaggregation of revenue, information about contract balances, and other disclosures about contracts with customers, including revenue recognition policiesto identify performance obligations and significant judgments in measurement and recognition. The Company adopted the new revenue standard as ofJanuary 1, 2018 using the modified retrospective method and the adoption did not have a material impact. 3. COMMON STOCKOn February 8, 2017, the Company announced that its Board of Directors authorized a stock repurchase program, under which the Company mayrepurchase up to $30,000 of its common stock under the program for a period of 12 months. Under this program, the Company is authorized to repurchase itsissued and outstanding common shares from time to time in open-market and privately negotiated transactions and block trades in accordance with federalsecurities laws. The stock repurchase program expired on February 8, 2018. During the year ended December 31, 2017, the Company repurchased 412 sharesof its common stock for a total of $7,288.On November 4, 2015 and February 9, 2016, the Company announced that its Board of Directors authorized two stock repurchase programs, underwhich the Company could repurchase up to $15,000 of its common stock under each program for a period of 12 months. During the first quarter of 2016, theCompany repurchased 1,452 shares of its common stock for a total of $30,000 and these repurchase programs expired upon the repurchase of the fullauthorized amount under such plans.4. COMPUTATION OF NET INCOME PER COMMON SHAREBasic net income per share is computed by dividing income from continuing operations attributable to The Ensign Group, Inc. stockholders by theweighted average number of outstanding common shares for the period. The computation of diluted net income per share is similar to the computation ofbasic net income per share except that the denominator is increased to include the number of additional common shares that would have been outstanding ifthe dilutive potential common shares had been issued.The adoption of ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting: Topic 718 requires excess tax benefits anddeficiencies to be prospectively excluded from assumed future proceeds in the calculation of diluted shares, resulting in an increase in diluted weightedaverage shares outstanding. A reconciliation of the numerator and denominator used in the calculation of basic net income per common share follows:127Table of ContentsTHE ENSIGN GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Year Ended December 31, 20172016 2015Numerator: Net income$40,833 $52,843 $55,917Less: net income attributable to noncontrolling interests358 2,853 485Net income attributable to The Ensign Group, Inc.$40,475 $49,990 $55,432 Denominator: Weighted average shares outstanding for basic net income per share50,932 50,555 50,316Basic net income per common share attributable to The Ensign Group, Inc.$0.79 $0.99 $1.10 A reconciliation of the numerator and denominator used in the calculation of diluted net income per common share follows: Year Ended December 31, 20172016 2017Numerator: Net income$40,833 $52,843 $55,917Less: net income attributable to noncontrolling interests358 2,853 485Net income attributable to The Ensign Group, Inc.$40,475 $49,990 $55,432 Denominator: Weighted average common shares outstanding50,932 50,555 50,316Plus: incremental shares from assumed conversion (1)1,897 1,578 1,894Adjusted weighted average common shares outstanding52,82952,133 52,210Diluted net income per common share attributable to The Ensign Group, Inc.$0.77 $0.96 $1.06(1) Options outstanding which are anti-dilutive and therefore not factored into the weighted average common shares amount above were 1,252, 838 and 258 for the years endedDecember 31, 2017, 2016 and 2015, respectively.5. FAIR VALUE MEASUREMENTSFair value measurements are based on a three-tier hierarchy that prioritizes the inputs used to measure fair value. These tiers include: Level 1, defined asobservable inputs such as quoted market prices in active markets; Level 2, defined as inputs other than quoted prices included within Level 1 that areobservable for the asset or liability, either directly or indirectly; and Level 3, defined as unobservable inputs for which little or no market data exists,therefore requiring an entity to develop its own assumptions.The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2017 and 2016: December 31, 2017 2016 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3Cash and cash equivalents $42,337 $— $— $57,706 $— $—Our non-financial assets, which include long-lived assets, including goodwill, intangible assets and property and equipment, are not required to bemeasured at fair value on a recurring basis. However, on a periodic basis, or whenever events or changes in circumstances indicate that their carrying valuemay not be recoverable, we assess our long-lived assets for impairment. When impairment has occurred, such long-lived assets are written down to fair value.See Note 2, Summary of Significant Accounting Policies for further discussion of the Company's significant accounting policies.Debt Security Investments - Held to Maturity128Table of ContentsTHE ENSIGN GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)At December 31, 2017 and 2016, the Company had approximately $41,777 and $35,184, respectively, in debt security investments which wereclassified as held to maturity and carried at amortized cost. The carrying value of the debt securities approximates fair value based on Level 1. The Companyhas the intent and ability to hold these debt securities to maturity. Further, as of December 31, 2017, the debt security investments were held in AA, A andBBB+ rated debt securities.6. REVENUE AND ACCOUNTS RECEIVABLERevenue for the years ended December 31, 2017, 2016 and 2015 is summarized in the following tables: Year Ended December 31, 20172016 2015 Revenue % ofRevenue Revenue % ofRevenue Revenue % ofRevenueMedicaid$644,803 34.9% $557,958 33.7% $458,956 34.2%Medicare515,884 27.9 477,019 28.8 395,503 29.5Medicaid — skilled102,875 5.6 87,517 5.3 71,905 5.4Total Medicaid and Medicare1,263,562 68.4 1,122,494 67.8 926,364 69.1Managed care303,386 16.4 265,508 16.0 206,770 15.4Private and other payors(1)282,369 15.2 266,862 16.2 208,692 15.5Revenue$1,849,317 100.0% $1,654,864 100.0% $1,341,826 100.0%(1) Private and other payors also includes revenue from all payors generated in other ancillary services for the years ended December 31, 2017, 2016 and 2015 and urgent care centersfor the years ended December 31, 2016 and 2015.Accounts receivable as of December 31, 2017 and 2016 is summarized in the following table: December 31, 2017 2016Medicaid$119,441 $111,031Managed care68,930 66,346Medicare55,667 55,500Private and other payors64,991 51,347 309,029 284,224Less: allowance for doubtful accounts(43,961) (39,791)Accounts receivable, net$265,068 $244,4337. BUSINESS SEGMENTSThe Company has three reportable operating segments: (1) transitional and skilled services, which includes the operation of skilled nursing facilities;(2) assisted and independent living services, which includes the operation of assisted and independent living facilities; and (3) home health and hospiceservices, which includes the Company's home health, home care and hospice businesses. The Company's Chief Executive Officer, who is its chief operatingdecision maker, or CODM, reviews financial information at the operating segment level.The Company also reports an “all other” category that includes results from its mobile diagnostics and other ancillary operations for the years endedDecember 31, 2017, 2016 and 2015 and urgent care centers for the years ended December 31, 2016 and 2015. The Company completed the sale of its urgentcare centers in 2016 and recognized a pretax gain of $41,492. These operations are neither significant individually nor in aggregate and therefore do notconstitute a reportable segment. The reporting segments are business units that offer different services and are managed separately to provide greatervisibility into those operations.As of December 31, 2017, transitional and skilled services included 160 wholly-owned affiliated skilled nursing facilities and 21 campuses that provideskilled nursing and rehabilitative care services. The Company provided room and board and social services through 49 wholly-owned affiliated assisted andindependent living facilities and 21 campuses. Home health, home care129Table of ContentsTHE ENSIGN GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)and hospice services were provided to patients through 46 affiliated agencies. As of December 31, 2017, the Company held majority membership interests inother ancillary operations, which operating results are included in the "all other" category.The Company evaluates performance and allocates capital resources to each segment based on an operating model that is designed to maximize thequality of care provided and profitability. General and administrative expenses are not allocated to any segment for purposes of determining segment profitor loss, and are included in the "all other" category in the selected segment financial data that follows. The accounting policies of the reporting segments arethe same as those described in Note 2, Summary of Significant Accounting Policies. The Company's CODM does not review assets by segment in his resourceallocation and therefore assets by segment are not disclosed below.Segment revenues by major payor source were as follows: Year Ended December 31, 2017 Transitional andSkilled Services Assisted andIndependentLiving Services Home Healthand HospiceServices All Other Total Revenue Revenue % Medicaid $603,104 $30,469 $11,230 $— $644,803 34.9% Medicare 417,870 — 98,014 — 515,884 27.9 Medicaid-skilled 102,875 — — — 102,875 5.6 Subtotal 1,123,849 30,469 109,244 — 1,263,562 68.4 Managed care 281,563 — 21,823 — 303,386 16.4 Private and other 139,798 106,177 11,336 25,058(1)282,369 15.2 Total revenue $1,545,210 $136,646 $142,403 $25,058 $1,849,317 100.0% (1) Private and other payors also includes revenue from all payors generated in other ancillary services for the year ended December 31, 2017. Year Ended December 31, 2016 Transitional andSkilled Services Assisted andIndependentLiving Services Home Healthand HospiceServices All Other Total Revenue Revenue % Medicaid $521,063 $26,397 $10,498 $— $557,958 33.7% Medicare 396,519 — 80,500 — 477,019 28.8 Medicaid-skilled 87,517 — — — 87,517 5.3 Subtotal 1,005,099 26,397 90,998 — 1,122,494 67.8 Managed care 247,844 — 17,664 — 265,508 16.0 Private and other 121,860 97,239 7,151 40,612(1)266,862 16.2 Total revenue $1,374,803 $123,636 $115,813 $40,612 $1,654,864 100.0% (1) Private and other payors also includes revenue from all payors generated in other ancillary services and urgent care centers for the year ended December 31, 2016. 130Table of ContentsTHE ENSIGN GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Year Ended December 31, 2015 Transitional andSkilled Services Assisted andIndependentLiving Services Home Healthand HospiceServices All Other Total Revenue Revenue % Medicaid $430,368 $19,642 $8,946 $— $458,956 34.2% Medicare 332,429 — 63,074 — 395,503 29.5 Medicaid-skilled 71,905 — — — 71,905 5.4 Subtotal 834,702 19,642 72,020 — 926,364 69.1 Managed care 194,743 — 12,027 — 206,770 15.4 Private and other 96,943 68,487 6,309 36,953(1)208,692 15.5 Total revenue $1,126,388 $88,129 $90,356 $36,953 $1,341,826 100.0% (1) Private and other payors also includes revenue from all payors generated in other ancillary services and urgent care centers for the year ended December 31, 2015.The following table sets forth selected financial data consolidated by business segment: Year Ended December 31, 2017 Transitional andSkilledServices(3) Assisted andIndependentLivingServices(3) Home Healthand HospiceServices All Other Elimination TotalRevenue from external customers $1,545,210 $136,646 $142,403 $25,058 $— $1,849,317Intersegment revenue (1) 3,023 — — 3,035 (6,058) —Total revenue $1,548,233 $136,646 $142,403 $28,093 $(6,058) $1,849,317Segment income (loss) (2) $140,272 $16,736 $19,717 $(95,440) $— $81,285Interest expense, net of interest income $(12,007)Income before provision for incometaxes $69,278Depreciation and amortization $29,928 $6,334 $945 $7,265 $— $44,472 (1) Intersegment revenue represents services provided at the Company's operating subsidiaries to the Company's other business lines.(2) Segment income (loss) includes depreciation and amortization expense and excludes general and administrative expense and interest expense for transitional and skilled services,assisted and independent living services and home health and hospice businesses. General and administrative expense is included in the "All Other" category.(3) The Company's campuses represent facilities that offer skilled nursing, assisted and/or independent living services. Revenue and expenses related to skilled nursing, assisted andindependent living services have been allocated and recorded in the respective reportable segment. Year Ended December 31, 2016 Transitional andSkilledServices(3) Assisted andIndependentLivingServices(3) Home Healthand HospiceServices All Other Elimination TotalRevenue from external customers $1,374,803 $123,636 $115,813 $40,612 $— $1,654,864Intersegment revenue (1) 2,929 — — 2,184 (5,113) —Total revenue $1,377,732 $123,636 $115,813 $42,796 $(5,113) $1,654,864Segment income (loss) (2) $118,118 $11,701 $16,571 $(54,543) $— $91,847Interest expense, net of interest income $(6,029)Income before provision for incometaxes $85,818Depreciation and amortization $26,298 $4,157 $924 $7,303 $— $38,682 (1) Intersegment revenue represents services provided at the Company's operating subsidiaries to the Company's other business lines.131Table of ContentsTHE ENSIGN GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)(2) Segment income (loss) includes depreciation and amortization expense and excludes general and administrative expense and interest expense for transitional and skilled services,assisted and independent living services and home health and hospice businesses. General and administrative expense is included in the "All Other" category.(3) The Company's campuses represent facilities that offer skilled nursing, assisted and/or independent living services. Revenue and expenses related to skilled nursing, assisted andindependent living services have been allocated and recorded in the respective reportable segment. Year Ended December 31, 2015 Transitional andSkilledServices(3) Assisted andIndependentLiving Services(3) Home Healthand HospiceServices All Other Elimination TotalRevenue from external customers $1,126,388 $88,129 $90,356 $36,953 $— $1,341,826Intersegment revenue (1) 2,447 — — 881 (3,328) —Total revenue $1,128,835 $88,129 $90,356 $37,834 $(3,328) $1,341,826Segment income (loss) (2) $136,744 $11,463 $13,584 $(68,709) $— $93,082Interest expense, net of interest income $(1,983)Income before provision for incometaxes $91,099Depreciation and amortization $18,008 $3,338 $980 $5,785 $— $28,111 (1) Intersegment revenue represents services provided at the Company's operating subsidiaries to the Company's other business lines.(2) Segment income (loss) includes depreciation and amortization expense and excludes general and administrative expense and interest expense for transitional and skilled services,assisted and independent living services and home health and hospice businesses. General and administrative expense is included in the "All Other" category.(3) The Company's campuses represent facilities that offer skilled nursing, assisted and/or independent living services. Revenue and expenses related to skilled nursing, assisted andindependent living services have been allocated and recorded in the respective reportable segment.The Company's transitional and skilled services segment income for the years ended December 31, 2017 and 2016 included continued obligationsunder the lease related to closed operations, lease termination costs and related closing expenses of $4,017 and $7,935, respectively. These amounts includedthe present value of future rental payments of approximately $2,715 and $6,512 and long-lived assets impairment of $111 and $137 for the years endedDecember 31, 2017 and 2016, respectively. These costs were not incurred for the year ended December 31, 2015. See Note 17, Leases for further detail.Included in the year ended December 31, 2017 is the loss recovery of $1,286 related to a facility that was closed in the prior year.8. ACQUISITIONSThe Company’s acquisition focus is to purchase or lease operating subsidiaries that are complementary to the Company’s current affiliated operations,accretive to the Company's business or otherwise advance the Company's strategy. The results of all the Company’s operating subsidiaries are included in theaccompanying Financial Statements subsequent to the date of acquisition. Acquisitions are accounted for using the acquisition method of accounting. TheCompany also enters into long-term leases that may include options to purchase the affiliated facilities. As a result, from time to time, the Company willacquire affiliated facilities that the Company has been operating under third-party leases.During the year ended December 31, 2017, the Company expanded its operations through a combination of long-term leases and purchases, with theaddition of eight stand-alone skilled nursing operations, nine stand-alone assisted and independent living operations, one campus operation, three homehealth agencies, three hospice agencies and one home care agency. The Company did not acquire any material assets or assume any liabilities other than thetenant's post-assumption rights and obligations under the long-term leases. The Company has also invested in ancillary services that are complementary to itsexisting transitional and skilled services, assisted and independent living services, and home health and hospice businesses. The aggregate purchase price forthese acquisitions for the year ended December 31, 2017 was $89,683. The addition of these operations added 905 operational skilled nursing beds and 594assisted living units operated by the Company's operating subsidiaries. The Company entered into a separate operations transfer agreement with the prioroperator as part of each transaction. Additionally, the Company's operating subsidiaries also opened four newly constructed stand-alone skilled nursingoperations under long-term lease agreements, which added 455 operational skilled nursing beds.During the year ended December 31, 2016, the Company expanded its operations with the addition of two home health agencies and five hospiceagencies. In addition, the Company acquired eighteen stand-alone skilled nursing operations and one post-acute care campus through a combination of long-term leases and purchases. As part of these acquisitions, the Company132Table of ContentsTHE ENSIGN GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)acquired the real estate at two of the skilled nursing operations and one post-acute care campus and entered into long term leases for sixteen skilled nursingoperations. The Company did not acquire any material assets or assume any liabilities other than the tenant's post-assumption rights and obligations underthe long-term lease. The Company also invested in new ancillary services that are complementary to its existing transitional and skilled services; assisted andindependent living services and home health and hospice businesses. The aggregate purchase price for these acquisitions for the year ended December 31,2016 was $64,521. The expansion of skilled nursing operations added 2,336 operational skilled nursing beds and ten assisted living units operated by theCompany's operating subsidiaries. The Company entered into a separate operations transfer agreement with the prior operator as part of each transaction.Additionally, the Company's operating subsidiaries opened six newly constructed post-acute care campuses under long-term lease agreements, which added463 operational skilled nursing beds and 142 assisted living units.During the year ended December 31, 2015, the Company continued to expand its operations with the addition of 50 stand-alone skilled nursing andassisted living operations, seven home health, hospice and home care agencies and three urgent care centers to its operations through a combination of long-term leases and purchases. The Company did not acquire any material assets or assume any liabilities other than the tenant's post-assumption rights andobligations under the long-term leases. As part of these transactions, we acquired the real estate at 18 of the skilled nursing and assisted and independentliving operations. In addition, the Company has invested in new business lines that are complementary to its existing transitional and skilled services;assisted and independent living services and home health and hospice businesses. The aggregate purchase price conveyed in all acquisitions was $119,965,including the assumption of liabilities of $8,939. The expansion of skilled nursing and assisted and independent living operations added 2,580 and 2,013operational skilled nursing beds and assisted and independent living units, respectively, operated by the Company's operating subsidiaries. The Companyalso entered into a separate operations transfer agreement with the prior operator as part of each transaction.The table below presents the allocation of the purchase price for the operations acquired in business combinations during the year ended December 31,2017, 2016 and 2015. As of the date of this filing, the preliminary allocation of the purchase price for certain acquisitions in the fourth quarter was notcompleted as necessary valuation information was not yet available. December 31, 2017 2016 2015Land$9,732 $1,054 $12,811Building and improvements53,735 21,057 73,502Equipment, furniture, and fixtures4,382 8,265 4,612Assembled occupancy762 1,299 895Definite-lived intangible assets— 363 360Goodwill13,962 30,343 10,617Favorable leases— 393 10,901Other indefinite-lived intangible assets7,018 1,741 6,285Other assets acquired, net of liabilities assumed92 6 (18) Total acquisitions$89,683 $64,521 $119,965In addition to the business combinations above, during the year ended December 31, 2017, the Company acquired Medicare and Medicaid licenses toadd to its existing operations for an aggregate purchase price of $195. For year ended December 31, 2016, the Company acquired the underlying real estate offifteen assisted living operations, which the Company previously operated under a long-term lease agreement for an aggregate purchase price of $127,348.For year ended December 31, 2015, the Company acquired the underlying real estate and assets of three skilled nursing operations that the Companypreviously operated under long-term lease agreements for an aggregate purchase price of $23,998, which included a promissory note of $6,248. These assetacquisitions did not impact the Company's operational bed or unit counts.Subsequent to December 31, 2017, the Company acquired two stand-alone assisted and independent living operations for an aggregate purchase price of$4,298. The addition of these operations added 74 assisted living units operated by the Company's operating subsidiaries.The Company’s acquisition strategy has been focused on identifying both opportunistic and strategic acquisitions within its target markets that offerstrong opportunities for return on invested capital. The operating subsidiaries acquired by the Company are frequently underperforming financially and canhave regulatory and clinical challenges to overcome. Financial information,133Table of ContentsTHE ENSIGN GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)especially with underperforming operating subsidiaries, is often inadequate, inaccurate or unavailable. Consequently, the Company believes that prioroperating results are not a meaningful representation of the Company’s current operating results or indicative of the integration potential of its newlyacquired operating subsidiaries. The businesses acquired during the year ended December 31, 2017 were not material acquisitions to the Companyindividually or in the aggregate. Accordingly, pro forma financial information is not presented. These acquisitions have been included in the December 31,2017 consolidated balance sheets of the Company, and the operating results have been included in the consolidated statements of operations of theCompany since the dates the Company gained effective control.9. PROPERTY AND EQUIPMENT— NetProperty and equipment, net consist of the following: December 31, 2017 2016Land$49,081 $47,565Buildings and improvements342,641 304,263Equipment181,530 153,170Furniture and fixtures5,244 6,931Leasehold improvements97,221 80,164Construction in progress5,460 2,441 681,177 594,534Less: accumulated depreciation(144,093) (110,036)Property and equipment, net$537,084 $484,498The Company disposed of $24,847 of land, building and equipment as part of the sale-leaseback transaction during the year ended December 31,2017. See Note 17, Leases for information on the sale-leaseback transaction. See also Note 8, Acquisitions for information on acquisitions during the yearended December 31, 2017.10. INTANGIBLE ASSETS — Net WeightedAverageLife (Years) December 31, 2017 2016 GrossCarryingAmount AccumulatedAmortization GrossCarryingAmount AccumulatedAmortization Intangible Assets Net NetLease acquisition costs 24.8 $483 $(99) $384 $483 $(78) $405Favorable leases 33.0 35,116 (6,568) 28,548 35,116 (4,589) 30,527Assembled occupancy 0.7 2,659 (2,631) 28 1,897 (1,897) —Facility trade name 30.0 733 (293) 440 733 (269) 464Customer relationships 18.7 4,933 (1,530) 3,403 4,933 (1,253) 3,680Total $43,924 $(11,121) $32,803 $43,162 $(8,086) $35,076Amortization expense was $3,035, $4,634 and $3,824 for the years ended December 31, 2017, 2016 and 2015, respectively. Of the $3,035 inamortization expense incurred during the year ended December 31, 2017, approximately $734 related to the amortization of patient base intangible assets atrecently acquired facilities, which is typically amortized over a period of four to eight months, depending on the classification of the patients and the level ofoccupancy in a new acquisition on the acquisition date. As of December 31, 2016, the Company removed $582 in customer relationships as part of the sale ofurgent care centers and $7,190 of favorable leases as part of the acquisition of the real estate of fifteen assisted living operations.Estimated amortization expense for each of the years ending December 31 is as follows:134Table of ContentsTHE ENSIGN GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)YearAmount20182,32920192,30120201,59320211,49720221,471Thereafter23,612 $32,80311. GOODWILL AND OTHER INDEFINITE-LIVED INTANGIBLE ASSETSThe Company tests goodwill during the fourth quarter of each year or more often if events or circumstances indicate there may be impairment. TheCompany performs its analysis for each reporting unit that constitutes a business for which discrete financial information is produced and reviewed byoperating segment management and provides services that are distinct from the other components of the operating segment, in accordance with theprovisions of Accounting Standards Codification topic 350, Intangibles—Goodwill and Other (ASC 350). This guidance provides the option to first assessqualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value, a "Step 0" analysis. If,based on a review of qualitative factors, it is more likely than not that the fair value of a reporting unit is less than its carrying value, the Company performs"Step 1" of the traditional two-step goodwill impairment test by comparing the net assets of each reporting unit to their respective fair values. The Companydetermines the estimated fair value of each reporting unit using a discounted cash flow analysis. In the event a unit's net assets exceed its fair value, animplied fair value of goodwill must be determined by assigning the unit's fair value to each asset and liability of the unit. The excess of the fair value of thereporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. An impairment loss is measured by the differencebetween the goodwill carrying value and the implied fair value.The Company performs its goodwill impairment test annually and evaluates goodwill when events or changes in circumstances indicate that itscarrying value may not be recoverable. The Company performs the annual impairment testing of goodwill using October 1 as the measurement date. TheCompany completed its goodwill impairment test as of October 1, 2017 and no impairments were identified. As of December 31, 2016, the Companyremoved $4,103 in goodwill as part of the sale of urgent care centers.The following table represents activity in goodwill by segment as of and for the year ended December 31, : Goodwill Transitional andSkilled Services Assisted andIndependentLiving Services Home Healthand HospiceServices All Other TotalJanuary 1, 2015$14,221 $1,756 $10,929 $3,363 $30,269Additions— 1,782 5,173 3,662 10,617December 31, 2015$14,221 $3,538 $16,102 $7,025 $40,886Less: Dispositions— — — (4,103) (4,103)Purchase price adjustment— — — (26) (26)Additions26,415 — 1,799 2,129 30,343December 31, 2016$40,636 $3,538 $17,901 $5,025 $67,100Additions4,850 420 6,421 2,271 13,962December 31, 2017$45,486 $3,958$24,322 $7,296 $81,062There was no impairment charge to goodwill for the years ended December 31, 2017, 2016 and 2015. The Company anticipates that the majority oftotal goodwill recognized will be fully deductible for tax purposes as of December 31, 2017. See further discussion of goodwill acquired at Note 8,Acquisitions.135Table of ContentsTHE ENSIGN GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)During the year ended December 31, 2017, the Company recorded $7,178 in Medicare and Medicaid licenses and $35 in trade name indefinite-livedintangible assets as part of its acquisitions. In addition, the Company disposed of $500 in Medicare license in fiscal year 2017.Other indefinite-lived intangible assets consists of the following: December 31, 2017December 31, 2016Trade name$1,181 $1,146Medicare and Medicaid licenses24,068 18,440 $25,249 $19,58612. RESTRICTED AND OTHER ASSETSRestricted and other assets consist of the following: December 31, 20172016Debt issuance costs, net$2,799 $3,611Long-term insurance losses recoverable asset5,394 4,104Deposits with landlords5,981 3,526Capital improvement reserves with landlords and lenders2,327 673Note receivable from sale of urgent care centers— 700Restricted and other assets$16,501 $12,614Included in restricted and other assets as of December 31, 2017 and 2016, are anticipated insurance recoveries related to the Company's workers'compensation, general and professional liability claims that are recorded on a gross rather than net basis in accordance with an Accounting Standards Updateissued by the FASB. Note receivable from sale of urgent centers was reclassified to current assets. The Company collected the receivable in January 2018.13. OTHER ACCRUED LIABILITIESOther accrued liabilities consist of the following: December 31, 20172016Quality assurance fee$4,864 $4,604Refunds payable21,661 18,368Deferred revenue7,066 6,994Cash held in trust for patients2,609 2,373Resident deposits6,574 6,099Dividends payable2,328 2,186Property taxes10,088 9,130Income tax payable— 1,182Operational closure liability910 1,972Other7,715 5,855Other accrued liabilities$63,815 $58,763Quality assurance fee represents amounts payable to Arizona, California, Colorado, Idaho, Iowa, Kansas, Nebraska, Nevada, Utah, Washington andWisconsin as a result of a mandated fee based on patient days or licensed beds. Refunds payable includes136Table of ContentsTHE ENSIGN GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)payables related to overpayments, duplicate payments and credit balances from various payor sources. Deferred revenue occurs when the Company receivespayments in advance of services provided. Resident deposits include refundable deposits to patients. Cash held in trust for patients reflects monies receivedfrom, or on behalf of, patients. Maintaining a trust account for patients is a regulatory requirement and, while the trust assets offset the liabilities, theCompany assumes a fiduciary responsibility for these funds. The cash balance related to this liability is included in other current assets in the accompanyingconsolidated balance sheets. Operational closure liability includes the short-term portion of the closing costs that are payable within the next 12 months. Theremaining long-term portion is included in other long-term liabilities in the accompanying consolidated balance sheets.14. INCOME TAXESThe Tax Act was enacted on December 22, 2017. Effective January 1, 2018 the Tax Act reduces the corporate rate from 35.0% to 21.0%. As of December31, 2017, the Company has not completed its accounting for the tax effects of the enactment of the Act; however, the Company has made a reasonableestimate of the effects on its existing deferred tax balances. The Company recognized an income tax expense of $3,915 in the year ended December 31, 2017to reflect the revaluation of the Company's net deferred tax assets based on the U.S. federal tax rate of 21.0%.The Company is currently analyzing the Tax Act and refining its calculations, which could potentially impact the measurement of the Company's taxbalances. The expected impact of the enactment of the Tax Act for fiscal year 2017 is reflected in the table below.The provision for income taxes on continuing operations for the years ended December 31, 2017, 2016 and 2015 is summarized as follows: Year Ended December 31, 2017 2016 2015Current: Federal$15,141 $30,043 $28,149State2,975 5,183 5,761 18,116 35,226 33,910Deferred: Federal5,428 (1,034) 2,026State986 (1,217) (754) 6,414 (2,251) 1,272Adjustment to deferred taxes for tax rate change3,915 — —Total$28,445 $32,975 $35,182A reconciliation of the federal statutory rate to the effective tax rate for income from continuing operations for the years ended December 31, 2017,2016 and 2015, respectively, is comprised as follows: December 31, 2017 2016 2015Income tax expense at statutory rate35.0 % 35.0 % 35.0 %State income taxes - net of federal benefit3.1 3.0 3.6Non-deductible expenses1.7 0.9 0.6Equity compensation(4.5) — —Revaluation of deferred5.7 — —Other adjustments0.1 (0.5) (0.6)Total income tax provision41.1 % 38.4 % 38.6 %The Company's deferred tax assets and liabilities as of December 31, 2017 and 2016 are summarized below. The deferred taxes in 2017 reflect thefederal tax rate of 21.0%, whereas 2016 reflect a federal tax rate of 35.0%.137Table of ContentsTHE ENSIGN GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) December 31, 2017 2016Deferred tax assets (liabilities): Accrued expenses$16,500 $21,732Allowance for doubtful accounts11,090 15,956Tax credits3,334 3,461Insurance5,135 7,333 36,059 48,482Valuation allowance(530) —Total deferred tax assets35,529 48,482State taxes(911) (1,023)Depreciation and amortization(18,248) (20,643)Prepaid expenses(3,625) (3,743)Total deferred tax liabilities(22,784) (25,409)Net deferred tax assets$12,745 $23,073The Company has recorded a decrease related to deferred tax assets and deferred tax liabilities of $17,995 and $14,080, respectively, with a netadjustment to deferred income tax expense of $3,915 for the year ended December 31, 2017 as a result of the Tax Act.The Company had state credit carryforwards as of December 31, 2017 and 2016 of $3,302 and $3,430, respectively. These carryforwards almost entirelyrelate to state limitations on the application of Enterprise Zone employment-related tax credits. Unless the Company uses the Enterprise Zone credits beforehand, the carryforward will begin to expire in 2023. The remainder of these carryforwards relates to credits against the Texas margin tax and is expected tocarry forward until 2027. As of December 31, 2017 a valuation allowance of $530 was recorded against the Enterprise Zone credits as the Company believesit is more likely than not that some of the benefit of the credits will not be realized.The Company's operating loss carry forwards for both federal and states were not material during the year ended December 31, 2017 and 2016.The Federal statutes of limitations on the Company's 2011, 2012, and 2013 income tax years lapsed during the third quarter of 2015, 2016, and 2017,respectively. During the fourth quarter of each year, various state statutes of limitations also lapsed. The lapses for the years ended December 31, 2017, 2016,and 2015 had no impact on the Company's unrecognized tax benefits.As of December 31, 2017, 2016 and 2015, the Company did not have any unrecognized tax benefits, net of their state benefits, that would affect theCompany's effective tax rate. The Company classifies interest and/or penalties on income tax liabilities or refunds as additional income tax expense orincome. Such amounts are not material.15. DEBTLong-term debt consists of the following: December 31, 2017 2016Term loan with SunTrust, interest payable quarterly$140,625 $148,125Credit facility with SunTrust50,000 122,000Mortgage loans and promissory note, principal and interest payable monthly, interest at fixed rate125,394 14,032 316,019 284,157Less: current maturities(9,939) (8,129)Less: debt issuance costs(3,090) (542) $302,990 $275,486138Table of ContentsTHE ENSIGN GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Credit Facility with a Lending Consortium Arranged by SunTrustThe Company maintains a credit facility with a lending consortium arranged by SunTrust (as amended to date, the Credit Facility). The Companyoriginally entered into the Credit Facility in an aggregate principal amount of $150,000 in May 2014. Under the Credit Facility, the Company could seek toobtain incremental revolving or term loans in an aggregate amount not to exceed $75,000. The interest rates applicable to loans under the Credit Facility are,at the Company’s option, equal to either a base rate plus a margin ranging from 1.25% to 2.25% per annum or LIBOR plus a margin ranging from 2.25% to3.25% per annum, based on the debt to Consolidated EBITDA ratio of the Company and its operating subsidiaries as defined in the agreement. In addition,the Company will pay a commitment fee on the unused portion of the commitments under the Credit Facility that will range from 0.30% to 0.50% per annum,depending on the debt to Consolidated EBITDA ratio of the Company and its operating subsidiaries. Loans made under the Credit Facility are not subject tointerim amortization. The Company is not required to repay any loans under the Credit Facility prior to maturity, other than to the extent the outstandingborrowings exceed the aggregate commitments under the Credit Facility.On February 5, 2016, the Company amended its existing revolving credit facility to increase its aggregate principal amount available to $250,000 (theAmended Credit Facility). Under the credit facility, the Company may seek to obtain incremental revolving or term loans in an aggregate amount not toexceed $150,000. The interest rates applicable to loans under the credit facility are, at the Company's option, equal to either a base rate plus a margin rangingfrom 0.75% to 1.75% per annum or LIBOR plus a margin ranging from 1.75% to 2.75% per annum, based on the Consolidated Total Net Debt toConsolidated EBITDA ratio (as defined in the agreement). In addition, the Company will pay a commitment fee on the unused portion of the commitmentsunder the credit facility that will range from 0.30% to 0.50% per annum, depending on the Consolidated Total Net Debt to Consolidated EBITDA ratio of theCompany and its subsidiaries. The Company is permitted to prepay all or any portion of the loans under the credit facility prior to maturity without premiumor penalty, subject to reimbursement of any LIBOR breakage costs of the lenders.On July 19, 2016, the Company entered into the second amendment to the credit facility (Second Amended Credit Facility), which amended theexisting credit agreement to increase the aggregate principal amount up to $450,000. The Second Amended Credit Facility is comprised of a $300,000revolving credit facility and a $150,000 term loan. Borrowings under the term loan portion of the Second Amended Credit Facility mature on February 5,2021 and amortize in equal quarterly installments, in an aggregate annual amount equal to 5.0% per annum of the original principal amount. The interestrates and commitment fee applicable to the Second Amended Credit Facility are similar to the Amended Credit Facility discussed below. Except as set forthin the Second Amended Credit Facility, all other terms and conditions of the Amended Credit Facility remained in full force and effect as described below.The Credit Facility is guaranteed, jointly and severally, by certain of the Company’s wholly owned subsidiaries, and is secured by a pledge of stock ofthe Company's material operating subsidiaries as well as a first lien on substantially all of its personal property. The credit facility contains customarycovenants that, among other things, restrict, subject to certain exceptions, the ability of the Company and its operating subsidiaries to grant liens on theirassets, incur indebtedness, sell assets, make investments, engage in acquisitions, mergers or consolidations, amend certain material agreements and paycertain dividends and other restricted payments. Under the Credit Facility, the Company must comply with financial maintenance covenants to be testedquarterly, consisting of a maximum Consolidated Total Net Debt to consolidated EBITDA ratio (which shall be increased to 3.50:1.00 for the first fiscalquarter and the immediate following three fiscal quarters), and a minimum interest/rent coverage ratio (which cannot be below 1.50:1.00). The majority oflenders can require that the Company and its operating subsidiaries mortgage certain of its real property assets to secure the Amended Credit Facility if anevent of default occurs, the Consolidated Total Net Debt to consolidated EBITDA ratio is above 2.75:1.00 for two consecutive fiscal quarters, or its liquidityis equal or less than 10% of the Aggregate Revolving Commitment Amount (as defined in the agreement) for ten consecutive business days, provided thatsuch mortgages will no longer be required if the event of default is cured, the Consolidated Total Net Debt to consolidated EBITDA ratio is below 2.75:1.00for two consecutive fiscal quarters, or its liquidity is above 10% of the Aggregate Revolving Commitment Amount (as defined in the agreement) or ninetyconsecutive days, as applicable. As of December 31, 2017, the Company's operating subsidiaries had $190,625 outstanding under the Credit Facility. Theoutstanding balance on the term loan was $140,625, of which $7,500 is classified as short-term and the remaining $133,125 is classified as long-term. Theoutstanding balance on the revolving Credit Facility was $50,000, which is classified as long-term. The Company was in compliance with all loan covenantsas of December 31, 2017.As of February 2, 2018, there was approximately $195,625 outstanding under the Credit Facility.Mortgage Loans and Promissory Note139Table of ContentsTHE ENSIGN GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)In December 2017, seventeen of the Company's subsidiaries entered into mortgage loans in the aggregate amount of $112,000. The mortgage loans areinsured with Department of Housing and Urban Development (HUD), which subjects these subsidiaries to HUD oversight and periodic inspections. Themortgage loans and note bear fixed interest rates of 3.3% per annum. Amounts borrowed under the mortgage loans may be prepaid, subject to prepaymentfees of the principal balance on the date of prepayment. During the first three years, the prepayment fee is 10% and is reduced by 3% in the fourth year of theloan, and reduced by 1.0% per year for years five through ten of the loan. There is no prepayment penalty after year ten. The terms of the mortgage loans are30 to 35-years. The borrowings were arranged by Lancaster Pollard Mortgage Company, LLC, and insured by HUD. Loan proceeds were used to pay downpreviously drawn amounts on Ensign's revolving line of credit. In addition to refinancing existing borrowings, the proceeds of the HUD-insured debt helpedfund acquisitions, to renovate and upgrade existing and future facilities, to cover working capital needs and for other business purposes.In addition to the HUD mortgage loans above, the Company had outstanding indebtedness under mortgage loans insured with HUD and a promissorynote issued in connection with various acquisitions. These mortgage loans and note bear fixed interest rates between 2.6% and 5.3% per annum. Amountsborrowed under the mortgage loans may be prepaid starting after the second anniversary of the notes subject to prepayment fees of the principal balance onthe date of prepayment. These prepayment fees are reduced by 1.0% per year for years three through eleven of the loan. There is no prepayment penalty afteryear eleven. The term of the mortgage loans and the note is between 12 and 33 years. The mortgage loans and note are secured by the real propertycomprising the facilities and the rents, issues and profits thereof, as well as all personal property used in the operation of the facilities.As of December 31, 2017, the Company's operating subsidiaries had $125,394 outstanding under the mortgage loans and note, of which $2,439 isclassified as short-term and the remaining $122,955 is classified as long-term. The Company was in compliance with all loan covenants as of December 31,2017.Based on Level 2, the carrying value of the Company's long-term debt is considered to approximate the fair value of such debt for all periods presentedbased upon the interest rates that the Company believes it can currently obtain for similar debt.Future principal payments due under the long-term debt arrangements discussed above are as follows:Years Ending December 31, Amount2018 9,9392019 10,1062020 10,2032021 170,9262022 2,904Thereafter 111,941 $316,019Off-Balance Sheet ArrangementsDuring the year ended December 31, 2017, the Company increased the letters of credit by $3,994. As of December 31, 2017, the Company hadapproximately $6,304 on the credit facility of borrowing capacity pledged as collateral to secure outstanding letters of credit.16. OPTIONS AND AWARDSStock-based compensation expense consists of share-based payment awards made to employees and directors, including employee stock options andrestricted stock awards, based on estimated fair values. As stock-based compensation expense recognized in the Company’s consolidated statements ofincome for the years ended December 31, 2017, 2016 and 2015 was based on awards ultimately expected to vest, it has been reduced for estimated forfeitures.The Company estimates forfeitures at the time of grant and, if necessary, revises the estimate in subsequent periods if actual forfeitures differ.During the second quarter of 2017, the Company's shareholders approved the 2017 Omnibus Incentive Plan (the 2017 Plan). The total number of sharesavailable under all of the Company’s stock incentive plans was 6,277 as of December 31, 2017. The140Table of ContentsTHE ENSIGN GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Company retired the 2001 Stock Option, Deferred Stock and Restricted Stock Plan (2001 Plan), the 2005 Stock Incentive Plan (2005 Plan), and the 2007Omnibus Incentive Plan (2007 Plan) as a result of the approval of the 2017 Plan.2007 Omnibus Incentive Plan - The 2007 Plan authorizes the sale of up to 2,000 shares of common stock to officers, employees, directors andconsultants of the Company. In addition, the number of shares of common stock reserved under the 2007 Plan will automatically increase on the first day ofeach fiscal year, beginning on January 1, 2008, in an amount equal to the lesser of (i) 1,000 shares of common stock, or (ii) 2% of the number of sharesoutstanding as of the last day of the immediately preceding fiscal year, or (iii) such lesser number as determined by the Company's board of directors. Grantednon-employee director options vest and become exercisable in three equal annual installments, or the length of the term if less than 3 years, on thecompletion of each year of service measured from the grant date. All other granted options vest over 5 years at 20% per year on the anniversary of the grantdate. Options expire 10 years from the date of grant. The Company granted 156 options and 61 restricted stock awards from the 2007 Plan in the first half of2017 prior to the retirement of the 2007 Plan.2017 Omnibus Incentive Plan - The 2017 Plan provides for the issuance of 6,881 shares of common stock. The number of shares available to be issuedunder the 2017 Plan will be reduced by (i) one share for each share that relates to an option or stock appreciation right award and (ii) 2.5 shares for each sharewhich relates to an award other than a stock option or stock appreciation right award (a full-value award). Granted non-employee director options vest andbecome exercisable in three equal annual installments, or the length of the term if less than 3 years, on the completion of each year of service measured fromthe grant date. All other options generally vest over 5 years at 20% per year on the anniversary of the grant date. Options expire 10 years from the date ofgrant. At December 31, 2017, there were 6,277 unissued shares of common stock available for issuance under this plan.The Company uses the Black-Scholes option-pricing model to recognize the value of stock-based compensation expense for all share-based paymentawards. Determining the appropriate fair-value model and calculating the fair value of stock-based awards at the grant date requires considerable judgment,including estimating stock price volatility, expected option life and forfeiture rates. The Company develops estimates based on historical data and marketinformation, which can change significantly over time. The Black-Scholes model required the Company to make several key judgments including:•The expected option term is calculated by the average of the contractual term of the options and the weighted average vesting period for all options.The calculation of the expected option term is based on the Company's experience due to sufficient history.•Estimated volatility also reflects the application of ASC 718 interpretive guidance and, accordingly, incorporates historical volatility of similarpublic entities until sufficient information regarding the volatility of the Company's share price becomes available. The Company has utilized itsown experience to calculate estimated volatility for options granted.•The dividend yield is based on the Company's historical pattern of dividends as well as expected dividend patterns.•The risk-free rate is based on the implied yield of U.S. Treasury notes as of the grant date with a remaining term approximately equal to the expectedterm.•Estimated forfeiture rate of approximately 9.73% per year is based on the Company's historical forfeiture activity of unvested stock options.Stock OptionsThe Company granted 481 options and 173 restricted stock awards from the 2007 and 2017 Plans during the year ended December 31, 2017. TheCompany used the following assumptions for stock options granted during the years ended December 31, 2017, 2016 and 2015:Grant Year Options Granted Weighted Average Risk-Free Rate Expected Life Weighted AverageVolatility Weighted AverageDividend Yield2017 481 2.0% 6.2 years 35.2% 0.8%2016 497 1.4% 6.3 years 37.8% 0.8%2015 637 1.7% 6.5 years 39.5% 0.6%For the years ended December 31, 2017, 2016 and 2015, the following represents the exercise price and fair value displayed at grant date for stockoption grants:141Table of ContentsTHE ENSIGN GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Grant Year Granted WeightedAverageExercise Price WeightedAverage FairValue ofOptions2017 481 $20.31 $7.002016 497 $19.43 $7.002015 637 $23.27 $9.08The weighted average exercise price equaled the weighted average fair value of common stock on the grant date for all options granted during theperiods ended December 31, 2017, 2016 and 2015 and therefore, the intrinsic value was $0 at date of grant.The following table represents the employee stock option activity during the years ended December 31, 2017, 2016 and 2015: Number ofOptionsOutstanding WeightedAverageExercise Price Number ofOptions Vested WeightedAverageExercise Priceof OptionsVestedJanuary 1, 20155,532 $8.51 2,218 $4.70Granted637 23.27 Forfeited(233) 12.55 Exercised(488) 5.20 December 31, 20155,448 $10.36 2,526 $6.35Granted49719.43 Forfeited(127)14.46 Exercised(642)6.47 December 31, 20165,176 $11.62 2,704 $8.18Granted481 20.31 Forfeited(178) 15.82 Exercised(740) 6.93 December 31, 20174,739 $13.08 2,776 $10.07The following summary information reflects stock options outstanding, vested and related details as of December 31, 2017: Stock OptionsVested Stock Options Outstanding NumberOutstanding Black-ScholesFair Value RemainingContractual Life(Years) Vested andExercisableYear of Grant Exercise Price 2008 2.56-4.06 185 $292 1 1852009 4.06-4.56 420 907 2 4202010 4.77-4.96 116 281 3 1162011 5.90-7.99 134 454 4 1342012 6.56-7.96 435 1,603 5 4352013 7.98-11.49 522 2,539 6 3902014 10.55-18.94 1,458 8,272 7 7892015 21.47-25.24 549 5,000 8 2192016 18.79-19.89 450 3,140 9 882017 18.64-22.90 470 3,291 10 —Total 4,739 $25,779 2,776142Table of ContentsTHE ENSIGN GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Restricted Stock AwardsThe Company granted 173, 299 and 323 restricted stock awards during the years ended December 31, 2017, 2016 and 2015, respectively. All awardswere granted at an exercise price of $0 and generally vest over five years. The fair value per share of restricted awards granted during the 2017, 2016 and2015 ranged from $18.47 to $22.90, $18.79 to $23.23 and $21.00 to $26.55, respectively. The fair value per share includes quarterly stock awards to non-employee directors.A summary of the status of the Company's non-vested restricted stock awards as of December 31, 2017 and changes during the years ended December31, 2017, 2016 and 2015 is presented below: Non-Vested RestrictedAwards Weighted AverageGrant Date Fair ValueNonvested at January 1, 2015366 $15.15Granted323 22.99Vested(234) 17.36Forfeited(30) 16.81Nonvested at December 31, 2015425 $19.79Granted299 20.55Vested(279) 19.58Forfeited(16) 20.85Nonvested at December 31, 2016429 $20.42Granted173 20.21Vested(195) 19.79Forfeited(24) 20.34Nonvested at December 31, 2017383 $20.65During the year ended December 31, 2017, the Company granted 30 automatic quarterly stock awards to non-employee directors for their service on theCompany's board of directors. The fair value per share of these stock awards ranged from $18.47 to $21.96 based on the market price on the grant date.Share-based compensation expense recognized for the Company's equity incentive plans for the years ended December 31, 2017, 2016 and 2015 was asfollows: Year Ended December 31, 2017 2016 2015Share-based compensation expense related to stock options$4,773 $4,793 4,164Share-based compensation expense related to restricted stock awards2,322 2,371 1,931Share-based compensation expense related to stock options and restricted stock awards to non-employeedirectors1,236 612 582Total$8,331$7,776 $6,677In future periods, the Company expects to recognize approximately $11,063 and $6,916 in share-based compensation expense for unvested optionsand unvested restricted stock awards, respectively, that were outstanding as of December 31, 2017. Future share-based compensation expense will berecognized over 2.9 and 3.4 weighted average years for unvested options and restricted stock awards, respectively. There were 1,963 unvested andoutstanding options at December 31, 2017, of which 1,864 are expected to vest. The weighted average contractual life for options outstanding, vested andexpected to vest at December 31, 2017 was 5.7 years.The aggregate intrinsic value of options outstanding, vested, expected to vest and exercised as of and for the years ended December 31, 2017, 2016 and2015 is as follows:143Table of ContentsTHE ENSIGN GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) December 31,Options 2017 2016 2015Outstanding $44,060 $55,610 $67,508Vested 33,976 38,101 41,128Expected to vest 9,311 15,983 23,508Exercisable 10,481 9,199 8,709The intrinsic value is calculated as the difference between the market value of the underlying common stock and the exercise price of the options.Equity Instrument Denominated in the Shares of a SubsidiaryOn May 26, 2016, the Company implemented a management equity plan and granted stock options and restricted stock awards of a subsidiary of theCompany to employees and management of that subsidiary (Subsidiary Equity Plan). These awards generally vest over a period of five years or upon theoccurrence of certain prescribed events. The value of the stock options and restricted stock awards is tied to the value of the common stock of the subsidiary.The awards can be put to the Company at various prescribed dates, which in no event is earlier than six months after vesting of the restricted awards orexercise of the stock options. The Company can also call the awards, generally upon employee termination.The grant-date fair value of the awards is recognized as compensation expense over the relevant vesting periods, with a corresponding adjustment tononcontrolling interests. The grant value was determined based on an independent valuation of the subsidiary shares. For the years ended December 31, 2017and 2016, the Company expensed $1,364 and $1,325, respectively, in share-based compensation related to the Subsidiary Equity Plan. There was no expenseincurred for the year ended December 31, 2015 as the plan was implemented in the second quarter of 2016.The aggregate number of the Company's common shares that would be required to settle these awards at current estimated fair values, including vestedand unvested awards, at December 31, 2017 and 2016 is 264 and 212, respectively. There was no comparable amount at December 31, 2015 as the plan wasimplemented in the second quarter of 2016.17. LEASESThe Company leases from CareTrust REIT, Inc. (CareTrust) real property associated with 92 affiliated skilled nursing, assisted living and independentliving facilities used in the Company’s operations under eight “triple-net” master lease agreements (collectively, the Master Leases), which range in termsfrom 12 to 19 years. At the Company’s option, the Master Leases may be extended for two or three five-year renewal terms beyond the initial term, on thesame terms and conditions. The extension of the term of any of the Master Leases is subject to the following conditions: (1) no event of default under any ofthe Master Leases having occurred and being continuing; and (2) the tenants providing timely notice of their intent to renew. The term of the Master Leasesis subject to termination prior to the expiration of the then current term upon default by the tenants in their obligations, if not cured within any applicablecure periods set forth in the Master Leases. If the Company elects to renew the term of a Master Lease, the renewal will be effective to all, but not less than all,of the leased property then subject to the Master Lease.The Company does not have the ability to terminate the obligations under a Master Lease prior to its expiration without CareTrust’s consent. If a MasterLease is terminated prior to its expiration other than with CareTrust’s consent, the Company may be liable for damages and incur charges such as continuedpayment of rent through the end of the lease term as well as maintenance and repair costs for the leased property.Commencing the third year, the rent structure under the Master Leases includes a fixed component, subject to annual escalation equal to the lesser of(1) the percentage change in the Consumer Price Index (but not less than zero) or (2) 2.5%. In addition to rent, the Company is required to pay the following:(1) all impositions and taxes levied on or with respect to the leased properties (other than taxes on the income of the lessor); (2) all utilities and other servicesnecessary or appropriate for the leased properties and the business conducted on the leased properties; (3) all insurance required in connection with the leasedproperties and the business conducted on the leased properties; (4) all facility maintenance and repair costs; and (5) all fees in connection with any licensesor authorizations necessary or appropriate for the leased properties and the business conducted on the leased properties. Total rent expense under the MasterLeases was approximately $57,169, $56,271 and $56,000 for the years ended December 31, 2017, 2016 and 2015, respectively.144Table of ContentsTHE ENSIGN GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Among other things, under the Master Leases, the Company must maintain compliance with specified financial covenants measured on a quarterlybasis, including a portfolio coverage ratio and a minimum rent coverage ratio. The Master Leases also include certain reporting, legal and authorizationrequirements. The Company is not aware of any defaults as of December 31, 2017.The Company also leases certain affiliated operations and its administrative offices under non-cancelable operating leases, most of which have initiallease terms ranging from five to 20 years. The Company has entered into multiple lease agreements with various landlords to operate newly constructed state-of-the-art, full-service healthcare resorts upon completion of construction. The term of each lease is 15 years with two five-year renewal options and is subjectto annual escalation equal to the percentage change in the Consumer Price Index with a stated cap percentage. In addition, the Company leases certain of itsequipment under non-cancelable operating leases with initial terms ranging from three to five years years. Most of these leases contain renewal options,certain of which involve rent increases. Total rent expense, inclusive of straight-line rent adjustments and rent associated with the Master Leases noted above,was $132,932, $125,221 and $89,264 for the years ended December 31, 2017, 2016 and 2015, respectively.Twenty-five of the Company’s affiliated facilities, excluding the facilities that are operated under the Master Leases with CareTrust, are operated undersix separate master lease arrangements. Under these master leases, a breach at a single facility could subject one or more of the other facilities covered by thesame master lease to the same default risk. Failure to comply with Medicare and Medicaid provider requirements is a default under several of the Company’sleases, master lease agreements and debt financing instruments. In addition, other potential defaults related to an individual facility may cause a default of anentire master lease portfolio and could trigger cross-default provisions in the Company’s outstanding debt arrangements and other leases. With an indivisiblelease, it is difficult to restructure the composition of the portfolio or economic terms of the lease without the consent of the landlord.In March 2017, the Company voluntarily discontinued operations at one of its skilled nursing facilities after determining that the facility could notcompetitively operate in the marketplace without substantial investment renovating the building. After careful consideration, the Company determined thatthe costs to renovate the facility could outweigh the future returns from the operation. As part of this closure, the Company entered into an agreement withits landlord allowing for the closure of the property, as well as other provisions, to allow its landlord to transfer the property and the licenses free and clear ofthe applicable master lease. This arrangement does not impact the rent expense paid in 2017, or expected to be paid in future periods, and has no materialimpact on the Company's lease coverage ratios under the Master Leases. The Company recorded a continued obligation liability under the lease and relatedclosing expenses of $2,830, including the present value of rental payments of approximately $2,715, in 2017. Residents of the affected facility weretransferred to local skilled nursing facilities.During the first quarter of 2016, the Company voluntarily discontinued operations at one of its skilled nursing facilities in order to preserve the overallability to serve the residents in surrounding counties after careful consideration and some clinical survey challenges. As part of this closure, the Companyentered into an agreement with its landlord allowing for the closure of the property as well as other provisions to allow its landlord to transfer the propertyand the licenses free and clear of the applicable master lease. This arrangement does not impact the rental payments and has no material impact on theCompany's lease coverage ratios under the Master Leases. The Company recorded a continued obligation liability under the lease and related closingexpenses of $7,935, including the present value of rental payments of approximately $6,512, in 2016. Residents of the affected facility were transferred tolocal skilled nursing facilities. In 2017, the Company recovered $1,286 of certain losses that were recorded in 2016 related to the closure of the operation.The loss recovery was recorded as a gain in 2017.In March 2017, the Company entered into definitive agreements to sell the properties of two skilled nursing facilities and one assisted livingcommunity. The transaction closed in the second quarter of 2017. Upon closing the transaction, the Company leased the properties under a triple-net masterlease with an initial 20-year term, with three 5-year optional extensions, at CPI-based annual escalators. The Company received $38,000 in proceeds. Thecarrying value for the sale was $24,847. Under applicable accounting guidance, the master lease was classified as an operating lease. The Companyrecognized a deferred gain on the transaction of $13,153 in 2017 that is amortized over the life of the lease.During the first quarter of 2017, the Company terminated its lease obligations on four transitional care facilities that are currently under developmentand one newly constructed stand-alone skilled nursing operation. The Company recorded $1,187 in lease termination costs and long-lived asset impairment.Future minimum lease payments for all leases as of December 31, 2017 are as follows:145Table of ContentsTHE ENSIGN GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Year Amount2018 135,8412019 135,3952020 135,1492021 134,9422022 133,446Thereafter 1,080,348 $1,755,12118. SELF INSURANCE RESERVESThe following table represents activity in our insurance reserves as of and for the years ended December 31, 2017 and 2016: General andProfessionalLiability Workers'Compensation Health TotalBalance January 1, 201630,710 20,219 5,074 $56,003Current year provisions23,149 12,887 38,151 74,187Claims paid and direct expenses(18,186) (10,290) (37,586) (66,062)Change in long-term insurance losses recoverable637 586 — 1,223Balance December 31, 201636,310 23,402 5,639 65,351Current year provisions20,396 15,202 53,796 89,394Claims paid and direct expenses(16,133) (12,455) (54,712) (83,300)Change in long-term insurance losses recoverable361 930 — 1,291Balance December 31, 2017$40,934 $27,079 $4,723 $72,736Included in long-term insurance losses recoverable as of December 31, 2017 and 2016, are anticipated insurance recoveries related to the Company'sgeneral and professional liability claims that are recorded on a gross rather than net basis in accordance with GAAP.19. COMMITMENTS AND CONTINGENCIESRegulatory Matters — Laws and regulations governing Medicare and Medicaid programs are complex and subject to interpretation. Compliance withsuch laws and regulations can be subject to future governmental review and interpretation, as well as significant regulatory action including fines, penalties,and exclusion from certain governmental programs. Included in these laws and regulations is the Health Insurance Portability and Accountability Act of 1996(HIPAA), which requires healthcare providers (among other things) to safeguard and keep confidential protected health information. In late December 2016,the Company learned of a potential issue at one of its independent operating entities in Arizona which involved the limited and inadvertent disclosure ofcertain confidential information. The issue has been internally investigated, addressed and disclosed as per the HIPAA obligations. The Company believesthat it is presently in compliance in all material respects with all applicable laws and regulations.Cost-Containment Measures — Both government and private pay sources have instituted cost-containment measures designed to limit payments madeto providers of healthcare services, and there can be no assurance that future measures designed to limit payments made to providers will not adversely affectthe Company.Indemnities — From time to time, the Company enters into certain types of contracts that contingently require the Company to indemnify partiesagainst third-party claims. These contracts primarily include (i) certain real estate leases, under which the Company may be required to indemnify propertyowners or prior facility operators for post-transfer environmental or other liabilities and other claims arising from the Company’s use of the applicablepremises, (ii) operations transfer agreements, in which the Company agrees to indemnify past operators of facilities the Company acquires against certainliabilities arising from the transfer of the operation and/or the operation thereof after the transfer, (iii) certain lending agreements, under which the Companymay be146Table of ContentsTHE ENSIGN GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)required to indemnify the lender against various claims and liabilities, and (iv) certain agreements with the Company’s officers, directors and employees,under which the Company may be required to indemnify such persons for liabilities arising out of their employment relationships. The terms of suchobligations vary by contract and, in most instances, a specific or maximum dollar amount is not explicitly stated therein. Generally, amounts under thesecontracts cannot be reasonably estimated until a specific claim is asserted. Consequently, because no claims have been asserted, no liabilities have beenrecorded for these obligations on the Company’s balance sheets for any of the periods presented.Litigation — The skilled nursing business involves a significant risk of liability given the age and health of the patients and residents served by theCompany's operating subsidiaries. The Company, its operating subsidiaries, and others in the industry are subject to an increasing number of claims andlawsuits, including professional liability claims, alleging that services provided have resulted in personal injury, elder abuse, wrongful death or other relatedclaims. The defense of these lawsuits may result in significant legal costs, regardless of the outcome, and can result in large settlement amounts or damageawards.In addition to the potential lawsuits and claims described above, the Company is also subject to potential lawsuits under the Federal False Claims Actand comparable state laws alleging submission of fraudulent claims for services to any healthcare program (such as Medicare) or payor. A violation mayprovide the basis for exclusion from federally-funded healthcare programs. Such exclusions could have a correlative negative impact on the Company’sfinancial performance. Some states, including California, Arizona and Texas, have enacted similar whistleblower and false claims laws and regulations. Inaddition, the Deficit Reduction Act of 2005 created incentives for states to enact anti-fraud legislation modeled on the Federal False Claims Act. As such, theCompany could face increased scrutiny, potential liability and legal expenses and costs based on claims under state false claims acts in markets in which itdoes business.In May 2009, Congress passed the Fraud Enforcement and Recovery Act (FERA) of 2009 which made significant changes to the Federal False ClaimsAct (FCA), expanding the types of activities subject to prosecution and whistleblower liability. Following changes by FERA, health care providers facesignificant penalties for the knowing retention of government overpayments, even if no false claim was involved. Health care providers can now be liable forknowingly and improperly avoiding or decreasing an obligation to pay money or property to the government. This includes the retention of any governmentoverpayment. The government can argue, therefore, that a FCA violation can occur without any affirmative fraudulent action or statement, as long as it isknowingly improper. In addition, FERA extended protections against retaliation for whistleblowers, including protections not only for employees, but alsocontractors and agents. Thus, there is generally no need for an employment relationship in order to qualify for protection against retaliation forwhistleblowing.Healthcare litigation (including class action litigation) is common and is filed based upon a wide variety of claims and theories, and the Company isroutinely subjected to varying types of claims. One particular type of suit arises from alleged violations of minimum staffing requirements for skilled nursingfacilities in those states which have enacted such requirements. Failure to meet these requirements can, among other things, jeopardize a facility's compliancewith conditions of participation under certain state and federal healthcare programs; it may also subject the facility to a notice of deficiency, a citation, a civilmoney penalty, or litigation. These class-action “staffing” suits have the potential to result in large jury verdicts and settlements. The Company expects theplaintiff's bar to continue to be aggressive in their pursuit of these staffing and similar claims.The Company has in the past been subject to class action litigation involving claims of alleged violations of regulatory requirements related to staffing.While the Company has been able to settle these claims without a material ongoing adverse effect on its business, future claims could be brought that maymaterially affect its business, financial condition and results of operations. Other claims and suits, including class actions, continue to be filed against theCompany and other companies in its industry. If there were a significant increase in the number of these claims or an increase in amounts owing shouldplaintiffs be successful in their prosecution of these claims, this could materially adversely affect the Company’s business, financial condition, results ofoperations and cash flows.The Company and its operating subsidiaries have been, and continue to be, subject to claims and legal actions that arise in the ordinary course ofbusiness, including potential claims related to patient care and treatment as well as employment related claims. Since 2011, the Company has been involvedin a class action litigation claim alleging violations of state and federal wage and hour laws. In January 2017, the Company participated in an initialmediation session with plaintiffs' counsel. As a result of this discussion and due to (i) the fact no class had been certified (ii) the lack of specificity as to legaltheories put forth by the plaintiffs, (iii) the nature of the remedies sought and (iv) the lack of any basis on which to compute estimated compensatory and/orexemplary damages, the Company could not predict what the outcome of the pending purported class action lawsuit would be, what the timing of theultimate resolution of this lawsuit would be, or an estimate and/or range of possible loss related to it. In light of the inherent uncertainties involved in thepending class action lawsuit, the Company determined that we were not able to estimate the related costs or range of costs for the year ended December 31,2016.147Table of ContentsTHE ENSIGN GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)In March 2017, the Company was invited to engage in further mediation discussions to determine whether settlement in advance of a decision on classcertification was possible. In April 2017, the Company reached an agreement in principle to settle the subject class action litigation, without any admissionof liability and subject to approval by the California Superior Court. Based upon the recent change in case status, the Company recorded an accrual forestimated probable losses of $11,000, exclusive of legal fees, in the first quarter of 2017. The Company funded the settlement amount of $11,000 inDecember 2017, and it will be distributed to the class members in Q1 of 2018.Other claims and suits continue to be filed against the Company and other companies in its industry. By way of recent example, a general/premisesliability lawsuit was filed against one of the Company’s independent operating entities in San Luis Obispo, California, in connection with an alleged injuryto a non-employee/contractor. Further, another one of the Company’s independent operating entities was sued on allegations of professional negligence,which claim was recently settled. The Company does not expect that there will be any material ongoing adverse effect on the Company's business, financialcondition or results of operations in connection with the resolution of these matters.The Company cannot predict or provide any assurance as to the possible outcome of any litigation. If any litigation were to proceed, and the Companyand its operating subsidiaries are subjected to, alleged to be liable for, or agrees to a settlement of, claims or obligations under Federal Medicare statutes, theFederal False Claims Act, or similar State and Federal statutes and related regulations, the Company's business, financial condition and results of operationsand cash flows could be materially and adversely affected and its stock price could be adversely impacted. Among other things, any settlement or litigationcould involve the payment of substantial sums to settle any alleged civil violations, and may also include the assumption of specific procedural and financialobligations by the Company or its subsidiaries going forward under a corporate integrity agreement and/or other arrangement with the government.Medicare Revenue Recoupments — The Company is subject to reviews relating to Medicare services, billings and potential overpayments as a result ofRecovery Audit Contractors (RAC), Zone Program Integrity Contractors (ZPIC), Program Safeguard Contractors (PSC) and Medicaid Integrity Contributors(MIC) programs. As of December 31, 2017, seven of the Company's operating subsidiaries had probes scheduled and in process, both pre- and post-payment.The Company anticipates that these probe reviews will increase in frequency in the future. If a facility fails a probe review and subsequent re-probes, thefacility could then be subject to extended pre-pay review or extrapolation of the identified error rate to all billing in the same time period. None of theCompany's operating subsidiaries are currently on extended prepayment review, although that may occur in the future.U.S. Government Inquiry — In October 2013, the Company completed and executed a settlement agreement (the Settlement Agreement) with the DOJ,which received the final approval of the Office of Inspector General-HHS and the United States District Court for the Central District of California. Pursuant tothe Settlement Agreement, the Company made a single lump-sum remittance to the government in the amount of $48,000 in October 2013. The Company hasdenied engaging in any illegal conduct and has agreed to the settlement amount without any admission of wrongdoing in order to resolve the allegations andto avoid the uncertainty and expense of protracted litigation.In connection with the settlement and effective as of October 1, 2013, the Company entered into a five-year corporate integrity agreement (the CIA)with the Office of Inspector General-HHS. The CIA acknowledges the existence of the Company’s current compliance program, which is in accord with theOffice of the Inspector General (OIG)’s guidance related to an effective compliance program, and requires that the Company continue during the term of theCIA to maintain a program designed to promote compliance with the statutes, regulations, and written directives of Medicare, Medicaid, and all other Federalhealth care programs. The Company is also required to notify the Office of Inspector General-HHS in writing, of, among other things: (i) any ongoinggovernment investigation or legal proceeding involving an allegation that the Company has committed a crime or has engaged in fraudulent activities; (ii)any other matter that a reasonable person would consider a probable violation of applicable criminal, civil, or administrative laws related to compliance withfederal healthcare programs; and (iii) any change in location, sale, closing, purchase, or establishment of a new business unit or location related to items orservices that may be reimbursed by federal health care programs. The Company is also required to retain an Independent Review Organization (IRO) toreview certain clinical documentation annually for the term of the CIA. The Company has continued to meet the requirements under the Settlement Agreement and pass its IRO audits. Participation in federal healthcareprograms by the Company is not affected by the Settlement Agreement or the CIA. In the event of an uncured material breach of the CIA, the Company couldbe excluded from participation in federal healthcare programs and/or subject to prosecution.Concentrations148Table of ContentsTHE ENSIGN GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Credit Risk — The Company has significant accounts receivable balances, the collectability of which is dependent on the availability of funds fromcertain governmental programs, primarily Medicare and Medicaid. These receivables represent the only significant concentration of credit risk for theCompany. The Company does not believe there are significant credit risks associated with these governmental programs. The Company believes that anappropriate allowance has been recorded for the possibility of these receivables proving uncollectible, and continually monitors and adjusts these allowancesas necessary. The Company’s receivables from Medicare and Medicaid payor programs accounted for approximately 56.7% and 58.6% of its total accountsreceivable as of December 31, 2017 and 2016, respectively. Revenue from reimbursement under the Medicare and Medicaid programs accounted for 68.4%,67.8% and 69.1% of the Company's revenue for the years ended December 31, 2017, 2016 and 2015, respectively.Cash in Excess of FDIC Limits — The Company currently has bank deposits with financial institutions in the U.S. that exceed FDIC insurance limits.FDIC insurance provides protection for bank deposits up to $250. In addition, the Company has uninsured bank deposits with a financial institution outsidethe U.S. As of February 2, 2018, the Company had approximately $965 in uninsured cash deposits. All uninsured bank deposits are held at high quality creditinstitutions.20. DIVESTITURESIn 2016, the Company completed the sale of seventeen urgent care centers for an aggregate sale price of $41,492. As a result of the sale, the Companyrecognized a pretax gain of $19,160, which is included in operating income. Due to the disposition of the clinics, the Company is no longer the primarybeneficiary and the variable interest entities associated with the urgent care operations was deconsolidated from the Company's consolidated financialstatements as of December 31, 2016. At deconsolidation, the Company eliminated intercompany balances that previously existed. The sale of thisinvestment supports the Company's increased focus on growth opportunities in its business lines that are complementary to its existing transitional andskilled services.The sale transactions did not meet the criteria of a discontinued operation as they do not represent a strategic shift that has or will have a major effect onthe Company’s operations and financial results.21.DEFINED CONTRIBUTION PLANThe Company has a 401(k) defined contribution plan (the 401(k) Plan), whereby eligible employees may contribute up to 15% of their annual basicearnings. Additionally, the 401(k) Plan provides for discretionary matching contributions (as defined in the 401(k) Plan) by the Company. The Companyexpensed matching contributions to the 401(k) Plan of $1,028, $862 and $682 during the years ended December 31, 2017, 2016 and 2015, respectively.Beginning in 2007, the 401(k) Plan allowed eligible employees to contribute up to 90% of their eligible compensation, subject to applicable annual InternalRevenue Code limits.(b)Financial Statement SchedulesTHE ENSIGN GROUP, INC. and SUBSIDIARIESSchedule IIValuation and Qualifying Accounts AdditionsCharged toCosts andExpenses Balance atBeginning ofYear Balances at Endof Year Deductions (In thousands) Year Ended December 31, 2015 Allowance for doubtful accounts$(20,438) $(19,802) $9,932 $(30,308)Year Ended December 31, 2016 Allowance for doubtful accounts$(30,308) $(28,512) $19,029 $(39,791)Year Ended December 31, 2017 Allowance for doubtful accounts$(39,791) $(31,023) $26,853 $(43,961)All other schedules have been omitted because the information required to be set forth therein is not applicable or is shown in the consolidatedfinancial statements or notes thereto.149Exhibit 10.87Notice of Stock OptionsOptionee: «Participant_First_Name» «Participant_Last_Name»Option Number: «Option_Number»Address: «Street_Address» «City» «State» «Zip»Plan: 2017 Omnibus Incentive PlanNotice is hereby given of the following Option Award grant (the “Option”) to purchase shares of the Common Stock of The Ensign Group, Inc. (the“Corporation”):Grant Date: «Grant_Date»Number of Option Shares: ***«Options_Award»***Type of Options: Non-IncentiveExercise Price Per Share: «Exercise_Price_Per_Share»V E S T I N GVesting Schedule: 20% annually, with the first block vesting on the first (1st) anniversary of the Grant Date.Expiration Date: Month, Date, Year, or upon earlier termination of the OptionExcept as otherwise provided in the Option Agreement, the Option may be exercised for vested Shares by Optionee in accordance with the followingschedule:On or after each ofthe following dates Number of Stock Options vested«Vesting_Y1» «OPTION_Y1»«Vesting_Y2» «OPTION_Y2»«Vesting_Y3» «OPTION_Y3»«Vesting_Y4» «OPTION_Y4»«Vesting_Y5» «OPTION_Y5»By accepting this Option Award, Optionee acknowledges and agrees that the option rights herein are granted only subject to and in accordance with theterms of (i) the enclosed NON-INCENTIVE STOCK OPTION AWARD TERMS AND CONDITIONS (together with this Notice of Grant of Stock Options, the“Option Agreement”), and (ii) THE ENSIGN GROUP, INC. 2017 OMNIBUS INCENTIVE PLAN (the “Plan”), both of which are incorporated herein by thisreference. Option Shares purchased pursuant to this Option Award can only be acquired subject to the terms set forth in the Plan and the Option Agreement,whether said options are purchased electronically or in person. All capitalized terms in this Notice of Grant of Stock Options shall have the meaning assignedto them in the Option Agreement or the Plan.EXECUTIVED AND DELIVERED as of the Grant Date set forth above. THE ENSIGN GROUP, INC.a Delaware corporationBy: Chad A KeetchExecutive Vice President and SecretaryTHE ENSIGN GROUP, INC.NON-INCENTIVE STOCK OPTION AWARDTERMS AND CONDITIONSThese NON-INCENTIVE STOCK OPTION AWARD TERMS AND CONDITIONS are an integralpart of the foregoing Notice of Grant of Stock Options (the “Notice,” and together with these Terms and Conditions, the “Option Agreement”) made by TheEnsign Group, Inc., a Delaware corporation (the “Company”) to the individual “Optionee” named therein. All capitalized terms used herein but not definedin the Option Agreement shall have the meanings given to them in The Ensign Group, Inc. 2017 Omnibus Incentive Plan (the “Plan”), the terms andconditions of which are incorporated herein by this reference.1.Grant of Option. The Company hereby grants Optionee, on the date such grant was approved by the Committee (the “Grant Date”), theoption (the “Option”) to purchase all or any part of the number of Option Shares set forth in the Notice (the “Shares”) of Common Stock of the Company atthe exercise price per share set forth in the Notice, according to the terms and conditions set forth in this Option Agreement and in the Plan. The Option willnot be treated as an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”). The Optionis issued under the Plan and is subject to its terms and conditions. A copy of the Plan will be furnished upon request of Optionee.The Option shall terminate at the close of business on the Expiration Date set forth in the Notice (the “Expiration Date”) unless sooner terminatedor cancelled in accordance with this Option Agreement or the Plan.2.Vesting of Option Rights.(a) Except as otherwise provided in this Option Agreement, the Option may be exercised for vested Shares by Optionee in accordancewith the schedule set forth in the Notice.(b) During the lifetime of Optionee, the Option shall be exercisable only by Optionee and shall not be assignable or transferable byOptionee, other than by will or the laws of descent and distribution; provided however, that Optionee may transfer the Option to any “Family Member” (assuch term is defined in the General Instructions to Form S-8 (or any successor to such Instructions or such Form) under the Securities Act), provided that theParticipant may not receive any consideration for such transfer, the Family Member may not make any subsequent transfers other than by will or by the lawsof descent and distribution and the Company receives written notice of such transfer.3.Exercise of Option after Death or Termination of Service. The Option shall terminate and may no longer be exercised if Optionee ceasesto provide Service to the Company or its affiliates, except that:(a) If Optionee’s Service shall be terminated for any reason, voluntary or involuntary, other than for “Cause” (as defined in Section 3(e))or Optionee’s death or disability (within the meaning of Section 22(e)(3) of the Code), Optionee may at any time within a period of 3 months after suchtermination exercise the Option to the extent the Option was vested and exercisable by Optionee on the date of the termination of Optionee’s Service.(b) If Optionee’s Service is terminated for Cause, the Option shall be terminated as of the date of the act giving rise to such termination.(c) If Optionee shall die while the Option is still exercisable according to its terms or if Optionee’s Service is terminated becauseOptionee has become disabled (within the meaning of Section 22(e)(3) of the Code) while providing Service to the Company and Optionee shall not havefully exercised the Option, such Option may be exercised at any time within 12 months after Optionee’s deathor date of termination of Service for disabilityby Optionee, personal representatives or administrators or guardians of Optionee as applicable, or by any person or persons to whom the Option istransferred by will or the applicable laws of descent and distribution, to the extent of the full number of Shares Optionee was entitled to purchase under theOption on (i) the earlier of the date of death or termination of Service or (ii) the date of termination for such disability, as applicable.(d) Notwithstanding the above, in no case may the Option be exercised to any extent by anyone after the Expiration Date.(e) "Cause" shall mean, with respect to a Optionee, the occurrence of any of the following: (i) Optionee’s personal dishonesty, willfulmisconduct, or breach of fiduciary duty involving personal profit, (ii) Optionee’s continuing intentional or habitual failure to perform stated duties, (iii)Optionee’s violation of any law (other than minor traffic violations or similar misdemeanor offenses not involving moral turpitude), (iv) Optionee’s materialbreach of any provision of an employment or independent contractor agreement with the Company, or (v) any other act or omission by a Optionee that, inthe opinion of the Committee, could reasonably be expected to adversely affect the Company’s business, financial condition, prospects and/or reputation.In each of the foregoing subclauses (i) through (v), whether or not a “Cause” event has occurred will be determined by the Committee in its sole discretionor, in the case of Optionees who are Directors or officers or persons subject to Section 16 of the Exchange Act, the Board, each of whose determination shallbe final, conclusive and binding. A Optionee’s Service shall be deemed to have terminated for Cause if, after the Optionee’s Service has terminated, factsand circumstances are discovered that would have justified a termination for Cause, including, without limitation, violation of material Company policiesor breach of noncompetition, confidentiality or other restrictive covenants that may apply to the Optionee. The foregoing definition shall not in any waypreclude or restrict the right of the Company (or any Affiliate) to discharge or dismiss Optionee or other person providing Service to the Company (or anyAffiliate) for any other acts or omissions but such other acts or omissions shall not be deemed, for purposes of this Option Agreement, to constitute groundsfor termination for Cause.4.Method of Exercise of Option. Subject to the foregoing, the Option may be exercised in whole or in part from time to time by servingwritten notice of exercise on the Company at its principal office or the Company’s designated agent for such purposes, within the Option period. The noticeshall state the number of Shares as to which the Option is being exercised and shall be accompanied by payment of the exercise price. Payment of theexercise price shall be made (i) in cash (including bank check, valid personal check or money order payable to the Company), or (ii) with the approval ofthe Company (which may be given in its sole discretion), by delivering to the Company for cancellation shares of the Company’s Common Stock alreadyowned by Optionee having a Fair Market Value (as defined in the Plan) equal to the full exercise price of the Shares being acquired. Only that portion of theOption covering vested Option Shares is exercisable at any time. Subject to Section 402 of the Sarbanes- Oxley Act of 2002, to the extent this Option isexercised for vested Shares, the Option may be exercised in whole or in part from time to time through a special sale and remittance procedure pursuant towhich Optionee shall concurrently provide irrevocable instructions (1) to Optionee’s brokerage firm to effect the immediate sale of the purchased Sharesand remit to the Company, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for thepurchased Shares plus all applicable income and employment taxes required to be withheld by the Company by reason of such exercise, and (2) to theCompany to deliver the certificates for the purchased Shares directly to such brokerage firm in order to complete the sale.5.Miscellaneous.(a) Plan Provisions Control. The Option award memorialized in this Option Agreement is made solely upon the terms and conditions setforth herein and in the Plan and any related documents. The Option Agreement and the Plan together constitute the entire agreement between the partieshereto with regard to the subject matter hereof. In the event that any provision of the Option Agreement conflicts with or is inconsistent in any respect withthe terms of the Plan, the terms of the Plan shall control.No Rights of Stockholders. Neither Optionee, Optionee’s legal representative nor a permissible assignee of this Option shall have any of therights and privileges of a stockholder of theCompany with respect to the Shares, unless and until such Shares have been issued in the name of Optionee,Optionee’s legal representative or permissible assignee, as applicable.(b) No Right to Employment. The grant of the Option shall not be construed as giving Optionee the right to be retained in the employ of,or as giving a director of the Company or an Affiliate (as defined in the Plan) the right to continue as a director of the Company or an Affiliate with, theCompany or an Affiliate, nor will it affect in any way the right of the Company or an Affiliate to terminate such employment or position at any time, with orwithout cause. In addition, the Company or an Affiliate may at any time dismiss Optionee from employment, or terminate the term of a director of theCompany or an Affiliate, free from any liability or any claim under the Plan or the Option Agreement. Nothing in the Option Agreement shall confer on anyperson any legal or equitable right against the Company or any Affiliate, directly or indirectly, or give rise to any cause of action at law or in equity againstthe Company or an Affiliate. The Option granted hereunder shall not form any part of the wages or salary of Optionee for purposes of severance pay ortermination indemnities, irrespective of the reason for termination of employment. Under no circumstances shall any person ceasing to be an employee ofthe Company or any Affiliate be entitled to any compensation for any loss of any right or benefit under the Option Agreement or Plan which such employeemight otherwise have enjoyed but for termination of employment, whether such compensation is claimed by way of damages for wrongful or unfairdismissal, breach of contract or otherwise. By participating in the Plan, Optionee shall be deemed to have accepted all the conditions of the Plan and theOption Agreement and the terms and conditions of any rules and regulations adopted by the Committee and shall be fully bound thereby.(c) Governing Law. The validity, construction and effect of the Plan and the Option Agreement, and any rules and regulations relating tothe Plan and the Option Agreement, shall be determined in accordance with the internal laws, and not the law of conflicts, of the State of Delaware.(d) Severability. If any provision of the Option Agreement is or becomes or is deemed to be invalid, illegal or unenforceable in anyjurisdiction or would disqualify the Option Agreement under any law deemed applicable by the Committee (as defined in the Plan), such provision shall beconstrued or deemed amended to conform to applicable laws, or if it cannot be so construed or deemed amended without, in the determination of theCommittee, materially altering the purpose or intent of the Plan or the Option Agreement, such provision shall be stricken as to such jurisdiction or theOption Agreement, and the remainder of the Option Agreement shall remain in full force and effect.(e) No Trust or Fund Created. Neither the Plan nor the Option Agreement shall create or be construed to create a trust or separate fund ofany kind or a fiduciary relationship between the Company or any Affiliate and Optionee or any other person.(f) Headings. Headings are given to the Sections and subsections of the Option Agreement solely as a convenience to facilitate reference.Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Option Agreement or any provision thereof.(g) Conditions Precedent to Issuance of Shares. Shares shall not be issued, and the Company shall not have any liability for failure toissue Shares, pursuant to the exercise of the Option unless such exercise and the issuance and delivery of the applicable Shares pursuant thereto shallcomply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act of 1934, as amended,the rules and regulations promulgated thereunder, the requirements of any applicable Stock Exchange and the Delaware General Corporation Law. As acondition to the exercise of the purchase price relating to the Option, the Company may require that the person exercising or paying the purchase pricerepresent and warrant that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in theopinion of counsel for the Company, such a representation and warranty is required by law.(h) Withholding. In order to provide the Company with the opportunity to claim the benefit of any income tax deduction which may beavailable to it upon the exercise of the Option and in order to comply with all applicable federal or state income tax laws or regulations, the Company maytake such action as it deems appropriate to insure that, if necessary, all applicable federal or state payroll, withholding, income or other taxes are withheld orcollected from Optionee.(i) Consultation With Professional Tax and Investment Advisors. The holder of this Option Agreement acknowledges that the grant,exercise, vesting or any payment with respect to this Option Agreement, and the sale or other taxable disposition of the Shares acquired pursuant to theexercise thereof, may have tax consequences pursuant to the Code or under local, state or international tax laws. The holder further acknowledges that suchholder is relying solely and exclusively on the holder’s own professional tax and investment advisors with respect to any and all such matters (and is notrelying, in any manner, on the Company or any of its employees or representatives). Finally, the holder understands and agrees that any and all taxconsequences resulting from the Option Agreement and its grant,exercise, vesting or any payment with respect thereto, and the sale or other taxable disposition of the Shares acquired pursuant to the Plan, is solely andexclusively the responsibility of the holder without any expectation or understanding that the Company or any of its employees or representatives will payor reimburse such holder for such taxes or other items.Exhibit 10.88Notice of Restricted Stock AwardGrantee: «Participant_First_Name» «Participant_Last_Name»Restricted Stock Number: «RSA_Number»Address: «Street_Address» «City» «State» «Zip»Plan: 2017 Omnibus Incentive PlanNotice is hereby given of the following award (the “Restricted Stock Award”) of Common Stock of The Ensign Group, Inc. (the “Corporation”):Grant Date: «Grant_Date»Number of Restricted Stock Shares: ***«RSA_Award»***Type of Award: Restricted Stock Award V E S T I N GVesting Schedule: 20% annually, with the first block vesting on the first (1st) anniversary of the Grant Date.Except as otherwise provided in the Restricted Stock Agreement, the Restricted Stock will be vested in the Grantee in accordance with the followingschedule:On or after each ofthe following dates Number of Restricted Stock Sharesvested«Vesting_Y1» «RSA_Y1»«Vesting_Y2» «RSA_Y2»«Vesting_Y3» «RSA_Y3»«Vesting_Y4» «RSA_Y4»«Vesting_Y5» «RSA_Y5»By accepting this Restricted Stock Award, Grantee acknowledges and agrees that the Restricted Stock Shares granted herein are subject to and in accordancewith the terms of (i) the enclosed RESTRICTED STOCK AWARD TERMS AND CONDITIONS (together with this Notice of Restricted Stock Award, the“Restricted Stock Agreement”), and (ii) THE ENSIGN GROUP, INC. 2017 OMNIBUS INCENTIVE PLAN (the “Plan”), both of which are incorporated hereinby this reference. All capitalized terms in this Notice of Restricted Stock Award shall have the meaning assigned to them in the Restricted Stock Agreementof the Plan.EXECUTIVED AND DELIVERED as of the Grant Date set forth above. THE ENSIGN GROUP, INCa Delaware corporationBy: Chad A KeetchExecutive Vice President and SecretaryTHE ENSIGN GROUP, INC. RESTRICTED STOCK AWARD TERMS AND CONDITIONSThese RESTRICTED STOCK AWARD TERMS AND CONDITIONS are an integral part of the foregoing Notice Restricted Stock Award (the“Notice,” and together with these Terms and Conditions, the “Restricted Stock Agreement” or this “Agreement”) made by The Ensign Group, Inc., aDelaware corporation (the “Company”) to the individual “Grantee” named therein. All capitalized terms used herein but not defined in this Restricted StockAgreement shall have the meanings given to them in The Ensign Group, Inc. 2017 Omnibus Incentive Plan (the “Plan”), the terms and conditions of whichare incorporated herein by this reference.1.Definitions. For the purposes of this Agreement, the following terms shall have the meanings set forth below:(a)"Cause" shall mean, with respect to a Grantee, the occurrence of any of the following: (i) Grantee’s personal dishonesty, willfulmisconduct, or breach of fiduciary duty involving personal profit, (ii) Grantee’s continuing intentional or habitual failure to perform stated duties, (iii)Grantee’s violation of any law (other than minor traffic violations or similar misdemeanor offenses not involving moral turpitude), (iv) Grantee’s materialbreach of any provision of an employment or independent contractor agreement with the Company, or (v) any other act or omission by a Grantee that, in theopinion of the Committee, could reasonably be expected to adversely affect the Company’s business, financial condition, prospects and/or reputation. Ineach of the foregoing subclauses (i) through (v), whether or not a “Cause” event has occurred will be determined by the Committee in its sole discretion or, inthe case of Grantees who are Directors or officers or persons subject to Section 16 of the Exchange Act, the Board, each of whose determination shall be final,conclusive and binding. A Grantee’s Service shall be deemed to have terminated for Cause if, after the Grantee’s Service has terminated, facts andcircumstances are discovered that would have justified a termination for Cause, including, without limitation, violation of material Company policies orbreach of noncompetition, confidentiality or other restrictive covenants that may apply to the Grantee. However, if the term or concept has been defined in anemployment agreement between the Company and Grantee, then Cause shall have the definition set forth in such employment agreement. The foregoingdefinition shall not in any way preclude or restrict the right of the Company (or any Affiliate) to discharge or dismiss Grantee or other person providingService to the Company (or any Affiliate) for any other acts or omissions but such other acts or omissions shall not be deemed, for purposes of this Agreement,to constitute grounds for termination for Cause."Disability" shall mean Grantee’s inability, due to illness, accident, injury, physical or mental incapacity or other disability, to carry outeffectively his or her duties and obligations as an employee of the Company or to participate effectively and actively in the management of the Companyfor a period of at least 90 consecutive days or for shorter periods aggregating at least 120 days (whether or not consecutive) during any twelve-month period,as determined in the reasonable judgment of the Board."Vested Shares" shall mean (i) all Shares issued pursuant to this Agreement that are vested pursuant to Section 3 hereof and (ii) all Sharesissued with respect to the Common Stock referred to in clause(i)above by way of stock dividend or stock split or in connection with any conversion, merger, consolidation or recapitalization or other reorganizationaffecting the Shares. Vested Shares shall continue to be Vested Shares in the hands of any holder other than Grantee (except for the Company and purchaserspursuant to a public offering under the Securities Act), and each such transferee thereof shall succeed to the rights and obligations of a holder of VestedShares hereunder.2.Issuance of Stock. In partial consideration for Grantee’s services to the Company, Grantee has been issued the number of Shares asset forth in the Notice (the “Restricted Stock”).3.Vesting.(a)Normal Vesting. Except as set forth in this Restricted Stock Agreement, the Restricted Stock shall vest in accordance with theschedule set forth in the Notice and shall become fully vested on the fifth anniversary of the date hereof (the “Vesting Date”). The Corporation shall delivera certificate(s) (or other evidence of ownership, such as book entry) for the Vested Shares to Grantee as soon as practical after each Vesting Date pursuant tothe Section 4(d) hereof.(b)If Grantee’s employment with the Company terminates for any reason prior to the Vesting Date (except as provided in Section 3(c))all unvested Restricted Stock shall be forfeited and automatically transferred to theCompany without consideration on the date of Grantee’s employment termination and Grantee shall have no further rights with respect to the RestrictedStock. For purposes of this Agreement, employment with a Subsidiary of the Corporation shall be considered employment with the Corporation.(c)Effect on Vesting in Case of Employment Termination. Notwithstanding Section 3(b) above, the following special vesting rulesshall apply if Grantee’s employment with the Company terminates prior to the Vesting Date:(i) Death or Disability. If Grantee dies or becomes subject to any Disability prior to the Vesting Date, his or her Restricted Stockshall vest on a pro rata basis according to the number of days elapsed since the date hereof and the date of his or her death or Disability. Anyportion of Grantee’s Restricted Stock that was not vested on the date of Grantee’s death or Disability pursuant to this Section 3(b)(i) shall beforfeited to the Company.(ii) Termination by the Company Without Cause. If Grantee is terminated by the Company without Cause prior to the VestingDate, his or her Restricted Stock shall vest in accordance with the schedule set forth in the Notice. Any portion of Grantee’s Restricted Stock thatwas not vested on the date of such termination without cause pursuant to this Section 3(b)(ii) shall be forfeited to the Company.4.Restrictions on Transfer.(a)Non-Transferability. Restricted Stock, and any rights and interests with respect thereto, issued under this Agreement and thePlan shall not, prior to vesting, be sold, exchanged, transferred, assigned or otherwise disposed of in any way by the Grantee (or any beneficiary(ies) of theGrantee), other than by testamentary disposition by the Grantee or the laws of descent and distribution. Any such Restricted Stock, and any rights andinterests with respect thereto, shall not, prior to vesting, be pledged or encumbered in any way by the Grantee (or any beneficiary(ies) of the Grantee) andshall not, prior to vesting, be subject to execution, attachment or similar legal process. Any attempt to sell, exchange, transfer, assign, pledge, encumber orotherwise dispose of in any way any of the Restricted Stock, or the levy of any execution, attachment or similar legal process upon the Restricted Stock,contrary to the terms and provisions of this Agreement and/or the Plan shall be null and void and without legal force or effect.(b)Securities Laws Restrictions on Transfer of Vested Shares. Grantee understands and hereby acknowledges that, in addition totransfer restrictions in this Agreement, federal and state securities laws govern and restrict Grantee’s right to offer, sell or otherwise dispose of any VestedShares unless such offer, sale or other disposition thereof is registered or qualified under the Securities Act and applicable state securities laws, or in theopinion of the Company's counsel, such offer, sale or other disposition is exempt from registration or qualification thereunder. Grantee agrees that he or sheshall not offer, sell or otherwise dispose of any Vested Shares in any manner which would: (i) require the Company to file any registration statement with theSecurities and Exchange Commission (or any similar filing under state law) or to amend or supplement any such filing or (ii) violate or cause the Companyto violate the Securities Act, the rules and regulations promulgated thereunder or any other state or federal law. Grantee further understands that thecertificates for any Vested Shares shall bear such legends as the Company deems necessary or desirable in connection with the Securities Act or other rules,regulations or laws. Grantee may not sell, transfer or dispose of any Vested Shares (except pursuant to an effective registration statement under the SecuritiesAct) without first obtaining from the Company an opinion of the Company’s counsel that registration under the Securities Act or any applicable statesecurities law is not required in connection with such transfer. If requested, Grantee agrees to provide the Company with written assurances, in form andsubstance satisfactory to the Company, that (1) the proposed disposition does not require registration of the Shares under the Securities Act or (2) allappropriate action necessary for compliance with the registration requirements of the Securities Act or any exemption from registration available under theSecurities Act (including Rule 144) has been taken. When shares of Restricted Stock awarded by this Agreement becomeVested Shares and after the conditions of this section 4(d) have been satisfied, the Grantee shall be entitled to receive unrestricted Shares and if the Grantee’sstock is certificated and contain legends restricting the transfer of such Shares, the Grantee shall be entitled to receive new stock certificates free of suchlegends (except any legends requiring compliance with securities laws). In connection with the delivery of the unrestricted Shares pursuant to thisAgreement, the Grantee agrees to execute any documents reasonably requested by the Company.(c)Restrictive Legend. The certificates representing the Restricted Stock, if any, shall bear the following legend:"THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY ISSUED ON , HAVE NOT BEEN REGISTERED UNDERTHE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD ORTRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND APPLICABLE STATESECURITIES LAWS OR AN EXEMPTION FROM REGISTRATION THEREUNDER. THE SECURITIES REPRESENTED BY THIS CERTIFICATEARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER, REPURCHASE RIGHTS AND FORFEITURE PROVISIONS ANDCERTAIN OTHER AGREEMENTS SET FORTH IN A RESTRICTED STOCK AGREEMENT BETWEEN THE COMPANY AND DATED ASOF ,____, A COPY OF WHICH MAY BE OBTAINED BY THE HOLDER HEREOF AT THE COMPANY'S PRINCIPAL PLACE OF BUSINESSWITHOUT CHARGE."(d)Restrictions on Transfer after Vesting. The transfer or sale of Vested Shares in accordance with this Section 4 of this Agreementshall be subject to the Company Policy Regarding Insider Trading, as amended from time to time, including any preclearance procedures or black-outperiods that specifically apply to Grantee.5.Conformity with Plan. The Restricted Stock is intended to conform in all respects with, and is subject to all applicableprovisions of, the Plan (which is incorporated herein by reference). Inconsistencies between this Agreement and the Plan shall be resolved in accordancewith the terms of the Plan. By executing and returning the enclosed copy of this Agreement, Grantee acknowledges receipt of this Agreement and the Planand agrees to be bound by all of the terms of this Agreement and the Plan.6.Rights of Employment. Nothing in this Agreement shall interfere with or limit in any way the right of the Company to terminateGrantee’s employment at any time (with or without Cause), nor confer upon Grantee any right to continue in the employ of the Company for any period oftime or to continue his or her present (or any other) rate of compensation, and in the event of Grantee’s termination of employment (including, but notlimited to, termination by the Company without Cause), any portion of Grantee’s Restricted Stock that was not previously vested shall be forfeited, exceptas otherwise provided herein. Nothing in this Agreement shall confer upon Grantee any right to be selected again as a Plan participant, and nothing in thePlan or this Agreement shall provide for any adjustment to the number of shares of Restricted Stock upon the occurrence of subsequent events except asprovided in Section 8 below.7.Withholding of Taxes.(a) The Grantee shall, immediately upon notification of the amount due, if any, pay to the Company in cash or by check or direct a brokerto sell a sufficient number of shares from the Grantee’s brokerage account and deliver the proceeds to the Company, in either case in the amount necessary tosatisfy any applicable federal, state and local tax withholding requirements. If additional withholding is or becomes required (as a result of the vesting ofany Restricted Stock or as a result of disposition of Vested Shares) beyond any amount deposited before delivery of the certificates, the Grantee shall paysuch amount to the Company, in cash or by check, on demand. The Company shall be entitled, if necessary or desirable, to withhold from Grantee anyamounts due and payable by the Company, including wages, to Grantee (or secure payment from Grantee in lieu of withholding), the amount of anywithholding or other tax due from theCompany with respect to any Restricted Stock issuable under this Agreement, and the Company may defer such issuance unless indemnified by Grantee toits satisfaction. Grantee acknowledges that he or she has reviewed with his or her own tax advisors the federal, state, local and foreign tax consequences ofthis investment and the transactions contemplated by this Agreement. Grantee is relying solely on such advisors and not on any statements orrepresentations of the Company or any of its agents. Grantee understands that he or she (and not the Company) shall be responsible for any tax liability thatmay arise as a result of the transactions contemplated by this Agreement. Grantee further understands that Section 83 of the Code, taxes as ordinary incomethe difference between the purchase price, if any, for the Shares and the fair market value of the Shares as of the date the forfeiture provisions in Section 3lapse. Grantee understands that the he or she may elect to be taxed at the time the Restricted Stock is issued rather than when and as the forfeiture provisionslapse expires by filing an election under Section 83(b) of the Code with the IRS within 30 days from the date of hereof. THE FORM FOR MAKING THISSECTION 83(b) ELECTION IS ATTACHED TO THIS AGREEMENT AS EXHIBIT A AND GRANTEE (AND NOT THE COMPANY OR ANY OFITS AGENTS) SHALL BE SOLELY RESPONSIBLE FOR APPROPRIATELY FILING SUCH FORM, EVEN IF GRANTEE REQUESTS THECOMPANY OR ITS AGENTS TO MAKE THIS FILING ON GRANTEE’S BEHALF.8.Adjustments. In the event of a reorganization, recapitalization, stock dividend or stock split, or combination or other change inthe Shares, the Board or the Committee shall make such adjustments in the number and type of shares of Grantee’s Restricted Stock as the Board orCommittee reasonably determine to be appropriate, provided that any such adjustments shall not adversely affect the Grantee.9.Rights as a Shareholder. Except as otherwise provided in this Agreement and the Plan, Grantee shall have all of the rights of ashareholder of the Company with respect to the Shares of Restricted Stock, including the right to vote such shares and the right to receive dividends. Thereis no guarantee by the Company that dividends will be paid. All dividends and other distributions paid with respect to Restricted Stock, including withrespect to unvested Restricted Stock and whether paid in cash, Shares, or other property, shall be paid by the Company on the same date that dividendpayments are made with respect to all of the Company’s outstanding Shares.10.Remedies. The parties hereto shall be entitled to enforce their rights under this Agreement specifically, to recover damages byreason of any breach of any provision of this Agreement and to exercise all other rights existing in their favor. The parties hereto acknowledge and agreethat money damages would not be an adequate remedy for any breach of the provisions of this Agreement and that any party hereto shall be entitled tospecific performance and/or injunctive relief (without posting bond or other security) from any court of law or equity of competent jurisdiction in order toenforce or prevent any violation of the provisions of this Agreement.11.Amendment. Except as otherwise provided herein, any provision of this Agreement may be amended or waived only with theprior written consent of Grantee and the Company.12.Successors and Assigns. Except as otherwise expressly provided herein, all covenants and agreements contained in thisAgreement by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and permitted assigns of the partieshereto whether so expressed or not.13.Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective andvalid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision shall beineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement.14.Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall constitute anoriginal, but all of which taken together shall constitute one and the same Agreement.15.Descriptive Headings. The descriptive headings of this Agreement are inserted for convenience only and do not constitute apart of this Agreement.16.Governing Law. The corporate law of the state of Delaware shall govern all questions concerning the relative rights of theCompany and its stockholders. All other questions concerning the construction, validity and interpretation of this Agreement shall be governed by theinternal law, and not the law of conflicts, of the state of Delaware.17.Entire Agreement. This Agreement and the Plan constitute the entire understanding between Grantee and the Company, andsupersedes all other agreements, whether written or oral, with respect to the acquisition by Grantee of Common Stock of the Company. If there are anyconflicts in terms and conditions between this Agreement and the Plan, the terms and conditions of the Plan shall govern, unless otherwise determined bythe Committee or the Board.EXHIBIT 21.1LEGAL NAMEPRESIDENT COMPANYJURISDICTION1000 WP Euless Holdings LLCThe Ensign Group, Inc.Nevada2016 Health Holdings LLCThe Ensign Group, Inc.Nevada2410 Stillhouse Health Holdings LLCThe Ensign Group, Inc.Nevada2410 Stillhouse Senior Living, Inc.Bridgestone Living LLCNevada24th Street Healthcare Associates LLCBandera Healthcare, Inc.NevadaAdipiscor LLCThe Ensign Group, Inc.NevadaAgape Health Holdings LLCThe Ensign Group, Inc.NevadaALH Enterprise LLCALH Health Holdings LLCCaliforniaALH Health Holdings LLCThe Ensign Group, Inc.NevadaALH Health Northwest LLCALH Health Holdings LLCNevadaAllen Creek Healthcare, Inc.Pennant Healthcare, Inc.NevadaAlpowa Healthcare, Inc.Paragon Healthcare, Inc.NevadaAnza Healthcare, Inc.Signum Healthcare South, Inc.NevadaApache Trail Healthcare, Inc.Bandera Healthcare, Inc.NevadaArmstrong Healthcare, Inc.Keystone Care LLCNevadaArvada Healthcare, Inc.Endura Healthcare, Inc.NevadaAtlantic Memorial Healthcare Associates, Inc.Signum Healthcare South, Inc.NevadaAurora Health Holdings LLCThe Ensign Group, Inc.NevadaAvenues Healthcare, Inc.Milestone Healthcare LLCNevadaAvocado Health Holdings LLCThe Ensign Group, Inc.NevadaAztec Healthcare, Inc.Bandera Healthcare, Inc.NevadaBainbridge Health Holdings LLCThe Ensign Group, Inc.NevadaBakorp L.L.C.PMD Investments, LLCNevadaBandera Healthcare, Inc.The Ensign Group, Inc.NevadaBannock Health Holdings LLCThe Ensign Group, Inc.NevadaBayshore Healthcare, Inc.Signum Healthcare Central, Inc.NevadaBayside Healthcare, Inc.Signum Healthcare South, Inc.NevadaBeacon Hill Healthcare, Inc.Pennant Healthcare, Inc.NevadaBell Villa Care Associates LLCSignum Healthcare South, Inc.NevadaBernardo Heights Healthcare, Inc.Signum Healthcare South, Inc.NevadaBertetti Healthcare, Inc.Keystone Care LLCNevadaBest SW Health Holdings LLCThe Ensign Group, Inc.NevadaBig Blue Healthcare, Inc.Gateway Healthcare, Inc.NevadaBijou Health Holdings LLCThe Ensign Group, Inc.NevadaBijou Healthcare, Inc.Endura Healthcare, Inc.NevadaBrackenridge Healthcare, Inc.Keystone Care, Inc.NevadaBrenwood Park Health Holdings LLCThe Ensign Group, Inc.NevadaBrenwood Park Senior Living, Inc.Bridgestone Living LLCNevadaBridgestone Living LLCThe Ensign Group, Inc.NevadaBrown Road Senior Housing LLCBridgestone Living LLCNevadaBrownsville Care Associates, Inc.Keystone Care LLCNevadaBruce Neenah Health Holdings LLCThe Ensign Group, Inc.NevadaBruce Neenah Senior Living, Inc.Bridgestone Living LLCNevadaC Street Health Associates LLCSignum Healthcare Central, Inc.NevadaCamarillo Community Care, Inc.Signum Healthcare Central, Inc.NevadaCane Island Healthcare, Inc.Keystone Care LLCNevadaCanyon Springs Senior Living, Inc.Bridgestone Living LLCNevadaCapitol Healthcare, Inc.Cornerstone Healthcare, Inc.NevadaCapstone Resources, Inc.Capstone Transportation Investments, Inc.NevadaCapstone Transportation Investments, Inc.The Ensign Group, Inc.NevadaCardiff Healthcare, Inc.Milestone Healthcare LLCNevadaCarolina Healthcare, Inc.Hopewell Healthcare, Inc.NevadaCarrollton Heights Healthcare, Inc.Keystone Care LLCNevadaCedar Senior Living, Inc.Bridgestone Living LLCNevadaCentral Avenue Healthcare, Inc.Gateway Healthcare, Inc.NevadaChaparral Healthcare, Inc.Keystone Care LLCNevadaChateau Julia Healthcare, Inc.Endura Healthcare, Inc.NevadaCherokee Healthcare, Inc.Gateway Healthcare, Inc.NevadaCherry Hills Healthcare, Inc.,Endura Healthcare, Inc.NevadaCircle Health Holdings LLCThe Ensign Group, Inc.NevadaCity Heights Health Associates LLCSignum Healthcare South, Inc.NevadaClaremont Foothills Health Associates LLCSignum Healthcare Central, Inc.NevadaClaydelle Healthcare, Inc.Signum Healthcare South, Inc.NevadaCloverleaf Healthcare, Inc.Gateway Healthcare, Inc.NevadaConcord Avenue Health Holdings LLCThe Ensign Group, Inc.NevadaCongaree Health Holdings LLCThe Ensign Group, Inc.NevadaConnected Healthcare, Inc.Cornerstone Healthcare, Inc.NevadaConstitution Road Healthcare, Inc.Endura Healthcare, Inc.NevadaConway Health Holdings LLCThe Ensign Group, Inc.NevadaCopeland Healthcare, Inc.Keystone Care LLCNevadaCopper Basin Healthcare, Inc.Cornerstone Healthcare, Inc.NevadaCornerstone Healthcare, Inc.The Ensign Group, Inc.NevadaCornerstone Service Center, Inc.Cornerstone Healthcare, Inc.NevadaCornet Limited, Inc.The Ensign Group, Inc.ArizonaCosta Victoria Healthcare LLCSignum Healthcare South, Inc.NevadaCow Creek Healthcare, Inc.Keystone Care LLCNevadaCustom Care Healthcare, Inc.Cornerstone Healthcare, Inc.NevadaCypresswood Healthcare, Inc.Keystone Care LLCNevadaDa Vinci Healthcare, Inc.Bandera Healthcare, Inc.NevadaDaffodil Healthcare, Inc.Keystone Care LLCNevadaDe Moisy Healthcare, Inc.Milestone Healthcare LLCNevadaDe Soto Senior Living, Inc.Bridgestone Living LLCNevadaDeer Creek Health Holdings LLCThe Ensign Group, Inc.NevadaDenmark Senior Living, Inc.Bridgestone Living LLCNevadaDesert Cove Healthcare, Inc.Bandera Healthcare, Inc.NevadaDessau Healthcare, Inc.Keystone Care LLCNevadaDiamond Valley Health Holdings LLCThe Ensign Group, Inc.NevadaDiscovery Trail Healthcare, Inc.Gateway Healthcare, Inc.NevadaDorothy Health Holdings LLCThe Ensign Group, Inc.NevadaDowney Community Care LLCSignum Healthcare South, Inc.NevadaDrinkwater Senior Living, Inc.Bridgestone Living LLCNevadaDuck Creek Healthcare, Inc.Keystone Care LLCNevadaEagle Harbor Healthcare, Inc.Pennant Healthcare, Inc.NevadaEcho Canyon Healthcare, Inc.Bandera Healthcare, Inc.NevadaEiffel Healthcare, Inc.Keystone Care LLCNevadaElkhorn Health Holdings LLCThe Ensign Group, Inc.NevadaEmblem Healthcare, Inc.Cornerstone Healthcare, Inc.NevadaEmerald City PubCo, Inc.Gateway Healthcare, Inc.KansasEmerald Healthcare, Inc.Cornerstone Healthcare, Inc.NevadaEmpirecare Health Associates, Inc.Signum Healthcare Central, Inc.NevadaEndura Healthcare, Inc.The Ensign Group, Inc.NevadaEnsign Cloverdale LLCSignum Healthcare North, Inc.NevadaEnsign Montgomery LLCSignum Healthcare North, Inc.NevadaEnsign Napa LLCThe Ensign Group, Inc.NevadaEnsign Palm I LLCSignum Healthcare Central, Inc.NevadaEnsign Panorama LLCSignum Healthcare Central, Inc.NevadaEnsign Pleasanton LLCSignum Healthcare North, Inc.NevadaEnsign Sabino LLCBandera Healthcare, Inc.NevadaEnsign San Dimas LLCSignum Healthcare Central, Inc.NevadaEnsign Santa Rosa LLCSignum Healthcare North, Inc.NevadaEnsign Services, Inc.The Ensign Group, Inc.NevadaEnsign Sonoma LLCSignum Healthcare North, Inc.NevadaEnsign Whittier East LLCSignum Healthcare South, Inc.NevadaEnsign Whittier West LLCSignum Healthcare South, Inc.NevadaEnsign Willits LLCSignum Healthcare North, Inc.NevadaEureka Healthcare, Inc.Cornerstone Healthcare, Inc.NevadaExemplar Healthcare, Inc.The Ensign Group, Inc.NevadaFinding Home Healthcare, Inc.Cornerstone Healthcare, Inc.NevadaForrest Hill Healthcare, Inc.Keystone Care LLCNevadaFossil Creek Healthcare, Inc.Keystone Care LLCNevadaGate Three Healthcare LLCSignum Healthcare South, Inc.NevadaGateway Gilbert Holdings LLCThe Ensign Group, Inc.NevadaGateway Healthcare, Inc.The Ensign Group, Inc.NevadaGEM Healthcare, Inc.Pennant Healthcare, Inc.NevadaGetzendaner Healthcare, Inc.Keystone Care LLCNevadaGlacier Peak Healthcare, Inc.Cornerstone Healthcare, Inc.NevadaGlendale Healthcare Associates LLCBandera Healthcare, Inc.NevadaGO Assisted, Inc.Bridgestone Living LLCNevadaGolden Oaks Healthcare, Inc.Gateway Healthcare, Inc.NevadaGolden Years Program, Inc.Milestone Healthcare LLCNevadaGood Hope Healthcare, Inc.Gateway Healthcare, Inc.NevadaGraceland Senior Living, Inc.Bridegstone Living LLCNevadaGrand Villa PHX, Inc.Keystone Care LLCNevadaGranite Healthcare, Inc.Cornerstone Healthcare, Inc.NevadaGranite Hills Senior Living, Inc.Bridgestone Living LLCNevadaGrassland Healthcare and Rehabilitation, Inc.Keystone Care LLCNevadaGreat Plains Healthcare, Inc.Cornerstone Healthcare, Inc.NevadaGreen Bay Health Holdings LLCThe Ensign Group, Inc.NevadaGreen Bay Senior Living, Inc.Bridgestone Living LLCNevadaGypsum Creek Healthcare, Inc.Gateway Healthcare, Inc.NevadaHarlan Heights Health Holdings LLCThe Ensign Group, Inc.NevadaHarlingen Healthcare, Inc.Keystone Care LLCNevadaHarmony Health Holdings LLCThe Ensign Group, Inc.NevadaHarrison Health Holdings LLCThe Ensign Group, Inc.NevadaHB Healthcare Associates LLCSignum Healthcare South, Inc.NevadaHealthlift Medical Transportation, Inc.Capstone Transportation Investments, Inc.NevadaHeartwood Home Health and Hospice, Inc.Cornerstone Healthcare, Inc.NevadaHighland Healthcare LLCBandera Healthcare, Inc.NevadaHigley Healthcare, Inc.Bandera Healthcare, Inc.NevadaHill Country Health Holdings LLCThe Ensign Group, Inc.NevadaHomedale Healthcare, Inc.Pennant Healthcare, Inc.NevadaHopewell Healthcare, Inc.The Ensign Group, Inc.NevadaHoquiam Healthcare, Inc.Pennant Healthcare, Inc.NevadaHub City Healthcare, Inc.Keystone Care LLCNevadaHueneme Healthcare, Inc.Milestone Healthcare LLCNevadaHutchins Healthcare, Inc.Keystone Care LLCNevadaICare Private Duty, Inc.Cornerstone Healthcare, Inc.NevadaImmediate Clinic Healthcare, Inc.Bandera Healthcare, Inc.NevadaImmediate Clinic Seattle, Inc.Immediate Clinic Healthcare, Inc.NevadaIndian Hills Healthcare, Inc.Gateway Healthcare, Inc.NevadaIron Horse Healthcare, Inc.Gateway Healthcare, Inc.NevadaJ.A.R.R. Transportation Group, Inc.Capstone Transportation Investments, Inc.NevadaJack Finney Healthcare, Inc.Keystone Care LLCNevadaJefferson Healthcare, Inc.Signum Healthcare South, Inc.NevadaJordan Health Associates, Inc.Milestone Healthcare LLCNevadaJoshua Tree Healthcare, Inc.Cornerstone Healthcare, Inc.NevadaJRT Healthcare, Inc.Pennant Healthcare, Inc.NevadaKenosha Health Holdings LLCThe Ensign Group, Inc.NevadaKenosha Senior Living, Inc.Bridgestone Living LLCNevadaKettle Creek Health Holdings LLCThe Ensign Group, Inc.NevadaKeystone Care LLCThe Ensign Group, Inc.NevadaKeystone Hospice Care, Inc.Cornerstone Healthcare, Inc.NevadaKingwood Health Holdings LLCThe Ensign Group, Inc.NevadaKlement Healthcare, Inc.Keystone Care LLCNevadaKnight Health Holdings LLCThe Ensign Group, Inc.NevadaLa Jolla Skilled, Inc.Signum Healthcare South, Inc.NevadaLaguna Healthcare, Inc.Cornerstone Healthcare, Inc.NevadaLake Cassidy Health Holdings LLCThe Ensign Group, Inc.NevadaLake Pleasant Healthcare, Inc.Bandera Healthcare, Inc.NevadaLake Pointe Health Holdings LLCThe Ensign Group, Inc.NevadaLake Pointe Senior Living, Inc.Bridgestone Living LLCNevadaLakewood Healthcare, Inc.Endura Healthcare, Inc.NevadaLayton Health Holdings LLCThe Ensign Group, Inc.NevadaLegend Lake Health Holdings LLCThe Ensign Group, Inc.NevadaLemon Grove Health Associates LLCSignum Healthcare South, Inc.NevadaLil’ Tots Day Program, Inc.Milestone Healthcare LLCNevadaLilly Road Health Holdings LLCThe Ensign Group, Inc.NevadaLindahl Healthcare, Inc.Gateway Healthcare, Inc.NevadaLittle Blue Health Holdings LLCThe Ensign Group, Inc.NevadaLivingston Care Associates, Inc.Keystone Care LLCNevadaLone Peak Healthcare, Inc.Milestone Healthcare LLCNevadaLone Star MTC, Inc.Capstone Transportation Investments, Inc.NevadaLowell Healthcare, Inc.Endura Healthcare, Inc.NevadaLynnwood Health Services, Inc.Pennant Healthcare, Inc.NevadaMadison Health Holdings LLCThe Ensign Group, Inc.NevadaMadison Pointe Health Holdings LLCThe Ensign Group, Inc.NevadaMadison Senior Living, Inc.Bridgestone Living LLCNevadaMagic Valley Senior Living, Inc.Bridgestone Living LLCNevadaManitowoc Health Holdings LLCThe Ensign Group, Inc.NevadaManitowoc Senior Living, Inc.Bridgestone Living LLCNevadaManor Park Healthcare LLCPennant Healthcare, Inc.NevadaMaple Hills Healthcare, Inc.Gateway Healthcare, Inc.NevadaMarian Healthcare LLCMilestone Healthcare LLCNevadaMarion Health Associates, Inc.Bridgestone Living LLCNevadaMarket Bayou Healthcare, Inc.Keystone Care LLCNevadaMcAllen Care Associates, Inc.Keystone Care LLCNevadaMcAllen Community Healthcare, Inc.Keystone Care LLCNevadaMcFarland Health Holdings LLCThe Ensign Group, Inc.NevadaMcFarland Senior Living, Inc.Bridgestone Living LLCNevadaMcPherson Health Holdings LLCThe Ensign Group, Inc.NevadaMedical Transportation Company of Arizona LLCCapstone Transportation Investments, Inc.NevadaMedical Transportation Company of Tucson LLCCapstone Transportation Investments, Inc.NevadaMenomonee Health Holdings LLCThe Ensign Group, Inc.NevadaMesa Grande Senior Living, Inc.Bridgestone Living LLCNevadaMidland Nampa Health Holdings LLCThe Ensign Group, Inc.NevadaMidland Nampa Healthcare, Inc.Pennant Healthcare, Inc.NevadaMilestone Healthcare LLC (registered in Utah as Milestone PostAcute Healthcare, Inc.)The Ensign Group, Inc.NevadaMission Trails Healthcare, Inc.Signum Healthcare South, Inc.NevadaMisty Willow Healthcare, Inc.Keystone Care LLCNevadaMohave Healthcare, Inc.Cornerstone Healthcare, Inc.NevadaMonroe Healthcare, Inc.Gateway Healthcare, Inc.NevadaMontebella Health Holdings LLCThe Ensign Group, Inc.NevadaMoss Bay Senior Living, Inc.Bridgestone Living LLCNevadaMountain View Retirement, Inc.Bridgestone Living LLCNevadaMountain Vista Senior Living, Inc.Bridgestone Living LLCNevadaNautilus Healthcare, Inc.Signum Healthcare South, Inc.NevadaNB Brown Rock Healthcare, Inc.Keystone Care LLCNevadaNobel Health Properties LLCThe Ensign Group, Inc.NevadaNordic Valley Health Holdings LLCThe Ensign Group, Inc.NevadaNorth Mountain Healthcare LLCBandera Healthcare, Inc.NevadaNorth Parkway Health Holdings LLCThe Ensign Group, Inc.NevadaNorth Parkway Healthcare, Inc.Milestone Healthcare LLCNevadaNorthern Oaks Healthcare, Inc.Keystone Care LLCNevadaOak Point Healthcare, Inc.Keystone Care LLCNevadaOceano Senior Living, Inc.Bridgestone Living LLCNevadaOceanside Healthcare, Inc.Cornerstone Healthcare, Inc.NevadaOceanview Healthcare, Inc.Keystone Care LLCNevadaOcotillo Healthcare, Inc.Bandera Healthcare, Inc.NevadaOlympus Health, Inc.Milestone Healthcare LLCNevadaOrangewood Senior Living, Inc.Bridgestone Living LLCNevadaOsmond Marketing Holdings LLCThe Ensign Group, Inc.NevadaPalo Duro Healthcare, Inc.Keystone Care LLCNevadaPanorama Health Holdings LLCThe Ensign Group, Inc.NevadaParagon Healthcare, Inc.The Ensign Group, Inc.NevadaPark Waverly Healthcare LLCBandera Healthcare, Inc.NevadaParkside Healthcare, Inc.Signum Healthcare South, Inc.NevadaPeak Construction, Inc.The Ensign Group, Inc.NevadaPennant Healthcare, Inc.The Ensign Group, Inc.NevadaPermunitum LLCThe Ensign Group, Inc.NevadaPikes Peak Healthcare, Inc.Endura Healthcare, Inc.NevadaPineridge Healthcare, Inc.Endura Healthcare, Inc.NevadaPiney Lufkin Healthcare, Inc.Keystone Care LLCNevadaPleasant Run Health Holdings LLCThe Ensign Group, Inc.NevadaPleasant Run Senior Living, Inc.Bridgestone Living LLCNevadaPMD Investments, LLCThe Ensign Group, Inc.NevadaPMDCA, LLCBakorp L.L.C.NevadaPMDLAB, LLCBakorp L.L.C.NevadaPMDTC, LLCBakorp L.L.C.NevadaPocatello Health Services, Inc.Pennant Healthcare, Inc.NevadaPointe Meadow Healthcare, Inc.Milestone Healthcare LLCNevadaPomerado Ranch Healthcare LLCKeystone Care LLCNevadaPonderosa Health Holdings LLCThe Ensign Group, Inc.NevadaPortside Healthcare, Inc.Signum Healthcare South, Inc.NevadaPrairie Creek Healthcare, Inc.Gateway Healthcare, Inc.NevadaPrairie Ridge Health Holdings LLCThe Ensign Group, Inc.NevadaPrairie View Healthcare, Inc.Cornerstone Healthcare, Inc.NevadaPresidio Health Associates LLCBandera Healthcare, Inc.NevadaPrice Healthcare, Inc.Milestone Healthcare LLCNevadaPrimrose Health Holdings LLCThe Ensign Group, Inc.NevadaPrimrose Senior Living, Inc.Bridgestone Living LLCNevadaProspect Senior Living, Inc.Bridgestone Living LLCNevadaProspector Park Health Holdings LLCThe Ensign Group, Inc.NevadaPurple Horse PubCo, Inc.Gateway Healthcare, Inc.KansasQuail Creek Health Holdings LLCThe Ensign Group, Inc.NevadaQueenston Healthcare, Inc.Keystone Care LLCNevadaRacine Health Holdings LLCThe Ensign Group, Inc.NevadaRacine Senior Living, Inc.Bridgestone Living LLCNevadaRadiant Hills Health Associates LLCBandera Healthcare, Inc.NevadaRaintree Grove Healthcare, Inc.The Ensign Group, Inc.NevadaRamon Healthcare Associates, Inc.Signum Healthcare Central, Inc.NevadaRandolph Healthcare, Inc.Gateway Healthcare, Inc.NevadaRed Cliffs Healthcare, Inc.Milestone Healthcare LLCNevadaRed Mountain Healthcare, Inc.Bandera Healthcare, Inc.NevadaRed Rock Healthcare, Inc.Cornerstone Healthcare, Inc.NevadaRedbrook Healthcare Associates LLCSignum Healthcare Central, Inc.NevadaRenewCare of Scottsdale, Inc.Bandera Healthcare, Inc.NevadaRichmond Senior Services, Inc.Keystone Care LLCNevadaRio Mesa Health Holdings LLCThe Ensign Group, Inc.NevadaRiverside Healthcare, Inc.Gateway Healthcare, Inc.NevadaRiverview Healthcare, Inc.Milestone Healthcare LLCNevadaRiverview Village Health Holdings LLCThe Ensign Group, Inc.NevadaRiverview Village Senior Living, Inc.Bridgestone Living LLCNevadaRiverwalk Healthcare, Inc.Keystone Care LLCNevadaRock Canyon Healthcare, Inc.Endura Healthcare, Inc.NevadaRock Hill Healthcare, Inc.Hopewell Healthcare, Inc.NevadaRose Park Healthcare Associates, Inc.Signum Healthcare South, Inc.NevadaRosemead Health Holdings LLCThe Ensign Group, Inc.NevadaRosenburg Senior Living, Inc.Bridgestone Living LLCNevadaRuby Reds PubCo, Inc.Gateway Healthcare, Inc.KansasSaguaro Senior Living, Inc.Bridgestone Living LLCNevadaSalado Creek Senior Care, Inc.Keystone Care LLCNevadaSan Gabriel Senior Living, Inc.Bridgestone Living. Inc.NevadaSand Hollow Healthcare, Inc.Milestone Healthcare LLCNevadaSand Lily Healthcare, Inc.Cornerstone Healthcare, Inc.NevadaSavoy Healthcare, Inc.Keystone Care LLCNevadaSawtooth Healthcare, Inc.Pennant Healthcare, Inc.NevadaScandinavian Court Health Holdings LLCThe Ensign Group, Inc.NevadaSedgewood Health Holdings LLCThe Ensign Group, Inc.NevadaSentinel Peak Healthcare, IncBandera Healthcare, Inc.NevadaSheboygan Health Holdings LLCThe Ensign Group, Inc.NevadaSheboygen Senior Living, Inc.Bridgestone Living LLCNevadaSherman Health Holdings LLCThe Ensign Group, Inc.NevadaSherwood Health Holdings LLCThe Ensign Group, IncNevadaShoshone Health Holdings LLCThe Ensign Group, Inc.NevadaSignum Healthcare Central, Inc.The Ensign Group, Inc.NevadaSignum Healthcare North, Inc.The Ensign Group, Inc.NevadaSignum Healthcare South, Inc.The Ensign Group, Inc.NevadaSilver Lake Healthcare, Inc.Cornerstone Healthcare, Inc.NevadaSomers Kenosha Health Holdings LLCThe Ensign Group, Inc.NevadaSomers Kenosha Senior Living, Inc.Bridgestone Living LLCNevadaSouth Bay Healthcare, Inc.Cornerstone Healthcare, Inc.NevadaSouth C Health Holdings LLCThe Ensign Group, Inc.NevadaSouth Plains Healthcare, Inc.Cornerstone Healthcare, Inc.NevadaSouth Valley Healthcare, Inc.Milestone Healthcare LLCNevadaSouthern Charm Healthcare, Inc.Hopewell Healthcare, Inc.NevadaSouthern Oaks Healthcare, Inc.Keystone Care LLCNevadaSouthland Management LLCSignum Healthcare South, Inc.NevadaSouthside Healthcare, Inc.Gateway Healthcare, Inc.NevadaSpokane Healthcare, Inc.Cornerstone Healthcare, Inc.NevadaSpring Creek Healthcare, Inc.Keystone Care LLCNevadaSpring Valley Assisted Living, Inc.Bridgestone Living LLCNevadaStandardbearer Insurance Company, Ltd.The Ensign Group, Inc.NevadaStanton Lake Healthcare, Inc.Gateway Healthcare, Inc.NevadaStevens Point Health Holdings LLCThe Ensign Group, Inc.NevadaStevens Point Senior Living, Inc.Bridgestone Living LLCNevadaStockyards Healthcare, Inc.Keystone Care LLCNevadaStonebridge Healthcare, IncCornerstone Healthcare, Inc.NevadaStoney Hill Healthcare, Inc.Hopewell Healthcare, Inc.NevadaStoughton Health Holdings LLCThe Ensign Group, Inc.NevadaStoughton Senior Living, Inc.Bridgestone Living LLCNevadaSuccessor Healthcare LLCMilestone Healthcare LLCNevadaSummerlin Healthcare, Inc.Cornerstone Healthcare, Inc.NevadaSummit Healthcare, Inc.The Ensign Group, Inc.NevadaSunland Health Associates LLCBandera Healthcare, Inc.NevadaSunny Acres Health Holdings LLCThe Ensign Group, Inc.NevadaSunny Acres Healthcare, Inc.Endura Healthcare, Inc.NevadaSycamore Senior Living, Inc.Bridgestone Living LLCNevadaSymbol Healthcare, Inc.Paragon Healthcare, Inc.NevadaTelemus Telemachus PubCo, Inc.Keystone Care LLCNevadaTerrace Court Health Holdings LLCThe Ensign Group, Inc.NevadaTerrace Court Senior Living, Inc.Bridgestone Living LLCNevadaTeton Healthcare, Inc.Cornerstone Healthcare, Inc.NevadaThe Ensign Emergency FundThe Ensign Group, Inc.NevadaThe Ensign Group, Inc. (registered in Utah as Ensign Healthcare, Inc.)The Ensign Group, Inc.DelawareTheraTroopers CA, Inc.Theratroopers Holdings LLCNevadaTheratroopers Holdings LLCThe Ensign Group, Inc.NevadaTheraTroopers, Inc.Theratroopers Holdings LLCNevadaThomas Road Senior Housing, Inc.Bridgestone Living LLCNevadaThunderbird Health Holdings LLCThe Ensign Group, Inc.NevadaTimpanogos Home Care and Hospice, Inc.Cornerstone Healthcare, Inc.NevadaTop City Healthcare, Inc.Gateway Healthcare, Inc.NevadaTortolita Healthcare, IncBandera Healthcare, Inc.NevadaTowers Park Health Holdings LLCThe Ensign Group, Inc.NevadaTowers Park Healthcare, Inc.Keystone Care LLCNevadaTowers Park Personal Care, Inc.Keystone Care LLCNevadaTown East Healthcare, Inc.Keystone Care LLCNevadaTown Square Healthcare, Inc.Keystone Care LLCNevadaTradewind Healthcare, Inc.Keystone Care LLCNevadaTreasure Valley Senior Living, Inc.Bridgestone Living LLCNevadaTreaty Healthcare, Inc.Keystone Care LLCNevadaTree City Healthcare, Inc.Keystone Care LLCNevadaTwo Rivers Health Holdings LLCThe Ensign Group, Inc.NevadaTwo Rivers Senior Living, Inc.Bridgestone Living LLCNevadaTwo Trails Healthcare, Inc.,Gateway Healthcare, Inc.NevadaUnion Hill Healthcare, Inc.Pennant Healthcare, Inc.NevadaUpland Community Care, Inc.Signum Healthcare Central, Inc.NevadaValley View Health Services, Inc.Pennant Healthcare, Inc.NevadaVelda Rose Health Holdings LLCThe Ensign Group, Inc.NevadaVesper Healthcare, Inc.Cornerstone Healthcare, Inc.NevadaVictoria Ventura Assisted Living Community, Inc.Bridgestone Living LLCNevadaVictoria Ventura Healthcare LLCSignum Healthcare Central, Inc.NevadaVictory Medical Transportation, Inc.Capstone Transportation Investments, Inc.NevadaViewpoint Healthcare, Inc.Bandera Healthcare, Inc.NevadaVirgin River Healthcare, Inc.Cornerstone Healthcare, Inc.NevadaVista Woods Health Associates LLCSignum Healthcare South, Inc.NevadaW. Forman PubCo, Inc.Keystone Care LLCNevadaWallsville Healthcare, Inc.Keystone Care LLCNevadaWalnut Grove CampusCare LLCThe Ensign Group, Inc.NevadaWashington Heights Healthcare, Inc.Milestone Healthcare LLCNevadaWaterfront Healthcare, Inc.Cornerstone Healthcare, Inc.NevadaWatson Woods Healthcare, Inc.Bandera Healthcare, Inc.NevadaWellington Healthcare, Inc.Keystone Care LLCNevadaWest 1020 Health Holdings LLCThe Ensign Group, Inc.NevadaWest 1020 Healthcare, Inc.Milestone Healthcare LLCNevadaWest 5600 Health Holdings LLCThe Ensign Group, Inc.NevadaWest 5600 Healthcare, Inc.Milestone Healthcare LLCNevadaWest Escondido Healthcare LLCSignum Healthcare South, Inc.NevadaWest Owyhee Health Holdings LLCThe Ensign Group, Inc.NevadaWildcreek Healthcare, Inc.Pennant Healthcare, Inc.NevadaWildwood Healthcare, Inc.Pennant Healthcare, Inc.NevadaWillow Canyon Healthcare, Inc.Bandera Healthcare, Inc.NevadaWillow Creek Senior Living, Inc.Bridgestone Living LLCNevadaWindsor Lake Healthcare, Inc.Bridgestone Living LLCNevadaWisconsin Rapids Health Holdings LLCThe Ensign Group, Inc.NevadaWisconsin Rapids Senior Living, Inc.Bridgestone Living LLCNevadaWolf River Healthcare, Inc.Gateway Healthcare, Inc.NevadaWood Bayou Healthcare, Inc.Keystone Care LLCNevadaWoodard Creek Healthcare, Inc.Pennant Healthcare, Inc.NevadaWoodway Healthcare, Inc.Keystone Care LLCNevadaYellow Bricks PubCo, Inc.Gateway Healthcare, Inc.KansasYellow Rose Health Holdings LLCThe Ensign Group, Inc.NevadaYosemite Healthcare, Inc.Signum Healthcare North, Inc.NevadaYoungtown Health, Inc.Bandera Healthcare, Inc.NevadaYucca Flats Health Holdings LLCThe Ensign Group, Inc.NevadaZebulon Pike PubCo, Inc.Endura Healthcare, Inc.NevadaZion Healthcare, Inc.Milestone Healthcare LLCNevadaEXHIBIT 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe consent to the incorporation by reference in Registration Statement No. 333-219666 on Form S-8 and No. 333-197426 on Form S-3 of our reports datedFebruary 8, 2018, relating to the consolidated financial statements and financial statement schedule of The Ensign Group, Inc. and subsidiaries (the“Company”) and the effectiveness of the Company’s internal control over financial reporting, appearing in this Annual Report on Form 10-K of The EnsignGroup, Inc. for the year ended December 31, 2017./s/ DELOITTE & TOUCHE LLPCosta Mesa, CaliforniaFebruary 8, 2018EXHIBIT 31.1I, Christopher R. Christensen, certify that:1.I have reviewed this Annual Report on Form 10-K of The Ensign Group, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared;(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal reporting purposes in accordance with generally accepted accounting principles;(c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recentfiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant's internal control over financial reporting; and5.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant's ability to record, process, summarize and report financial information; and(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controlover financial reporting.Date: February 8, 2018 /s/ Christopher R. Christensen Name: Christopher R. Christensen Title: Chief Executive Officer EXHIBIT 31.2I, Suzanne D. Snapper, certify that:1.I have reviewed this Annual Report on Form 10-K of The Ensign Group, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared;(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal reporting purposes in accordance with generally accepted accounting principles;(c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recentfiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant's internal control over financial reporting; and5.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant's ability to record, process, summarize and report financial information; and(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controlover financial reporting.Date: February 8, 2018 /s/ Suzanne D. Snapper Name: Suzanne D. Snapper Title: Chief Financial Officer EXHIBIT 32.1 CERTIFICATION PURSUANT TO18 U.S.C. §1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of The Ensign Group, Inc. (the Company) on Form 10-K for the period ended December 31, 2017, as filed with theSecurities and Exchange Commission on the date hereof (the Report), I, Christopher R. Christensen, Chief Executive Officer of the Company, certify,pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: 1 The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2 The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Christopher R. Christensen Name: Christopher R. Christensen Title: Chief Executive Officer February 8, 2018 A signed original of this written statement required by 18 U.S.C. Section 1350 has been provided to the Company and will be retained by the Company andfurnished to the Securities and Exchange Commission or its staff upon request.EXHIBIT 32.2CERTIFICATION PURSUANT TO18 U.S.C. §1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of The Ensign Group, Inc. (the Company) on Form 10-K for the period ended December 31, 2017, as filed with theSecurities and Exchange Commission on the date hereof (the Report), I, Suzanne D. Snapper, Chief Financial Officer of the Company, certify, pursuant to 18U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: 1 The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2 The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Suzanne D. Snapper Name: Suzanne D. Snapper Title: Chief Financial Officer February 8, 2018 A signed original of this written statement required by 18 U.S.C. Section 1350 has been provided to the Company and will be retained by the Company andfurnished to the Securities and Exchange Commission or its staff upon request. 

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