2021 A n n ual R e port
Dear Fellow Shareholder:
2021 was another extraordinary year for us. And yet, in spite of the continued challenges brought on as the result of the ongoing
global pandemic, we achieved some of our best results in our history. While the financial performance is the primary focus of
our annual shareholder report, we recognize that none of those results would have been possible without the enormous
sacrifices and the skilled services provided by our caregivers. Some of our biggest victories are the unseen efforts from unsung
heroes that collectively make all of this possible. The work that our front-line partners, our field leaders and our Service Center
partners are doing is awe inspiring and at the heart of our performance. These heroes have rolled up their sleeves and worked
tirelessly to find ways to make clinical and operational adjustments that are tailored to meet the needs of their existing and
potential patients in their local market. As they have done so, the medical community and the patient’s families have entrusted
them to care for residents with increasingly complex clinical needs.
Due to these efforts, our GAAP diluted earnings per share for the year was $3.42, representing an increase of 12% over the
prior year, and adjusted diluted earnings per share for the year was $3.64, an increase of 16% over the prior year. In addition,
our consolidated GAAP and adjusted revenues for the year were $2.6 billion, an increase of 10% over the prior year. Lastly our
GAAP net income was $194.7 million for the year, an increase of 14% over the prior year, and our adjusted net income for the
year was $207.2 million, an increase of 19% over the prior year.
In spite of the unprecedented challenges, the pandemic has forced us to become stronger and more agile, while allowing us to
develop strategic local advantages that will continue to bear fruit even when the pandemic eventually subsides. We continue to
work closely with our hospitals, government agencies, and managed care partners to care for patients with increasingly
demanding medical needs. In doing so, our operations are solidifying their position as providers of choice and are increasingly
seen as critical partners in the healthcare continuum as an essential, cost-effective setting for these complex patients. Moreover,
as the pandemic has continued to put pressure on the labor markets, our operations have discovered new methods for attracting
healthcare professionals into our workforce, while also strengthening their ability to retain and develop existing staff as we have
focused on being the employer of choice in our communities. While we would never have wanted this pandemic to occur, it has
revealed the strength of front-line professionals and caused us to become better clinically and operationally than ever before.
As of January 1, 2022, we completed the formation of a new captive REIT, Standard Bearer Healthcare REIT, Inc.. While our
real estate strategy has always been an important part of our DNA, we believe this new organizational structure allows us to
take the next step with our already thriving real estate business. We look forward to establishing new partnerships with other
outstanding operators and to working together to help further underline the importance of post-acute care providers in the
continuum. At the same time, this new strategy will open up new doors to growth that we haven’t pursued in the past, allowing
us to accelerate Ensign’s strategy of acquiring and operating both performing and underperforming operations.
We are very proud of what we were able to accomplish in 2021 while dealing with so many unusual challenges, but we also
know we can still be so much better and are excited about the enormous potential within our portfolio as we continue to apply
our proven locally-driven healthcare model. It’s an incredible honor as we work together to achieve great outcomes. While we
most certainly expect some challenges ahead, we are excited about our future and look forward to continuing to show our
dedication to all those that have entrusted us with the care of their loved ones.
Sincerely,
Barry R. Port
Chief Executive Officer
Our Affiliated Entity Locations
Industry Leader with Strong and Growing National Presence in 13 states
Map as of April 1, 2022
Our People
~27,000
Patients*
~30,000
Employees
*ABILITY TO SERVE
2021 Select Financial Data
All information in the charts below is reflective of Ensign's continuing operations only.
Revenue Performance ($M)Fiscal Years 2017 - 2021$1,598$1,754$2,036$2,402$2,62720172018201920202021$1,000m$2,000m$3,000mAdjusted EBITDAR MarginFiscal Years 2017 - 202113.9%14.3%15.7%17.6%18.1%2017201820192020202110%12%14%16%18%20%Adjusted Diluted Earnings PerShare PerformanceFiscal Years 2018 - 2021$1.26$1.78$3.13$3.642018201920202021$0.75$1.50$2.25$3.00Ensign Stock Performancevs. NASDAQFiscal Years 2007- 2021447%2132%NASDAQENSG 2021 Financial Highlights
In thousands except per share data
Selected Operating Data
Total revenue
Income from operations
Net income
Adjusted net income(1)
Diluted earnings per share
Adjusted diluted earnings per share(1)
EBITDA
Adjusted EBITDA(1)
Adjusted EBITDAR(1)
Funds from operations(1)
Net cash provided by operating activities
Closing share price on December 31
Facility and Property Data
Total number of operated facilities
Total number of owned real estate properties
As of and for the years ended December 31,
2021
2020
$
$
2,627,461 $
260,465
194,652
207,207
3.42
3.64
313,377
336,572
475,905
55,712
275,684
83.96 $
2,402,596
223,155
170,478
174,608
3.06
3.13
276,840
292,751
422,577
49,541
373,351
72.92
245
100
228
94
(1) Adjusted EBITDA(R), Funds from operations, Adjusted net income and Adjusted diluted earnings per share are financial measures that
are not calculated in accordance with Generally Accepted Accounting Principles (GAAP). See "Non-GAAP Financial Measures" beginning
on page 68 of the Annual Report on From 10-K including in this 2021 Annual Report for the Company's definitions of its non-GAAP
financial measures, reconciliations of such measures to their most comparable GAAP financial measures and other important information
regarding the use of the Company's non-GAAP financial measures.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________
FORM 10-K
☑
☐
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 2021.
OR
TRANSITION 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)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
33-0861263
(I.R.S. Employer
Identification No.)
29222 Rancho Viejo Road, Suite 127
San Juan Capistrano, CA 92675
(Address of Principal Executive Offices and Zip Code)
(949) 487-9500
(Registrant’s Telephone Number, Including Area Code)
_____________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.001 per share
Trading Symbol(s)
ENSG
Name of each exchange on which registered
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark:
if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
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 preceding 12 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.
þ Yes ☐ No
☐ Yes þ No
þ Yes ☐ No
whether the registrant has submitted electronically, every Interactive Data File required to be submitted 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 submit such files).
þ Yes ☐ No
whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, a smaller reporting company,
or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting
company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act:
Large accelerated
filer
þ Accelerated filer
☐ Non-accelerated filer ☐
Smaller reporting
company
☐
Emerging growth
company
☐
If an emerging growth company, indicate if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange
Act.
☐ Yes ☐ No
Whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its
internal control over financial reporting under Section-404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the
registered public accounting firm that prepared or issued its audit report.
whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
As of June 30, 2021, the aggregate market value of the Registrant's Common Stock held by non-affiliates was:
☑ Yes ☐ No
☐ Yes þ No
Common Stock
The aggregate market value of Common Stock was computed by reference to the closing price as of the last business day of
the registrant's most recently completed second fiscal quarter. Shares of Common Stock held by each executive officer,
director and each person owning more than 10% of the outstanding Common Stock of the registrant have been excluded (in
the amount of $1,726,185,000) 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.
$2,800,287,000
As of February 4, 2022, 55,086,434 shares of the registrant’s common stock, $0.001 par value, were outstanding.
Part III of this Form 10-K incorporates information by reference from the Registrant's definitive proxy statement for the Registrant's
2022 Annual Meeting of Stockholders to be filed within 120 days after the close of the fiscal year covered by this annual report.
DOCUMENTS INCORPORATED BY REFERENCE:
THE ENSIGN GROUP, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2021
TABLE OF CONTENTS
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
PART I
PART II.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
[RESERVED]
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
Item 9C.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Directors, Executive Officers and Corporate Governance
Executive Compensation
PART III.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accountant Fees and Services
Exhibits, Financial Statements and Schedules
Form 10-K Summary
PART IV.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Item 16.
Signatures
1
29
55
55
57
59
59
61
61
80
81
122
122
124
124
124
124
124
124
125
125
127
128
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This 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 and objectives of management. Forward-looking statements
can often be identified by words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,”
“estimates,” “may,” “will,” “should,” “would,” “could,” “potential,” “continue,” “ongoing,” similar expressions, and variations
or negatives of these words. These statements are subject to the safe harbors under Private Securities Litigation Reform Act of
1995. These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are
difficult to predict. Additionally, many of these risks and uncertainties are currently, and in the future may continue to be,
amplified by surges in the coronavirus (COVID-19) pandemic. Therefore, our actual results could differ materially and
adversely from those expressed in any forward-looking statements as a result of various 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 not rely upon
forward-looking statements as predictions of future events. These forward-looking statements speak only as of the date of this
Annual Report, and are based on our current expectations, estimates and projections about our industry and business,
management's beliefs, and certain assumptions made by us, all of which are subject to change. We undertake no obligation to
revise or update publicly any forward-looking statement for any reason, except as otherwise required by law.
As used in this Annual Report on Form 10-K, the words, "Ensign," "Company," “we,” “our” and “us” refer to The Ensign
Group, Inc. and its consolidated subsidiaries. All of our operating subsidiaries, the Service Center (defined below) and our
wholly owned captive insurance subsidiary (the Captive Insurance) and captive real estate investment trust called Standard
Bearer Healthcare REIT, Inc. (Standard Bearer REIT) 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, as well as the use of the terms “we,” “us,” “our” and similar terms in this Annual Report on Form 10-K is not meant
to imply, nor should it be construed as meaning, that The Ensign Group, Inc. has direct operating assets, employees or revenue,
or that any of the subsidiaries are operated by The Ensign Group.
The Ensign Group, Inc. is a holding company with no direct operating assets, employees or revenues. In addition, certain
of our wholly-owned independent 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. The Captive Insurance provides some claims-made
coverage to our operating subsidiaries for general and professional liability, as well as for certain workers' compensation
insurance liabilities. Standard Bearer REIT owns and manages our real estate business.
The Service Center address is 29222 Rancho Viejo Rd Suite 127, San Juan Capistrano, CA 92675, and our telephone
number is (949) 487-9500. Our corporate website is located at www.ensigngroup.net. The information contained in, or that can
be accessed through, our website does not constitute a part of this Annual Report on Form 10-K.
EnsignTM is our United States trademark. All other trademarks and trade names appearing in this annual report are the
property of their respective owners.
Item 1.
BUSINESS
PART I.
Founded in 1999, The Ensign Group, Inc. ("Ensign") is a holding company with subsidiaries that provide skilled nursing,
senior living and rehabilitative services, as well as other ancillary businesses (including mobile diagnostics and medical
transportation), in 13 states. As part of our investment strategy, we also acquire, lease and own healthcare real estate to service
the post-acute care continuum through acquisition and investment opportunities in healthcare properties. For the year ended
December 31, 2021, we generated approximately 96.0% of our revenue from our skilled nursing facilities. The remainder of our
revenue is primarily generated from our real estate properties, senior living services and other ancillary services.
OPERATIONS
Overview
As of December 31, 2021, we offered skilled nursing, senior living and rehabilitative care services through 245 skilled
nursing and senior living facilities. Of the 245 facilities, we operated 176 facilities under long-term lease arrangements, and
have options to purchase 11 of those 176 facilities. Our real estate portfolio includes 100 owned real estate properties, which
includes 69 operations we operated and managed, the real estate associated with 32 senior living operations that were leased to
and operated by The Pennant Group, Inc. (Pennant) as part of the Spin-Off (defined below), and the Service Center location. Of
the 32 real estate operations leased to Pennant, two senior living operations are located on the same real estate properties as
skilled nursing facilities that the Company owns and operates.
Our Unique Approach and Structure
The name "Ensign" is synonymous 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 that through our efforts and leadership, we can foster a new level of patient
care and professional competence at our affiliated operating subsidiaries, and set a new industry standard for each patient we
service. We view healthcare services primarily as a local business. We believe our success is largely driven by our proven
ability to build strong relationships with key stakeholders in local healthcare communities, in part, by leveraging our reputation
for providing superior care. Accordingly, our brand strategy and organizational structure promotes the empowerment of local
leadership and staff to make their facility the “operation of choice” in their community. This is accomplished by allowing local
leadership to discern and address the unique needs and priorities of healthcare professionals, customers and other stakeholders
in the local community or market, and then work to create a superior service offering for, and reputation in, their particular
community. This local empowerment is unique within the healthcare services industry.
We believe that our localized approach encourages prospective customers and referral sources to choose or recommend
the operation. In addition, our leaders are enabled and motivated to share real-time operating data and otherwise benchmark
clinical and operational performance against their peers in order to improve clinical care, enhance patient satisfaction and
augment operational efficiencies, promoting the sharing of best practices.
We organize our operating subsidiaries into portfolio companies, which we believe has enabled us to maintain a local,
field-driven organizational structure, attract additional qualified leadership talent, and to identify, acquire, and improve
operations at a generally faster rate. Each of our portfolio companies has its own leader. These leaders, who are generally taken
from the ranks of operational CEOs, serve as leadership resources within their own portfolio companies, and have the primary
responsibility for recruiting qualified talent, finding potential acquisition targets, and identifying other internal and external
growth opportunities. We believe this organizational structure has improved the quality of our recruiting and will continue to
facilitate successful acquisitions.
Since we spun-off our owned real estate properties into a public real estate investment trust (REIT) in 2014, we have
continued to expand our real estate portfolio. Following the real estate spin-off, we have acquired and currently own 100 real
estate properties, including 32 real estate properties that are leased to a third party under triple-net long-term leases. We manage
and operate the remaining real estate properties, including the Service Center location. We are committed to growing our real
estate portfolio, which we believe will further enhance our earnings and maximize long-term shareholder value.
On October 1, 2019, we completed the separation of our home health and hospice operations and substantially all of our
senior living operations into Pennant, a separate and publicly traded company, through a tax-free distribution of all of the
outstanding shares of common stock of Pennant to Ensign stockholders on a pro rata basis (the Spin-Off). For further details on
the Spin-Off, refer to Note 22, Spin-Off Of Subsidiaries, in Notes to the Consolidated Financial Statements of this Annual
Report on Form 10-K.
1
To continue with our growth strategy on our real estate portfolio, on January 1, 2022, we formed Standard Bearer REIT.
Standard Bearer REIT owns and manages our real estate business. We believe the REIT structure will allow us to better
demonstrate the growing value of our owned real estate and provide us with an efficient vehicle for future acquisitions of
properties that could be operated by Ensign affiliates or other third parties. We believe this structure will give us new pathways
to growth with transactions we would not have considered in the past. Standard Bearer REIT intends to qualify and elect to be
taxed as a REIT, for U.S. federal income tax purposes, commencing with its taxable year ending December 31, 2022. The real
estate portfolio in Standard Bearer REIT consists of 93 of our 100 owned real estate properties.
SEGMENTS
We have two reportable segments: (1) skilled services, which includes the operation of skilled nursing facilities and
rehabilitation therapy services; and (2) real estate, which is primarily comprised of properties owned by us and leased to skilled
nursing and senior living operations, including our own operating subsidiaries and third-party operators and are subject to
triple-net long-term leases.
We also report an “all other” category that includes operating results from our senior living operations, mobile
diagnostics, transportation and other ancillary operations. Our senior living, mobile diagnostics, transportation and other
ancillary operations are neither significant individually, nor in aggregate and therefore do not constitute a reportable segment.
Our Chief Executive Officer, who is our chief operating decision maker, or CODM, reviews financial information at the
operating segment level. We have presented our segment results in this Annual Report on Form 10-K on a comparative basis to
conform to the segment structure. For more information about our operating segments, as well as financial information, see Part
II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 7, Business
Segments of the Notes to the Consolidated Financial Statements.
Skilled Services
As of December 31, 2021, our skilled nursing companies provided skilled nursing care at 236 operations, with 25,032
operational beds, in Arizona, California, Colorado, Idaho, Iowa, Kansas, Nebraska, Nevada, South Carolina, Texas, Utah,
Washington and Wisconsin. We provide short and long-term nursing care services for patients with chronic conditions,
prolonged illness, and the elderly. Our residents are often high-acuity patients that come to our facilities to recover from
strokes, cardiovascular and respiratory conditions, neurological conditions, joint replacements, and other muscular or skeletal
disorders. We use interdisciplinary teams of experienced medical professionals to provide services prescribed by physicians.
These medical professionals provide individualized comprehensive nursing care to our short-stay and long-stay patients. Many
of our skilled nursing facilities are equipped to provide specialty care, such as on-site dialysis, ventilator care, cardiac and
pulmonary management. We also provide standard services such as room and board, special nutritional programs, social
services, recreational activities, entertainment, and other services. We are dedicated to ensuring our residents are happy,
comfortable, and motivated to achieve their health goals through the provision of quality care. We generate our skilled services
revenue from Medicaid, Medicare, managed care, commercial insurance, and private pay. During the year ended December 31,
2021, approximately 46.7% and 28.8% of our skilled services revenue was derived from Medicaid and Medicare programs,
respectively.
Real Estate
We engage in the acquisition and leasing of skilled nursing and senior living properties. As of December 31, 2021, our
owned real estate portfolio was comprised of 100 real estate properties located in Arizona, California, Colorado, Idaho, Kansas,
Nebraska, Nevada, South Carolina, Texas, Utah, Washington and Wisconsin. Of these properties, 69 are leased to affiliated
skilled nursing facilities, wholly-owned and managed by the Company, 32 are leased to senior living operations, wholly-owned
and managed by Pennant, and our Service Center location. The Service Center real estate is leased to our Service Center and
numerous third-parties for commercial office space. Of the 32 real estate operations leased to Pennant, two senior living
operations are located on the same real estate properties as skilled nursing facilities that the Company owns and operates.
We generate real estate revenue primarily by leasing post-acute care properties we have acquired, to healthcare operators,
including our own operating subsidiaries, under triple-net lease arrangements whereby the tenant is solely responsible for the
costs related to the property, including property taxes, insurance and maintenance and repair costs, subject to certain exceptions.
During the year ended December 31, 2021, we generated rental revenue of $65.5 million, of which $49.6 million was derived
from affiliated wholly-owned healthcare facilities. Intercompany rental revenue is eliminated in consolidation, along with
corresponding intercompany rent expenses of related healthcare facilities.
2
Other
Revenue from our senior living operations, mobile diagnostics and other ancillary operations comprise approximately
3.4% of our annual revenue.
Senior Living. As of December 31, 2021, we had an aggregate of 2,237 senior living units across 31 operations, of which
22 are located on the same site location as our skilled nursing care operations. Our senior living communities located in
Arizona, California, Colorado, Idaho, Iowa, Kansas, Nebraska, Texas, and Utah, provide residential accommodations, activities,
meals, 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 care provided in a skilled nursing operation. Our independent living units are non-licensed
independent living apartments in which residents are independent and require no support with the activities of daily living.
Substantially all our senior living operations were contributed to Pennant as part of the Spin-Off. Thus, our remaining
senior living operations are not significant to our consolidated operations, only comprising approximately 1.8% of our annual
revenue. We generate revenue at these units primarily from private pay sources, with a small portion derived from Medicaid or
other state-specific programs. Specifically, during the year ended December 31, 2021, approximately 86.6% of our senior living
revenue was derived from private pay sources.
Ancillary. As of December 31, 2021, we held a majority membership interest of ancillary operations located in Arizona,
California, Colorado, Idaho, Texas, Utah and Washington. We have invested in and are exploring new business lines that are
complementary to our existing skilled services and senior living services. 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 these businesses were not meaningful contributors to our operating results.
GROWTH
We have an established track record of successful acquisitions. Much of our historical growth can be attributed to
implementing our expertise in acquiring real estate or 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 and financially. In
years where pricing has been high, we have focused on the integration and improvement of our existing operating subsidiaries
while limiting our acquisitions to strategically situated properties.
From January 1, 2011 through December 31, 2021, we acquired 278 facilities, which added 16,484 operational skilled
nursing beds and 5,409 senior living units to our operating subsidiaries, which included the operations that were contributed to
Pennant. The following table summarizes cumulative skilled nursing and senior living operation, operational skilled nursing
bed and senior living unit counts at the end of 2011 and each of the last five years to reflect our growth over a ten-year period
and five-year period as a result of the acquisition of these facilities:
2011(2)
2017(1)(2)
2018(2)
2019(1)(2)
2020
2021
December 31,
Cumulative number of skilled nursing and senior living
operations
102
230
244
223
228
245
Cumulative number of operational skilled nursing beds
9,787
18,870
19,615
22,625
23,172
25,032
Cumulative number of senior living units
1,509
5,011
5,664
2,154
2,254
2,237
(1) Number of operational beds and number of operations for 2017 through 2019 include operational beds and operations that we no longer operated. The number of operations and
operational beds do not include the closed facilities beginning in the year of their closures.
(2) Included in the 2011 and 2017-2018 number of operational units and number of operations are the operational units and operations of senior living facilities that we transferred to
Pennant as part of the 2019 Spin-Off transaction. In 2019, the number of operations and operational units do not include operations transferred to Pennant.
We have also invested in new business lines that are complementary to our existing businesses, such as ancillary services.
We plan to continue to grow our revenue and earnings by:
z
•
•
•
•
•
•
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.
3
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 our company with the entrepreneurial opportunity and challenge of entering a new market and
starting a new business, we established our New Market CEO program in 2006. Supported by our Service Center and other
resources, a New Market CEO evaluates a target market, develops a comprehensive business plan, and relocates to the target
market to find talent and connect with other providers, regulators and the healthcare community in that market, with the goal of
ultimately acquiring businesses and establishing an operating platform for future growth. In addition, this program includes
other lines of business that are closely related to the skilled nursing industry. For example, we entered into the home health and
hospice industry as part of this program, which was a part of the Spin-Off. The New Ventures program encourages our local
leaders to evaluate service offerings with the goal of establishing an operating platform in new markets and new businesses. We
believe that 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 have experienced the challenges of growing and operating a new business.
EXPANSIONS
During the year ended December 31, 2021, we expanded our operations and real estate portfolio through a combination
of long-term leases and real estate purchases, with the addition of 17 stand-alone skilled nursing operations and five real estate
purchases, four of which we previously operated and continue to operate. These new operations added a total of 1,832
operational skilled nursing beds operated by our affiliated operating subsidiaries. The aggregate purchase price for these
acquisitions during the year ended December 31, 2021 was $104.2 million.
Subsequent to December 31, 2021, we expanded our operations and real estate portfolio through a combination of two
long-term leases and one real estate purchase, which added three stand-alone skilled nursing operations. These new operations
added 379 operational skilled nursing beds to be operated by our affiliated operating subsidiaries. The aggregate purchase price
for these acquisitions was approximately $27.4 million and we did not assume any liabilities other than the tenant's post-
assumption rights and obligations under the long-term leases. We entered into a separate operations transfer agreement with the
prior operator as part of each transaction.
For further discussion of our acquisitions, see Note 8, Operation Expansions in the Notes to the Consolidated Financial
Statements.
QUALITY OF CARE MEASURES
Improvement in Acquired Facilities. In December 2008, the Centers for Medicare and Medicaid Services (CMS)
introduced the Five-Star Quality Rating System to help consumers, their families and caregivers compare nursing homes more
easily. The Five-Star Quality Rating System gives each skilled nursing operation a rating between one and five stars in various
categories. We have a strong history of quickly improving the quality of care in the facilities we acquire. Thus, as new
assessments are conducted post-acquisition, the star ratings see consistent improvement. At the time of acquisition, the majority
of our facilities have 1 and 2-Star ratings.
Over the last few years, CMS had modified the Star rating requirements. These changes have been significant and made it
more difficult to achieve a 4 or 5-Star rating. The 2019 changes resulted in nursing centers losing stars in their "Quality" and
"Staffing" ratings, which negatively impacted the "Overall" ratings. Nevertheless, we continue to demonstrate strong
performance in the Five-Star Quality Rating System. We believe compliance and quality outcomes are precursors to
outstanding financial performance. Thus, we strive to aggressively increase quality and compliance in every facility we acquire,
and to adjust our overall policies to adapt to CMS’s changing criteria for the Five-Star Quality Rating System. As a result of the
COVID-19 pandemic, CMS temporarily waived certain reporting timeframes and suspended certain inspections that impacted
the underlying data used for calculating star-ratings. This resulted in CMS freezing affected quality measures by only using data
collected for periods not impacted by the COVID-19 waivers. CMS continues to change the way the star-rating is calculated,
both through ongoing regulation changes and CMS's enactment or expiration of waivers regarding reporting and calculation
requirements for five-star ratings. Therefore, depending on the changes, we may experience periods of times where the number
of facilities with 4 or 5-Star ratings decline. The star-rating calculations resumed on January 27, 2021.
The table below summarizes the number of our facilities with 4 and 5-Star ratings since 2017:
4 and 5-Star Quality Rated skilled nursing facilities
As of December 31,
2017
2018
2019
2020
2021
100
91
102
116
114
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Above-Average Ratings. Additionally, despite the fact that Ensign’s acquisition of facilities with 1 or 2-Star ratings skews
our company-wide ratings, our mean score on the Five-Star Quality Rating System is 67.4%, which exceeds the national
average score of 63.0%.
INDUSTRY TRENDS
The post-acute care industry has evolved to meet the growing demand for post-acute and long-term healthcare services
generated by an aging population, increasing life expectancies and the trend toward shifting patient care to lower cost settings.
The industry has evolved in recent years, which we believe has led to a number of favorable improvements in the industry, as
described below:
•
•
•
•
•
Shift of Patient Care to Lower Cost Alternatives — The growth of the senior population in the U.S. continues to
increase healthcare costs, often faster than the available funding from government-sponsored healthcare programs. In
response, federal and state governments have adopted cost-containment measures that encourage the treatment of
patients in more cost-effective settings such as skilled nursing facilities, for which the staffing requirements and
associated costs are often significantly lower than acute care hospitals and other post-acute care settings. As a result,
skilled nursing facilities are generally serving a larger population of higher-acuity patients than in the past.
Significant Acquisition and Consolidation Opportunities — The skilled nursing industry is large and highly
fragmented, characterized predominantly by numerous local and regional providers. Due to the increasing demands
from hospitals and insurance carriers to implement sophisticated and expensive reporting systems, we believe this
fragmentation provides us with significant acquisition and consolidation opportunities.
Improving Supply and Demand Balance — The number of skilled nursing facilities has declined modestly over the
past several years. We expect that the supply and demand balance in the skilled nursing industry will continue to
improve due to the shift of patient care to lower cost settings, an aging population and increasing life expectancies.
Increased Demand Driven by Aging Populations — As seniors account for an increasing percentage of the total U.S.
population, we believe the demand for skilled nursing and senior living services will continue to increase. According
to the census projection released by the U.S. Census Bureau in early 2020, between 2016 and 2030, the number of
individuals over 65 years old is projected to be one of the fastest growing segments of the United States population,
growing from 16% to 21%. The Bureau expects this segment to increase nearly 50% to 73 million, as compared to the
total U.S. population which is projected to increase by 10% over that time period. Furthermore, the generation
currently retiring has accumulated less savings than prior generations, creating demand for more affordable senior
housing and skilled nursing services. As a high-quality provider in lower cost settings, we believe we are well-
positioned to benefit from this trend.
Transition to Value-Based Payment Models — In response to rising healthcare spending in the United States,
commercial, government and other payors are generally shifting away from fee-for-service (FFS) payment models
towards value-based models, including risk-based payment models that tie financial incentives to quality, efficiency
and coordination of care. We believe that patient-centered outcomes driven reimbursement models will continue to
grow in prominence. Many of our operations already receive value-based payments, and as valued-based payment
systems continue to increase in prominence, it is our view that our strong clinical outcomes will be increasingly
rewarded.
• Accountable Care Organizations and Reimbursement Reform — A significant goal of U.S. federal health care reform
is to transform the delivery of health care by changing reimbursement to reflect and support the quality and safety of
care that providers deliver, increase efficiency, and reduce growth in spending. Reimbursement models that provide
financial incentives to encourage efficiency, affordability, and high-quality care have been developed and implemented
by government and commercial third-party payers. The most prolific of these models, the Accountable Care
Organization (ACO) model, incentivizes groups of providers to share in savings that are achieved through the
coordination of care and chronic disease management of an assigned patient population. Reimbursement methodology
reform includes Value-Based Purchasing (VBP), in which a portion of provider reimbursement is redistributed based
on relative performance, or improvement on designated economic, clinical quality, and patient satisfaction metrics. In
addition, CMS has implemented Episode-based demonstration, voluntary and mandatory payment initiatives that
bundle acute care and post-acute care reimbursement. These bundled payment models incentivize cross-continuum
care coordination and include financial and performance accountability for episodes of care. These reimbursement
methodologies and similar programs are likely to continue and expand, both in government and commercial health
plans. Many of our operations already participate in ACOs. With our focus on quality care and strong clinical
outcomes, Ensign is well-positioned to benefit from these outcome-based payment models.
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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 increasing among seniors as a means of planning for the costs of skilled nursing services. In addition, as a
result of increased mobility in society, reduction of average family size, and the increased number of two-wage earner couples,
more residents are looking for alternatives outside the family for their care.
Our business is affected by seasonal fluctuations in occupancy and acuity which are most prominent when comparing the
summer and winter months of the calendar year (including volatility arising from COVID-19).
x
REVENUE SOURCES
x
We derive revenue primarily from the Medicaid and Medicare programs, managed care and commercial insurance
payors, and private pay patients. The majority of our revenue is derived from skilled nursing, which is highly dependent upon
the Medicaid and Medicare programs. Thus, any changes to payment models, reimbursements and budgets impact our revenue,
some positively and some negatively. A detailed discussion of the regulatory framework impacting our business is found in the
Government Regulation section below. See also, Item 1A., Risk Factors.
A brief overview of each of our revenue sources is as follows:
Medicaid. Medicaid is a program financed by state funds and matching federal funds administered by the states and their
political subdivisions, and often go by state-specific names, such as Medi-Cal in California and the Arizona Healthcare Cost
Containment System in Arizona. Medicaid programs generally provide health benefits for qualifying individuals, and may
supplement Medicare benefits for the disabled and for persons aged 65 and older meeting financial eligibility requirements.
Medicaid reimbursement formulas are established by each state with the approval of the federal government in accordance with
federal guidelines. Seniors who enter skilled nursing facilities as private pay clients can become eligible for Medicaid once they
have substantially depleted their assets. Medicaid is generally the largest source of funding for most skilled nursing facilities.
x
Medicaid reimbursement varies from state to state and is based upon a number of different systems, including cost-based,
prospective payment; case mixed adjusted payments and negotiated rate systems. Rates are subject to a state’s annual budgetary
requirements and funding, statutory and regulatory changes and interpretations and rulings by individual state agencies and
State Plan Amendments approved by CMS.
x
Medicaid typically covers patients that require standard room and board services and provides reimbursement rates that
are generally lower than rates earned from other sources. We monitor our payor mix to measure the level received from each
payor across each of our business units. We intend to continue to focus on enhancing our care offerings to accommodate more
high acuity patients.
x
Approximately 77.8% of our Medicaid revenue comes from Arizona, California, Texas, and Utah. In California, the state
enacted legislation expanding their Medicaid program, which in recent years has continued to see budget increases. It is
projected that California General Fund spending on California Medicaid will increase by about $1.6 billion in 2022‑2023, to a
total of $31.1 billion. Further, the 2025-2026 estimated California General Fund expenditures on Medicaid will increase to a
total of $34.6 billion. In California, reimbursement rates for long term care facilities are calculated based upon the median rate
of each peer group, which results in varying reimbursement rates among facilities. Texas is one of the remaining states that has
not expanded Medicaid under the Affordable Care Act. Texas lawmakers have, in the past, underfunded Medicaid, requiring an
infusion of state and federal funds. Funding for the 2022-2023 Texas biennium includes $25.1 billion in general revenue funds,
which is a decrease of $400 million in general funds from the 2020-2021 biennium amounts. In Arizona, the state enacted
legislation expanding their Medicaid program in 2013 but has seen decreased Medicaid enrollments in recent years. Their 2021
budget for the state Medicaid program included $1.9 billion from the general fund, and the 2022 budget rose to over $1.92
billion.
x
Medicare. Medicare is a federal program that provides healthcare benefits to individuals who are 65 years of age or older
or are disabled. To achieve and maintain Medicare certification, a skilled nursing facility must sign a Medicare provider
agreement and meet the CMS “Conditions of Participation” on an ongoing basis, as determined in periodic facility inspections
or “surveys” conducted primarily by the state licensing agency in the state where the facility is located. Medicare pays for
inpatient skilled nursing facility services under the prospective payment system (PPS). Under PPS, facilities are paid a
predetermined amount per patient, per day, for certain services. Medicare Part A skilled nursing facility coverage is limited to
100 days per episode of illness for those beneficiaries who require daily care following discharge from an acute care hospital.
For Medicare beneficiaries who qualify for the Medicare Part A coverage, rehabilitation services are included in the per
diem payment. For beneficiaries who do not meet the coverage criteria for Part A services, rehabilitation services may qualify
for the services to be provided under Medicare Part B.
6
Managed Care and Private Insurance. Managed care patients consist of individuals who are insured by certain third-
party entities, or who are Medicare beneficiaries who have assigned their Medicare benefits to a senior managed care
organization plan. Another type of insurance, long-term care insurance, is also becoming more 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 the services we provide. x
Rental Revenue. Real estate rental revenue is generated by leasing post-acute care properties that we acquired to
healthcare operators under triple-net lease arrangements, whereby the tenant is solely responsible for the costs related to the
property, including property taxes, insurance, and maintenance and repair costs, subject to certain exceptions.
The following charts sets forth our total service revenue by payor source generated by our consolidated operations and
skilled services segment as a percentage of total revenue for the years ended December 31, 2021 and 2020, respectively:
CONSOLIDATED SERVICE REVENUE BY PAYOR
SKILLED SERVICES REVENUE BY PAYOR
7
December 31, 2021Medicaid39.2%Medicare27.8%Medicaid-skilled6.6%Managed care17.5%Private and other8.9%December 31, 2020Medicaid37.7%Medicare30.5%Medicaid-skilled6.3%Managed care15.4%Private and other10.1%December 31, 2021Medicaid39.9%Medicare28.8%Medicaid - Skilled6.8%Managed Care18.1%Private and other6.4%December 31, 2020Medicaid38.8%Medicare31.8%Medicaid - Skilled6.5%Managed Care16.0%Private and other6.9% Payor Sources as a Percentage of Skilled Nursing Services. The following table sets forth our percentage of skilled
nursing patient days by payor source:
Percentage of Skilled Nursing Days:
Medicare
Managed care
Other skilled
Skilled mix
Private and other payors
Medicaid
Total skilled nursing
Year Ended December 31,
2021
2020
13.5 %
13.0
5.2
31.7
10.2
58.1
100.0 %
15.6 %
11.2
4.9
31.7
10.9
57.4
100.0 %
REIMBURSEMENT FOR SPECIFIC SERVICES
Reimbursement for Skilled Nursing Services. Skilled nursing facility revenue is primarily derived from Medicaid,
Medicare, managed care and private payors. Our skilled nursing operations provide Medicaid-covered services to eligible
individuals consisting of nursing care, room and board and social services. In addition, states may, at their option, cover other
services such as physical, occupational and speech therapies.
Historically, adjustments to reimbursement under Medicare and Medicaid have had a significant effect on our revenue and
results of operations. Recently enacted, pending and proposed legislation and administrative rulemaking at the federal and state
levels could have similar effects on our business. Efforts to impose reduced reimbursement rates, greater discounts and more
stringent cost controls by government and other payors are expected to continue for the foreseeable future and could adversely
affect our business, financial condition and results of operations. Additionally, any delay or default by the federal or state
governments in making Medicare and/or Medicaid reimbursement payments could materially and adversely affect our business,
financial condition and results of operations.
Reimbursement for Rehabilitation Therapy Services. Rehabilitation therapy revenue is primarily received from private
pay, managed care and Medicare for services provided at skilled nursing operations and senior living operations. The payments
are based on negotiated patient per diem rates or a negotiated fee schedule based on the type of service rendered.
Reimbursement for Senior Living. Senior living facility revenue is primarily derived from private pay patients at rates we
established, with only a small portion of such revenue derived from state-specific programs such as Medicaid.
Reimbursement for Other Ancillary Services. Other ancillary revenue, such as mobile diagnostics and medical
transportation, is primarily derived from Medicare Part B, Medicaid, managed care and private payors at rates we establish
based upon the services we provide and market conditions in the area of operation.
RENTAL REVENUE
Rental revenue from third party rental property tenants. Owned properties are leased pursuant to non-cancelable
operating leases, generally with an initial term of 10 to 15 years. All of the post-acute care healthcare properties leased to third
parties contain renewal options. The leases provide for fixed minimum base rent during the initial and renewal periods. The
majority of our leases contain provisions for specified annual increases over the rents of the prior year and those increases are
generally computed on a calculation based on the Consumer Price Index.
Each lease is a triple net lease which requires the lessee to pay all taxes, insurance, maintenance and repairs, capital and
non-capital expenditures and other costs necessary in the operations of the facilities. In addition, our leases with third-parties
are typically structured as master leases. The master leases consist of multiple leases, each with its own pool of properties, that
have varying maturities and diversity in property geography.
If a lessee makes payments for taxes and insurance directly to a third-party on our behalf, we are required to exclude
these payments from variable payments and from revenue recognition in our consolidated statements of income. Otherwise,
tenant reimbursements paid to us for taxes and insurance are classified as additional rental revenue recognized by us on a gross
basis.
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Rental revenue from Ensign-affiliated tenants. Rental revenue from Ensign-affiliated operations is based on mutually
agreed-upon base rents that are subject to change from time to time. Intercompany revenue is eliminated in consolidation, along
with the corresponding intercompany rent expenses of the related healthcare facilities.
COMPETITION
The post-acute care industry is highly competitive, and we expect that the industry will become increasingly competitive
in the future. The industry is highly fragmented and characterized by numerous local and regional providers, in addition to large
national providers that have achieved geographic diversity and economies of scale. Our operating subsidiaries also compete
with inpatient rehabilitation facilities and long-term acute care hospitals. Increasingly, we are competing with home health and
community-based providers who have developed programs designed to provide services to seniors outside a facility-based
setting, potentially decreasing the time they need the higher level of care provided in a skilled nursing facility. Competitiveness
may vary significantly from location to location, depending upon factors such as the number of competing facilities, availability
of services, expertise of staff, and the physical appearance and amenities of each location. We believe that the primary
competitive factors in the post-acute care industry 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 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 that the operation leaders are generally free to discern and address the unique needs and priorities of
healthcare professionals, customers and other stakeholders in the local community or market, and then create a superior service
offering and reputation for that particular community or market that is calculated to encourage 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 our competitors have greater financial and other resources than we have, may have greater brand recognition
and may be more established in their respective communities than we are. Competing companies may also offer newer facilities
or different programs or services than we offer, and may therefore attract individuals who are currently patients of our facilities,
potential patients of our facilities, or who are otherwise receiving our healthcare services. Other competitors may have lower
expenses or other competitive advantages than us and, therefore, provide services at lower prices than we offer.
Our other services, such as senior living facilities and other ancillary services, also compete with local, regional, and
national companies. The primary competitive factors in these businesses are similar to those for our skilled nursing facilities
and include reputation, cost of services, quality of clinical services, responsiveness to patient/resident needs, location and the
ability to provide support in other areas such as third-party reimbursement, information management and patient recordkeeping.
Our real estate segment competes for real property investments with healthcare providers, healthcare-related REITs, real
estate partnerships, banks, private equity funds, venture capital funds and other investors. Some of these competitors are
significantly larger and have greater financial resources and lower costs of capital than us. Our ability to compete successfully
for real property investments will be determined by numerous factors, including our ability to identify suitable acquisition
targets, our ability to negotiate acceptable terms for any such acquisition and our cost of capital in the event an acquisition
requires debt or equity financing.
OUR COMPETITIVE STRENGTHS
We believe that we are well positioned to benefit from the ongoing changes within our industry. We believe that our
ability to acquire, integrate and improve our facilities is a direct result of the following key competitive strengths:
9
Experienced and Dedicated Employees. We believe that our operating subsidiaries' employees are among the best in their
respective industries. We believe each of our operating subsidiaries is led by an experienced and caring leadership team,
including dedicated front-line care staff, who participates daily in the clinical and operational improvement of their individual
operations. We have been successful in attracting, training, incentivizing and retaining a core group of outstanding business and
clinical leaders to spearhead our operating subsidiaries. These leaders operate as separate local businesses. With broad local
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 and performance bonuses, based on achieving target clinical quality, cultural, compliance and financial
benchmarks, represent a significant component of total compensation for our operational leaders. We believe that these
compensation programs assist us in encouraging our leaders and key employees to act with a shared ownership mentality.
Furthermore, our leaders are motivated to help local operations within a defined “cluster” and "market," which is a group of
geographically 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. Other training opportunities are generally offered via on-
demand training tools, including podcasts. In addition, we offer weekly cultural and interactive educational topics including
leadership development, our values, updates on Medicaid and Medicare billing requirements, updates on new regulations or
legislation, infection control, COVID-19 clinical and regulations, 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 and increase the breadth of their knowledge and expertise. We believe that our commitment
to, and substantial investment in, ongoing education will further strengthen 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 each operation. 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 back office support services, so that local leaders can focus on delivering top-quality care and efficient business
operations. Our Service Center approach allows individual operations to function with the strength, synergies and economies of
scale found in larger organizations, but without what we believe are the disadvantages of a top-down management structure or
corporate hierarchy. We believe our Service Center approach is unique within the industry, and allows us to preserve the “one-
operation-at-a-time” focus and culture that has contributed to our success.
Proven Track Record of Successful Acquisitions. We have established a disciplined acquisition strategy that is focused
on selectively acquiring operations within our target markets. Our acquisition strategy is driven by our operations team.
Prospective leaders are included in the decision-making process and compensated as these acquired operations reach pre-
established clinical quality and financial benchmarks, helping to ensure that we only undertake acquisitions that key leaders
believe can become clinically sound and contribute to our financial performance.
As of December 31, 2021, we have expanded to 245 facilities with an aggregate of 25,032 operational skilled nursing
beds and 2,237 senior living units, through both long-term leases and purchases. We believe our experience in acquiring these
operations and our demonstrated success in significantly improving their operations enables us to consider a broad range of
acquisition targets. In addition, we believe we have developed expertise in transitioning newly acquired operations to our
unique organizational culture and systems, which enables us to acquire operations with limited disruption to patients, residents
and operating staff, while significantly improving quality of care. We have also constructed new facilities to target demand,
which exists for high-end healthcare facilities when we determine that market conditions justify the cost of new construction in
some of our markets.
Successful Real Estate Investment Strategy. We maintain a portfolio of long-term healthcare facilities of high-quality
assets diversified by geographic location and operated by a diverse group of established healthcare providers. We are focused
on selectively acquiring real estate properties based on our industry experience and opportunistic strategy, which we believe
provides us with greater investment and purchasing opportunities. Due to our credit strength, we have the ability to acquire
large portfolios of real estate properties; a portion of which can be managed and operated by our Ensign affiliated established
healthcare leaders and a portion of which can be leased to third parties.
10
As of December 31, 2021, our real estate portfolio consists of 100 owned facilities, which include properties leased to
and operated by third parties and properties we managed and operated. We believe our real estate investment strategy has
allowed us to accumulate a portfolio that aids our healthcare operators in improving performance and generating additional
returns through leases with third parties.
Reputation for Quality Care. We believe that we have achieved a reputation for high-quality and cost-effective care and
services to our patients and residents within the communities we serve. We believe that our achievement of quality outcomes
enhances our reputation for quality, that when coupled with the integrated services that we offer, allows us to attract patients
that require more intensive and medically complex care and generally result in higher reimbursement rates than lower acuity
patients.
Community Focused Approach. We view our services primarily as a local, community-based business. Our local
leadership-centered management culture enables each operation's nursing support staff and leaders to meet the unique needs of
their patients and local communities. We believe that our commitment to this “one-operation-at-a-time” philosophy helps to
ensure that each operation, its patients, their family members and the community will receive the individualized attention they
need. By serving our patients, their families, the community and our fellow healthcare professionals, we strive to make each
individual business 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 a corporation or business. Therefore, rather than pursuing a traditional organization-wide branding
strategy, we actively seek to develop the operations brand at the local level, serving and marketing one-on-one to caregivers,
our patients, their families, the community and our fellow healthcare professionals in the local market.
Investment in Information Technology. We utilize information technology that enables our operational leaders to access,
and to share with their peers, both clinical and financial performance data in real time. Armed with relevant and current
information, our operation leaders and their management teams are able to share best practices and the latest information, adjust
to challenges and opportunities on a timely basis, improve quality of care, mitigate risk and improve both clinical outcomes and
financial performance. We have also invested in specialized healthcare technology systems to assist our nursing and support
staff. We have installed software and touch-screen interface systems in each operation to enable our clinical staff to more
efficiently monitor and deliver patient care and record patient information. We believe these systems have improved the quality
of our medical and billing records, while improving the productivity of our staff.
OUR GROWTH STRATEGY
We 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 component of our organizational culture is our belief that strong local leadership is a primary key to the
success of each operation. While we believe that significant acquisition 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” that
attracts proven business leaders from various industries and backgrounds, and provides them the knowledge and hands-on
training they need to successfully lead one of our operating subsidiaries. We generally have between 25 and 30 prospective
administrators progressing through the various stages of this training program, which is generally much more rigorous, hands-
on and intensive than the minimum 1,000 hours of training mandated by the licensing requirements of most states where we do
business. Once administrators are licensed and assigned to an operation, they continue to learn and develop in our operational
Chief Executive Officer Program (CEO Program), which facilitates the continued development of these talented business
leaders into outstanding operational chief executive officers, through regular peer review, our Ensign University and on-the-job
training.
In addition, our Chief Operating Officer Program (COO Program) recruits and trains highly qualified Directors of
Nursing to lead the clinical programs in our operations. Working together with their operational CEO and/or administrator,
other key operational leaders and front-line staff, these experienced nurses manage delivery of care and other clinical personnel
and programs to optimize both clinical outcomes and employee and patient satisfaction.
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Increase Mix of High Acuity Patients. Many skilled nursing facilities are serving an increasingly larger population of
patients who require a high level of skilled nursing and rehabilitative care, whom we refer to as high acuity patients, as a result
of government and other payors seeking lower-cost alternatives to 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. Where higher complex
services are medically necessary and prescribed by a patient's physician or other appropriate healthcare professional, we
generally receive additional revenue in connection with the provision of those services. By making these integrated services
available to such patients, and maintaining established clinical standards in the delivery of those services, we are able to
increase our overall revenues. We believe that we can continue to attract high acuity patients to our operations 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 occupancy within our existing operations. Although some of the facilities we have acquired were in good
physical and operating condition, the majority have been clinically and financially troubled, with some facilities having had
occupancy rates as low as 30% at the time of acquisition. Additionally, we believe that incremental operating margins on the
last 20% of our beds/units are significantly higher than on the first 80%, offering opportunities to improve financial
performance within our existing 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 was 72.8% and 73.5% for the years ended December 31,
2021 and 2020, respectively. Our average occupancy rates in 2021 and 2020 have been negatively impacted by surges in
COVID-19 caused by COVID-19 variants.
We also believe we can generate organic growth by improving operating efficiencies and the quality of care at the patient
level. By focusing on staff development, clinical systems and the efficient delivery of quality patient care, we believe we are
able to deliver higher quality care at lower costs than many of our competitors.
Historically, we have achieved incremental occupancy and revenue growth by creating or expanding clinical service
offerings in existing operations. For example, by expanding clinical programs to provide outpatient therapy services in many
markets, we are able to increase revenue while spreading the fixed costs of maintaining these programs over a larger patient
base. Outpatient therapy has also proven to be an effective marketing tool, raising the visibility of our facilities in their local
communities and enhancing the reputation of our facilities with short-stay rehabilitation patients.
Add New Facilities and Expand Existing Facilities. One of our growth strategies includes the acquisition of new and
existing facilities from third parties and the expansion and upgrade of current facilities. In the near term, we plan to take
advantage of the fragmented skilled nursing industry by acquiring operations within select geographic markets and may
consider the construction of new facilities. In addition, we have targeted facilities that we believed were performing and
operations that were underperforming, where we believed we could improve service delivery, occupancy rates and cash flow.
With experienced leaders in place at the community level and demonstrated success in significantly improving operating
conditions at acquired facilities, we believe that we are well positioned for continued growth. While the integration of
underperforming facilities generally has a negative short-term effect on overall operating margins, these facilities are typically
accretive to earnings within 12 to 18 months following their acquisition. For the 232 facilities that we acquired from 2001
through 2021, the aggregate EBITDAR as a percentage of revenue improved from 11.8% during the first full three months of
operations to 15.7% during the thirteenth through fifteenth months of operation and to 18.8% during the 45th quarter of
operation.
Real Estate Portfolio Growth. An important part of our business strategy is to continue to expand and diversify our real
estate portfolio through accretive acquisition and investment opportunities in healthcare properties. Our execution of this
strategy hinges on our ability to successfully identify, secure and consummate beneficial transactions. We have a proven track
record of acquiring properties that we have determined are investment opportunities and develop these into thriving properties
that are well-suited for operational purposes. We then use these properties for our skilled nursing or assisted living operations or
we lease the properties to other long-term care facility operators. We expect that our newly formed REIT structure will allow us
to expand our real estate footprint while bringing the best operational practices to our own and other operators in the industry.
12
HUMAN CAPITAL
At December 31, 2021, we had approximately 25,900 full-time equivalent employees who were employed by our Service
Center and our operating subsidiaries. For the year ended December 31, 2021, approximately 60.0% of our total expenses were
payroll related. Periodically, market forces, which vary by region, require that we increase wages in excess of general inflation
or in excess of increases in reimbursement rates we receive. We believe that we staff appropriately, focusing primarily on the
acuity level and day-to-day needs of our patients and residents. In most of the states where we operate, our skilled nursing
facilities are subject to state mandated minimum staffing ratios, so our ability to reduce costs by decreasing staff,
notwithstanding decreases in acuity or need, is limited and subject to government audits and penalties in some states. We seek
to manage our labor costs by improving staff retention, improving operating efficiencies, maintaining competitive wage rates
and benefits and reducing reliance on overtime compensation and temporary nursing agency services. Our Chief Human Capital
Officer reports to our Board of Directors and oversees the following human capital initiatives:
Our Culture. The operation of our skilled nursing and senior living facilities requires a large number of highly skilled
healthcare professionals and support staff. Our employees are at the heart of our Company and we are committed to their health,
professional development and workplace satisfaction. Our core values, which focuses on developing our employees, fostering
an ownership mentality and allowing for intelligent risk taking, guide us in our decision making and inspire us to be better
people, both professionally and personally.
Compensation and Benefits. The healthcare industry as a whole has been experiencing shortages of qualified professional
clinical staff. We believe that our ability to attract and retain qualified professional clinical staff stems from our ability to offer
attractive wage and benefits packages, a high level of employee training, an empowered culture that provides incentives for
individual efforts and a quality work environment.
Diversity and Inclusion. We value diversity in our recruiting, hiring and career development practices. Our commitment is
to provide equal opportunity and fair treatment to all individuals based on merit and without discriminations.
Training and Development. We provide training and development to all employees. We have many training programs at
all levels such as our CEO in Training, Director of Nursing in Training, Preceptors, Young Gun Program, weekly culture
trainings, boot camps and annual meetings, where we focus on both career and professional development.
Social Sustainability. We continuously working toward bridging the gap between what the healthcare system currently
provides and the basic needs of individuals. We aim to have an enduring impact on the communities in which we live and work.
Elevate Charities is a non-profit organization that is dedicated to elevating the condition and quality of life for members of the
senior healthcare community - employees, caregivers, family members, patients and residents. Elevate Charities has three
unique funds: Heritage Fund, Heritage Scholarship Fund and the Emergency Fund.
The Heritage Fund and the Heritage Scholarship Fund engage in a mission to enhance the quality of life for seniors in our
communities through caring service, fulfilling essential needs and providing education to caregivers. The Heritage Fund helps
the caregiver identify specific and practical ways to meet the needs of those under their care. This can help provide a better life,
improved experience and greater satisfaction for our aging population. The financial support provided by the Heritage Fund
benefits seniors directly. In addition, the Heritage Scholarship Fund helps qualified clinical professionals who may not be able
to afford to advance in the field of long-term care. Through grants and scholarships, the fund helps these qualified professionals
gain the education needed to advance in the field of senior-focused healthcare. Since 2019, we awarded 97 scholarships to
employees in our workforce.
Lastly, the Emergency Fund is a way of passing the hat to help our co-workers whose lives are affected by tragedy. This
program is funded for Company team members by the Company team members. All Company team members can contribute to
the fund either through a one-time donation or by recurring payroll deduction. In 2021, over 19,800, or 76% of our employees
employed by our operating subsidiaries contributed to the Emergency Fund. In 2021, we distributed approximately $2.0 million
in grants to 1,819 members of our Ensign-affiliated family. To date, the Emergency Fund has distributed over 8,400 grants
totaling almost $10.0 million to members of our Ensign-affiliated family in their time of need.
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COVID-19. Our employees nationwide have been on the front lines in the battle against COVID-19. When it would have
been easier to simply hunker down and wait for the challenges to pass, the heroes in our operations continued to provide selfless
service to all their patients, including COVID patients. To recognize these front-line workers, our company, along with each
individual operating subsidiary, provided financial awards to our employees for their tirelessly daily efforts to provide
outstanding care to each resident they serve. We are beyond grateful for their enormous efforts and will continue to recognize
the sacrifices of these employees as we navigate through the pandemic. Additionally, to date, we granted $0.7 million from the
Emergency Fund for our employees in need as a result of COVID-19.
For additional information on human capital matters, please see our most recent proxy statement or sustainability report,
each of which is available on our website at www.ensigngroup.net. For additional information on Elevate Charities, please visit
www.elevatecharities.org.
GOVERNMENT REGULATION
General
Healthcare is an area of extensive and frequent regulatory change. Changes in the law or new interpretations of existing
laws may have a significant impact on revenue, costs and business operations. Our independent, operating subsidiaries that
provide healthcare services are subject to federal, state and local laws relating to, among other things, licensure, quality and
adequacy of care, physical plant requirements, life safety, personnel and operating policies. In addition, these same subsidiaries
are subject to federal and state laws that govern billing and reimbursement, relationships with vendors and business
relationships with physicians, and workplace protection for healthcare staff. Such laws include the Anti-Kickback Statue, the
federal False Claims Act (FCA), the Stark Law, the Health Care Emergency Temporary Standard, and state corporate practice
of medicine statutes.
Governmental and other authorities periodically inspect the skilled nursing facilities, senior living facilities and outpatient
rehabilitation agencies of our independent operating subsidiaries to verify continued compliance with applicable regulations and
standards. The operations must pass these inspections to remain licensed under state laws and to comply with Medicare and
Medicaid provider agreements. The operations can only participate in these third-party payment programs if inspections by
regulatory authorities reveal that the operations are in substantial compliance with applicable requirements. In the ordinary
course of business, federal or state regulatory authorities may issue notices to the operations alleging deficiencies in certain
regulatory practices. These statements of deficiency may require corrective action to regain and maintain compliance. In some
cases, federal or state regulators may impose other remedies including imposition of civil monetary penalties, temporary
payment bans, loss of certification as a provider in the Medicare or Medicaid program, or revocation of a state operating
license.
We believe that the regulatory environment surrounding the healthcare industry subjects providers to intense scrutiny. In
the ordinary course of business, providers are subject to inquiries, investigations and audits by federal and state agencies related
to compliance with participation and payment rules under government payment programs. These inquiries may originate from
the United States Department of Health and Human Services (HHS) Office of the Inspector General (OIG), state Medicaid
agencies, state Attorney Generals, local and state ombudsman offices and CMS Recovery Audit Contractors, among other
agencies. In response to the inquiries, investigations and audits, the federal and state governments continue to impose citations
for regulatory deficiencies and other regulatory penalties, including demands for refund of overpayments, expanded civil
monetary penalties that extend over long periods of time and date back to incidents prior to surveyor visits, Medicare and
Medicaid payment bans and terminations from the Medicare and Medicaid programs. We vigorously contest each such
regulatory outcome when appropriate; however, there are significant legal and other expenses involved that consume our
financial and personnel resources. Expansion of enforcement activity could adversely affect our business, financial condition or
the results of operations.
Coronavirus
In an effort to promote efficient care delivery and to decrease the spread of COVID-19, federal, state and local regulators
have implemented new regulations and waived (in some cases, temporarily) certain existing regulations, including those set
forth below.
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Temporary suspension of certain patient coverage criteria and documentation and care requirements - The
Coronavirus Aid, Relief, and Economic Security Act of 2020 (the CARES Act) and a series of temporary waivers and guidance
issued by CMS suspended various Medicare patient coverage criteria to ensure patients continue to have adequate access to
care, notwithstanding the burdens placed on healthcare providers as related to the COVID-19 pandemic. Many of these
regulatory waivers were issued pursuant to Section 1135 of the Social Security Act, which authorizes the HHS Secretary to
temporarily waive or modify Medicare and Medicaid requirements for affected health care providers and facilities following the
declaration of a public health emergency (Section 1135 Waivers). HHS also waived requirements specific to skilled nursing
facilities pursuant to its authority under Section 1812(f) of the Social Security Act (Section 1812(f) Waiver, and together with
the Section 1135 Waivers, the Emergency Waivers). While many of the Emergency Waivers are expected to last throughout the
duration of the COVID-19 public health emergency, CMS ended several Emergency Waivers effective May 10, 2021. Due to
the prevalence of waves of COVID-19 variants in 2021 and continuing into 2022, it is unclear when the remaining Emergency
Waivers will expire, or whether previously expired Emergency Waivers will be reinstated. On January 14, 2022, the COVID-19
Public Health Emergency (PHE) was extended until at least April 16, 2022.
Examples of requirements that were waived due to the COVID-19 emergency declaration include the following: (1)
approving temporary expansion sites to ensure that local hospitals and health systems have the capacity to handle a potential
surge of COVID-19 patients (e.g. CMS Hospital Without Walls); (2) removing barriers to practice for physicians, nurses, and
other clinicians from the community or from other states to allow healthcare systems to provide clinical and workforce support
where needed; (3) increasing access to telehealth and corresponding reimbursement through Medicare to ensure patients have
access to healthcare while remaining safe at home; (4) expanding in-place COVID-19 testing to allow for more testing at home
or in community based settings; and (5) temporarily waiving certain documentation, reporting and audit requirements to allow
providers, health care facilities, Medicare Advantage (MA) and Part D plans, and states to focus on the provision of care (e.g.,
Patients Over Paperwork). Many states have also waived regulations to ease regulatory burdens on the healthcare industries. It
remains uncertain when federal and state regulators will resume enforcement of those regulations, which remain waived or are
otherwise not being enforced during the public health emergency. We believe these regulatory actions could contribute to
changes in skilled mix, which may have been different without the existence of the waivers.
Pursuant to the Emergency Waivers, CMS also authorized temporary waivers on medical review requirements, effective
March 1, 2020, for the duration of the public health emergency. In addition, CMS is re-prioritizing scheduled program audits
and contract-level Risk Adjustment Data Validation audits for MA organizations, Part D sponsors, Medicare-Medicaid Plans,
and Programs of All-Inclusive Care for the Elderly organizations. Re-prioritizing these audit activities allows providers, CMS
and organizations to focus on patient care.
In July 2020, CMS updated its COVID-19 Provider Burden Relief Frequently Asked Questions (FAQ) related to claim
audit waivers for multiple services. On March 30, 2020, CMS suspended most Medicare FFS medical reviews because of the
COVID-19 pandemic. This included pre-payment medical reviews conducted by Medicare Administrative Contractors (MACs)
under the Targeted Probe and Educate program and post-payment reviews conducted by the MACs, Supplemental Medical
Review Contractors (SMRC), and Recovery Audit Contractors (RAC). CMS authorized MACs to resume these audit activities
beginning on August 3, 2020, regardless of the status of the public health emergency. All reviews will be conducted in
accordance with statutory and regulatory provisions, as well as related billing and coding requirements. Available waivers and
flexibilities for the claims selected for review will also be applied. In December of 2021, CMS issued a 2019 Novel
Coronavirus Medicare Provider Enrollment Relief FAQ document, which addressed Medicare enrollment and re-enrollment
during the ongoing public health emergency. Within this December 2021 FAQ, CMS indicated that it would resume collecting
application fees in 2021 and revalidating enrollees in 2022.
Under the Emergency Waivers, CMS is also allowing skilled nursing facilities to provide a skill-in-place program for
Medicare beneficiaries who are residents of the skilled nursing facilities that meet the skill-in-place criteria, foregoing the usual
three-day qualifying hospital stay. This waiver remains valid for the duration of the COVID-19 public health emergency. As
patients qualify for skill-in-place for Medicare Part A stays, we could see a decrease in long-term care Medicare Part B
programs.
On August 24, 2020, CMS released a Medicaid Informational Bulletin providing guidance to states on flexibilities that are
available to increase reimbursement for nursing facilities implementing specific infection control practices. On September 8,
2021, CMS clarified that CMS's waivers do not waive or change other requirements for SNF coverage under Medicare,
including the SNF level of care criteria, which is unchanged by the public health emergency. CMS used this update of its March
16, 2021 Medicare FFS Response to the PHE on COVID-19 article to further clarify that CMS will review and take action in
connection with SNF admissions that do not satisfy SNF level of care criteria that existed prior to the public health emergency
and CMS's institution of applicable waivers that facilitated payment for SNF services.
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Resuming visitation and resident rights — CMS has issued guidance to facilities throughout the public health emergency
regarding patients’ rights to visitation. While the CMS guidance issued in March 2020 directed that facilities severely restrict
visitation, CMS has subsequently provided guidance through the course of the pandemic (and most recently updated in
November 2021 and January 2022) that broadens visitation and provides guidance on visitation procedures.
Testing requirements — Beginning in April 2020, authorities in several states in which our independent operating
subsidiaries are located began to mandate widespread COVID-19 testing at all nursing home and long-term care facilities. This
came after the Centers for Disease Control and Prevention (CDC) stated that older adults are at a higher risk for serious illness
from the coronavirus and issued updated testing guidelines for nursing homes. Some of these states were also publicly reporting
COVID-19 outbreaks in facilities. On July 22, 2020, CMS announced that nursing homes in states with a 5% or greater
positivity rate for COVID-19 will be required to test all nursing home staff each week. On August 26, 2020, CMS issued new
parameters for testing, requiring routine monthly testing of all facility staff if the facility’s county positivity rate is less than 5%;
weekly testing if the county positivity rate is between 5% and 10%; and twice weekly testing if the county positivity rate
exceeds 10%. On April 27, 2021, CMS again issued revised parameters for testing, specifying that the requirement for routine
testing of staff applies only to those staff members that are unvaccinated - fully vaccinated staff do not have to be routinely
tested. On September 9, 2021, the Biden-Harris administration (the Administration) announced a forthcoming interim final rule
(IFR) that would require all workers in Medicare and Medicaid participating health facilities to be fully vaccinated.
On November 5, 2021, CMS issued the Omnibus COVID-19 Health Care Staff Vaccination IFR, requiring all eligible
staff to receive their first dose of a two-dose primary vaccination series by December 5, 2021, and the second dose of a two-
dose primary vaccination series by January 4, 2022. CMS's enforcement of this IFR was temporarily blocked in certain states
pending appeal to the United States Supreme Court. On January 13, 2022, the United States Supreme Court entered an order
allowing CMS's enforcement of the IFR and its vaccination requirements by March 15, 2022 for skilled nursing and long term
facilities in (among other states) Arizona, Idaho, Iowa, Kansas, Nebraska, South Carolina and Utah and by February 28, 2022
for all other states except Texas. On January 20, 2022, the authority of CMS to enforce the IFR in Texas was affirmed and CMS
set a deadline of March 21, 2022 for full compliance with its vaccination requirements. The routine testing requirements are in
addition to obligations to screen staff each shift, residents daily, and all persons entering the facility for signs and symptoms of
COVID-19. Facilities must test any staff or resident, regardless of vaccination status, who has signs or symptoms of
COVID-19. In the event of a COVID-19 outbreak in the facility, all staff and residents must be tested at regular intervals until
repeat testing identifies no new cases of COVID-19 infection among staff or residents for a 14-day period. Additional guidance
may be issued in connection with the forthcoming IFRs regarding mandatory worker vaccinations expected by CMS for
Medicare and Medicaid-participating facilities, which may also contain provisions affecting the testing and vaccination of
residents. In addition to CMS's testing mandates, some states have imposed their own testing requirements for residents and
staff, or are enforcing testing mandates under existing or expanded workplace safety regulations.
In addition to the IFR mandating vaccinations for health facility workers by CMS and vaccinations, several states where
our independent operating facilities are located have issued vaccine mandates that apply to facility employees. As discussed in
greater detail below in Item 1A., Risk Factors, the United States Supreme Court has halted enforcement of OSHA's vaccination
and testing emergency temporary standard (ETS). California, the most populous state, issued an order on August 5, 2021,
requiring workers in nursing homes and other health facilities to receive at least one vaccine dose by September 30, 2021.
California's Department of Public Health expanded its mandate on September 28, 2021, requiring adult care facilities and direct
care workers to be vaccinated as well, and for all affected workers to be fully vaccinated (including both shots of the two-shot
Pfizer or Moderna vaccination course) by November 30, 2021. On August 20, 2021, the State of Washington’s governor issued
a proclamation requiring workers in long-term care facilities and healthcare settings—including employees, contractors, and
volunteers—to be fully vaccinated against COVID-19 by October 2021. On August 30, 2021, the Colorado Board of Health
approved a COVID-19 vaccine requirement for employees, contractors, and other individuals working in certain health care
facilities including nursing homes and assisted living facilities, mandating that these workers be fully vaccinated by October
2021, which was extended by 120 days on December 15, 2021. Additionally, none of these states have been enjoined from
enforcing their respective mandates. Non-compliance with state or federal mandates may result in imposition of fines or other
administrative action. Compliance with these federal and state vaccine mandates, whether a result of changes in law, regulation,
or the result of an executive or agency order, may be difficult due to legal challenges and differing requirements imposed by
numerous authorities.
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Reporting requirements — Effective May 8, 2020, CMS published an IFR requiring skilled nursing facilities to report
information related to COVID-19 cases among facility residents and staff directly to the CDC National Health Safety Network
no less than weekly; the reported information is made publicly available on a dedicated website. In addition, skilled nursing
facilities are required to inform residents, their families and representatives of confirmed or suspected COVID-19 cases in their
facilities. This resident/family/representative notification is required to take place by 5:00 p.m. (local time) the next calendar
day following the occurrence of: (1) a single confirmed infection of COVID-19, or (2) three or more residents or staff with
new-onset of respiratory symptoms that occur within 72 hours of one another.
Effective May 21, 2021, CMS published an IFR requiring long-term care facilities to report weekly COVID-19
vaccination data of both residents and staff to the CDC National Healthcare Safety Network. Facilities are also required to
provide residents and staff with vaccine education and offer vaccines, when available, to residents and staff. CMS may initiate
enforcement activities and assess civil monetary penalties for not meeting any of these COVID-19 related requirements.
Effective June 11, 2021, HHS revised the Post-Payment Notice of Reporting Requirements which are applicable to
recipients of Provider Relief Funds. The revised requirements provide additional information on the data elements that
recipients are required to report as part of the post-payment reporting process, as well as the timing of such reporting.
Effective August 23, 2021, CMS published an IFR incorporating comments on its May 21, 2021 IFR which continued the
obligation for long-term care and intermediate care facilities to report COVID-19 vaccination data for both residents and staff to
the CDC National Healthcare Safety Network. This new IFR requires facilities to develop policies and procedures to ensure the
availability of the COVID-19 vaccine to residents and staff, and to educate residents and staff concerning the benefits, risks,
and potential side effects associated with the vaccine. This IFR also addresses responses to vaccination refusal by residents and
staff in compliance with U.S. Equal Employment Opportunity Commission guidance. CMS may initiate enforcement activities
and assess civil monetary penalties for not meeting any of these COVID-19 related reporting requirements under this IFR. We
do not believe these COVID-19 related requirements will have a material impact on our Consolidated Financial Statements.
Survey Activity and Enforcement — On March 20, 2020, CMS announced the initiation of focused infection control
surveys intended to assess long-term care facility compliance with infection control requirements in connection with the
COVID-19 pandemic. CMS prioritized infection control surveys over annual recertification and complaint surveys at the non-
immediate jeopardy level, confirming its commitment to infection prevention and control in the skilled nursing industry.
Effective August 17, 2020, CMS provided guidance authorizing resumption of traditional survey activity.
On June 1, 2020 (and subsequently updated in January 2021), CMS introduced an enhanced enforcement program with
respect to infection control deficiencies. The program contemplates more significant remedies against facilities with a prior
history of infection control deficiencies and imposes more stringent penalties with deficiencies identified at a higher scope and
severity. The spectrum of remedies available to CMS for imposition on skilled nursing facilities in connection with this
enhancement includes increased monetary fines, shortened time periods to return to compliance, and other administrative
penalties.
Federal COVID-19 Vaccination Program — On December 11, 2020, the U.S. Food and Drug Administration (FDA)
issued the first emergency use authorization (EUA) for the Pfizer-BioNTech vaccine for the prevention of COVID-19, followed
by the second EUA for the use of the Moderna COVID-19 vaccine on December 28, 2020, and the third EUA for the Johnson
& Johnson vaccine on February 27, 2021. Vaccine distribution is now widespread in all 50 states.
On August 18, 2021, the Administration announced that CMS was developing an emergency regulation requiring all
workers within Medicare and Medicaid-participating nursing homes to be vaccinated against COVID-19 as a condition of
participation in the Medicare and Medicaid programs. The Administration expanded the scope of this forthcoming emergency
regulation on September 9, 2021, and on the same day the Administration announced that OSHA would introduce a rule
requiring employers with more than 100 employees to mandate that its employees be fully vaccinated against COVID-19 or
submit to weekly testing for the virus. As further discussed below in Item 1A., Risk Factors, both CMS’s IFR and OSHA’s ETS
for vaccination were challenged in court and halted from enforcement in certain states. On January 13, 2022, the United States
Supreme Court halted any enforcement of OSHA’s rule but allowed CMS’s enforcement of the IFR and its vaccination
requirements by March 15, 2022 for skilled nursing and long term care facilities in Arizona, Idaho, Iowa, Kansas, Nebraska,
South Carolina and Utah and by February 28, 2022 for skilled nursing and long term care facilities in all other states except in
Texas. On January 20, 2022, Texas ended its litigation against CMS’sm enforcement of the IFR, and CMS published guidance
that employees of affected health facilities in that State must receive a first vaccination dose by February 19, 2022 and any
second dose by March 21, 2022, or apply for and receive exemptions within those timeframes.
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Through a series of amendments to the EUA beginning in 2021 through early January 2022, the FDA approved and the
CDC recommended the use of a single booster of the vaccines to be administered to individuals 12 years and older, at least six
months after completing the primary vaccination series of Pfizer-BioNTech or Moderna, or two months after completing the
primary Johnson & Johnson vaccination.
Medicare
Medicare presently accounts for approximately 28.8% of our skilled nursing services revenue year-to-date, being our
second-largest payor. The Medicare program and its reimbursement rates and rules are subject to frequent change. These
include statutory and regulatory changes, rate adjustments (including retroactive adjustments), administrative or executive
orders and government funding restrictions, all of which may materially adversely affect the rates at which Medicare
reimburses us for our services. Budget pressures often lead the federal government to reduce or place limits on reimbursement
rates under Medicare. Implementation of these and other types of measures has in the past, and could in the future, result in
substantial reductions in our revenue and operating margins.
Patient-Driven Payment Model (PDPM)
The Skilled Nursing Facility Prospective Payment System (SNF PPS) Rule became effective October 1, 2019. The SNF
PPS Rule includes a new case-mix model that focuses on the patient’s condition (clinically relevant factors) and resulting care
needs, rather than on the volume of care provided, to determine Medicare reimbursement. The case mix-model is called the
Patient-Driven Payment Model (PDPM), which utilizes clinically relevant factors for determining Medicare payment by using
International Classification of Diseases, Tenth Revision diagnosis codes and other patient characteristics as the basis for patient
classification. PDPM utilizes five case-mix adjusted payment components: physician therapy, occupational therapy, speech
language pathology, nursing and social services and non-therapy ancillary services. It also uses a sixth non-case mix component
to cover utilization of skilled nursing facilities resources that do not vary depending on resident characteristics.
PDPM replaces the existing case-mix classification methodology, Resource Utilization Groups, Version IV. The structure
of PDPM moves Medicare towards a more value-based, unified post-acute care payment system. For example, PDPM adjusts
Medicare payments based on each aspect of a resident’s care, thereby more accurately addressing costs associated with
medically complex patients. PDPM also removes therapy minutes as the basis for therapy payment. Finally, PDPM adjusts the
skilled nursing facilities per diem payments to reflect varying costs throughout the stay, through the physician therapy,
occupational therapy and non-therapy ancillary services components.
In addition, PDPM is intended to reduce paperwork requirements for performing patient assessments. Under the SNF PPS
PDPM system, the payment to skilled nursing facilities and nursing homes is based heavily on the patient’s condition rather
than the specific services provided by each skilled nursing facility. On August 4, 2021, CMS published the SNF PPS final rule
for fiscal year 2022, which included a 1.2% net market basket increase in payment to SNFs, and reduced the negative impact of
readmissions for providers with more than 25 stays by returning 60% of the 2% withheld by CMS regardless of that provider’s
performance measures. Providers with lower volume and fewer than 25 stays will not have any adjustments made to their
payment.
Skilled Nursing Facility - Quality Reporting Program (SNF QRP)
The Improving Medicare Post-Acute Care Transformation Act of 2014 (IMPACT Act) imposed new data reporting
requirements for certain Post-Acute-Care (PAC) providers. The IMPACT Act requires that each skilled nursing facility submit
their quality measures data. Beginning with fiscal year 2018, and each subsequent year, if a skilled nursing facility does not
submit required quality data, their payment rates are reduced by 2.0% for each such fiscal year. Application of the 2.0%
reduction may result in payment rates for a fiscal year being less than the preceding fiscal year. In addition, reporting-based
reductions to the market basket increase factor will not be cumulative; they will only apply for the fiscal year involved. A
skilled nursing facility's MAC will issue the facility a notice of non-compliance if it does not satisfy its Quality Reporting
Program reporting requirements.
Updated performance measures mandated for the SNF QRP for fiscal year 2020 were established in the final SNF PPS
rule adopted on August 8, 2019 (fiscal year 2020 SNF PPS Rule). The final rule continues implementation of the SNF QRP
measures to improve program interoperability, operational quality and safety. Specifically, the rule adopts a number of
standardized patient assessment data elements. The SNF QRP applies to freestanding skilled nursing facilities, skilled nursing
facilities affiliated with acute care facilities, and all non-critical access hospital swing-bed rural hospitals.
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On July 29, 2021, CMS issued a final rule for the SNF QRP that adopted two new reporting measures and updated the
specifications for another measure. Starting with the FY 2023 SNF QRP, SNFs are required for the first time to report the SNF
Healthcare-Associated Infections (HAI) measure, which tracks the number of infections requiring hospitalization following a
medical intervention, and the COVID-19 Vaccination Coverage among Healthcare Personnel (HCP) measure, which tracks
vaccination of staff in order to assess whether SNFs are taking steps to limit the spread of COVID-19. The Transfer of
Healthcare (TOH) information data SNFs must report, which is included in the Patient-Post-Acute Care measurement, will be
changed to exclude SNF patients discharged to their homes under the care of either a home health service or hospice. The
elimination of this information will change how the TOH is used in calculating Patient-Post-Acute Care measurement, and may
have an impact on our quality ratings and reimbursement from Medicare and Medicaid on a prospective basis.
Beginning in March 2020, due to the COVID-19 pandemic, CMS issued a temporary suspension of SNF QRP reporting
requirements effective until June 30, 2020. This effectively gave skilled nursing facilities discretion as to whether to report data
from the fourth quarter (October 1, 2019 – December 31, 2019), and removed reporting requirements entirely for the first and
second quarters of 2020 (January 1, 2020 – June 30, 2020). Skilled nursing facilities were required to resume timely quality
data collection and submission of measure and patient assessment data effective June 30, 2020. In January 2022, SNF ratings
based on the resumed data reporting were recalculated for publication on the SNF Care Compare website.
Medicare Annual Market Basket
CMS is required to calculate an annual Medicare market-basket update to the payment rates. On July 31, 2020, CMS
issued a final rule for fiscal year 2021 that updates the Medicare payment rates and the quality programs for skilled nursing
facilities. Under the final rule, effective October 1, 2020, the aggregate payments to skilled nursing facilities increased by 2.2%
for fiscal year 2021, compared to fiscal year 2020. This estimated increase is attributable to a 2.2% market basket increase
factor.
On July 29, 2021, CMS issued a final rule for fiscal year 2022 that updates the Medicare payment rates and the quality
programs for skilled nursing facilities. Under the final rule, effective October 1, 2021, the aggregate net market basket rate
increased by 1.2% for fiscal year 2022, compared to fiscal year 2021. This increase is attributable to a 2.7% market basket
increase factor with a 0.8% point reduction for forecast error adjustment and a 0.7% point reduction for multifactor productivity
adjustment.
On April 12, 2021, CMS revealed its intent to recalibrate PDPM’s parity adjustment up to 5.0% based on the prior year
aggregate spending under the new model. On July 29, 2021, CMS’s final rule for fiscal year 2022 did not include this parity
adjustment and indicated that this PDPM parity adjustment would be revisited in CMS’s proposed rule for the 2023 fiscal year.
The reimbursement change, if proposed and finalized in a future fiscal year, could adversely impact our reimbursement rates.
Sequestration of Medicare Rates
The Budget Control Act of 2011 requires a mandatory, across the board reduction in federal spending, called a
sequestration. Medicare FFS claims with dates of service or dates of discharge on or after April 1, 2013 incur a 2.0% reduction
in Medicare payments. All Medicare rate payments and settlements have incurred this mandatory reduction and it will continue
to be in place through at least 2023, unless Congress takes further action. In response to COVID-19, the CARES Act
temporarily suspended the automatic 2.0% reduction of Medicare claim reimbursements for the period of May 1, 2020 through
December 31, 2020. On December 27, 2020, the Consolidated Appropriations Act further suspended the 2.0% payment
adjustment through March 31, 2021. On April 14, 2021, Congress extended the suspension of the 2.0% payment adjustment
through December 31, 2021. On December 10, 2021, President Biden signed into law a bill to postpone the 2.0% payment
adjustment through April 1, 2022; from April 1, 2022 through June 30, 2022, the 2.0% payment adjustment is reduced from
2.0% to 1.0%. To pay for the change, Congress would increase the sequester cuts by one year to fiscal year 2030.
Skilled Nursing Facility Value-Based Purchasing (SNF-VBP) Program
The SNF-VBP Program rewards skilled nursing facilities with incentive payments based on the quality of care they
provide to Medicare beneficiaries, as measured by a hospital readmissions measure. CMS annually adjusts its payment rules for
skilled nursing facilities using the SNF-VBP Program. Effective October 1, 2018, CMS began withholding 2.0% to fund the
SNF-VBP incentive payment pool and will redistribute 60% of the withheld payments back to skilled nursing facilities through
the program. The fiscal year 2020 SNF PPS Rules estimate the economic impact of the SNF-VBP Program to be a reduction of
$213.6 million in aggregate payments to skilled nursing facilities during fiscal year 2020. The Rule also introduced two new
quality measures to assess how health information is shared and adopted a number of standardized patient assessment data
elements that assess factors such as cognitive function and mental status, special services, and social determinants of health.
The fiscal year 2021 SNF PPS rule updated the deadlines for baseline period quality measure quarterly reporting and announced
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performance periods and standards for the fiscal year 2023 program year, but otherwise made no changes to the measures,
scoring or payment policies. In the fiscal year 2022 program, CMS proposed changes to account for COVID-19 impacting
readmission rates and SNF admissions during the performance periods of fiscal year 2020. These proposed changes would
impact the SNF-VBP rate adjustment. On July 29, 2021, CMS published its final rule for the fiscal year 2022 program in the
Federal Register, adopting the proposed changes for measuring the performance period and amending the data to be reported to
CMS, which impacted the SNF-VBP rate adjustment.
Part B Rehabilitation Requirements
Some of our revenue is paid by the Medicare Part B program under a fee schedule. Part B services are limited with a
payment cap by combined speech-language pathology services (SLP) and physical therapy (PT) services and a separate annual
cap for occupational therapy (OT) services. These caps were implemented under the authority of the Balanced Budget
Amendments of 1997. These amounts were previously associated with the financial limitation amounts. The Bipartisan Budget
Act of 2018 (BBA) repealed those caps while retaining and adding additional limitations to ensure appropriate therapy services.
This policy does not limit the amount of medically necessary Medicare Part B therapy services a beneficiary may receive. The
BBA establishes coding modifier requirements to obtain payments beyond the updated KX modifier thresholds, discussed
below, and reaffirms the specific $3,000 claim audit threshold requirements for the Medicare Administrative Contractors. For
PT and SLP combined the threshold for coding modifier requirements is $2,110 for 2021, compared to $2,080 for 2020. The
KX Modifier Threshold is set at $2,150 for CY 2022. The threshold is the same for OT services.
Consistent with CMS’s “Patients over Paperwork” initiative, the agency has also been moving toward eliminating
burdensome claims-based functional reporting requirements for Part B therapy services. For example, beginning in January
2019, skilled nursing facilities are no longer required to append selected G-codes or the severity modifiers on outpatient therapy
claims. This reduces the reporting burden on therapists providing outpatient services and increases the amount of time that
therapists can spend with their patients. Effective January 1, 2021, CMS rescinded 21 problematic National Correct Coding
Initiative edits impacting outpatient therapy services, including services furnished under Medicare Part B primarily related to
PT and OT services. These code edits were previously implemented on October 1, 2020 and required additional documentation
and claim modifier coding burden when procedure codes representing many PT or OT evaluation codes or treatment codes
performed under a PT, OT, or SLP plan of care was billed on the same date. This additional coding burden has been removed.
On December 1, 2020, CMS issued the calendar year 2021 Physician Fee Schedule (PFS) Final Rule, which reduced the
conversion factor (i.e. the number by which CMS determine all current procedural terminology code payments) by 10.2%.
These changes lowered the reimbursement rate for therapy Medicare Part B specialty providers, specific to our industry by 9%
for PT and OT and by 6% for SLP Codes.
The Consolidated Appropriations Act of 2021 (CAA, also referred to as The Omnibus Appropriations Law) was signed
into law on December 27, 2020. The CAA includes three components relevant to the Medicare Part B PFS. First, the CAA
incorporates a rate relief of approximately 3.75% for fiscal year 2021. Additionally, the CAA incorporates a freeze to the
payment for the physician add-on code for three years which would effectively create relief on the initial cuts through 2023.
Finally, the relief calls for the 2% sequester to not be applied to the Medicare Part B program for the first quarter of 2021. CMS
incorporated the first and second components of the CAA relief into the fiscal year 2021 PFS files which were published on
January 5, 2021. While the 2021 PFS Final Rule reduced the fiscal year 2021 factor to $32.4085 (calendar year conversion
factor was $36.0896), subsequently, the CAA restored part of the reductions resulting in the final fiscal year 2021 conversion
factor of $34.8931. This conversion factor rate does not include the 2% sequester which has been suspended until April 1, 2022
and then will be implemented as a 1% sequestration until June 30, 2022.
On July 13, 2021, CMS issued the calendar year 2022 PFS proposed rule, which proposes to implement the portion of the
BBA requiring the use of new modifiers to allow CMS to identify and make payments at 85% of the otherwise applicable Part
B payment amount for PT and OT services furnished in whole or in part by PT and OT assistants. Other changes in the
proposed rule, including reducing the conversion factor by 3.89%, will have the effect of lowering the reimbursement rate for
Part B therapy services if implemented. On November 19, 2021, CMS published the 2022 PFS, which required the use of new
modifiers (the CO modifier) to identify and make payments at 85% of the otherwise applicable Part B payment amount for PT
and OT services furnished in whole, or in part by PT and OT assistants. On December 10, 2021, President Biden signed the
Protecting Medicare and American Farmers from Sequester Cuts Act into law, which restored funding for Medicare payments
that was removed in the 2022 PFS. Following passage of this law, CMS announced forthcoming payment changes to the 2022
PFS on December 16, 2021. Based on these announced adjustments, Medicare payments would not be adjusted from January
1, 2022 through March 31, 2022; FFS Medicare payments would then be adjusted by 1% from April 1, 2022 through June 30,
2022, and further adjusted by a total of 2% from July 1, 2022 through December 31, 2022. Under the recalculated 2022 PFS
announced by CMS in December of 2021, the conversion factor was reduced from the 2021 conversion factor of $34.8931 by
0.82% to $34.6062, rather than the expected 3.89% in the proposed rule, or by the more than 3.7% expected based on the
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calculations contained within the original 2022 PFS announced in November of 2021, which would have reduced the
conversion factor to $33.5983.
The Multiple Procedure Payment Reduction (MPPR) continues at a 50% reduction, which is applied to therapy procedures
by reducing payments for practice expense of the second and subsequent procedures when services provided beyond one unit of
one procedure are provided on the same day. The implementation of MPPR includes (1) facilities that provide Medicare Part B
speech-language pathology, occupational therapy, and physical therapy services and bill under the same provider number; and
(2) providers in private practice, including speech-language pathologists, who perform and bill for multiple services in a single
day.
On May 27, 2020, pursuant to its authority under the Emergency Waivers, CMS added physical therapy, occupational
therapy and speech-language pathology to list of approved telehealth Providers for the Medicare Part B programs provided by a
skilled nursing facility. This waiver allows the reimbursement of certain Healthcare Common Procedure Coding System
(HCPCS) codes delivered by PT, OT, SLP through telehealth through the end of the public health emergency. Subsequently, the
calendar year 2021 PFS Final Rule added certain of these PT and OT services to the list of Medicare telehealth services on a
temporary basis through the end of the calendar year in which the COVID-19 public health emergency ends. These services
have been used to provide some services to community-based outpatients from our skilled nursing facilities that are eligible
through local rules to provide community-based outpatient services. Under the calendar year 2022 PFS, these certain telehealth
services would continue to be included on the Medicare telehealth services list until the end of calendar year 2023.
Pursuant to the Emergency Waivers, CMS allowed for the facility to bill an originating site fee to CMS for telehealth
services provided to Medicare Part B beneficiary residents of the facility when the services are provided by a physician from an
alternate location, effective March 6, 2020 through the end of the public health emergency, which is currently in effect through
April 16, 2022 and could be further extended (or expired Emergency Waivers even reinstated) due to waves of COVID-19
variants that affected the country and globe in 2021 and continuing into 2022. The PFS Final Rule also increased the frequency
limitation on nursing facility telehealth visits from once every 30 days to once every fourteen days. Our facilities are utilizing
this waiver as physicians elect to provide telehealth visits to Medicare Part B beneficiaries residing in the skilled nursing
facility.
On December 31, 2020, CMS announced the annual update to the list of codes that describe Medicare Part B outpatient
therapy services, effective January 1, 2021. Several existing and new codes introduced during the COVID-19 public health
emergency impacting skilled nursing facilities providers for use under physical therapy, occupational therapy, or speech-
language pathology plans of care were recently made permanent including several telehealth codes. CMS designated all these
new HCPCS/Current Procedural Terminology (CPT) codes as “sometimes therapy,” to permit physicians and certain non-
physician practitioners, including nurse practitioners, physician assistants, and clinical nurse specialists, to render these services
outside a therapy plan of care when appropriate. “Sometimes therapy” codes will not have the MPPR applied. On November
19, 2021, CMS expanded these “sometimes therapy” codes further for the 2022 PFS, including five new codes for remote
therapeutic monitoring (RTM) treatment. These RTM codes affect skilled nursing facilities and be used to measure and evaluate
adherence to medication and therapy, as well as response to medication and therapy. The use of RTM codes is anticipated to be
broader than the existing remote patient monitoring codes approved by CMS.
Programs of All-Inclusive Care for the Elderly
CMS issued a final rule on June 3, 2019, which updates the requirements for the Programs of All-Inclusive Care for the
Elderly (PACE) under the Medicare and Medicaid programs. The regulation is intended to provide greater operational
flexibility, remove redundancies and outdated information and codify existing programs. Such flexibility includes: (i) more
lenient standards applicable to the current requirement that the PACE organization be monitored for compliance with the PACE
program requirements during and after a 3-year trial period and (ii) relieving certain restrictions placed upon the
interdisciplinary team that comprehensively assesses and provides for the individual needs of each PACE participant by
allowing one person to fill two roles and permitting secondary participation in the PACE program. Further, non-physician
primary care providers can provide certain services in place of primary care physicians. On October 21, 2021, CMS published
an extension of the timeline to complete further final rulemaking for the PACE program until November 1, 2022, based on a
proposed rule published on November 1, 2018, regarding policy and technical changes to Medicare Advantage, Medicare
Prescription Drug Benefit, PACE, Medicaid FFS, and Medicaid managed care programs for 2020 and 2021. Based on
completed studies, public comments, and the intervening COVID-19 pandemic that required CMS’s focus, CMS extended the
timeline to issue a final rule regarding new policy and technical changes to the PACE program until November of 2022. The
November 2018 proposed rule suggests changes to payment and appeals of disputes within the PACE program which may
affect our business.
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Preadmission Screening and Resident Review
On February 20, 2020, CMS published a proposed rule which would modernize requirements for the Preadmission
Screening and Resident Review process. This process assesses the needs of individuals with mental illness or intellectual
disability that are applying to or residing in Medicaid-certified nursing facilities. The proposed rule, if enacted as currently
drafted, would impose additional resident review requirements that are not reflected in current regulations, authorize the use of
telehealth, and simplify the list of information that must be collected during evaluations.
Decisions Regarding Skilled Nursing Facility Payment
Medicare reimbursement rates and rules are subject to frequent change. Historically, adjustments to reimbursement under
Medicare have had a significant effect on our revenue. The federal government and state governments continue to focus on
efforts to curb spending on healthcare programs such as Medicare and Medicaid. We are not able to predict the outcome of the
legislative process. We also cannot predict the extent to which proposals will be adopted or, if adopted and implemented, what
effect, if any, such proposals and existing new legislation will have on us. Efforts to impose reduced allowances, greater
discounts and more stringent cost controls by government and other payors are expected to continue and could adversely affect
our business, financial condition and results of operations.
These include statutory and regulatory changes, rate adjustments (including retroactive adjustments), administrative or
executive orders and government funding restrictions, all of which may materially adversely affect the rates at which Medicare
reimburses us for our services. Budget pressures often lead the federal government to reduce or place limits on reimbursement
rates under Medicare. Implementation of these and other types of measures has in the past, and could in the future, result in
substantial reductions in our revenue and operating margins. For a discussion of historic adjustments and recent changes to the
Medicare program and related reimbursement rates, see Part I, Item 1A Risk Factors under the headings Risks Related to Our
Business and Industry - “Our revenue could be impacted by federal and state changes to reimbursement and other aspects of
Medicaid and Medicare,” “Our future revenue, financial condition and results of operations could be impacted by continued
cost containment pressures on Medicaid spending,” “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” and
“Reforms to the U.S. healthcare system will impose new requirements upon us and may lower our reimbursements.”
Patient Protection and Affordable Care Act
Various healthcare reform provisions became law upon enactment of the Patient Protection and Affordable Care Act and
the Healthcare Education and Reconciliation Act (collectively, the ACA). The reforms contained in the ACA have affected our
operating subsidiaries in some manner and are directed in large part at increased quality and cost reductions. Several of the
reforms are very significant and could ultimately change the nature of our services, the methods of payment for our services and
the underlying regulatory environment. These reforms include modifications to the conditions of qualification for payment,
bundling of payments to cover both acute and post-acute care and the imposition of enrollment limitations on new providers.
The upcoming Congressional elections in the United States and policies implemented by the current and former Presidential
administration have resulted in significant changes in legislation, regulation, implementation of Medicare, Medicaid, and
government policy. The 2022 midterm elections may significantly alter the current regulatory framework and impact our
business and the health care industry. We continually monitor these developments so we can respond to the changing regulatory
environment impacting our business.
Requirements of Participation
CMS has requirements that providers, including skilled nursing facilities and other long-term care (LTC) facilities must
meet in order to participate in the Medicare and Medicaid Programs. Some requirements can be burdensome and costly, and in
recent years, CMS has modified these requirements. For example, beginning in 2016, skilled nursing facilities were required to
comply with emergency preparedness requirements, which requirements have since been strengthened via promulgation of
additional rules.
Another relevant change is a 2019 final rule that removed the prohibition on the use of pre-dispute, binding arbitration
agreements by LTC facilities. The rule imposed specific requirements on the use of these agreements, including requiring the
use of plain language in drafting; that facilities post a notice in plain language that describes the policy on the use of agreements
for binding arbitration in an area that is visible to residents and visitors; that admission to the facility not be conditioned on the
signing of an arbitration agreement; and that the facility expressly inform the resident or his/her representative of the right not
to sign the agreement as a condition of admission. Congress has routinely introduced, but not passed, legislation addressing the
issue of arbitration agreements used by LTC facilities. While legislative action is possible in the future, federal and state
regulations remain our primary source of authority over the use of pre-dispute binding arbitration agreements.
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As discussed under the “Coronavirus” heading above, the Administration announced that CMS and OSHA would
implement emergency rules requiring all workers within all Medicare and Medicaid-participating nursing homes, and all
employees of companies with more than 100 employees, to be fully vaccinated against COVID-19. Significant litigation
followed, including enforcement of both the CMS and OSHA vaccination mandates being halted by certain courts. On January
13, 2022, the United States Supreme Court held that the OSHA vaccination mandate could not be enforced against large
employers, but that the CMS vaccination mandate could be enforced upon Medicare- and Medicaid-participating facilities.
Those states except Texas where the CMS rule had been halted against enforcement then had to enforce the rule. On January
20, 2022, the United States District Court for the Northern District of Texas dismissed the block of the CMS's vaccination IFR
in Texas. That same day, CMS became empowered to enforce the IFR in Texas and set a deadline of March 21, 2022 for full
compliance with its vaccination requirements.
Civil and Criminal Fraud and Abuse Laws and Enforcement
Various complex federal and state laws exist which govern a wide array of referrals, relationships and arrangements, and
prohibit fraud by healthcare providers. Governmental agencies are devoting increasing attention and resources to such anti-
fraud efforts. The Health Insurance Portability and Accountability Act of 1996 (HIPAA), and the Balanced Budget Act of 1997
expanded the penalties for healthcare fraud. Additionally, in connection with our involvement with federal healthcare
reimbursement programs, the government or those acting on its behalf may bring an action under the FCA, alleging that a
healthcare provider has defrauded the government by submitting a claim for items or services not rendered as claimed, which
may include coding errors, billing for services not provided, and submitting false or erroneous cost reports. The Fraud
Enforcement and Recovery Act of 2009 (FERA) expanded the scope of the FCA by, among other things, creating liability for
knowingly and improperly avoiding repayment of an overpayment received from the government and broadening protections
for whistleblowers. The FCA clarifies that if an item or service is provided in violation of the Anti-Kickback Statute, the claim
submitted for those items or services is a false claim that may be prosecuted under the FCA as a false claim. Civil monetary
penalties under the FCA range from approximately $11 thousand to $23 thousand per violation and are adjusted annually for
inflation. Under the qui tam or “whistleblower” provisions of the FCA, a private individual with knowledge of fraud may bring
a claim on behalf of the federal government and receive a percentage of the federal government’s recovery. Due to these
whistleblower incentives, lawsuits have become more frequent. Many states also have a false claim prohibition that mirrors or
tracks the federal FCA. Federal law also provides that OIG has the authority to exclude individuals and entities from federally
funded health care programs on a number of grounds, including, but not limited to, certain types of criminal offenses, licensure
revocations or suspensions, and exclusion from state or other federal healthcare programs. And, CMS can recover
overpayments from health care providers up to five years following the year in which payment was made.
In November 2019, the OIG released a report of its investigation into overpayments to hospitals that did not comply with
Medicare’s post-acute-care transfer policy. Hospitals violating this policy transferred patients to certain post-acute-care settings,
such as skilled nursing facilities, but claimed the higher reimbursements associated with discharges to homes. A similar OIG
audit report, released in February 2019, focused on improper payments for skilled nursing facility services when the Medicare
three-day inpatient hospital stay requirement was not met. In 2021, the OIG released the result of an audit finding that Medicare
overpaid millions of dollars of chronic care management (CCM) services. The OIG's 2021 report found that in calendar years
2017 and 2018, Medicare overpaid millions of dollars in CCM claims. These investigatory actions by OIG demonstrate its
increased scrutiny into post-hospital skilled nursing facility care provided to beneficiaries and may encourage additional
oversight or stricter compliance standards.
On numerous occasions, CMS has indicated its intent to vigilantly monitor overall payments to skilled nursing facilities,
paying particular attention to facilities that have high reimbursements for ultra-high therapy, therapy resource utilization groups
with higher activities of daily living scores, and long average lengths of stay. The OIG recognizes that there is a strong financial
incentive for facilities to bill for higher levels of therapies, even when not needed by patients. We cannot predict the extent to
which the OIG's recommendations to CMS will be implemented and, what effect, if any, such proposals would have on us. Our
business model, like those of some other for-profit operators, is based in part on seeking out higher-acuity patients whom we
believe are generally more profitable, and over time our overall patient mix has consistently shifted to higher-acuity in most
facilities we operate. We also use specialized care-delivery software that assists our caregivers in more accurately capturing and
recording services in order to, among other things, increase reimbursement to levels appropriate for the care actually delivered.
These efforts may place us under greater scrutiny with the OIG, CMS, our fiscal intermediaries, recovery audit contractors and
others.
Federal Healthcare Reform
In 2015, CMS released a final rule addressing, among other things, implementation of certain provisions of Medicare
Access and CHIP Reauthorization Act of 2015, which changes the way physicians are paid who participate in Medicare through
implementation of the Quality Payment Program, which created new paths for payment based on the Merit-based Incentive
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Payment System (MIPS) or the use of Alternative Payment Models (APM). A measure to ascertain provider quality is the Five-
Star Quality Rating system, which includes a rating of one to five in various categories. In 2018 and 2019, these calculations
changed to reflect new and additional data that affected rankings, including freezing information regarding health inspection
information, and including data to reflect the ranking of staffing (including emphasizing the level of registered nurse staffing),
stay durations, spending, discharge outcomes and readmissions.
As of January 1, 2020, CMS assigned ratings to SNFs under its Five Star Quality reporting system and displayed those
ratings on its consumer-based Nursing Home Compare website. CMS’s assignment of ratings under its Five Star Quality for a
SNF measure is based upon numerous quality measures, which as of January 1, 2020 included staffing levels (and staffing
composition, focusing on the use of registered nurses), the use of antipsychotic medications, rate of hospitalization, emergency
department use, community discharge, improvements in function, independently worsened and anxiety or hypnotic medication
use, payroll based journals, and Medicare spending by beneficiary. Additionally, this data is segregated and rated separately for
short-term and long-term stays in the SNF. These measures were subject to thresholds for stars assigned based on both staffing
and quality components, with standards for score assignment that restricted the number of 4- and 5-star ratings that could be
given. This resulted in a reduction in the number of 4- and 5-star facilities compared to their prior ranking, including certain of
our own facilities. CMS also displays a consumer alert icon next to nursing homes that had been cited for incidents of abuse,
neglect, or exploitation on the Nursing Home Compare website, which is updated monthly with CMS’s refresh of survey
inspection results on that website. In February 2020, CMS announced that part of its Enhancing Enforcement efforts would
include improved oversight of state survey agencies (SSA) and revisions to the State Performance Standards System, which is
the program used to access SSA performance.
In 2020, in response to the COVID-19 pandemic, a temporary freeze was placed on Skilled Nursing Facilities Quality
Reporting Program data, Staffing data, and Health Inspection data on the Nursing Home Compare website to account for the
suspended reporting and inspection obligations due to the COVID-19 pandemic. The information reported to CMS and used in
these quality calculations changed over the period of 2020. Beginning in August of 2020, and in response to the COVID-19
pandemic, CMS announced a new, targeted inspection plan to focus on urgent patient safety threats and infection control,
therefore causing a shift in the number of nursing homes inspected and the manner in which the inspections are conducted. As
this change would disrupt the inspections and data collection CMS and state surveyors conducted as part of the Nursing Home
Five Star Quality Rating System, results of these inspections conducted on or after March 4, 2020 were not initially used to
calculate a nursing home’s health inspection star ratings. By December of 2020, CMS and state surveyors had resumed
inspections of nursing homes to include inspection data, including surveys that occurred on March 4, 2020 and afterward, in its
star rankings calculated for January 2021. CMS resumed calculating nursing homes' health inspection ratings on January 27,
2021. Similarly, although staff reporting requirements were waived for the first and second quarters of 2020, this waiver ended
on June 25, 2020. Thereafter, nursing homes were required to report staffing data to CMS, which was incorporated into CMS’s
Five Star Quality rating for those nursing homes beginning in January 2021. The January 2021 calculation of Five Star Quality
ratings for nursing homes reflected nursing home-provided quarterly updates of most quality measures for the period beginning
June 2019 and ending June 2020 due to interruptions in data collection. The quality measures that are specific to SNFs but not
included in CMS’s Five Star Quality ratings for January 2021 were the measures for percentages of new or worsening pressure
injuries, and the rate of residents who successfully return to home from a SNF. These measures may be included in future Five
Star Quality ratings and the delay may not reveal improvements in previously low-rated facilities, or declines in performance
within highly rated facilities. When the anticipated January 2022 refresh of Five Star Quality ratings occurs, SNF quality
reporting measures will be calculated based on the data reported from July 1, 2020 through March 31, 2021, due to the ongoing
COVID-19 PHE. When these Five Star Quality ratings are updated, they may not contain or reflect the latest or most accurate
data regarding our facilities, including improvements in previously low-rated facilities, or declines in performance within
higher-rated facilities.
Another impact of the COVID-19 pandemic to the Nursing Home Five-Star Quality Rating System is CMS’s decision to
make submission of the minimum data set assessment data optional for the fourth quarter of 2019 and excepted for the first and
second quarters of 2020. Due to the gap in reported data, CMS did not include the two quality measures that are reflected in the
minimum data set assessment-based data in its quality measure ratings in January 2021.
On August 10, 2021, the Nursing Home Improvement and Accountability Act of 2021 (Nursing Home Improvement Act)
was introduced in the U.S. Senate and is intended to update federal nursing home policy to improve quality of care and
oversight. The proposed legislation reduces SNF payments by two percentage points beginning in fiscal year 2025 for
inaccurate submission of certain data, provides federal funding of $50 million to carry out data validation tasks for SNF data
and provides federal funding of $250 million to ensure accuracy of information on cost reports. The Nursing Home
Improvement Act also proposes to establish nurse staffing requirements, including the requirement for the use of a 24-hour
registered professional nurse and other provisions intended to increase transparency and accuracy of reported data regarding
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nursing activities, improve accountability and enhance quality of care. If passed in its current form, however, this bill would
provide participating states with a temporary enhanced federal Medicaid match to fund improvements in nursing home
workforce and care. This match would last six years and states would be responsible for showing CMS that Medicaid
reimbursement increases were used to increase worker wages and yield new training resources and opportunities for nursing
home staff. As of December 31, 2021, no action has been taken on this bill since its introduction to the Senate on August 10,
2021 and referral to the Senate Finance Committee that same day.
Monitoring Compliance in Our Facilities
Governmental agencies and other authorities periodically inspect our independent operating facilities to assess compliance
with various standards, rules and regulations. The robust regulatory and enforcement environment continues to impact
healthcare providers, especially in connection with responses to any alleged noncompliance identified in periodic surveys and
other inspections by governmental authorities. Unannounced surveys or inspections generally occur at least annually and may
also follow a government agency's receipt of a complaint about a facility. Facilities must pass these inspections to maintain
licensure under state law, to obtain or maintain certification under the Medicare and Medicaid programs, to continue
participation in the Veterans Administration program at some facilities, and to comply with provider contracts with managed
care clients at many facilities. From time to time, our independent operating subsidiaries, like others in the healthcare industry,
may receive notices from federal and state regulatory agencies of an alleged failure to substantially comply with applicable
standards, rules or regulations. These notices may require corrective action, may impose civil monetary penalties for
noncompliance, and may threaten or impose other operating restrictions on skilled nursing facilities such as admission holds,
provisional skilled nursing license, or increased staffing requirements. If our independent operating subsidiaries fail to comply
with these directives or otherwise fail to comply substantially with licensure and certification laws, rules and regulations, the
facility could lose its certification as a Medicare or Medicaid provider, or lose its license permitting operation in the State.
Facilities with otherwise acceptable regulatory histories generally are normally given an opportunity to correct
deficiencies and continue their participation in the Medicare and Medicaid programs by a certain date, usually within nine
months; however, although where denial of payment remedies are asserted, such interim remedies go into effect much sooner.
Facilities with deficiencies that immediately jeopardize patient health and safety and those that are classified as poor performing
facilities, however, may not be given an opportunity to correct their deficiencies prior to the imposition of remedies and other
enforcement actions. Moreover, facilities with poor regulatory histories continue to be classified by CMS as poor performing
facilities notwithstanding any intervening change in ownership, unless the new owner obtains a new Medicare provider
agreement instead of assuming the facility's existing agreement. However, new owners nearly always assume the existing
Medicare provider agreement due to the difficulty and time delays generally associated with obtaining new Medicare
certifications, especially in previously certified locations with sub-par operating histories. Accordingly, facilities that have poor
regulatory histories before acquisition by our independent operating subsidiaries and that develop new deficiencies after
acquisition are more likely to have sanctions imposed upon them by CMS or state regulators.
In addition, CMS has increased its focus on facilities with a history of serious or sustained quality of care problems
through the special focus facility (SFF) initiative. A facility's administrators and owners are notified when it is identified as a
special focus facility. This information is also provided to the general public. The SFF designation is based in part on the
facility's compliance history typically dating before our acquisition of the facility. Local state survey agencies recommend to
CMS that facilities be placed on special focus status. SFFs receive heightened scrutiny and more frequent regulatory surveys.
Failure to improve the quality of care can result in fines and termination from participation in Medicare and Medicaid. A
facility “graduates” from the program once it demonstrates significant improvements in quality of care that are continued over a
defined period of time.
Sanctions such as denial of payment for new admissions often are scheduled to go into effect before surveyors return to
verify compliance. Generally, if the surveyors confirm that the facility is in compliance upon their return, the sanctions never
take effect. However, if they determine that the facility is not in compliance, the denial of payment goes into effect retroactive
to the date given in the original notice. This possibility sometimes leaves affected operators, including our independent
subsidiaries, with the difficult task of deciding whether to continue accepting patients after the potential denial of payment date,
thus risking the retroactive denial of revenue associated with those patients' care if the operators are later found to be out of
compliance, or simply refusing admissions from the potential denial of payment date until the facility is actually found to be in
compliance. In the past and from time to time, some of our independent operating subsidiaries have been or will be in denial of
payment status due to findings of continued regulatory deficiencies, resulting in an actual loss of the revenue associated with
the Medicare and Medicaid patients admitted after the denial of payment date. Additional sanctions could ensue and, if
imposed, could include various remedies up to and including decertification.
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CMS has undertaken several initiatives to increase or intensify Medicaid and Medicare survey and enforcement activities,
including federal oversight of state actions. CMS is taking steps to focus more survey and enforcement efforts on facilities with
findings of substandard care or repeat violations of Medicaid and Medicare standards, and to identify multi-facility providers
with patterns of noncompliance. In addition, HHS has adopted a rule that requires CMS to charge user fees to healthcare
facilities cited during regular certification, recertification or substantiated complaint surveys for deficiencies, which require a
revisit to assure that corrections have been made. CMS is also increasing its oversight of state survey agencies and requiring
state agencies to use enforcement sanctions and remedies more promptly when substandard care or repeat violations are
identified, to investigate complaints more promptly, and to survey facilities more consistently.
Regulations Regarding Financial Arrangements
We are also subject to federal and state laws that regulate financial arrangement by and between healthcare providers,
such as the federal and state anti-kickback laws, the Stark laws, and various state anti-referral laws.
The Anti-Kickback Statute, Section 1128B of the Social Security Act (Anti-Kickback Statute) prohibits the knowing and
willful offer, payment, solicitation, or receipt of any remuneration, directly or indirectly, overtly or covertly, in cash or in kind,
to induce the referral of an individual, in return for recommending, or to arrange for, the referral of an individual for any item or
service payable under any federal healthcare program, including Medicare or Medicaid. The OIG has issued regulations that
create “safe harbors” for certain conduct and business relationships that are deemed protected under the Anti-Kickback Statute.
In order to receive safe harbor protection, all of the requirements of a safe harbor must be met. The fact that a given business
arrangement does not fall within one of these safe harbors, however, does not render the arrangement per se illegal. Business
arrangements of healthcare service providers that fail to satisfy the applicable safe harbor criteria, if investigated, will be
evaluated based upon all facts and circumstances and risk increased scrutiny and possible sanctions by enforcement authorities.
Violations of the Anti-Kickback Statute can result in criminal penalties of up to $100 thousand and ten years
imprisonment. Violations of the Anti-Kickback Statute can also result in civil monetary penalties of up to $100 thousand per
violation and an assessment of up to three times the total amount of remuneration offered, paid, solicited, or received. Violation
of the Anti-Kickback Statute may also result in an individual's or organization's exclusion from future participation in federal
healthcare programs. State Medicaid programs are required to enact an anti-kickback statute. Many states in which our
independent operating subsidiaries operate have adopted or are considering similar legislative proposals, some of which extend
beyond the Medicaid program, to prohibit the payment or receipt of remuneration for the referral of patients regardless of the
source of payment for the care. We believe that business practices of providers and financial relationships between providers
have become subject to increased scrutiny as healthcare reform efforts continue on the federal and state levels.
Additionally, Section 1877 of the Social Security Act, commonly known as the “Stark Law,” provides that a physician
may not refer a Medicare or Medicaid patient for a “designated health service” to an entity with which the physician or an
immediate family member has a financial relationship unless the financial arrangement meets an exception under the Stark Law
or its regulations. Designated health services include inpatient and outpatient hospital services, PT, OT, SLP, durable medical
equipment, prosthetics, orthotics and supplies, diagnostic imaging, enteral and parenteral feeding and supplies and home health
services. Under the Stark Law, a “financial relationship” is defined as an ownership or investment interest or a compensation
arrangement. If such a financial relationship exists and does not meet a Stark Law exception, the entity is prohibited from
submitting or claiming payment under the Medicare or Medicaid programs or from collecting from the patient or other payor.
Many of the compensation arrangements exceptions permit referrals if, among other things, the arrangement is set forth in a
written agreement signed by the parties, the compensation to be paid is set in advance, is consistent with fair market value and
is not determined in a manner that takes into account the volume or value of any referrals or other business generated between
the parties. Exceptions may have other requirements. Any funds collected for an item or service resulting from a referral that
violates the Stark Law are not eligible for payment by federal healthcare programs and must be repaid to Medicare or Medicaid,
any other third-party payor, and the patient. Violations of the Stark Law may result in the imposition of civil monetary
penalties, including, treble damages. Individuals and organizations may also be excluded from participation in federal
healthcare programs for Stark Law violations. Many states have enacted healthcare provider referral laws that go beyond
physician self-referrals or apply to a greater range of services than just the designated health services under the Stark Law.
Regulations Regarding Patient Record Confidentiality
Health care providers are also subject to laws and regulations enacted to protect the confidentiality of patient health
information. For example, HHS has issued rules pursuant to HIPAA, including the Health Information Technology for
Economic and Clinical Health (HITECH) Act which governs our use and disclosure of protected health information of patients.
We have established policies and procedures to comply with HIPAA privacy and security requirements at our independent
operating subsidiaries. Our independent operating subsidiaries have adopted and implemented HIPAA compliance plans, which
we believe comply with the HIPAA privacy and security regulations. The HIPAA privacy and security regulations have and
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will continue to impose significant costs on our independent operating subsidiaries in order to comply with these standards.
There are numerous other laws and legislative and regulatory initiatives at the federal and state levels addressing privacy and
security concerns. Our independent operating subsidiaries are also subject to any federal or state privacy-related laws that are
more restrictive than the privacy regulations issued under HIPAA. These laws vary and could impose additional penalties for
privacy and security breaches. Healthcare entities are also required to afford patients with certain rights of access to their health
information under HIPAA and the 21st Century Cures Act (Cures Act). Recently, the Office of Civil Rights, the agency
responsible for HIPAA enforcement, has targeted investigative and enforcement efforts on violations of patients’ rights of
access, including denial of access to medical records, imposing significant fines for violations largely initiated from patient
complaints. The Office of the National Coordinator for Health Information Technology can also investigate and impose
separate penalties for information blocking violations under the Cures Act.
Antitrust Laws
We are also subject to federal and state antitrust laws. Enforcement of the antitrust laws against healthcare providers is
common, and antitrust liability may arise in a wide variety of circumstances, including third party contracting, physician
relations, joint venture, merger, affiliation and acquisition activities. In some respects, the application of federal and state
antitrust laws to healthcare is still evolving, and enforcement activity by federal and state agencies appears to be increasing. At
various times, healthcare providers and insurance and managed care organizations may be subject to an investigation by a
governmental agency charged with the enforcement of antitrust laws, or may be subject to administrative or judicial action by a
federal or state agency or a private party. Violators of the antitrust laws could be subject to criminal and civil enforcement by
federal and state agencies, as well as by private litigants.
Americans with Disabilities Act
Our independent operating subsidiaries must also comply with the ADA, and similar state and local laws to the extent that
the facilities are "public accommodations" as defined in those laws. The obligation to comply with the ADA and other similar
laws is an ongoing obligation, and the independent operating subsidiaries continue to assess their facilities relative to ADA
compliance and make appropriate modifications as needed.
REGULATIONS SPECIFIC TO SENIOR LIVING COMMUNITIES
As previously mentioned, senior living services revenue is primarily derived from private pay residents, with a small
portion of senior living revenue (approximately 1.8% of total revenue) derived from Medicaid funds. Thus, some of the
regulations discussed above applicable to Medicaid providers, also apply to senior living. However, the following provides a
brief overview of the regulatory framework applicable specifically to senior living.
A majority of states provide, or are approved to provide, Medicaid payments for personal care and medical services to
some residents in licensed senior living communities under waivers granted by or under Medicaid state plans approved by
CMS. State Medicaid programs control costs for senior living and other home and community-based services by various means
such as restrictive financial and functional eligibility standards, enrollment limits and waiting lists. Because rates paid to senior
living community operators are generally lower than rates paid to skilled nursing facility operators, some states use Medicaid
funding of senior living services as a means of lowering the cost of services for residents who may not need the higher level of
health services provided in skilled nursing facilities. States that administer Medicaid programs for services in senior living
communities are responsible for monitoring the services at, and physical conditions of, the participating communities. As a
result of the growth of senior living in recent years, states have adopted licensing standards applicable to assisted living
communities. Most state licensing standards apply to senior living communities regardless of whether they accept Medicaid
funding.
Since 2003, CMS has commenced a series of actions to increase its oversight of state quality assurance programs for
senior living communities, and has provided guidance and technical assistance to states to improve their ability to monitor and
improve the quality of services paid through Medicaid waiver programs. CMS is encouraging state Medicaid programs to
expand their use of home and community-based services as alternatives to facility-based services, pursuant to provisions of the
ACA, and other authorities, through the use of several programs.
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The types of laws and statutes affecting the regulatory landscape of the post-acute industry continue to expand. In addition
to this changing regulatory environment, federal, state and local officials are increasingly focusing their efforts on the
enforcement of these laws. In order to operate our businesses, we must comply with federal, state and local laws relating to
licensure, delivery and adequacy of medical care, distribution of pharmaceuticals, equipment, personnel, operating policies, fire
prevention, rate-setting, billing and reimbursement, building codes and environmental protection. Additionally, we must also
adhere to anti-kickback statues, physician referral laws, the ADA, and safety and health standards set by the OSHA
Administration. Changes in the law or new interpretations of existing laws may have an adverse impact on our methods and
costs of doing business.
Our independent operating subsidiaries are also subject to various regulations and licensing requirements promulgated by
state and local health and social service agencies and other regulatory authorities. Requirements vary from state to state and
these requirements can affect, among other things, personnel education and training, patient and personnel records, services,
staffing levels, monitoring of patient wellness, patient furnishings, housekeeping services, dietary requirements, emergency
plans and procedures, certification and licensing of staff prior to beginning employment, and patient rights. These laws and
regulations could limit our ability to expand into new markets and to expand the services provided by independent operating
subsidiaries in existing markets.
ENVIRONMENTAL MATTERS
We strive to reduce our environmental impact through initiatives to modernize our facilities, conserve water, optimize
waste, work towards a paperless office and partner with green vendors. Our ongoing and planned facility modernization
initiatives include solar projects, heating, ventilation and air condition (HVAC) upgrades, water systems updates, lighting
retrofits and utility upgrades. For the year ended December 31, 2021, we spent $69.6 million on purchases of property and
equipment which included facility modernization initiatives.
Our business is subject to a variety of federal, state and local environmental laws and regulations. As a healthcare
provider, we face regulatory requirements in areas of air and water quality control, medical and low-level radioactive waste
management and disposal, asbestos management, response to mold 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 the property, including any such substances that may have migrated off, or may have been
discharged or transported from the property. Part of our operations involves 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 or surrounding properties may have produced continuing environmental contamination or noncompliance,
particularly where the timing or cost of making such determinations is not deemed cost-effective. These activities, as well as the
possible presence of such materials in, on and under our properties, may result in damage 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 cannot assure you that we will not encounter liabilities with respect to these regulations in the
future, and such liabilities may result in material adverse consequences to our operations or financial condition.
AVAILABLE INFORMATION
We are subject to the reporting requirements under the Securities Exchange Act of 1934, as amended (the Exchange Act).
Consequently, we are required to file reports and information with the Securities and Exchange Commission (SEC), including
reports on the following forms: 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. These reports, proxy
and information statements and other information concerning 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 are placed 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 in our website is not deemed to be a part
of this Annual Report on Form 10-K.
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Item 1A.
RISK FACTORS
We are providing the following summary of the risk factors contained in our Form 10-K to enhance the readability and
accessibility of our risk factor disclosures. We encourage our stockholders to carefully review the risk factors contained in this
Form 10-K in their entirety for additional information regarding the risks and uncertainties that could cause our actual results to
vary materially from recent results or from our anticipated future results.
Risks Related to our Business and Industry
• We face numerous risks related to the COVID-19 public health emergency, which could individually or in the aggregate
have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects.
• Changes to reimbursement rates and rules and other aspects of Medicare and Medicaid could have a material, adverse effect
on our revenues, financial condition and results of operations.
• Our revenue could be impacted by a shift to value-based reimbursement models, such as PDPM.
• Reforms to the U.S. healthcare system, including the ACA, continue to impose new requirements upon us and may lower
our reimbursements, which could materially impact our business.
• The recent U.S. Presidential and Congressional elections and upcoming midterm elections in 2022, for which certain
primary campaigns are already underway, may create significant changes to the regulatory framework, enforcements, and
reimbursements.
• We are subject to various government reviews, audits and investigations that could adversely affect our business, including
an obligation to refund amounts previously paid to us, potential criminal charges, the imposition of fines, and/or the loss of
our right to participate in Medicare and Medicaid programs.
• Failure to comply with applicable laws and regulations, including state-specific mandates or proclamations regarding
COVID-19, or if these laws and regulations change, could cause us to incur significant expenses and/or change our
operations in order to bring our facilities and operations into compliance.
• Public and government calls for increased survey and enforcement efforts toward long-term care facilities could result in
increased scrutiny by state and federal survey agencies. Potential sanctions and remedies based upon alleged regulatory
deficiencies could negatively affect our financial condition and results of operations.
• Future cost containment initiatives undertaken by third-party payors may limit our revenue and profitability.
• Changes in Medicare reimbursements for physician and non-physician services could impact reimbursement for medical
professionals, which could have a negative effect on our business, financial condition or results of operations.
• We may be subject to increased investigation and enforcement activities related to HIPAA violations if we fail to adopt and
maintain business procedures and systems designed to protect the privacy, security and integrity of patients’ individual
health information.
• Security breaches and other cyber-security incidents could violate security laws and subject us to significant liability.
•
•
If we are not fully reimbursed for all services for which each facility bills through consolidated billing, our revenue,
financial condition and results of operations 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 resulting from a failure to maintain minimum staffing requirements.
• Annual caps and other cost-reductions for outpatient therapy services may reduce our future revenue and profitability or
•
cause us to incur losses.
Increased scrutiny of our billing practices by the Office of the Inspector General or other regulatory authorities may result in
an increase in regulatory monitoring and oversight, decreased reimbursement rates, or otherwise adversely 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 to expand our operations, or could result in increased competition.
• Changes to federal and state employment-related laws and regulations could increase our cost of doing business.
• Required regulatory approvals could delay or prohibit transfers of our healthcare operations, which could result in periods in
which we are unable to receive reimbursement for such properties.
• Compliance with federal and state fair housing, fire, safety and other regulations may require us to incur unexpected
expenses, which could be costly to us.
• We depend largely upon reimbursement from third-party payors, and our revenue, financial condition and results of
operations could be negatively impacted by any changes in the acuity mix of patients in our affiliated facilities as well as
payor mix and payment methodologies.
• We are subject to litigation that could result in significant legal costs and large settlement amounts or damage awards.
•
If our regular internal investigations into the care delivery, recordkeeping and billing processes of our operating subsidiaries
detect instances of noncompliance, efforts to correct such non-compliance could materially decrease our revenue.
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• We may be unable to complete future facility or business acquisitions at attractive prices or at all, or may elect to dispose of
underperforming or non-strategic operating subsidiaries, either of which could decrease our revenue.
• We may not be able to successfully integrate acquired facilities and businesses into our operations, or we may be exposed to
costs, liabilities and regulatory issues that may adversely affect our operations.
•
•
If we do not achieve or maintain competitive quality of care ratings from CMS or private organizations engaged in similar
monitoring activities, our business may be negatively affected.
If we are unable to obtain insurance, or if insurance becomes more costly for us to obtain, our business may be adversely
affected, and our self-insurance programs may expose us to significant and unexpected costs and losses.
• The geographic concentration of our affiliated facilities could leave us vulnerable to economic downturn, regulatory changes
or acts of nature in those areas.
• The actions of a national labor union that has pursued a negative publicity campaign criticizing our business in the past may
adversely affect our revenue and our profitability.
• We lease the majority of our affiliated facilities, and risks associated with leased property, could adversely affect our
business, financial position or 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-term operating leases could result in defaults under such agreements and cross-defaults under other debt,
mortgage or operating lease arrangements, which could harm our operating subsidiaries and cause us to lose facilities or
experience foreclosures.
• Move-in and occupancy rates may remain unpredictable even after the COVID-19 pandemic is over.
• A housing downturn could decrease demand for senior living services.
• As we continue to acquire and lease real estate assets, we may not be successful in identifying and consummating these
transactions.
• As we expand our presence in other relevant healthcare industries, we would become subject to risks in a market in which
we have limited experience.
•
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 may decrease.
• 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.
• The condition of the financial markets, could limit the availability of debt and equity financing sources to fund the capital
and liquidity requirements of our business, as well as negatively impact or impair the value of our current portfolio of cash,
cash equivalents and investments.
• Delays in reimbursement may cause liquidity problems.
• Compliance with the regulations of the Department of Housing and Urban Development may require us to make
unanticipated expenditures which could increase our costs.
• Failure to safeguard our patient trust funds may subject us to citations, fines and penalties.
• We are a holding company with no operations and rely upon our multiple independent operating subsidiaries to provide us
with the funds necessary to meet our financial obligations. Liabilities of any one or more of our subsidiaries could be
imposed upon us or our other subsidiaries.
• We may incur operational difficulties or be exposed to claims and liabilities as a result of the separation of Pennant,
including if the Spin-Off is not tax-free for U.S. federal income tax purposes.
• We may not achieve some or all of the anticipated benefits of the Spin-Off, which may adversely affect our business.
• The Spin-Off and related transactions may expose us to potential liabilities arising out of state and federal fraudulent
conveyance laws and legal distribution requirements.
• Certain directors who serve on our Board of Directors also serve as directors of Pennant, and ownership of shares of Pennant
common stock by our directors and executive officers may create, or appear to create, conflicts of interest.
• Changes in the method of determining LIBOR, or the replacement of LIBOR with an alternative reference rate, may
adversely affect interest rates on our current or future indebtedness and may otherwise adversely affect our financial
condition and results of operations.
Risks Related to Ownership of our Common Stock
• We may not be able to pay or maintain dividends and the failure to do so would adversely affect our stock price.
• Our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law contain provisions
that could discourage transactions resulting in a change in control, which may negatively affect the market price of our
common stock.
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You should carefully consider each of the following risk factors and all other information set forth in this Annual Report
on Form 10-K. The risk factors generally have been separated into two categories: risks relating to our business and our
industry and risks relating to our common stock. Based on the information currently known to us, we believe that the following
information identifies the most significant risk factors affecting our company in each of these categories of risks. However, the
risks and uncertainties we face are not limited to those set forth in the risk factors described below. Additional risks and
uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business. In
addition, past financial performance may not be a reliable indicator of future performance and historical trends should not be
used to anticipate results or trends in future periods.
If any of the following risks and uncertainties develops into actual events, these events could have a material adverse
effect on our business, financial condition or results of operations. In such case, the trading price of our common stock could
decline. You should carefully read the following risk factors, together with the financial statements, related notes and other
information contained in this Annual Report on Form 10-K. This Annual Report on Form 10-K contains forward-looking
statements that contain risks and uncertainties. Please refer to the section entitled "Cautionary Note Regarding Forward-
Looking Statements" on page 1 of this Annual Report on Form 10-K in connection with your consideration of the risk factors
and other important factors that may affect future results described below.
Risks Related to Our Business and Industry
We face numerous risks related to the COVID-19 public health emergency, which could have a material adverse effect on
our business, financial condition, liquidity, results of operations and prospects.
The extent to which the COVID-19 public health emergency will continue impacting our operations will depend on future
developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak,
federal vaccination program efforts, additional or modified government actions, new information which may emerge
concerning the severity of the virus, variant outbreaks and efficacy of vaccinations, and the actions taken to contain the virus or
treat its impact, among others. Some of the risks of COVID-19 are being mitigated as a result of the federal vaccination
program, including vaccinations of nursing facility staff and residents, but there remains uncertainty as to when the pandemic
will subside and eventually end.
As discussed in Item 1., under Government Regulation, federal, state and local regulators have implemented new
regulations and waived existing regulations to promote care delivery during the COVID-19 public health emergency. While the
majority of these changes are beneficial by reducing regulatory burdens, these accommodations may also have an adverse effect
through increased legal and operational costs related to compliance and monitoring. Additionally, most of the accommodations
are limited in duration and tied to the COVID-19 public health emergency declaration, thus there may be significant operational
change requirements on short notice. Other proposed changes, could include requirements for employees to be vaccinated as a
condition of Medicare participation or in order to avoid fines or penalties under other laws, may be prospective in nature and
affect the ability to retain and attract a qualified workforce. Also, the reinstatement of waived state and federal regulations may
not occur simultaneously, requiring heightened monitoring to ensure compliance.
Other factors from the continuation of the COVID-19 pandemic that could have an adverse effect on our business,
financial condition, liquidity, results of operations and prospects, include:
•
•
•
•
•
•
•
•
potential for increased government regulations and restrictions to combat COVID-19;
increased strain on employees and resources caused by different waves of COVID-19 variants with different infection
and effects;
significantly reduced occupancy as a result of government-imposed orders;
lower census due to general decline in all hospital procedures, including elective/non-urgent procedures;
increased costs and staffing requirements related to additional CDC protocols, federal and state workforce protection
and related isolation procedures, including obligations to test patients and staff for COVID-19;
limitations on availability of staff due to COVID-19 related illness or exposure;
disruptions to supply chains which could negatively impact consistent and reliable delivery of personal protective
equipment, sanitizing supplies, food, pharmaceuticals, utilities and other goods to our affiliated facilities, resulting in
our inability to obtain on reasonable terms, or at all, personal protective equipment, sanitizing supplies, food,
pharmaceuticals, utilities and other goods;
incurrence of additional expenditures to comply with COVID-19 isolation procedures, including temporary
construction or purchase of additional equipment;
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•
•
•
•
•
increased scrutiny by regulators of infection control and prevention measures, including increased reporting
requirements related to suspected and confirmed COVID-19 diagnoses of residents and staff, which may result in fines
or other sanctions related to non-compliance;
new state requirements or pressure from state officials to accept post-discharge patients from hospitals facing
overcrowding, which increases the potential spread of COVID-19 within our facilities;
increased risk of litigation and related liabilities arising in connection with patient or staff illness, hospitalization and/
or death;
negative impacts on our patients' ability or willingness to pay for healthcare services and our third parties' ability or
willingness to pay rents; and
new regulations which will require that all of our workers be fully vaccinated against COVID-19 as a condition of
participating in Medicare and Medicaid programs.
The extent and duration of the impact of the COVID-19 pandemic on our stock price is uncertain, our stock price may be
more volatile, and our ability to raise capital could be impaired.
Our revenue could be impacted by federal and state changes to reimbursement and other aspects of Medicare.
We derived 27.8% and 30.5% of our service revenue from the Medicare programs for the years ended December 31, 2021
and 2020, respectively. In addition, many other payors may use published Medicare rates as a basis for reimbursements.
Accordingly, if Medicare reimbursement rates are reduced or fail to increase as quickly as our costs, if there are changes in the
rules governing the Medicare program that are disadvantageous to our business or industry, or if there are delays in Medicare
payments, our business and results of operations will be adversely affected.
The Medicare program and its reimbursement rates and rules are subject to frequent change. These include statutory and
regulatory changes, rate adjustments (including retroactive adjustments), annual caps that limit the amount that can be paid
(including deductible and coinsurance amounts) administrative or executive orders and government funding restrictions, all of
which may materially adversely affect the rates at which Medicare reimburses us for our services. Budget pressures often lead
the federal government to reduce or place limits on reimbursement rates under Medicare. Implementation of these and other
types of measures has in the past and could in the future result in substantial reductions in our revenue and operating margins.
For example, see Item 1., under Government Regulation, Sequestration of Medicare Rates.
Additionally, Medicare payments can be delayed or declined due to determinations that certain costs are not reimbursable
or reasonable because either adequate or additional documentation was not provided or because certain services were not
covered or considered medically 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, CMS often changes the rules governing the Medicare program, including those governing reimbursement.
Changes to the Medicare program that could adversely affect our business include:
•
•
•
•
•
•
administrative or legislative changes to base rates or the bases of payment;
limits on the services or types of providers for which Medicare will provide reimbursement;
changes in methodology for patient assessment and/or determination of payment levels;
changes in staff requirements (i.e. requiring all workers to be vaccinated against COVID-19) as a condition of payment
or eligibility for Medicare reimbursement (See also, Item 1., under Government Regulation);
the reduction or elimination of annual rate increases (See also, Item 1., under Government Regulation); or
an increase in co-payments or deductibles payable by beneficiaries.
Among the important statutory changes that are being implemented by CMS are provisions of the IMPACT Act. This law
imposes a stringent timeline for implementing benchmark quality measures and data metrics across post-acute care providers
(long stay hospitals, IRFs, skilled nursing facilities and home health agencies). The enactment also mandates specific actions to
design a unified payment methodology for post-acute providers. CMS continues to promulgate regulations to implement
provisions of this enactment. Depending on the final details, the costs of implementation could be significant. The failure to
meet implementation requirements could expose providers to fines and payment reductions.
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Reductions in reimbursement rates or the scope of services being reimbursed could have a material, adverse effect on
our revenue, financial condition and results of operations or even result in reimbursement rates that are insufficient to cover our
operating costs. Loss of Medicare reimbursement entirely would also have a material adverse effect on our revenue. Medicare
may rescind our certification and terminate its payor agreements if not all of our employees are fully vaccinated consistent with
CMS's IFR requiring vaccination of SNF employees, which the United States Supreme Court has allowed enforcement of as of
January 13, 2022. As of January 20, 2022, CMS’s IFR requiring vaccination of SNF employees is in effect in the State of
Texas, with SNF staff required to be fully vaccinated or to have exemptions granted by March 21, 2022. Failure to comply
with the CMS IFR in all states by their applicable deadlines stated by CMS may result in fines and other sanctions imposed by
CMS. In addition, within California, Washington, and Colorado, if our employees are not fully vaccinated as required by those
states’ vaccination mandates, we could incur a deficiency that could endanger our Medicaid certification and participation status
for certain locations within those states where employees have not been vaccinated. Any penalty, suspension, termination, or
other sanction under any state’s Medicaid program could lead to reciprocal and commensurate penalties being imposed under
the Medicare program, up to termination or rescission of our Medicare participation and payor agreements as noted above.
Additionally, any delay or default by the government in making Medicare reimbursement payments could materially and
adversely affect our business, financial condition and results of operations.
Reductions in Medicaid reimbursement rates or changes in the rules governing the Medicaid program could have a
material, adverse effect on our revenue, financial condition and results of operations.
A significant portion of reimbursement for skilled nursing services comes from Medicaid. In fact, Medicaid is our largest
source of revenue, accounting for 45.8% and 44.0% of our service revenue for the years ended December 31, 2021 and 2020,
respectively. Medicaid is a state-administered program financed by both state funds and matching federal funds. Medicaid
spending has increased rapidly in recent years, becoming a significant component of state budgets, which has led both the
federal government and many states to institute measures aimed at controlling the growth of Medicaid spending, and in some
instances reducing aggregate Medicaid spending. Since a significant portion of our revenue is generated from our skilled
nursing operating subsidiaries in California, Texas and Arizona, any budget reductions or delays in these states could adversely
affect our net patient service revenue and profitability. Despite present state budget surpluses in many of the states in which we
operate, we can expect continuing cost containment pressures on Medicaid outlays for skilled nursing facilities, and any such
decline could adversely affect our financial condition and results of operations.
The Medicaid program and its reimbursement rates and rules are subject to frequent change at both the federal and state
level. These include statutory and regulatory changes, rate adjustments (including retroactive adjustments), administrative or
executive orders and government funding restrictions, all of which may materially adversely affect the rates at which our
services are reimbursed by state Medicaid plans. To generate funds to pay for the increasing costs of the Medicaid program,
many states utilize financial arrangements commonly referred to as provider taxes. Under provider tax arrangements, states
collect taxes from healthcare providers and then use the revenue to pay the providers as a Medicaid expenditure, which allows
the states to then claim additional federal matching funds on the additional reimbursements. Current federal law provides for a
cap on the maximum allowable provider tax as a percentage of the provider's total revenue. There can be no assurance that
federal law will continue to provide matching federal funds on state Medicaid expenditures funded through provider taxes, or
that the current caps on provider taxes will not be reduced. Any discontinuance or reduction in federal matching of provider
tax-related Medicaid expenditures could have a significant and adverse effect on states' Medicaid expenditures, and as a result
could have a material and adverse effect on our business, financial condition or results of operations.
Our revenue could be impacted by a shift to value-based reimbursement models, including PDPM.
As discussed in more detail in Item 1., under Government Regulation, CMS implemented a final rule in October 2019 to
replace the existing case-mix classification system, Resource Utilization Groups, Version IV, with a new case-mix
classification system, PDPM, that focuses more on the clinical condition of the patient and less on the volume of services
provided. Payments under PDPM for fiscal year 2021 are estimated to remain largely unchanged from fiscal year 2020, but
there remains risk that CMS may make future adjustments to reimbursement levels as it continues to monitor the impact of
PDPM on patient outcomes and budget neutrality. With the increased focus on therapy utilization under RUGs IV, there is
concern as to the accuracy of the parity adjustment and how closely it will reflect the data that will be captured under PDPM
where the focus is on the clinical condition of the patient in lieu of resource utilization. In addition, the entire parity adjustment
could be removed by CMS and this would cause a drastic reduction in payments.
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Reforms to the U.S. healthcare system continue to impose new requirements upon us and may lower our reimbursements.
The ACA included sweeping changes to how healthcare is paid for and furnished in the U.S. Applicable to our business,
as discussed in greater detail in Item 1., under Government Regulation, the ACA has resulted in significant changes to our
operations and reimbursement models for services we provide. CMS continues to issue rules to implement the ACA. Courts
continue to interpret and apply the ACA’s provisions.
The efficacy of the ACA is the subject of much debate among members of Congress and the public. Additionally, a
number of lawsuits have been filed challenging various aspects of the ACA and related regulations with inconsistent outcomes -
some expand the ACA while others limit the ACA. In the event that the ACA is repealed or materially amended as a result of
future challenges, particularly any elements of the ACA that are beneficial to our business or that cause changes in the health
insurance industry, including reimbursement and coverage by private, Medicare or Medicaid payers, our business, operating
results and financial condition could be harmed. Thus, the future impact of the ACA on our business is difficult to predict and
its continued uncertain future may negatively impact our business. However, any material changes to the ACA or its
implementing regulations may negatively impact our operations.
Similarly, the proposed Nursing Home Improvement Act may have an impact on our business due to the proposed two
percent decrease in payments to skilled nursing facilities, as well as the staffing and reporting requirements contained within the
bill. This bill primarily creates penalties such as reduced reimbursement and monetary penalties for submitting inaccurate cost
reports or staffing data. If passed in its current form, however, this bill would provide participating states with a temporary
enhanced federal Medicaid match to fund improvements in nursing home workforce and care. This match would last six years,
and states would be responsible for showing CMS that Medicaid reimbursement increases were used to increase worker wages
and yield new training resources and opportunities for nursing home staff. While it is difficult to determine whether the Nursing
Home Improvement Act will be amended prior to adoption, or even passed into law, if passed, this bill may negatively impact
our business and the scope and nature of its consequences are not yet known.
We cannot predict what effect future reforms to the U.S. healthcare system will have on our business, including the
demand for our services or the amount of reimbursement available for those services. However, it is possible these new laws
may lower reimbursement or increase the cost of doing business and adversely affect our business.
The results of recent U.S. Presidential and Congressional elections, and upcoming midterm elections in 2022, for which
certain primary campaigns are already underway, may create significant changes to regulatory framework, enforcements
and reimbursements.
The recent Presidential and Congressional elections in the United States and upcoming midterm elections in 2022, could
result in significant changes in, and uncertainty with respect to, legislation, regulation, implementation or repeal of laws and
rules related to government health programs, including Medicare and Medicaid. Democratic proposals for Medicare for All or
significant expansion of Medicare, could significantly impact our business and the healthcare industry if implemented. Further,
if proposed policies specific to nursing facilities are implemented, these may result in significant regulatory changes, increased
survey frequency and scope, and increased penalties for non-compliance.
We continually monitor these developments in order to respond to the changing regulatory environment impacting our
business. While it is not possible to predict whether and when any such changes will occur, specific proposals discussed during
and after the election, including a repeal or material amendment of the ACA, could harm our business, operating results and
financial condition. If we are slow or unable to adapt to any such changes, our business, operating results and financial
condition could be adversely affected.
Our business may be materially impacted if certain aspects of the ACA are amended, repealed, or successfully challenged.
A number of lawsuits have been filed challenging various aspects of the ACA and related regulations. In addition, the
efficacy of the ACA is the subject of much debate among members of Congress and the public. Cases challenging the ACA or
related rules have had inconsistent outcomes - some expand the ACA while others limit the ACA. Thus, the future impact of the
ACA on our business is difficult to predict. The uncertainty as to the future of the ACA may negatively impact our business, as
will any material changes to the ACA.
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Presidential and Congressional elections in the United States and the upcoming midterm elections of 2022 could result in
significant changes to, and uncertainty with respect to, legislation, regulation, implementation or repeal of the ACA, and other
federal health program policy that could significantly impact our business and the healthcare industry. In the event that legal
challenges are successful or the ACA is repealed or materially amended, particularly any elements of the ACA that are
beneficial to our business or that cause changes in the health insurance industry, including reimbursement and coverage by
private, Medicare or Medicaid payers, our business, operating results and financial condition could be harmed. While it is not
possible to predict whether and when any such changes will occur, specific proposals discussed during and after the election,
including a repeal or material amendment of the ACA, could harm our business, operating results and financial condition. In
addition, even if the ACA is not amended or repealed, the President and the executive branch of the federal government, as well
as CMS and HHS have a significant impact on the implementation of the provisions of the ACA, and a new administration
could make changes impacting the implementation and enforcement of the ACA, which could harm our business, operating
results and financial condition. If we are slow or unable to adapt to any such changes, our business, operating results and
financial condition could be adversely affected.
We are subject to various government reviews, audits and investigations that could adversely affect our business, including
an obligation to refund amounts previously paid to us, potential criminal charges, the imposition of fines, and/or the loss of
our right to participate in Medicare and Medicaid programs.
As a result of our participation in the Medicaid and Medicare programs, we are subject to various governmental reviews,
audits and investigations to verify our compliance with these programs and applicable laws and regulations. We are subject to
regulatory reviews relating to Medicare services, billings and potential overpayments resulting from Recovery Audit
Contractors, Zone Program Integrity Contractors, Program Safeguard Contractors, Unified Program Integrity Contractors,
Supplemental Medical Review Contractors and Medicaid Integrity Contractors programs, (collectively referred to as Reviews),
in which third party firms engaged by CMS conduct extensive reviews of claims data and medical and other records to identify
potential improper payments under the Medicare programs. Private pay sources also reserve the right to conduct audits. We
believe that billing and reimbursement errors and disagreements are common in our industry. We are regularly engaged in
reviews, audits and appeals of our claims for reimbursement due to the subjectivities inherent in the process related to patient
diagnosis and care, record keeping, claims processing and other aspects of the patient service and reimbursement 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 could be material to our business;
• state or federal agencies imposing fines, penalties and other sanctions on us;
•
temporary or permanent 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 administrative contractors began to conduct selected reviews of claims previously submitted by and
paid to some of our affiliated facilities. While we have always been subject to post-payment audits and reviews, more intensive
“probe reviews” appear to be a permanent procedure with our fiscal intermediaries. All findings of overpayment from CMS
contractors are eligible for appeal through the CMS defined continuum. With the exception of rare findings of overpayment
related to objective errors in Medicare payment methodology or claims processing, we utilize all defenses reasonably available
to us to demonstrate that the services provided meet all clinical and regulatory requirements for reimbursement.
In cases where claim and documentation review by any CMS contractor results in repeated poor performance, an
operation can be subjected to protracted oversight. This oversight may include repeat education and re-probe, extended pre-
payment review, referral to recovery audit or integrity contractors, or extrapolation of an error rate to other reimbursement
outside of specifically reviewed claims. Sustained failure to demonstrate improvement towards meeting all claim filing and
documentation requirements could ultimately lead to Medicare decertification. As of December 31, 2021 and subsequently,
thirteen of our independent operating subsidiaries had Reviews scheduled, on appeal, or in a dispute resolution process, either
pre- or post-payment. We anticipate that these Reviews could increase in frequency in the future.
Additionally, both federal and state government agencies have heightened and coordinated civil and criminal enforcement
efforts as part of numerous ongoing investigations of healthcare companies and, in particular, skilled nursing facilities. The
focus of these investigations includes, among other things:
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• cost reporting and billing practices;
• quality of care;
•
• medical necessity of services provided.
financial relationships with referral sources; and
On May 31, 2018, we received a Civil Investigative Demand (CID) from the DOJ stating that it is investigating our company
to determine whether we have violated the FCA or the Anti-Kickback Statute with respect to the relationships between certain
of our skilled nursing facilities and persons who served as medical directors, advisory board participants or other referral
sources. The CID covered the period from October 3, 2013 through 2018 and was limited in scope to ten of our Southern
California skilled nursing facilities. In October 2018, the Department of Justice made an additional request for information
covering the period of January 1, 2011 through 2018, relating to the same topic. As a general matter, our operating entities
maintain policies and procedures to promote compliance with the FCA, the Anti-Kickback Statute, and other applicable
regulatory requirements. We are fully cooperating with the U.S. Department of Justice to promptly respond to the requests for
information. However, we cannot predict when the investigation will be resolved, the outcome of the investigation or its
potential impact on our company.
If we should agree to a settlement of, claims or obligations under federal Medicare statutes, the federal FCA, or similar
state and federal statutes and related regulations, our business, financial condition and results of operations and cash flows
could be materially and adversely affected, and our stock price could be adversely impacted. Among other things, any
settlement or litigation could involve the payment of substantial sums to settle any alleged civil violations and may also include
our assumption of specific procedural and financial obligations going forward under a corporate integrity agreement or other
arrangement with the government.
If the government or court were to conclude that errors and deficiencies constitute criminal violations, concluded that such
errors and deficiencies resulted in the submission of false claims to federal healthcare programs, or if it were to discover other
problems in addition to the ones identified by the probe reviews that rose to actionable levels, we and certain of our officers
might face potential criminal charges and civil claims, administrative sanctions and penalties for amounts that could be material
to our business, results of operations and financial condition. In addition, we or some of the key personnel of our operating
subsidiaries could be temporarily or permanently excluded from future participation in state and federal healthcare
reimbursement programs such as Medicaid and Medicare.
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 referrals of our operating subsidiaries and ultimately a reduction in occupancy
at these facilities. Also, responding to auditing and enforcement efforts diverts 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 after
any such investigation or proceedings, regardless of whether we prevail on the underlying claim.
We are subject to extensive and complex laws and government regulations. If we are not operating in compliance with these
laws and regulations or if these laws and regulations change, we could be required to make significant expenditures or
change our operations in order to bring our facilities and operations into compliance.
We, along with other companies in the healthcare industry, are required to comply with extensive and complex laws and
regulations at the federal, state and local government levels relating to, among other things:
•
•
•
•
•
•
•
•
•
•
licensure and certification;
adequacy and quality of healthcare services;
qualifications and vaccination 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;
addition of facilities and services; and
billing for services.
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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 believe that 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 these
applicable 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, restrictions on 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 in federal and state reimbursement programs.
Additionally, in the future, different interpretations or enforcement of these laws and regulations could subject our current or
past practices to allegations of impropriety or illegality or could require us to make changes in our facilities, equipment,
personnel, services, capital expenditure programs and operating expenses.
As discussed in greater detail in Item 1., under Government Regulation, we are subject to federal and state laws intended
to prevent healthcare fraud and abuse, including the federal FCA, state false claims acts, the illegal remuneration provisions of
the Social Security Act, the Anti-Kickback Statute, state anti-kickback laws, the Civil Monetary Penalties Law and the federal
“Stark” Law. Among other things, these laws prohibit kickbacks, bribes and rebates, as well as other direct and indirect
payments or fee-splitting arrangements that are designed to induce the referral of patients to a particular provider for medical
products or services payable by any federal healthcare program and prohibit presenting a false or misleading claim for payment
under a federal or state program. They also prohibit some physician self-referrals. Possible sanctions for violation of any of
these restrictions or prohibitions include loss of eligibility to participate in federal and state reimbursement programs and civil
and criminal penalties. If we fail to comply, even inadvertently, with any of these requirements, we could be required to alter
our operations, refund payments to the government, enter into a corporate integrity agreement, deferred prosecution or similar
agreements with state or federal government agencies, and become subject to significant civil and criminal penalties.
These anti-fraud and abuse laws and regulations are complex, and we do not always have the benefit of significant
regulatory or judicial interpretation of these laws and regulations. While we do not believe we are in violation of these
prohibitions, we cannot assure you that governmental officials charged with the responsibility for enforcing these prohibitions
will not assert that we are violating the provisions of such laws and regulations. Our company is currently aware of another
investigation by the DOJ related to allegations some of our California facilities may have violated the FCA or the Anti-
Kickback Statute with respect to the relationships between certain of our skilled nursing facilities and persons who served as
medical directors, advisory board participants or other referral sources. While our operating entities maintain policies and
procedures to promote compliance with the FCA, the Anti-Kickback Statute, and other applicable regulatory requirements, we
cannot predict when the investigation will be resolved, the outcome of the investigation or its potential impact on our company.
We are unable to predict the future course of federal, state and local regulation or legislation, including Medicare and
Medicaid statutes and regulations related to fraud and abuse, the intensity of federal and state enforcement actions or the extent
and size of any potential sanctions, fines or penalties. Changes in the regulatory framework, our failure to obtain or renew
required regulatory approvals or licenses or to comply with applicable regulatory requirements, the suspension or revocation of
our licenses or our disqualification from participation in federal and state reimbursement programs, or the imposition of other
enforcement sanctions, fines or penalties could have a material adverse effect upon our business, financial condition or results
of operations. Furthermore, should we lose licenses or certifications for a number of our facilities or other businesses as a result
of regulatory action or legal proceedings, we could be deemed to be in default under some of our agreements, including
agreements governing outstanding indebtedness.
Public and government calls for increased survey and enforcement efforts toward long-term care facilities could result in
increased scrutiny by state and federal survey agencies. In addition, potential sanctions and remedies based upon alleged
regulatory deficiencies could negatively affect our financial condition and results of operations.
As CMS turns its attention to enhancing enforcement of long-term care facilities, as discussed in Item 1., under
Government Regulation, state survey agencies will have more accountability for their survey and enforcement efforts. As
discussed in Item 1., under Government Regulation, from time to time in the ordinary course of business, we receive deficiency
reports from state and federal regulatory bodies resulting from such inspections or surveys. The focus of these deficiency
reports tends to vary from year to year and state to state. Although most inspection deficiencies are resolved through an agreed-
upon plan of corrective action, the reviewing agency typically has the authority to take further action against a licensed or
certified facility, which could result in the imposition of fines, imposition of a license to a conditional or provisional status,
suspension or revocation of a license, suspension or denial of payment for new admissions, loss of certification as a provider
under state or federal healthcare programs, or imposition of other sanctions, including criminal penalties. In the past, we have
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experienced inspection deficiencies that have resulted in the imposition of a provisional license and could experience these
results in the future.
Furthermore, in some states, citations in one company facility could negatively impact other company facilities in the
same state. Revocation of a license at a given facility could therefore impair our 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 our credit
arrangements, or adversely affect our ability to operate or obtain financing in the future. If state or federal regulators were to
determine, formally or otherwise, that one facility's regulatory history ought to impact another of our existing or prospective
facilities, this could also increase costs, result in increased scrutiny by state and federal survey agencies, and even impact our
expansion plans. Therefore, our failure to comply with applicable legal and regulatory requirements in any single facility could
negatively impact our financial condition and overall of operations results.
From time to time, we have opted to voluntarily stop accepting new patients pending completion of a new state survey, in
order to avoid possible denial of payment for new admissions during the deficiency cure period, or simply to avoid straining
staff and other resources while retraining staff, upgrading operating systems or making other operational 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 or
federal survey, it could negatively impact our financial condition and results of operation.
We have received notices of potential sanctions and remedies based upon alleged regulatory deficiencies from time to
time, and such sanctions have been imposed on some of our affiliated facilities. We have had affiliated facilities placed on
special focus facility status in the past, continue to have some facilities on this status currently and other operating subsidiaries
may be identified for such status in the future. We currently have one facility placed on special focus facility status.
Future cost containment initiatives undertaken by private third-party payors may limit our revenue and profitability.
Our non-Medicare and non-Medicaid revenue and profitability are affected by continuing efforts of third-party payors to
maintain or reduce costs of healthcare by lowering payment rates, narrowing the scope of covered services, increasing case
management review of services and negotiating pricing. In addition, sustained unfavorable economic conditions may affect the
number of patients enrolled in managed care programs and the profitability of managed care companies, which could result in
reduced payment rates. There can be no assurance that third party payors will make timely payments for our services, or that we
will continue to maintain our current payor or revenue mix. We are continuing our efforts to develop our non-Medicare and
non-Medicaid sources of revenue and any changes in payment levels from current or future third-party payors could have a
material adverse effect on our business and consolidated financial condition, results of operations and cash flows.
Changes in Medicare reimbursements for physician and non-physician services could impact reimbursement for medical
professionals.
As discussed in greater detail in Item 1., under Government Regulation, MACRA revised the payment system for
physician and non-physician services. Section 1 of that law, the sustainable growth rate repeal and Medicare Provider Payment
Modernization will impact payment provisions for medical professional services. That enactment also extended for two years
provisions that permit an exceptions process from therapy caps imposed on Medicare Part B outpatient therapy. There was a
combined cap for PT and SLP and a separate cap for OT services that apply subject to certain exceptions. On February 9, 2018,
the BBA was signed into law, which provides for the repeal of all therapy caps retroactively to January 1, 2018. The law also
reduced the monetary threshold that triggers a manual medical review (MMR), in certain instances (from $3,700 to $3,000).
The reduction in the MMR threshold will likely result in increased number of reviews, which could in turn have a negative
effect on our business, financial condition or results of operations.
We may be subject to increased investigation and enforcement activities related to HIPAA violations.
We are required to comply with numerous legislative and regulatory requirements at the federal and state levels
addressing patient privacy and security of health information, as discussed in greater detail in Item 1., under Government
Regulation. HIPAA, as amended by the HITECH Act, requires us to adopt and maintain business procedures and systems
designed to protect the privacy, security and integrity of patients' individual health information. States also have laws that apply
to the privacy of healthcare information. We must comply with these state privacy laws to the extent that they are more
protective of healthcare information or provide additional protections not afforded by HIPAA. If we fail to comply with these
state and federal laws, we could be subject to criminal penalties, civil sanctions, litigation, and be forced to modify our policies
and procedures. Additionally, if a breach under HIPAA or other privacy laws were to occur, remediation efforts could be costly
and damage to our reputation could occur.
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In addition to breaches of protected patient information, under HIPAA and the 21st Century Cures Act (Cures Act),
healthcare entities are also required to afford patients with certain rights of access to their health information. Recently, the
Office of Civil Rights, the agency responsible for HIPAA enforcement, has targeted investigative and enforcement efforts on
violations of patients’ rights of access, imposing significant fines for violations largely initiated from patient complaints. If we
fail to comply with our obligations under HIPAA, we could face significant fines. Likewise, if we fail to comply with our
obligations under the Cures Act, we could face fines from the Office of the National Coordinator for Health Information
Technology, the agency responsible for Cures Act enforcement.
Security breaches and other cyber-security incidents could violate security laws and subject us to significant liability.
Healthcare businesses are increasingly the target of cyberattacks whereby hackers disrupt business operations or obtain
protected health information, often demanding large ransoms. Our business is dependent on the proper functioning and
availability of our computer systems and networks. While we have taken steps to protect the safety and security of our
information systems and the patient health information and other data maintained within those systems, we cannot assure you
that our safety and security measures and disaster recovery plan will prevent damage, interruption or breach of our information
systems and operations. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage
systems change frequently and may be difficult to detect, we may be unable to anticipate these techniques or implement
adequate preventive measures. In addition, hardware, software or applications we develop or procure from third parties may
contain defects in design or manufacture or other problems that could unexpectedly compromise the security of our information
systems. Unauthorized parties may attempt to gain access to our systems or facilities, 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, and these acquired
systems may expose us to risk. We also license certain third-party software to support our operations and information systems.
Our inability, or the inability of third-party software providers, 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 or adequate support of
existing systems also could disrupt or reduce the efficiency of our operations.
A cyber-attack or other incident that bypasses our information systems security could cause a security breach which may
lead to a material disruption to our information systems infrastructure or business and may involve a significant loss of business
or patient health information. If a cyber-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 impact our ability to provide various healthcare
services. Any successful cyber-attack or other unauthorized attempt to access our systems or facilities also could result in
negative publicity which could damage our reputation or brand with our patients, referral sources, payors or other third parties
and could subject us to a number of adverse consequences, the vast majority 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, Office of Civil Rights, the OIG
or state attorneys general), fines, private litigation with those affected by the data breach, loss of customers, disputes with
payors and increased operating expense, which either individually or in the aggregate could have a material adverse effect on
our business, financial position, results of operations and liquidity.
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 consolidated billing requirement essentially confers on the skilled nursing facility itself the Medicare billing
responsibility for the entire package of care that its patients receive 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 nursing facility
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 are paid by Medicare for skilled nursing care of the patient. Although this provision applies to a limited
number of DRGs, it has a negative effect on skilled nursing facility utilization and payments, either because hospitals are
finding it difficult to place patients in skilled nursing facilities which will not be paid as before or because hospitals are
reluctant to discharge the patients to skilled nursing facilities and lose part of their payment. This bundling requirement could
be extended to more DRGs in the future, which would accentuate the negative impact on skilled nursing facility utilization and
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payments. 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.
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 and other skilled personnel, such as Certified Nurse
Assistants, social workers and speech, physical and occupational therapists. Our success also depends upon our ability to retain
and attract skilled management personnel who are responsible for the day-to-day operations of each of our affiliated facilities.
Each facility has 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 and marketing and community outreach programs. Other key
positions supporting each facility may include individuals responsible for physical, occupational and speech therapy, food
service and maintenance. We compete with various healthcare service providers, including other skilled nursing providers, in
retaining and attracting 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, South Carolina, Texas, Utah, Washington and Wisconsin. With the exception of Utah, which
follows federal regulations, each of these states has established minimum staffing requirements for facilities operating in that
state. Failure to comply with these requirements can, among other things, jeopardize a facility's compliance with the conditions
of participation under relevant state and federal healthcare programs. In addition, if a facility is determined to be out of
compliance with these requirements, it may be subject to a notice of deficiency, a citation, or a significant fine or litigation risk.
Deficiencies (depending on the level) may also result in the suspension of patient admissions and the termination of Medicaid
participation, or the suspension, revocation or non-renewal of the skilled nursing facility's license. If the federal or state
governments were to issue regulations which materially change the way compliance with the minimum staffing standard is
calculated or enforced, our labor costs could increase and the current shortage of healthcare workers could impact us more
significantly, including the increased scrutiny on staffing at the state and federal levels as a result of the COVID-19 virus. The
broader labor market where we compete is in a unique state of disequilibrium where the needs of businesses such as ours
outstrip the supply of available and willing workers. There is additional upward pressure on wages from different industries,
some of which compete with us for labor and others that do not, which makes it difficult to make significant hourly wage and
salary increases due to the fixed nature of our reimbursement under insurance contracts as well as Medicare and Medicaid, in
addition to our increasing variable costs. Due to the limited supply of qualified applicants who seek or are willing to accept
employment, these broader concerns, as well as those specific to both forthcoming federal COVID-19 vaccination mandates
and existing state mandates, may increase our labor costs or lead to potential staffing shortages, reduced operations to comply
with applicable laws and regulations, or difficulty complying with those laws and regulations at current operational levels.
Federal laws and regulations may increase our costs of maintaining qualified nursing and skilled personnel, or make it
more difficult for us to attract or retain qualified nurses and skilled staff members. The proposed Nursing Home Improvement
Act, if passed into law in substantially the same form as the proposed bill, may increase our responsibility to provide nursing
coverage and the costs associated with that increased coverage. We are monitoring our facilities for potential effects from
CMS's IFR requiring employees of Medicare and Medicaid-participating medical facilities to be vaccinated, which may cause
disruption to our affiliated facilities’ nursing staff and may additionally disrupt our operations if affected personnel decline to
be vaccinated and replacement staffing cannot be located. On November 5, 2021, CMS issued the IFR discussed under Item 2,
Government Regulations, requiring all eligible staff to receive their first dose of a two-dose primary vaccination series by
December 5, 2021 and the second dose of a two-dose primary vaccination series by January 4, 2022. CMS’s enforcement of
this IFR was temporarily blocked in certain states pending appeal to the United States Supreme Court. On January 13, 2022, the
United States Supreme Court entered an order allowing CMS’s enforcement of the IFR and its vaccination requirements by
March 15, 2022 for our operating subsidiaries in Arizona, Idaho, Iowa, Kansas, Nebraska, South Carolina and Utah and by
February 28, 2022 for all of our other operating subsidiaries except those in Texas.
Similar state-level requirements in the states where our affiliated skilled nursing facilities operate, whether such
requirements are passed by statute, regulation, or executive order, may result in a shortage or inability to obtain nurses and
skilled staff. As noted above, California, Washington, and Colorado have all mandated vaccinations for workers in health care
facilities that include nursing homes. These administrative mandates precede, may be more restrictive than and are not likely to
be preempted by CMS's IFR. On October 11, 2021, Texas issued an executive order banning the practice of mandating
vaccination, including by private employers. On January 20, 2022, the United States District Court for the Northern District of
Texas dismissed the State of Texas’s lawsuit against CMS’s enforcement of the IFR’s vaccine mandate upon the request of the
State of Texas. The District Court’s dismissal of the Texas's lawsuit ended the court’s injunction against CMS’s enforcement of
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the IFR's vaccine mandate in Texas. On January 20, 2022, CMS became empowered to enforce the IFR in Texas and set a
deadline of March 21, 2022 for full compliance with its vaccination requirements.
Increased competition for, or a shortage of, nurses or other trained personnel, or general inflationary pressures may
require that we enhance our pay and benefits 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 patients of 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
qualified and skilled personnel, our ability to conduct our business operations effectively could be harmed.
Annual caps and other cost-reductions for outpatient therapy services may reduce our future revenue and profitability or
cause us to incur losses.
As discussed in detail in Item 1., under Government Regulation, sub-heading Part B Rehabilitation Requirements, several
government actions have been taken in recent years to try and contain the costs of rehabilitation therapy services provided under
Medicare Part B, including the MPPR, institution of annual caps, mandatory medical reviews for annual claims beyond a
certain monetary threshold, and a reduction in reimbursement rates for therapy assistant claim modifiers. Of specific concern is
CMS's decision to lower Medicare Part B reimbursement rates for outpatient therapy services by 9%, beginning in January 1,
2021. Such cost-containment measures and ongoing payment changes could have an adverse effect on our revenue.
The Office of the Inspector General or other regulatory authorities may choose to more closely scrutinize billing practices in
areas where we operate or propose to expand, which could result in an increase in regulatory monitoring and oversight,
decreased reimbursement rates, or otherwise adversely affect our business, financial condition and results of operations.
As discussed in greater detail in Item 1., under Government Regulation, Civil and Criminal Fraud and Abuse Laws and
Enforcement, the OIG regularly conducts investigations regarding certain payment or compliance issues within various
healthcare sectors. Following, the OIG publishes these reports, in part, to educate involved stakeholders and signal future
enforcement focus. Reports published in 2019 and 2020 demonstrate the OIG’s increased scrutiny on post-hospital skilled
nursing facility care and billing. This may impact the skilled nursing facility industry by motivating additional reviews and
stricter compliance in the areas outlined in the recent reports, expending material time and resources.
Additionally, OIG reports published in 2010 and 2015 show the OIG’s concerns related to the billing practices of skilled
nursing facilities based on Medicare Part A claims and financial incentives for facilities to bill for higher levels of therapies,
even when not needed by patients. In its fiscal year 2014 work plan, and again in 2017, OIG specifically stated that it will
continue to study and report on questionable Part A and Part B billing practices amongst skilled nursing facilities. Recently, in
its 2021 work plan, OIG stated it will evaluate whether payments to SNFs under PDPM complied with Medicare requirements.
Our business model, like those of some other for-profit operators, is based in part on seeking out higher-acuity patients
whom we believe are generally more profitable, and over time our overall patient mix has consistently shifted to higher-acuity
and higher-resource utilization patients in most facilities we operate. We also use specialized care-delivery software that assists
our caregivers in more accurately capturing and recording activities of daily living services, among other things. These efforts
may place us under greater scrutiny with the OIG, CMS, our fiscal intermediaries, recovery audit contractors and others.
State efforts to regulate or deregulate the healthcare services industry or the construction or expansion of healthcare
facilities could impair our ability to expand 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: (i) the purchase, construction or expansion of healthcare facilities; (ii) capital expenditures exceeding a
prescribed amount; or (iii) 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 establishment of new ones 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 have established such stringent development standards and approval
procedures for constructing new healthcare facilities that the construction of new facilities, or the expansion or renovation of
existing facilities, may become cost-prohibitive or extremely time-consuming. In addition, some states require the approval of
the state Attorney General for acquisition of a facility being operated by a non-profit organization.
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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 to obtain the necessary approvals, if there are changes in the standards applicable to those
approvals, or if we experience delays and increased expenses associated with obtaining those approvals. We may not be able to
obtain licensure, certificate of need approval, Medicaid certification, state Attorney General approval or other necessary
approvals for future expansion projects. Conversely, the elimination or reduction of state regulations that limit the construction,
expansion or renovation of new or existing facilities could result in increased competition 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 we operate 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 our services.
Changes to 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 ADA and similar state laws that provide civil rights protections to individuals with disabilities in the
context of employment, public accommodations and other areas, the National Labor Relations Act, regulations of the 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 and other employment law matters. On November 5, 2021,
OSHA issued an ETS requiring employers with more than 100 employees to have employees who were not fully vaccinated to
complete weekly testing to prove they were not infected with COVID-19 to remain in the workforce, which the United States
Supreme Court blocked enforcement of on January 13, 2022 after nationwide litigation over the ETS. The uncertain
environment regarding these mandates and potential attempts to enforce similar mandates in 2022 is one we are monitoring, as
it represents a risk of uncertainty to the Company that may result in limitations on staff availability, disruption caused by staff
departure, potential claims under the ADA and other laws and potential government sanctions which could cause disruptions to
the operations of our subsidiaries, limit our ability to grow and otherwise adversely affect our business and financial results.
Rising operating costs due to labor shortages, greater compensation and incentives required to attract and retain qualified
personnel and higher-than-usual inflation on items including energy, utilities, food and other goods used in our facilities and the
costs for transporting these items could increase our cost and decrease our profits.
The compliance costs associated with these laws and evolving regulations could be substantial. For example, all of our
affiliated facilities are required to comply with the ADA. The ADA has separate compliance requirements for “public
accommodations” and “commercial properties,” but generally requires that 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
or restrictions with respect to access by disabled persons. In addition, federal proposals to introduce a system of mandated
health insurance and flexible work time and other similar initiatives could, if implemented, adversely affect our operations. We
also may be subject to employee-related claims such as wrongful discharge, discrimination or violation of equal employment
law. While we are insured for these types of claims, we could be subject to damages that are not covered by our insurance
policies or that exceed our insurance limits, and we may be required to pay such damages directly, which would negatively
impact our cash flow from operations.
Required regulatory approvals could delay or prohibit transfers of our healthcare operations, which could result in periods
in which we are unable to receive reimbursement for such properties.
The operations of our operating subsidiaries must be licensed under applicable state law and, depending upon the type of
operation, certified or approved as providers under the Medicare and/or Medicaid programs. In the process of acquiring or
transferring operating assets, our operations must receive change of ownership approvals from state licensing agencies,
Medicare and Medicaid as well as third party payors. If there are any delays in receiving regulatory approvals from the
applicable federal, state or local government agencies, or the inability to receive such approvals, such delays could result in
delayed or lost reimbursement related to periods of service prior to the receipt of such approvals, which could negatively impact
our cash position.
Compliance with federal and state fair housing, fire, safety and other regulations may require us to make unanticipated
expenditures, which could be costly 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 cause such individuals to face barriers in gaining residency in any of our affiliated facilities.
Additionally, the Fair Housing Act and other similar state laws require that we advertise our services in such a way that we
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promote diversity and not limit it. We may be required, among other things, to change our marketing techniques 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 land use regulations and food licensing or certification requirements as they may be adopted by
governmental agencies and bodies from time to time. Like other healthcare facilities, our affiliated skilled nursing facilities are
subject to periodic surveys or inspections by governmental authorities to assess and assure compliance with regulatory
requirements. Surveys occur on a regular (often annual or biannual) schedule, and special surveys may result from a specific
complaint filed by a patient, a family member or one of our competitors. We may be required to make substantial capital
expenditures to comply with these requirements.
We depend largely upon reimbursement from third-party payors, and our revenue, financial condition and results of
operations could be negatively impacted 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 mix among Medicaid, Medicare, private payors and managed care
companies, significantly affect our profitability because we generally receive higher reimbursement rates for high acuity
patients and because the payors reimburse us at different rates. For the years ended December 31, 2021 and 2020, 73.6% and
74.5% of our service revenue was provided by government payors that reimburse us at predetermined rates. If our labor or other
operating costs increase, we will be unable to recover such increased costs from government payors. Accordingly, if we fail to
maintain our proportion of high acuity patients or if there is any significant increase in the percentage of the patients of our
operating subsidiaries for whom we receive Medicaid reimbursement, our results of operations may be adversely affected.
Initiatives undertaken by major insurers and managed care companies to contain healthcare costs may adversely affect our
business. Among other initiatives, these payors attempt to control healthcare costs by contracting with healthcare providers to
obtain services on a discounted basis. We believe that this trend will continue and may limit reimbursements for healthcare
services. If insurers or managed care companies from whom we receive substantial payments 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.
On November 5, 2021, CMS issued the IFR discussed under Item 1, Government Regulations, subheading Coronavirus
requiring all eligible staff to be fully vaccinated against COVID-19. CMS’s enforcement of this IFR was temporarily blocked in
certain states pending appeal to the United States Supreme Court. On January 13, 2022, the United States Supreme Court
entered an order allowing CMS’s enforcement of the IFR and its vaccination requirements by March 15, 2022 for our operating
subsidiaries in Arizona, Idaho, Iowa, Kansas, Nebraska, South Carolina and Utah and by February 28, 2022 for all of our other
operating subsidiaries except those in Texas. On January 20, 2022, CMS became empowered to enforce the IFR in Texas and
set a deadline of March 21, 2022 for compliance with its vaccination requirements.
The IFR and its enforcement by CMS may cause disruption to our affiliated facilities’ nursing staff and may further
disrupt our operations if affected personnel decline to be vaccinated and replacement staff cannot be located. In the event we or
our affiliated facilities do not comply with this requirement, our Medicare and Medicaid agreements could be terminated and
the termination of those agreements may lead to other payors terminating their agreements with us or our affiliated facilities and
operating subsidiaries. CMS terminating Medicare or Medicaid participation agreements and the loss of the payment
agreements with private payors as a result of CMS terminating Medicare or Medicaid participation agreements with our
affiliated facilities and operating subsidiaries would materially and adversely affect our business, financial condition and results
of operations.
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 subsidiaries and the services we provide. The industry has experienced an increased trend in the number and
severity of litigation claims, due in part to the number of large verdicts, including large punitive damage awards. These claims
are filed based upon a wide variety of claims and theories, including deficiencies under conditions of participation under certain
state and federal healthcare programs. Plaintiffs' attorneys have become increasingly more aggressive in their pursuit of claims
against healthcare providers, including skilled nursing providers, employing a wide variety of advertising and solicitation
activities to generate more claims. The defense of lawsuits has in the past, and may in the future, result in significant legal costs,
regardless of the outcome. Additionally, increases to the frequency and/or severity of losses from such claims and suits may
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result in increased liability insurance premiums or a decline in available insurance coverage levels, which could materially and
adversely affect our business, financial condition and results of operations.
We have in the past been subject to class action litigation involving claims of violations of various regulatory
requirements. While we have been able to settle these claims without an ongoing material 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 our industry. For example, there has been a
general increase in the number of wage and hour class action claims filed in several of the jurisdictions where we are present.
Allegations typically include claimed 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 number of these claims against us or an increase in amounts owing
should plaintiffs be successful in their prosecution of these claims, this could have a material adverse effect to 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 our contracts
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 our financial condition and results of operations.
If litigation is instituted against one or more of our subsidiaries, a successful plaintiff might attempt to hold us or another
subsidiary liable for the alleged wrongdoing of the subsidiary principally targeted by the litigation. If a court in such litigation
decided to disregard the corporate form, the resulting judgment could increase our liability and adversely affect our financial
condition and results of operations.
Congress has repeatedly considered, without passage, a bill that would require, among other things, that agreements to
arbitrate nursing home disputes be made after the dispute has arisen rather than before prospective patients move in, to prevent
nursing home operators and prospective patients from mutually entering into a pre-admission pre-dispute arbitration agreement.
This bill, known as the Fairness in Nursing Home Arbitration Act, was introduced in the House of Representatives as a H.R.
5326 in 2019 and H.R. 2812 in 2021; neither bill made it out of the committees to which it was referred for discussion to be
voted on by the entire House of Representatives. We use arbitration agreements, which have generally been favored by the
courts, to streamline the dispute resolution process and reduce our exposure to legal fees and excessive jury awards. If we are
not able to secure pre-admission arbitration agreements, our litigation exposure and costs of defense in patient liability actions
could increase, our liability insurance premiums could increase, and our business may be adversely affected.
We conduct regular internal investigations into the care delivery, recordkeeping and billing processes of our operating
subsidiaries. These reviews sometimes 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. Our compliance program includes, among other things, (i) policies and procedures modeled after
applicable laws, regulations, government manuals and industry practices and customs that govern the clinical, reimbursement
and operational aspects of our subsidiaries; (ii) training about our compliance process for all of the employees of our operating
subsidiaries, our directors and officers, and training about Medicare and Medicaid laws, fraud and abuse prevention, clinical
standards and practices, and claim submission and reimbursement policies and procedures for appropriate employees; and (iii)
internal controls that monitor, for example, the accuracy of claims, reimbursement submissions, cost reports and source
documents, provision of patient care, services, and supplies as required by applicable standards and laws, accuracy of clinical
assessment and treatment documentation, and implementation of judicial and regulatory requirements (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 would continue 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 have also identified and, at the conclusion of such investigations, assisted in implementing,
targeted improvements in the assessment and recordkeeping practices to make them consistent with the existing standards and
policies applicable to our affiliated skilled nursing facilities in these areas. We continue to monitor the measures implemented
for effectiveness and perform follow-up reviews to ensure compliance. Consistent with healthcare industry accounting
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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 will accrue
additional liabilities for claim costs and interest, and repay any amounts due in normal course. Furthermore, failure to refund
overpayments within required time frames (as described in greater detail above) could result in FCA liability. If future
investigations ultimately result in findings of significant billing and reimbursement noncompliance which could require us to
record significant additional provisions or remit payments, our business, financial condition and results 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 also elect 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 conditions and the availability of essential resources and leadership within our company, we continue to seek
both single-and multi-facility acquisition and business acquisition 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 to identify suitable acquisition candidates, the purchase price of the facilities, prevailing market
conditions, the availability of leadership to manage new facilities and our own willingness to take on new operations, the rate at
which we have historically acquired facilities has fluctuated significantly. In the future, 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, which were or have proven to be non-strategic or less desirable, and we
may consider disposing of such facilities or exchanging them for facilities which are more desirable, either because they were
included in larger, indivisible groups of facilities or under other circumstances. To the extent we dispose of such a facility
without simultaneously acquiring a facility in exchange, our revenue may decrease.
We may not be able to successfully integrate acquired facilities and businesses into our operations, and we may not achieve
the benefits we expect from any of our facility acquisitions.
We may not be able to successfully or efficiently integrate new acquisitions of facilities and businesses with our existing
operating subsidiaries, culture and systems. The process of integrating acquisitions into our existing operations may result in
unforeseen operating difficulties, divert management's attention from existing operations, or require an unexpected commitment
of staff and financial resources, and may ultimately be unsuccessful. Existing operations available for acquisition frequently
serve or target different markets than those that we currently serve. We also may determine that renovations of acquired
facilities and changes in staff and operating management personnel are necessary to successfully integrate those acquisitions
into our existing operations. We may not be able to recover the costs incurred to reposition or renovate newly operating
subsidiaries. The financial benefits we expect to realize from many of our acquisitions are largely dependent upon our ability to
improve clinical performance, 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 we acquire, we will not realize the anticipated benefits and
we may experience lower than anticipated profits, or even losses.
During the year ended December 31, 2021, we expanded our operations through long-term leases and real estate
purchases, with the addition of 17 stand-alone skilled nursing operations. This growth has placed and will continue to place
significant demands on our current management resources. Our ability to manage our growth effectively and to successfully
integrate new acquisitions into our existing business will require us to continue to expand our operational, financial and
management information systems and to continue to retain, attract, train, motivate and manage key employees, including
facility-level leaders and our local directors of nursing. We may not be successful in attracting qualified individuals necessary
for future acquisitions to be successful, and our management team may expend significant time and energy working to attract
qualified personnel to manage facilities we may acquire in the future. Also, the newly acquired facilities may require us to
spend significant time improving services that have historically been 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. If we are not able to
successfully overcome these and other integration challenges, we may not achieve the benefits we expect from any of our
acquisitions, and our business may suffer.
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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 those facilities, against whom we may have little or no recourse. Many facilities we have historically acquired
were underperforming financially and had clinical and regulatory issues prior to and at the time of acquisition. Even where we
have improved operating subsidiaries and patient care at affiliated facilities that we have acquired, we still may face post-
acquisition regulatory issues related to pre-acquisition events. These may include, without limitation, payment recoupment
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 full compliance. Diligence materials pertaining to acquisition targets, especially the
underperforming facilities that often represent the greatest opportunity for return, are often inadequate, inaccurate or impossible
to obtain, sometimes requiring us to make acquisition decisions with incomplete information. Despite our due diligence
procedures, facilities that we have acquired or may acquire in the future may generate unexpectedly low returns, may cause us
to incur substantial losses, may require unexpected levels of management time, expenditures or other resources, or may
otherwise not meet a risk profile that our investors find acceptable.
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. If CMS later determines that the prior owner of the facility had
received overpayments from Medicare for the period of time during which it operated the facility, or had incurred fines in
connection with the operation of the facility, CMS could hold us liable for repayment of the overpayments or fines. We may be
unable to improve every facility that we acquire. In addition, operation of these facilities may divert management time and
attention from other operations and priorities, negatively impact cash flows, result in adverse or unanticipated accounting
charges, or otherwise damage other areas of our company if they are not timely and adequately improved.
We also incur regulatory risk in acquiring certain facilities due to the licensing, certification and other regulatory
requirements affecting our right to operate the acquired facilities. For example, in order to acquire facilities on a predictable
schedule, or to acquire declining operations quickly to prevent further pre-acquisition declines, we frequently acquire such
facilities prior to receiving license approval or provider certification. We operate such facilities as the interim manager for the
outgoing licensee, assuming financial responsibility, among other obligations for the facility. To the extent that we may be
unable or delayed in obtaining a license, we may need to operate the facility under a management agreement from the prior
operator. Any inability in obtaining 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 incur unanticipated costs and other challenges
which could cause our business to suffer.
If we do not achieve or maintain competitive quality of care ratings from CMS or private organizations engaged in similar
monitoring activities, our business may be negatively affected.
CMS, as well as certain private organizations engaged in similar monitoring activities, provides comparative public data,
rating every skilled nursing facility operating in each state based upon quality-of-care indicators. CMS’s system is the Five-Star
Quality Rating System, introduced in 2008, to help consumers, their families and caregivers compare nursing homes more
easily. The Five-Star Quality Rating System gives each nursing home a rating of between one and five stars in various
categories, and the ratings are available on a consumer-facing website, Nursing Home Compare. In cases of acquisitions, the
previous operator's clinical ratings are included in our overall Five-Star Quality Rating. Over the years, the Five-Star Quality
Rating System has been modified, with the most recent changes being implemented in 2018 and 2019. Additionally, as a result
of the COVID-19 pandemic and CMS’s suspension or modification of certain inspection and reporting requirements, the data
used to calculate the star ratings of facilities was interrupted. CMS temporarily froze certain data on the Nursing Home
Compare website through January 2021, and recalculated its Five Star Quality ratings with modified data used to calculate the
nursing home's rating. Other data related to quality reporting measures, including new or worsened pressure-related injuries and
discharges to home, are not presently factored into CMS's star calculations. This data is reflected on the Nursing Home
Compare website based on the recalculation in January of 2022. The temporary adjustments due to COVID-19 could impact
facilities that might have less favorable Five-Star Ratings from being able to demonstrate improvements on the public-facing
website through mid-2022. For more information on these changes, see Item 1., under Government Regulation.
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CMS continues to increase quality measure thresholds, making it more difficult to achieve upward ratings. CMS
acknowledges that some facilities may see a decline in their overall five-star rating absent any new inspection information. This
change could further affect star ratings across the industry. Additionally, on the Nursing Home Compare website, CMS recently
began displaying a consumer alert icon next to nursing homes that have been cited on inspection reports for incidents of abuse,
neglect, or exploitation. See Item 1., under Government Regulation.
Providing quality patient care is the cornerstone of our business. We believe that hospitals, physicians and other referral
sources refer patients to us in large part because of our reputation for delivering quality care. If we should fail to achieve our
internal rating goals or fail to exceed the national average rating on the Five-Star Quality Rating System, or have facilities
displaying a consumer alert icon for incidents of abuse, neglect, or exploitation, it may affect our ability to generate referrals,
which could have a material adverse effect upon our business and consolidated financial condition, results of operations and
cash flows.
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 or pay 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 liability claims or litigation. Coverage for punitive damages is also excluded under some insurance
policies. As a result, we may be liable for punitive damage awards in these states that either are not covered or are in excess of
our insurance policy limits. Claims against us, regardless of their merit or eventual outcome, also could inhibit our ability to
attract patients or expand our business and could 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 these increases, we have increased the amounts of our self-insured retention and deductibles in
connection with general and professional liability claims. We also have implemented a self-insurance program for workers
compensation in all states, except Washington, and elected non-subscriber status for workers' compensation in Texas. In
Washington, the insurance coverage is financed through premiums paid by the employers and employees. Due to the nature of
our business and the residents we serve, including the risk of claims from residents as well as potential governmental action, it
may be difficult to complete the underwriting process and obtain insurance at commercially reasonable rates. If we are unable
to 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 be adversely 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 owned subsidiary insurance company, Standardbearer Insurance Company, Ltd., to insure our self-
insurance reimbursements and deductibles as part of a continually evolving overall risk management strategy. We establish the
insurance loss reserves based on an estimation process that uses information obtained from both company-specific and industry
data. The 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, along with an independent actuary, develop information
about the size of ultimate claims based on our historical experience and other available industry information. The most
significant assumptions used 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 or pay damages with respect to unpaid claims. It is possible, however,
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that the actual liabilities may exceed our estimates of loss. We may also experience an unexpectedly 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 is made 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 self-insurance reimbursements under our general and professional liability and workers
compensation programs applies on a per claim basis, there is no limit to the maximum number of claims or the total amount for
which we could incur liability in any policy period.
We also self-insure our employee health benefits. With respect to our health benefits self-insurance, our reserves and
premiums are computed based on a mix of company specific and general industry data that is not specific to our own company.
Even with a combination of limited company-specific loss data and general industry data, our loss reserves are based on
actuarial estimates that may not correlate to actual loss experience in the future. Therefore, our reserves may prove to be
insufficient and we may be exposed to significant and unexpected losses.
The frequency and magnitude of claims and legal costs may increase due to the COVID-19 pandemic or our related
response efforts.
The geographic concentration of our affiliated facilities could leave us vulnerable to an economic downturn, regulatory
changes or acts of nature in those areas.
Our affiliated facilities located in Arizona, California, and Texas account for the majority of our total revenue. As a result
of this concentration, the conditions of local economies, changes in governmental rules, regulations and reimbursement rates or
criteria, changes in demographics, state funding, acts of nature and other factors that may result in a decrease in demand and/or
reimbursement for skilled nursing services in these states could have a disproportionately adverse effect on our revenue, costs
and results of operations. Moreover, since over 21% 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, cost increases or damage caused by natural disasters including hurricanes, tornadoes and flooding.
These acts of nature may cause disruption to us, the employees of 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, utilities
and other goods to our affiliated facilities, and the availability of employees to provide services at our affiliated facilities. If the
delivery of goods or the ability of employees to reach our affiliated facilities were interrupted in any material respect due to a
natural disaster or other reasons, it would have a significant impact on our affiliated facilities and our business. Furthermore, the
impact, or impending threat, of a natural disaster may require that we evacuate one or more facilities, which would be costly
and would involve risks, including potentially fatal risks, for the patients. The impact of disasters and similar events is
inherently uncertain. Such events could 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 revenue and 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 upon the workplace generally and upon individual employees. With one exception, to our knowledge the
staff at our affiliated facilities that have been approached to unionize have uniformly rejected union organizing efforts. If
employees decide to unionize, our cost of doing business could increase, and we could 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.
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Because we lease the majority of our affiliated facilities, we are subject to risks associated with leased real property,
including risks relating to lease termination, lease extensions and special charges, any of which could adversely affect our
business, financial position or results of operations.
As of December 31, 2021, we leased 176 of our 245 affiliated facilities. Most of our leases are triple-net leases, which
means that, in addition to rent, we are required to pay for the costs related to the property (including property taxes, insurance,
and maintenance and repair costs). We are responsible for paying these 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 variety of reasons, including the default in any
payment 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 a default under our debt agreements and could adversely affect our business, financial position or
results of operations. There can be no assurance that we will be able to comply with all of our obligations under the leases in the
future.
Failure to generate sufficient cash flow to cover required payments or meet operating covenants under our long-term debt,
mortgages and long-term operating leases could result in defaults under such agreements and cross-defaults under other
debt, mortgage or operating lease arrangements, which could harm our operating subsidiaries and cause us to lose facilities
or experience foreclosures.
We maintain a revolving credit facility under the Third Amended and Restated Credit Agreement, dated as of October 1,
2019, between our company and a lending consortium arranged by Truist Financial Corporation (Truist) (formerly known as
SunTrust Bank, Inc.) with a revolving line of credit of up to $350.0 million in aggregate principal amount (the Credit Facility).
As of December 31, 2021, we have no outstanding debt under our Credit Facility. Twenty-three of our subsidiaries have
mortgage loans insured with Department of Housing and Urban Development (HUD) for an aggregate amount of $156.6
million, which subjects these subsidiaries to HUD oversight and periodic inspections. The terms of the mortgage loans range
from 25- to 35-years.
We also have two outstanding promissory notes with an aggregate principal amount of approximately $3.3 million as of
December 31, 2021. The terms of the notes are 10 months and 12 years. Because these mortgage 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, 2021. We intend to continue
financing our operating subsidiaries through mortgage financing, long-term operating leases and other types of financing,
including borrowings under our lines of credit and future credit 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 Credit Facility and mortgage loans contain restrictive covenants and require us to maintain or satisfy
specified coverage tests on a consolidated basis and on a facility or facilities basis. These restrictions and operating covenants
include, among other things, requirements with respect to occupancy, debt service coverage, project yield, net leverage ratios,
minimum interest coverage ratios and minimum asset coverage ratios. These restrictions may interfere with our ability to obtain
additional advances under our existing Credit Facility or to obtain new financing or to engage in other business activities, which
may inhibit our 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 the terms of the mortgage. Any non-payment, noncompliance or other default under our financing
arrangements could, subject to cure provisions, cause the lender to foreclose upon the facility or facilities securing such
indebtedness or, in the case of a lease, 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 lender could avoid judicial procedures
required to foreclose on real property by declaring all amounts outstanding under the guaranty immediately due and payable,
and requiring us to fulfill our obligations to make such payments. If any of these scenarios were to occur, our financial
condition would be adversely affected. 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 the debt secured by the mortgage. If the outstanding balance of the debt
secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would
not receive any cash proceeds, which would negatively impact our earnings and cash position. Further, because our mortgages
and operating leases generally contain cross-default and cross-collateralization provisions, a default by us related to one facility
could affect a significant number of other facilities and their corresponding financing arrangements and operating leases.
49
Because our term loans, promissory notes, bonds, mortgages and lease obligations are fixed expenses and secured by
specific assets, and because our revolving loan obligations are secured by virtually all of our assets, if reimbursement rates,
patient acuity mix or occupancy levels decline, or if for any reason 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 ability to 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 of which 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 on our operating leases, we may be required, among other things, to seek
additional financing in the debt or equity markets, refinance or restructure all or a portion of our indebtedness, sell selected
assets, reduce or delay planned capital expenditures or delay or abandon desirable acquisitions. Such measures might 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 debt or 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 and sustain profitability. In addition, any such financing, refinancing or sale of
assets might not be available on terms that are economically favorable to us, or at all.
Move-in and occupancy rates may remain unpredictable even after the COVID-19 pandemic is over.
Occupancy levels at skilled nursing facilities are likely to remain vulnerable to the effects of COVID-19 even after the
pandemic is over. Facilities experiencing decreases in move-in rates in 2021 cite resident or family member concerns as the
basis for such decreases. These and other similar concerns may continue to impact our ability to attract new residents and our
ability to retain existing residents.
A housing downturn could decrease demand for senior living services.
Seniors often use the proceeds of home sales to fund their admission to senior living facilities. A downturn in the housing
markets could adversely affect seniors’ ability to afford our resident fees and entrance fees. If national or local housing markets
enter a persistent decline, our occupancy rates, revenues, results of operations and cash flow could be negatively impacted.
As we continue to acquire and lease real estate assets, we may not be successful in identifying and consummating these
transactions.
As part of, and subsequent to, the Spin-Off, we lease 32 of our properties to Pennant’s senior living operations. In the
future, we might expand our leasing property portfolio to additional Pennant operations or other unaffiliated tenants. We have
very limited control over the success or failure of our tenants’ and operators’ businesses and, at any time, a tenant or operator
may experience a downturn in its business that weakens its financial condition. If that happens, the tenant or operator may fail
to make its payments to us when due. Although our lease agreements give us the right to exercise certain remedies in the event
of default on the obligations owing to us, we may determine not to do so if we believe that enforcement of our rights would be
more detrimental to our business than seeking alternative approaches.
An important part of our business strategy is to continue to expand and diversify our real estate portfolio through accretive
acquisition and investment opportunities in healthcare properties. Our execution of this strategy by successfully identifying,
securing and consummating beneficial transactions is made more challenging by increased competition and can be affected by
many factors, including our relationships with current and prospective tenants, our ability to obtain debt and equity capital at
costs comparable to or better than our competitors and our ability to negotiate favorable terms with property owners seeking to
sell and other contractual counterparties. Our competitors for these opportunities include healthcare REITs, real estate
partnerships, healthcare providers, healthcare lenders and other investors, including developers, banks, insurance companies,
pension funds, government-sponsored entities and private equity firms, some of whom may have greater financial resources and
lower costs of capital than we do. If we are unsuccessful at identifying and capitalizing on investment or acquisition
opportunities, our growth and profitability in our real estate investment portfolio may be adversely affected.
Investments in and acquisitions of healthcare properties entail risks associated with real estate investments generally,
including risks that the investment will not achieve expected returns, that the cost estimates for necessary property
improvements will prove inaccurate or that the tenant or operator will fail to meet performance expectations. Income from
properties and yields from investments in our properties may be affected by many factors, including changes in governmental
regulation (such as licensing and government payment), general or local economic conditions (such as fluctuations in interest
rates, senior savings, and employment conditions), the available local supply of and demand for improved real estate, a
reduction in rental income as the result of an inability to maintain occupancy levels, natural disasters (such as hurricanes,
earthquakes and floods) or similar factors. Furthermore, healthcare properties are often highly customized, and the development
50
or redevelopment of such properties may require costly tenant-specific improvements. As a result, we cannot assure you that we
will achieve the economic benefit we expect from acquisition or investment opportunities.
As we expand our presence in other relevant healthcare industries, we would become subject to risks in a market in which
we have limited experience.
The majority of our affiliated facilities have historically been skilled nursing facilities. As we expand our presence in
other relevant healthcare industries, our existing overall business model will continue to change and expose our company to
risks in markets in which we have limited experience. We expect that we will have to adjust certain elements of our existing
business model, which could have an adverse effect on our business.
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 may decrease.
We rely significantly on appropriate referrals from physicians, hospitals and other healthcare providers in the
communities in which we deliver our services to attract appropriate residents and patients to our affiliated facilities. Our referral
sources are not obligated to refer business to us and may refer business 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 efforts to establish and build a
relationship with our referral sources. If we lose, or fail to maintain, existing relationships with our referral resources, fail to
develop new 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 patient mix 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 occupancy rate and the quality of our patient mix could
suffer.
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 efficiently and remain competitive in our markets requires us to commit substantial resources to continued
investment in our affiliated facilities and equipment. We are sometimes more aggressive than our competitors in capital
spending to address issues that arise in connection with aging and obsolete facilities and equipment. In addition, continued
expansion of our business through the acquisition of existing facilities, expansion of our existing facilities and construction of
new facilities may require additional capital, particularly if we were to accelerate our acquisition and expansion plans.
Financing may not be available 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, we may 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 those of 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 and equity financing sources to fund the capital and liquidity requirements of our business, as well as
negatively impact or impair the value of our current portfolio of cash, cash equivalents and investments, including U.S.
Treasury securities and U.S.-backed investments.
Our cash, cash equivalents and investments are held in a variety of interest-bearing instruments, including U.S. treasury
securities. As a result of the uncertain domestic and global political, credit and financial market conditions, including an
increase in the Consumer Price Index of seven percent in 2021, investments in these types of financial instruments pose risks
arising from liquidity and credit concerns. Given that future deterioration in the U.S. and global credit and financial markets is a
possibility, no assurance can be made that losses or significant deterioration in the fair value of our cash, cash equivalents, or
investments will not occur. Uncertainty surrounding the trading market for U.S. government securities or impairment of the
U.S. government's ability to satisfy its obligations under such treasury securities could impact the liquidity or valuation of our
current portfolio of cash, cash equivalents, and investments, a substantial portion of which were invested in U.S. treasury
securities. Further, unless and until the current U.S. and global political, credit and financial market crisis has been sufficiently
resolved, it may be difficult for us to liquidate our investments prior to their maturity without incurring a loss, which would
have a material adverse effect on our consolidated financial position, results of operations or cash flows.
51
We may need additional capital if a substantial acquisition or other growth opportunity becomes available or if
unexpected events occur or opportunities arise. U.S. capital markets can be volatile. We cannot assure you that additional
capital will be available or available on terms acceptable to us. If capital is not available, we may not be able to fund internal or
external business expansion or respond to competitive 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 in our payment cycle. From time to time, we have experienced such delays as a result of
government payors instituting planned reimbursement delays for budget balancing purposes or as a result of prepayment
reviews.
Some states in which we operate are operating with budget deficits or could have budget deficit in the future, which may
delay reimbursement in a manner that would adversely affect our liquidity. In addition, from time to time, procedural issues
require us to resubmit claims before payment is remitted, which contributes to our aged receivables. Unanticipated delays in
receiving reimbursement from state programs due to changes in their policies or billing or audit procedures may adversely
impact our liquidity and working capital.
Compliance with the regulations of the Department of Housing and Urban Development may require us to make
unanticipated expenditures which could increase our costs.
Twenty-three of our affiliated facilities are currently subject to regulatory agreements with HUD that give the
Commissioner of HUD broad authority to require us to be replaced as the operator of those facilities in the event that the
Commissioner determines there are operational deficiencies at such facilities under HUD regulations. Compliance with 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 from obtaining HUD financing in the future or we may encounter limitations or
prohibitions on our operation of HUD-insured 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, fines and 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 any money 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. If any 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 may be 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 to meet 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 revenue. 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 or indirectly hold in our multiple operating and real estate holding
subsidiaries. As a result, we are dependent upon distributions from our subsidiaries to generate the funds necessary to meet our
financial obligations and pay dividends. Our subsidiaries are legally distinct from us and have no obligation to make funds
available to us. The ability of our subsidiaries to make distributions to us will depend substantially on their respective operating
results and will be subject to restrictions under, among other things, the laws of their jurisdiction of organization, which may
limit the amount of funds available for distribution to investors or stockholders, agreements of those subsidiaries, the terms of
our financing arrangements and the terms of any future financing arrangements of our subsidiaries.
We may incur operational difficulties or be exposed to claims and liabilities as a result of the separation of Pennant.
On October 1, 2019, we distributed all of the outstanding shares of The Pennant Group, Inc. or Pennant, common stock to
stockholders in connection with the separation of our home health and hospice business and substantially all of our senior living
operations into a separate publicly traded company, or the Spin-Off. In connection with the Spin-Off, we entered into a
separation agreement and various other agreements, including a tax matters agreement, an employee matters agreement and
transition services agreements. These agreements govern the separation and distribution and the relationship between us and
52
Pennant going forward, including with respect to potential tax-related losses associated with the separation and distribution.
They also provide for the performance of services by each company for the benefit of the other for a period of time.
The separation agreement provides for indemnification obligations designed to make Pennant financially responsible for
many liabilities that may exist relating to its business activities, whether incurred prior to or after the distribution, including any
pending or future litigation, but we cannot guarantee that Pennant will be able to satisfy its indemnification obligations. It is
also possible that a court would disregard the allocation agreed to between us and Pennant and require us to assume
responsibility for obligations allocated to Pennant. Third parties could also seek to hold us responsible for any of these
liabilities or obligations, and the indemnity rights we have under the separation agreement may not be sufficient to fully cover
all of these liabilities and obligations. Even if we are successful in obtaining indemnification, we may have to bear costs
temporarily. In addition, our indemnity obligations to Pennant, including those related to assets or liabilities allocated to us,
may be significant. In addition, certain landlords required, in exchange for their consent to the Spin-Off, that our lease
guarantees remain in place for a certain period of time following the Spin-Off. These guarantees could result in significant
additional liabilities and obligations for us if Pennant were to default on their obligations under their leases with respect to these
properties. These risks could negatively affect our business, financial condition or results of operations.
The separation of Pennant continues to involve a number of additional risks, including, among other things, the potential
that management’s and our employees’ attention will be significantly diverted by the provision of skilled services or that we
may incur other operational challenges or difficulties as a result of the separation. Certain of the agreements described above
provide for the performance of services by each company for the benefit of the other for a period of time. If Pennant is unable
to satisfy its obligations under these agreements, we could incur losses and may not have sufficient resources available for such
services. These arrangements could also lead to disputes over rights to certain shared property and over the allocation of costs
and revenues for products and operations. Our inability to effectively manage the transition activities and related events could
adversely affect our business, financial condition or results of operations.
If our Spin-Off fails to qualify as generally tax-free for U.S. federal income tax purposes, we and our stockholders could be
subject to significant tax liabilities.
The Spin-Off is intended to qualify for tax-free treatment to us and our stockholders for U.S. federal income tax purposes.
Accordingly, completion of the transaction was conditioned upon, among other things, our receipt of opinions from outside tax
advisors that the distributions would qualify as a transaction that is intended to be tax-free to both us and our stockholders for
U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Internal Revenue Code. The opinions were based
on and relied on, among other things, certain facts and assumptions, as well as certain representations, statements and
undertakings, including those relating to the past and future conduct. If any of these facts, assumptions, representations,
statements or undertakings is, or becomes, inaccurate or incomplete, or if any of the parties breach any of their respective
covenants relating to the transactions, the tax opinions may be invalid. Moreover, the opinions are not binding on the IRS or
any courts. Accordingly, notwithstanding receipt of the opinion, the IRS could determine that the distribution and certain
related transactions should be treated as taxable transactions for U.S. federal income tax purposes.
If the Spin-Off fails to qualify as a transaction that is generally tax-free under Sections 355 and 368(a)(1)(D) of the
Internal Revenue Code, in general, for U.S. federal income tax purposes, we would recognize taxable gain with respect to the
distributed securities and our stockholders who received securities in such distribution would be subject to tax as if they had
received a taxable distribution equal to the fair market value of such shares.
We also have obligations to provide indemnification to a number of parties as a result of the transaction. Any indemnity
obligations for tax issues or other liabilities related to the Spin-Off, could be significant and could adversely impact our
business.
Certain directors who serve on our Board of Directors also serve as directors of Pennant, and ownership of shares of
Pennant common stock by our directors and executive officers may create, or appear to create, conflicts of interest.
Certain of our directors who serve on our Board of Directors also serve on the board of directors of Pennant. This may
create, or appear to create, conflicts of interest when our, or Pennant's management and directors face decisions that could have
different implications for us and Pennant, including the resolution of any dispute regarding the terms of the agreements
governing the Spin-Off and the relationship between us and Pennant after the Spin-Off or any other commercial agreements
entered into in the future between us and the spun-off business and the allocation of such directors’ time between us and
Pennant.
53
All of our executive officers and some of our non-employee directors own shares of the common stock of Pennant. The
continued ownership of such common stock by our directors and executive officers following the Spin-Off creates, or may
create, the appearance of a conflict of interest when these directors and executive officers are faced with decisions that could
have different implications for us and Pennant.
Changes in the method of determining LIBOR, or the replacement of LIBOR with an alternative reference rate, may
adversely affect interest rates on our current or future indebtedness and may otherwise adversely affect our financial
condition and results of operations.
Certain of our indebtedness is made at variable interest rates that use the London Interbank Offered Rate, or LIBOR (or
metrics derived from or related to LIBOR), as a benchmark for establishing the interest rate. On July 27, 2017, the United
Kingdom’s Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR
rates after 2021. These reforms may cause LIBOR to cease to exist, new methods of calculating LIBOR to be established, or
alternative reference rates to be established. The potential consequences cannot be fully predicted and could have an adverse
impact on the market value for or value of LIBOR-linked securities, loans, and other financial obligations or extensions of
credit held by or due to us. Changes in market interest rates may influence our financing costs, returns on financial investments
and the valuation of derivative contracts and could reduce our earnings and cash flows. In addition, any transition process may
involve, among other things, increased volatility or illiquidity in markets for instruments that rely on LIBOR, reductions in the
value of certain instruments or the effectiveness of related transactions such as hedges, increased borrowing costs, uncertainty
under applicable documentation, or difficult and costly consent processes. This could materially and adversely affect our results
of operations, cash flows, and liquidity. We cannot predict the effect of the potential changes to LIBOR or the establishment
and use of alternative rates or benchmarks.
Risks Related to Ownership of our Common Stock
We 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 negotiate favorable lease and other contractual terms, anticipated operating cost levels, the level of
demand for our beds, the rates we charge and actual results that may vary 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 maintain dividends. The Credit Facility
restricts our ability to pay dividends to stockholders if we receive notice that we are in default under this agreement. The failure
to pay or maintain dividends could adversely affect our stock price.
Our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law contain provisions
that could discourage transactions 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 Directors to 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 the future for shares of our common
stock. Such provisions set forth in our amended and restated certificate of incorporation or our amended and restated bylaws
include:
•
•
•
•
•
•
•
•
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 acted upon 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 who acquires 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 a majority 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 by majority vote of the remaining directors;
our Board of Directors is expressly authorized to make, alter or repeal our bylaws; and
54
•
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, if anyone 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, “interested stockholder” 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 our outstanding 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 discourage acquisition proposals and make it more difficult or expensive for stockholders or potential
acquirers to obtain control of our Board of Directors or initiate actions that are opposed by our then-current Board of Directors,
including delaying or impeding a merger, tender offer or proxy contest involving us. Any delay or prevention of a change of
control transaction or changes in our Board of Directors could cause the market price of our common stock to decline.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2. PROPERTIES
Service Center. Our Service Center is located in San Juan Capistrano, California. In June 2018, we acquired an office
space for a purchase price of $31.0 million to accommodate our growing Service Center team. The property consists of
approximately 108,058 square feet of usable office space. In addition, we lease a substantial portion of the space within the
campus to third-party tenants.
Operating Facilities. We operate 245 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 27,000 patients as of December 31, 2021. Of the 245 facilities, we operate 176 facilities under long-term lease
arrangements and have options to purchase 11 of those 176 facilities. The results of our operating facilities are reflected in our
skilled services segment for our skilled nursing operations and in "All Other" category for our senior living operations.
The following table provides summary information regarding the location of our facilities, operational beds and units by
property type as of December 31, 2021:
Leased without a
Purchase Option
Leased with a Purchase
Option
Owned
Total
Facilities Beds/Units
Facilities Beds/Units
Facilities Beds/Units
Facilities Beds/Units
Operated Facilities
California
Texas
Arizona
Wisconsin
Utah
Colorado
Washington
Idaho
Nebraska
Kansas
Iowa
South Carolina
Nevada
44
46
21
—
12
12
11
7
5
—
6
—
1
165
4,394
5,690
2,760
—
1,311
1,096
1,023
551
336
—
399
—
92
17,652
—
5
—
—
2
1
—
—
—
3
—
—
—
11
—
714
—
—
159
125
—
—
—
325
—
—
—
1,323
55
7
18
11
2
7
7
2
5
2
4
—
4
—
69
749
2,377
1,758
100
684
701
204
454
350
493
—
424
—
8,294
51
69
32
2
21
20
13
12
7
7
6
4
1
245
5,143
8,781
4,518
100
2,154
1,922
1,227
1,005
686
818
399
424
92
27,269
The following table sets forth the location of our facilities and the number of operational beds and units located at our
skilled nursing, senior living and campus facilities as of December 31, 2021:
Facility Counts
Bed / Unit Counts
Skilled
Nursing
Operations
Senior
Living
Communities
Campus
Operations
Total
Skilled
Nursing Beds
Senior
Living Units
Total Beds /
Units
California
Texas
Arizona
Wisconsin
Utah
Colorado
Washington
Idaho
Nebraska
Kansas
Iowa
South Carolina
Nevada
50
64
29
2
18
14
13
11
4
—
4
4
1
214
—
1
—
—
2
5
—
—
1
—
—
—
—
9
1
4
3
—
1
1
—
1
2
7
2
—
—
22
51
69
32
2
21
20
13
12
7
7
6
4
1
5,078
8,276
4,203
100
1,991
1,303
1,227
984
385
601
368
424
92
65
505
315
—
163
619
—
21
301
217
31
—
—
5,143
8,781
4,518
100
2,154
1,922
1,227
1,005
686
818
399
424
92
245
25,032
2,237
27,269
Real Estate Properties. As of December 31, 2021, we owned 100 real estate properties in Arizona, California, Colorado,
Idaho, Kansas, Nebraska, Nevada, South Carolina, Texas, Utah, Washington and Wisconsin, which include 69 of the 245
facilities that we operate and manage. Of our 100 real estate properties, 32 senior living operations are leased to and operated by
Pennant as part of the Spin-Off. Two of the senior living operations leased by Pennant are located on the same real estate
properties as skilled nursing facilities that we own and operate. We further own the real estate property of our Service Center
location and continue to lease a portion of the office space to third-party tenants. Our real estate segment reflects the results of
operations for our owned real estate properties.
The following table provides summary information regarding the location of our owned real estate properties as of
December 31, 2021:
California(1)
Texas(1)
Arizona
Wisconsin
Utah
Colorado
Washington
Idaho
Nebraska
Kansas
South Carolina
Nevada
Owned and
Operated by
Ensign(1)
7
18
11
2
7
7
2
5
2
4
4
—
69
Owned and Leased
to Pennant(1)
Service Center
Total Properties(1)
3
6
1
19
—
—
—
2
—
—
—
1
32
1
—
—
—
—
—
—
—
—
—
—
—
1
10
23
12
21
7
7
2
7
2
4
4
1
100
(1) In connection with the Spin-off, one senior living operation in California and one senior living operation in Texas, which are owned by Ensign and leased to
Pennant are located on the same real estate property as a skilled nursing facility which we own and operate. In each of these situations, the senior living
operation is included in the total under "Owned and Leased to Pennant" and the skilled nursing operation is included in the total under "Owned and Operated by
Ensign", however, the amount reflected under "Total Properties" only recognizes these operations as a single property.
56
Item 3.
LEGAL PROCEEDINGS
Regulatory Matters — Laws and regulations governing Medicare and Medicaid programs are complex and subject to
review and interpretation. Compliance with such laws and regulations is evaluated regularly, the results of which can be subject
to future governmental review and interpretation, and can include significant regulatory action with fines, penalties, and
exclusion from certain governmental programs. Included in these laws and regulations are rules requiring vaccination of
employees and HIPAA, the terms of which require healthcare providers (among other things) to safeguard the privacy and
security of certain patient protected health information.
Cost-Containment Measures — Both government and private pay sources have instituted cost-containment measures
designed to limit payments made to providers of healthcare services, and there can be no assurance that future measures
designed to limit payments made to providers will not adversely affect us.
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 for post-transfer environmental or other liabilities and other claims arising
from our use of the applicable premises, (ii) operations transfer agreements, in which we agree to indemnify past operators of
facilities we acquire against certain liabilities arising from the transfer of the operation and/or the operation thereof after the
transfer to the Company's independent operating subsidiary, (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 others,
under which we may be required to indemnify such persons for liabilities arising out of the nature of their relationship to the
Company. The terms of such obligations vary by contract and, in most instances, do not expressly state or include a specific or
maximum dollar amount. Generally, amounts under these contracts cannot be reasonably estimated until a specific claim is
asserted. Consequently, because no claims have been asserted, no liabilities have been recorded for these obligations on our
balance sheets for any of the periods presented.
In connection with the spin-off transaction, certain landlords required, in exchange for their consent to the transaction, that
our lease guarantees remain in place for a certain period of time following the spin-off. These guarantees could result in
significant additional liabilities and obligations for us if Pennant were to default on their obligations under their leases with
respect to these properties.
U.S. Department of Justice Civil Investigative Demand — On May 31, 2018, we received a CID from the U.S.
Department of Justice stating that it was investigating whether there had been a violation of the False Claims Act and/or the
Anti-Kickback Statute with respect to the relationships between certain of our independently operated skilled nursing facilities
and persons who serve or have served as medical directors, advisory board participants or other potential referral sources. The
CID covered the period from October 3, 2013 through 2018, and was limited in scope to ten of our Southern California
independent operating entities. In October 2018, the Department of Justice made an additional request for information covering
the period of January 1, 2011 through 2018, relating to the same topic. As a general matter, our independent operating entities
have established and maintain policies and procedures to promote compliance with the False Claims Act, the Anti-Kickback
Statute, and other applicable regulatory requirements. We have fully cooperated with the U.S. Department of Justice and
promptly responded to its requests for information; in April 2020, we were advised that the U.S. Department of Justice declined
to intervene in any subsequent action filed by a relator in connection with the subject matter of this investigation.
Litigation — We and our independent operating entities are party to various legal actions and administrative proceedings,
and are subject to various claims arising in the ordinary course of business, including claims that services provided to patients
by our independent operating entities have resulted in injury or death, and claims related to employment and commercial
matters. Although we intend to vigorously defend against these claims, there can be no assurance that the outcomes of these
matters will not have a material adverse effect on operational results and financial condition. In certain states in which we have
or have had independent operating entities, insurance coverage for the risk of punitive damages arising from general and
professional liability litigation may not be available due to state law and/or public policy prohibitions. There can be no
assurance that our independent operating entities will not be liable for punitive damages awarded in litigation arising in states
for which punitive damage insurance coverage is not available.
57
The skilled nursing and post-acute care industry is heavily regulated. As such, we and our independent operating
subsidiaries are continuously subject to state and federal regulatory scrutiny, supervision and control in the ordinary course of
business. Such regulatory scrutiny often includes inquiries, investigations, examinations, audits, site visits and surveys, some of
which are non-routine. In addition to being subject to direct regulatory oversight from state and federal agencies, the skilled
nursing and post-acute care industry is also subject to regulatory requirements which could result in civil, administrative or
criminal fines, penalties or restitutionary relief, and reimbursement; authorities could also seek the suspension or exclusion of
the provider or individual from participation in their programs. We believe that there has been, and will continue to be, an
increase in governmental investigations of long-term care providers, particularly in the area of Medicare/Medicaid false claims,
as well as an increase in enforcement actions resulting from these investigations. Adverse determinations in legal proceedings
or governmental investigations, whether currently asserted or arising in the future, could have a material adverse effect on our
financial position, results of operations, and cash flows.
Additionally, and in 2020, the U.S. House of Representatives Select Subcommittee on the Coronavirus Crisis launched a
nation-wide investigation into the COVID-19 pandemic, which included the impact of the coronavirus on residents and
employees in nursing homes. In June 2020, the Company received a document and information request from the House Select
Subcommittee. The Company is cooperating in responding to this inquiry. However, it is not possible to predict the ultimate
outcome of any such investigation, or whether and what other investigations or regulatory responses may result from the
investigation, which could have a material adverse effect on our reputation, business, financial condition and results of
operations.
In addition to the potential lawsuits and claims described above, we and our independent operating subsidiaries are also
subject to potential lawsuits under the Federal False Claims Act and comparable state laws alleging submission of fraudulent
claims for services to any healthcare program (such as Medicare or Medicaid) or other payor. A violation may provide the basis
for exclusion from Federally funded healthcare programs. Such exclusions could have a correlative negative impact on our
financial performance. Under the qui tam or "whistleblower" provisions of the False Claims Act, a private individual with
knowledge of fraud or potential fraud may bring a claim on behalf of the Federal Government and receive a percentage of the
Federal Government's recovery. Due to these whistleblower incentives, qui tam lawsuits have become more frequent. For
example, and despite the decision of the U.S. Department of Justice to decline to participate in litigation based on the subject
matter of its previously issued Civil Investigative Demand, the involved qui tam relator is continuing on with the lawsuit and
pursuing claims that one or more of the Company's independent operating entities have allegedly violated the False Claims Act
and/or the Anti-Kickback Statute.
In addition to the Federal False Claims Act, some states, including California, Arizona and Texas, have enacted similar
whistleblower and false claims laws and regulations. Further, the Deficit Reduction Act of 2005 created incentives for states to
enact anti-fraud legislation modeled on the Federal False Claims Act. As such, we and our independent operating subsidiaries
could face increased scrutiny, potential liability, and legal expenses and costs based on claims under state false claims acts in
markets where our independent operating subsidiaries do business.
In May 2009, Congress passed the FERA which made significant changes to the Federal False Claims Act (FCA) and
expanded the types of activities subject to prosecution and whistleblower liability. Following changes by FERA, health care
providers face significant penalties for the knowing retention of government overpayments, even if no false claim was involved.
Health care providers can now be liable for knowingly and improperly avoiding or decreasing an obligation to pay money or
property to the government. This includes the retention of any government overpayment. The government can argue, therefore,
that an FCA violation can occur without any affirmative fraudulent action or statement, as long as the action or statement is
knowingly improper. In addition, FERA extended protections against retaliation for whistleblowers, including protections not
only for employees, but also contractors and agents. Thus, an employment relationship is generally not required in order to
qualify for protection against retaliation for whistleblowing.
Healthcare litigation (including class action litigation) is common and is filed based upon a wide variety of claims and
theories, and our independent operating entities are routinely subjected to varying types of claims, including class action
"staffing" suits where the allegation is understaffing at the facility level. These class-action “staffing” suits have the potential to
result in large jury verdicts and settlements. We expect the plaintiffs' bar to continue to be aggressive in their pursuit of these
staffing and similar claims.
58
We and our independent operating subsidiaries have been, and continue to be, subject to claims and legal actions that arise
in the ordinary course of business, including potential claims related to patient care and treatment (professional negligence
claims) as well as employment related claims. In addition, we and our independent operating subsidiaries, and others in the
industry, are subject to claims and lawsuits in connection with COVID-19 and facility preparation for and/or response to the
COVID-19 pandemic. While we have been able to settle or otherwise resolve these types of claims without an ongoing material
adverse effect on our business, a significant increase in the number of these claims, or an increase in the amounts owing should
plaintiffs be successful in their prosecution of future claims, could materially adversely affect the Company’s business,
financial condition, results of operations and cash flows.
Claims and suits, including class actions, continue to be filed against our independent operating subsidiaries and other
companies in the post-acute care industry. We and our independent operating entities have been subjected to, and/or are
currently involved in, class action litigation alleging violations (alone or in combination) of state and federal wage and hour
law as related to the alleged failure to pay wages, to timely provide and authorize meal and rest breaks, and other such similar
causes of action. We do not believe that the ultimate resolution of these actions will have a material adverse effect on our
business, cash flows, financial condition or results of operations.
Medicare Revenue Recoupments — We and our independent operating subsidiaries are subject to regulatory reviews
relating to the provision of Medicare services, billings and potential overpayments resulting from reviews conducted via RAC,
Program Safeguard Contractors, and Medicaid Integrity Contractors (collectively referred to as Reviews). For several months
during the COVID-19 pandemic, CMS suspended its Targeted Probe and Educate Program. Beginning in August 2020, CMS
resumed Targeted Probe and Educate Program activity. If an operation fails a Review and/or subsequent Reviews, the operation
could then be subject to extended review or an extrapolation of the identified error rate to billings in the same time period. We
anticipate that these Reviews could increase in frequency in the future. As of December 31, 2021 and subsequently, thirteen of
our independent operating subsidiaries had Reviews scheduled, on appeal, or in a dispute resolution process.
Item 4.
MINE SAFETY DISCLOSURES
None.
PART II.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our 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. As of February 4,
2022, there were approximately 287 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 future filings, including the Annual Report on Form 10-K, in whole or in part, the Stock Performance Graph
and supporting data which follows shall not be deemed to be incorporated by reference into any such filings except to the extent
that we specifically incorporate any such information into any such future filings.
The graph below shows the cumulative total stockholder return of investment of $100 (and the reinvestment of any
dividends thereafter) on December 31, 2016 in (i) our common stock, (ii) the Skilled Nursing Facilities Peer Group 1 and (iii)
the NASDAQ Market Index. Our stock price performance shown in the graph below is not indicative of future stock price
performance.
On October 1, 2019, Ensign completed the Spin-Off of The Pennant Group, Inc. (Pennant) with the pro rata distribution
of 1.18 shares of Pennant’s common stock for every share of Ensign’s common stock to our stockholders, pursuant to which
Pennant became an independent company. Pennant's stock traded at $6.15 at opening price on the first day of trading and closed
at $15.09. Ensign's stock price was reduced by the same value on the same day. For the purpose of this graph, the effect of the
final separation of Pennant is reflected in the cumulative total return of Ensign Common Stock as a reinvested dividend.
59
COMPARISON OF 60 MONTH CUMULATIVE TOTAL RETURN*
Among Ensign Group, the NASDAQ Composite Index and Our Peer Group
December 2021
*Assumes $100 invested on December 31, 2016 in stock in index, including reinvestment of dividends.
The Ensign Group, Inc.(2)
NASDAQ Market Index
Peer Group(1)
December 31,
2016
2017
2018
2019
2020
2021
$ 100.00 $ 100.76 $ 177.00 $ 226.33 $ 361.19 $ 421.64
$ 100.00 $ 129.64 $ 125.96 $ 172.18 $ 249.51 $ 304.85
$ 100.00 $ 103.72 $ 125.95 $ 156.19 $ 154.17 $ 161.42
(1) The current composition of our Peer Group is as follows: Amedysis, Inc., CareTrust REIT Inc., Encompass Healthcare Corp., LTC Properties, Inc., National
Healthcare Corporation, National Health Investors, Inc., Omega Healthcare Investors, Inc., Select Medical Holdings Corp. and Welltower Inc.
(2) The value displayed only incorporates the value of The Ensign Group, Inc. stock and does not incorporate the value shareholders received in connection
with our spin-offs of CareTrust REIT Inc. and The Pennant Group, Inc.
Dividend Policy
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. We have been a dividend-paying company since 2002 and have increased our dividend every
year for the last 19 years.
Issuer Repurchases of Equity Securities
Stock Repurchase Programs. As approved by the Board of Directors on October 21, 2021, we entered into a stock
repurchase program pursuant to which we may repurchase up to $20.0 million of our common stock under the program for a
period of approximately 12 months that started on October 29, 2021. Under this program, we are authorized to repurchase our
issued and outstanding common shares from time to time in open-market and privately negotiated transactions and block trades
in accordance with federal securities laws. During the year ended December 31, 2021, we repurchased 0.1 million shares of our
common stock for $10.1 million. Subsequent to December 31, 2021, we repurchased 0.1 million shares of our common stock
for $9.9 million. On February 9, 2022, the Board of Directors approved a stock repurchase program pursuant to which we may
repurchase up to $20.0 million of our common stock under the program for a period of approximately 12 months that starts on
February 10, 2022.
60
The Ensign Group, Inc.NASDAQ Composite - Total ReturnsPeer Group12/31/1612/31/1712/31/1812/31/1912/31/2012/31/21$0$50$100$150$200$250$300$350$400$450 As approved by the Board of Directors on March 4, 2020 and March 13, 2020, we entered into two stock repurchase
programs pursuant to which we are authorized to repurchase up to $20.0 million and $5.0 million, respectively, of our common
stock under the programs for a period of approximately 12 months. Under these programs, we are authorized to repurchase our
issued and outstanding common shares from time to time in open-market and privately negotiated transactions and block trades
in accordance with federal securities laws. During the first quarter of 2020, we repurchased 0.5 million and 0.2 million shares of
our common stock for $20.0 million and $5.0 million, respectively. These repurchase programs expired upon the repurchase of
the full authorized amount under the two plans.
As approved by the Board of Directors on August 26, 2019, we entered into a stock repurchase program pursuant to
which we may repurchase up to $20.0 million of our common stock under the program for a period of approximately 12
months. Under this program, we are authorized to repurchase our issued and outstanding common shares from time to time in
open-market and privately negotiated transactions and block trades in accordance with federal securities laws. We repurchased
0.1 million shares of our common stock for a total of $6.4 million in fiscal year 2019 before the stock repurchase program was
cancelled in the first quarter of 2020.
A summary of the repurchase activity for the year ended December 31, 2021 and subsequently is as follows (dollars in
millions, except per share amounts):
Period
January 1 - December 31, 2021(1)
January 1 to January 31, 2022(1)
(1) These purchases were effectuated through a Rule 10b5-1 trading plan adopted by the Company on October 21, 2021.
132,268 $
133,328 $
74.09
76.47
Total Number
of Shares
Repurchased
Average Price
Per Share
Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs
Approximate
Dollar Value
of Shares that
May Yet Be
Purchased
Under the
Plans or
Programs
132,268 $
133,328 $
9.9
—
Item 6. [RESERVED]
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the consolidated financial statements and accompanying
notes, which appear elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including those discussed below and elsewhere in this Annual Report on Form 10-K.
See Part I. Item 1A. Risk Factors and Cautionary Note Regarding Forward-Looking Statements.
For discussion of 2019 items and year-over-year comparisons between 2020 and 2019 that are not included in this 2021
Form 10-K, refer to “Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations”
found in our Form 10-K for the year ended December 31, 2020, that was filed with the Securities and Exchange Commission on
February 3, 2021.
Overview
We are a provider of health care services across the post-acute care continuum, engaged in the ownership, acquisition,
development and leasing of skilled nursing, senior living and other healthcare related properties and other ancillary businesses
located in Arizona, California, Colorado, Idaho, Iowa, Kansas, Nebraska, Nevada, South Carolina, Texas, Utah, Washington
and Wisconsin. Our operating subsidiaries, each of which strives to be the operation of choice in the community it serves,
provide a broad spectrum of skilled nursing, senior living and other ancillary services. As of December 31, 2021, we offered
skilled nursing, senior living and rehabilitative care services through 245 skilled nursing and senior living facilities. Of the 245
facilities, we operated 176 facilities under long-term lease arrangements and have options to purchase 11 of those 176 facilities.
Our real estate portfolio includes 100 owned real estate properties, which included 69 facilities operated and managed by us, 32
senior living operations leased to and operated by The Pennant Group, Inc., or Pennant, as part of the spin-off transaction that
occurred in October 2019 (Spin-Off), and the Service Center location. Of the 32 real estate operations leased to Pennant, two
senior living operations are located on the same real estate properties as skilled nursing facilities that we own and operate.
61
Ensign is a holding company with no direct operating assets, employees or revenues. Our operating subsidiaries are
operated by separate, independent entities, each of which has its own management, employees and assets. In addition, certain of
our wholly owned subsidiaries, referred to collectively as the Service Center, provide centralized accounting, payroll, human
resources, information technology, legal, risk management and other centralized services to the other operating subsidiaries
through contractual relationships with such subsidiaries. We also have a wholly owned captive insurance subsidiary (or the
Captive Insurance) that provides some claims-made coverage to our operating subsidiaries for general and professional liability,
as well as coverage for certain workers’ compensation insurance liabilities and our captive real estate trust owns and operates
our real estate portfolio. Our captive real estate investment trust (Standard Bearer REIT) owns and manages our real estate
business. References herein to the consolidated “Company” and “its” assets and activities, as well as the use of the terms “we,”
“us,” “our” and similar terms in this Annual Report, are not meant to imply, nor should they be construed as meaning, that The
Ensign Group, Inc. has direct operating assets, employees or revenue, or that any of the subsidiaries are operated by The Ensign
Group.
Recent Activities
Captive Real Estate Investment Trust — On January 1, 2022, we completed our plan to form Standard Bearer REIT.
Standard Bearer REIT is a holding company with subsidiaries that own most of our real estate portfolio. We expect the REIT
structure will allow us to better demonstrate the growing value of our owned real estate and provides us with an efficient
vehicle for future acquisitions of properties that could be operated by Ensign affiliates or other third parties. We believe this
structure will give us new pathways to growth with transactions we would not have considered in the past. Standard Bearer
REIT intends to qualify and elects to be taxed as a REIT, for U.S. federal income tax purposes, commencing with its taxable
year ending December 31, 2022.
The real estate portfolio in Standard Bearer REIT consists of selected 93 of our 100 owned real estate properties. Of the
93 owned real estate properties in Standard Bearer REIT, 65 facilities are operated by Ensign operating subsidiaries and 30 are
leased to and operated by Pennant. Of the 30 real estate operations leased to Pennant, two senior living operations are located
on the same real estate properties as skilled nursing facilities that we own and operate.
The fair value of Standard Bearer REIT's real estate portfolio is approximately $1.0 billion. The fair value was determined
by a third party independent valuation specialist and incorporated each property's rental income, capitalization rate, rental yield
rate and discount rate as appropriate.
On January 1, 2022, as part of the formation of Standard Bearer REIT, certain of our operating subsidiaries and the 65
Standard Bearer REIT subsidiaries entered into five "triple-net" master lease agreements (collectively, the Standard Bearer
REIT Master Leases). The lease period ranges from 15 to 19 years with three five-year renewal option beyond the initial term,
on the same terms and conditions. The rent structure under the Standard Bearer REIT Master Leases includes a fixed
component, subject to annual escalation equal to the lesser of (1) the percentage change in the Consumer Price Index (but not
less than zero) or (2) 2.5%. In addition to rent, the operating subsidiaries are required to pay the following: (1) all impositions
and taxes levied on or with respect to the leased properties (other than taxes on the income of the lessor); (2) all utilities and
other services necessary or appropriate for the leased properties and the business conducted on the leased properties; (3) all
insurance required in connection with the leased properties and the business conducted on the leased properties; (4) all facility
maintenance and repair costs; and (5) all fees in connection with any licenses or authorizations necessary or appropriate for the
leased properties and the business conducted on the leased properties. Total annual rental income under the Standard Bearer
REIT Master Lease is approximately $54.0 million. In addition, as we expand our real estate portfolio through our acquisition
strategy, we anticipate that the acquired real estate will be included in Standard Bearer REIT.
Standard Bearer REIT has no employees. Personnel and service provided to Standard Bearer REIT by the Service Center
are pursuant to the management agreement between Standard Bearer REIT and the Service Center. The management agreement
provides for a base management fee and an incentive management fee, payable in cash, among other terms. The base
management fee for each applicable period is equal to 5% of the total revenue of Standard Bearer REIT. The incentive
management fee is equal to 5% of funds from operations (FFO) and is capped at 1% of total revenue. In addition, operating
expenses incurred by the Service Center on Standard Bearer REIT's behalf, which includes the cost of legal, tax, consulting,
accounting and other similar services rendered by the Service Center, its advisers or other third parties, are reimbursed by
Standard Bearer REIT.
Standard Bearer REIT will obtain its funding through various sources including operating cash flows, access to debt
arrangements and intercompany loans. The intercompany debt arrangements include mortgage loans and a credit revolver
between the Ensign Group, Inc., the real estate properties and Standard Bearer REIT and will fund acquisitions and working
capital needs. The interest rate under the credit revolver is a base rate plus a margin ranging from 0.50% to 1.50% per annum or
LIBOR plus a margin range from 1.50% to 2.50% per annum. The intercompany mortgage loan amount is $93.0 million. There
62
is currently no outstanding debt under the intercompany credit revolver. In addition, as the Department of Housing and Urban
Development (HUD) mortgage loans and promissory notes are entered into by our real estate properties, these debts in the
aggregate amount of $160.0 million are included in Standard Bearer REIT.
Coronavirus Update — We are continuing to closely monitor the impact of the global COVID-19 pandemic on our
business and are taking proactive steps designed to protect the health and safety of our residents and employees and to maintain
business continuity. As the vaccines became accessible in all 50 states, we began to see a significant decline in COVID-19
cases in our affiliated operations as we worked diligently to vaccinate all of our willing residents and staff. While we saw
declining COVID-19 cases during the summer of 2021 as a result of vaccination efforts, introductions of variants have caused
spikes in the number of COVID cases. Our primary focus throughout the COVID-19 pandemic has remained ensuring the
health and safety of our patients, residents, employees, and their respective families. We continue to implement measures
necessary to provide the safest possible environment within our sites of service, taking into consideration the vulnerable nature
of our patients and the unique exposure risks of our staff.
During the year, combined Same Facilities and Transitioning Facilities occupancy declined by 0.4% and skilled mix
increased by 0.6% compared to 2020. In 2020, our occupancy, which was at its highest point prior to the pandemic, started to
decline in mid-February and continued to decrease to its lowest point in December 2020. As the vaccine distribution
commenced and infection rates began to decline, our occupancy rates started to recover in the first quarter of 2021 and
continued throughout 2021. The improvements in occupancy were due to our operations developing innovative approaches to
confront the occupancy declines, including strategic partnerships with upstream and downstream continuum partners and
increasing clinical competencies to treat high-acuity patients, including those that are COVID-19 positive. Additionally, we
have seen increases in hospital volumes for surgeries. Some operations added COVID-19 wings, while others became
COVID-19 dedicated facilities, enabling an important offloading of strained hospital capacity. Even with COVID-19 demands
waning, the partnerships developed during the pandemic will continue to benefit us into the future.
More specifically as a result of our local, one operation at a time approach, our Same Facilities and Transitioning
Facilities occupancy rebounded by 3.1% and 4.8%, respectively, during the second quarter of 2021 compared to the fourth
quarter of 2020. As the Delta variant and the recent Omicron variant become the dominant form of COVID-19 in the U.S. and
elsewhere, many states and areas in which our communities are located are experiencing new COVID-19 caseloads. The rise of
COVID-19 cases in the third quarter of 2021 and continuing through early 2022 has slowed down our census recoveries. Our
monthly occupancy for Same Facilities and Transitioning Facilities grew 85 basis points from July 2021 to December 2021
after growth had accelerated sequentially by 337 basis points from December 2020 to June 2021. Occupancy at the end of 2021
has recovered 53.8% from the lowest point in 2020. We expect sequential monthly occupancy to again grow starting in the first
quarter of 2022, but at a slightly more moderated rate. By strengthening existing partnerships, creating new partnerships and
most importantly, demonstrating clinical capabilities and favorable outcomes, our census has continued to stabilize. We believe
our operations are primed to rebuild occupancies and continue to gain additional market share as a result of relationships with
acute care providers and other health care partners.
During the year ended December 31, 2021, we received approximately $11.6 million in provider relief fund distributions
(Provider Relief Fund) from the Coronavirus Aid, Relief and Economic Security Act of 2020 (the CARES Act) from the federal
government. To date, we have returned all Provider Relief Funds that we received. Further, in March 2021, we repaid the
remaining $102.0 million of Medicare Accelerated and Advance Payment Program funds. On September 10, 2021, HHS made
an additional round of $17.0 billion in Provider Relief Fund available to support healthcare-related expenses or lost revenue
attributable to COVID-19. We have not received any funding related to the additional round of Provider Relief Fund
distributions.
During the year ended December 31, 2021 and 2020, we received state relief funding of $70.5 million and $51.9 million
and recognized $75.2 million and $45.4 million, respectively, as revenue. Our unapplied state funding as of December 31, 2021
and 2020 was $1.8 million and $6.5 million, respectively. See Note 3, COVID-19 Update in the Notes to the Consolidated
Financial Statements.
The CARES Act also provides for deferred payment of the employer portion of social security taxes through the end of
2020, with 50% of the deferred amount due by December 31, 2021 and the remaining 50% due by December 31, 2022. We
recorded $48.3 million of deferred payments of social security taxes as a liability in 2020, of which $24.2 million was paid out
in the fourth quarter of 2021 and the remaining liabilities will be paid in the fourth quarter of 2022.
Until the COVID-19 pandemic has been resolved as a public health crisis, it has the potential to cause further and more
severe disruption of the global and national economies. Despite these challenges, we believe we are well-positioned to operate
effectively in the current environment. Our forecasted metrics may be modified as the pace of the recovery in our volumes and
costs of services and supplies become clearer over the coming months.
63
We continue to focus on navigating the challenges presented by COVID-19 through utilizing the infrastructure of our
local operational approach. Each location is partnering with its local leaders and community outreach to ensure the operations
are well equipped to deliver quality care. Consistent with previous hurdles, our local leaders are adjusting their operation to
meet the clinical and financial challenges, including utilizing the expertise of our Service Center resources to implement best
practices.
HUD Mortgage Loans — During the year ended December 31, 2021, four of our subsidiaries entered into HUD
mortgage loans in the aggregate amount of approximately $45.0 million. The mortgage loans are insured with HUD, which
subjects these subsidiaries to HUD oversight and periodic inspections. Loan proceeds were used to fund acquisitions, to
renovate and upgrade existing and future facilities, to cover working capital needs and for other business purposes.
Common Stock Repurchase Program — On October 21, 2021, the Board of Directors approved a stock repurchase
program pursuant to which we may repurchase up to $20.0 million of our common stock under the program for a period of
approximately 12 months that starts on October 29, 2021. During the year ended December 31, 2021, we repurchased
approximately 0.1 million shares of our common stock for $10.1 million. Subsequent to December 31, 2021, we repurchased
approximately 0.1 million shares of our common stock for $9.9 million. This repurchase program expired upon the repurchase
of the full authorized amount under the plan. On February 9, 2022, the Board of Directors approved a stock repurchase program
pursuant to which we may repurchase up to $20.0 million of our common stock under the program for a period of
approximately 12 months that starts on February 10, 2022.
Key Performance Indicators
We manage the fiscal aspects of our business by monitoring key performance indicators that affect our financial
performance. Revenue associated with these metrics is generated based on contractually agreed-upon amounts or rate,
excluding the estimates of variable consideration under the revenue recognition standard, ASC 606. These indicators and their
definitions include the following:
Skilled Services
•
•
•
•
•
•
Routine revenue — Routine revenue is generated by the contracted daily rate charged for all contractually inclusive
skilled nursing services. The inclusion of therapy and other ancillary treatments varies by payor source and by
contract. Services provided outside of the routine contractual agreement are recorded separately as ancillary revenue,
including Medicare Part B therapy services, and are not included in the routine revenue definition.
Skilled revenue - The amount of routine revenue generated from patients in the skilled nursing facilities who are
receiving higher levels of care under Medicare, managed care, Medicaid, or other skilled reimbursement programs.
The other skilled patients who are included in this population represent very high acuity patients who are receiving
high levels of nursing and ancillary services which are reimbursed by payors other than Medicare or managed care.
Skilled revenue excludes any revenue generated from our senior living services.
Skilled mix — The amount of our skilled revenue as a percentage of our total skilled nursing routine revenue. Skilled
mix (in days) represents the number of days our Medicare, managed care, or other skilled patients are receiving skilled
nursing services at the skilled nursing facilities divided by the total number of days patients from all payor sources are
receiving skilled nursing services at the skilled nursing facilities for any given period.
Average daily rates — The routine revenue by payor source for a period at the skilled nursing facilities divided by
actual patient days for that revenue source for that given period. These rates exclude additional state relief funding,
which includes payments we recognized as part of The Family First Coronavirus Response Act.
Occupancy percentage (operational beds) — The total number of patients occupying a bed in a skilled nursing facility
as a percentage of the beds in a facility which are available for occupancy during the measurement period.
Number of facilities and operational beds — The total number of skilled nursing facilities that we own or operate and
the total number of operational beds associated with these facilities.
Skilled Mix — Like most skilled nursing providers, we measure both patient days and revenue by payor. Medicare,
managed care and other skilled patients, whom we refer to as high acuity patients, typically require a higher level of skilled
nursing and rehabilitative care. Accordingly, Medicare and managed care reimbursement rates are typically higher than from
other payors. In most states, Medicaid reimbursement rates are generally the lowest of all payor types. Changes in the payor
mix can significantly affect our revenue and profitability.
64
The following table summarizes our overall skilled mix from our skilled nursing services for the periods indicated as a
percentage of our total skilled nursing routine revenue and as a percentage of total skilled nursing patient days:
Skilled Mix:
Days
Revenue
Year Ended December 31,
2021
2020
31.7 %
52.3 %
31.7 %
53.1 %
Occupancy — We define occupancy derived from our skilled services as the ratio of actual patient days (one patient day
equals one patient occupying one bed for one day) during any measurement period to the number of beds in facilities which are
available for occupancy during the measurement period. The number of licensed beds in a skilled nursing facility that are
actually operational and available for occupancy may be less than the total official licensed bed capacity. This sometimes
occurs due to the permanent dedication of bed space to alternative purposes, such as enhanced therapy treatment space or other
desirable uses calculated to improve service offerings and/or operational efficiencies in a facility. In some cases, three- and
four-bed wards have been reduced to two-bed rooms for resident comfort, and larger wards have been reduced to conform to
changes in Medicare requirements. These beds are seldom expected to be placed back into service. We believe that reporting
occupancy based on operational beds is consistent with industry practices and provides a more useful measure of actual
occupancy performance from period to period.
The following table summarizes our overall occupancy statistics for skilled nursing operations for the periods indicated:
Occupancy for skilled services:
Operational beds at end of period
Available patient days
Actual patient days
Occupancy percentage (based on operational beds)
Segments
Year Ended December 31,
2021
25,032
2020
23,172
8,895,949
8,392,147
6,478,810
6,171,198
72.8 %
73.5 %
We have two reportable segments: (1) skilled services, which includes the operation of skilled nursing facilities and
rehabilitation therapy services and (2) real estate, which is comprised of properties owned by us and leased to skilled nursing
and assisted living operations, including our own operating subsidiaries and third party operators, and are subject to triple-net
long-term leases.
We also reported an “all other” category that includes operating results from our senior living operations, mobile
diagnostics, transportation and other ancillary operations. Our senior living, mobile diagnostics, transportation and other
ancillary operations businesses are neither significant individually, nor in aggregate and therefore do not constitute a reportable
segment. Our Chief Executive Officer, who is our chief operating decision maker, or CODM, reviews financial information at
the operating segment level.
Revenue Sources
Skilled Services
Within our skilled nursing operations, we generate revenue from Medicaid, private pay, managed care and Medicare
payors. We believe that our skilled mix, which we define as the number of days Medicare, managed care and other skilled
patients are receiving services at our skilled nursing operations divided by the total number of days patients are receiving
services at our skilled nursing operations, from all payor sources (less days from senior living services) for any given period, is
an important indicator of our success in attracting high-acuity patients because it represents the percentage of our patients who
are reimbursed by Medicare, managed care and other skilled payors, for whom we receive higher reimbursement rates.
We are participating in supplemental payment programs in various states that provide supplemental Medicaid payments
for skilled nursing facilities that are licensed to non-state government-owned entities such as city and county hospital districts.
Several of our operating subsidiaries entered into transactions with several such hospital districts providing for the transfer of
the licenses for those skilled nursing facilities to the hospital districts. Each affected operating subsidiary agreement between
the hospital district and our subsidiary is terminable by either party to fully restore the prior license status.
65
Real Estate
We generate rental revenue primarily by leasing post-acute care properties we acquired to healthcare operators under
triple-net lease arrangements, whereby the tenant is solely responsible for the costs related to the property, including property
taxes, insurance, and maintenance and repair costs, subject to certain exceptions. As of December 31, 2021, our real estate
portfolio comprised of 100 real estate properties. Of these properties, 69 are leased to affiliated skilled nursing facilities wholly
owned and managed by us, 32 are leased to senior living operations wholly owned and managed by Pennant and our Service
Center property, which is leased to our Service Center and numerous third parties for commercial office space. Of the 32 real
estate operations leased to Pennant, two senior living operations are located on the same real estate properties as skilled nursing
facilities that the Company owns and operates. During the year ended December 31, 2021, we generated rental revenues of
$65.5 million, of which $49.6 million was derived from affiliated wholly owned healthcare operators, and therefore eliminated
in consolidation.
Other
Within our senior living operations, we generate revenue primarily from private pay sources, with a portion earned from
Medicaid payors or through other state-specific programs. In addition, we hold majority membership interests in our other
ancillary operations. Payment for these services varies and is based upon the service provided. The payment is adjusted for an
inability to obtain appropriate billing documentation or authorizations acceptable to the payor and other reasons unrelated to
credit risk.
Primary Components of Expense
Cost of Services (exclusive of rent and depreciation and amortization shown separately). Our cost of services represents
the costs of operating our operating subsidiaries, which primarily consists of payroll and related benefits, supplies, purchased
services, and ancillary expenses such as the cost of pharmacy and therapy services provided to patients. Cost of services also
includes the cost of general and professional liability insurance, rent expenses related to leasing our operational facilities that
are not included in facility rent - cost of services, and other general cost 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-party real estate owners. Our operating subsidiaries lease and operate but do not own the underlying real
estate and these amounts do not include taxes, insurance, impounds, capital reserves or other charges payable under the
applicable lease agreements. Expenses related to leasing our operations other than rent are included in cost of services.
General and Administrative Expense. General and administrative expense consists primarily of payroll and related
benefits and travel expenses for our Service Center personnel, including training and other operational support. General and
administrative expense also includes professional fees (including accounting and legal fees), costs relating to our information
systems and stock-based compensation related to our Service Center employees.
Depreciation and Amortization. Property and equipment are recorded at their original historical cost. Depreciation is
computed using the straight-line method over the estimated useful lives of the depreciable assets. The following is a summary
of the depreciable lives of our depreciable assets:
Buildings and improvements
Minimum of three years to a maximum of 57 years, generally 45 years
Leasehold improvements
Furniture and equipment
Critical Accounting Estimates
Shorter of the lease term or estimated useful life, generally 5 to 15 years
3 to 10 years
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial
statements, which have been prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP). The
preparation of these financial statements and related disclosures requires us to make judgments, estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting period. We believe that the application of the
following accounting policies, which are important to our financial position and results of operations, require significant
judgments and estimates on the part of management. For a summary of our significant accounting policies, including the
accounting policies discussed below, see Note 2, “Summary of Significant Accounting Policies” of the Notes to Consolidated
Financial Statements.
66
Variable consideration within revenue recognition — Revenue recognized from healthcare services are adjusted for
estimates of variable consideration to arrive at the transaction price. We determine the transaction price based on contractually
agreed-upon amounts or rates, adjusted for estimates of variable consideration. We use the expected value method in
determining the variable component that should be used to arrive at the transaction price, using contractual agreements and
historical reimbursement experience within each payor type. The amount of variable consideration which is included in the
transaction price may be constrained, and is included in the net revenue only to the extent that it is probable that a significant
reversal in the amount of the cumulative revenue recognized will not occur in a future period. If actual amounts of consideration
ultimately received differ from our estimates, we adjust these estimates, which would affect net service revenue in the period
such variances become known.
Self-insurance for general and professional liability — The self-insured retention and deductible limits for general
and professional liability for all states are self-insured through our wholly owned captive insurance subsidiary (the Captive
Insurance), the related assets and liabilities of which are included in the accompanying consolidated balance sheets. Our
general and professional liability as of December 31, 2021 and 2020 was $69.7 million and $60.9 million, respectively.
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 insured claims that have been incurred but not reported. We develop information about the size of the
ultimate claims based on historical experience, current industry information and actuarial analysis, and evaluate the estimates
for claim loss exposure on a quarterly basis. We use actuarial valuations to estimate the liability based on historical experience
and industry information.
Results of Operations
We believe we exist to dignify and transform post-acute care. We set out a strategy to achieve our goal of ensuring our
patients are receiving the best possible care through our ability to acquire, integrate and improve our operations. Our results
serve as a strong indicator that our strategy is working and our transformation is underway. As vaccines became available in the
communities we serve, we began to see a recovery in our census during the first quarter of 2021, which has improved
throughout 2021. Despite the emergence of COVID-19 variants in late 2021, which has led to spikes in COVID-19 caseloads
and slowed down our census recoveries starting in the beginning of the third quarter of 2021, we continue to experience healthy
growth in both revenue and operational earnings.
Our net revenue for the year ended December 31, 2021 continued to be impacted by COVID-19. The Emergency
Waivers issued by CMS, including a waiver of the requirement to have a three-day stay in a hospital to get Medicare coverage
of a skilled nursing stay as well as the authorization of renewed skilled nursing facility coverage without having to start a new
benefit period for certain beneficiaries who recently exhausted their skilled nursing facility benefits, continued into 2021 and
remain in effect at the beginning of 2022. In addition, we continued to receive state relief funding in selected states, which has
been designed to enhance reimbursement to provide additional funding to cover COVID-19 related expenses. For the year
ended December 31, 2021, we recorded state relief revenue of $75.2 million, respectively, which directly offset against
COVID-19 related expenses we incurred in those states. See Recent Activities for further information.
Since 2016, our total revenue increased $1.2 billion, or 82.8%, representing a 12.8% compound annual growth rate
(CAGR) while our diluted GAAP earning per share (EPS) from continued operations grew by $2.86 from 2016 to $3.42,
representing a 35.2% CAGR. Over the past year, we have continued to make progress on targeted initiatives, including our
foundational structure of local operations that are the centers of excellence in the communities they serve. As part of this focus,
we have been able to expand our relationships with doctors, hospitals and managed care plans. Revenue from our skilled
services collectively increased by 10.3%. We have also strengthened our collection process and identified non-clinical areas
where we can manage spending. These operational fundamentals coupled with the reduction of interest expense due to the
deferral of payroll tax payments and cash generated from strong fiscal year performance.
67
The following table sets forth details of operating results for our revenue, expenses and earnings, and their respective
components, as a percentage of total revenue for the periods indicated:
Revenue:
Service revenue
Rental revenue
Total revenue
Expense:
Cost of services
Rent—cost of services
General and administrative expense
Depreciation and amortization
Total expenses
Income from operations
Other income (expense):
Interest expense
Other income
Other expense, net
Income before provision for income taxes
Provision for income taxes
Net income
Less: net income attributable to noncontrolling interests
Net income attributable to The Ensign Group, Inc.
Segment Income(1)
Skilled services
Real estate(2)
Non-GAAP Financial Measures:
Performance Metrics
EBITDA
Adjusted EBITDA
FFO for real estate segment
Valuation Metric
Adjusted EBITDAR
Year Ended December 31,
2021
2020
99.4 %
0.6
100.0 %
99.4 %
0.6
100.0 %
76.9
5.3
5.8
2.1
90.1
9.9
(0.3)
0.2
(0.1)
9.8
2.3
7.5
0.1
77.6
5.4
5.4
2.3
90.7
9.3
(0.4)
0.2
(0.2)
9.1
2.0
7.1
—
7.4 %
7.1 %
Year Ended December 31,
2021
2020
(In thousands)
373,603 $
35,986 $
327,812
31,323
313,377 $
336,572 $
55,712 $
276,840
292,751
49,541
475,905
$
$
$
$
$
$
(1) Segment income represents operating results of the reportable segments excluding gain and loss on sale of assets, impairment charges and provision for
income taxes. Segment income is reconciled to the Consolidated Statement of Income in Note 7, Business Segments in Notes to Consolidated Financial
Statements of this Annual Report on Form 10-K.
(2) Real estate segment income includes rental revenue from Ensign affiliated tenants and related expenses.
68
The following discussion includes references to EBITDA, Adjusted EBITDA, Adjusted EBITDAR and Funds from
Operations (FFO) which are non-GAAP financial measures (collectively, the Non-GAAP Financial Measures). Regulation G,
Conditions for Use of Non-GAAP Financial Measures, and other provisions of the Securities Exchange Act of 1934, as
amended (the Exchange Act), define and prescribe the conditions for use of certain non-GAAP financial information. These
Non-GAAP Financial Measures are used in addition to and in conjunction with results presented in accordance with GAAP.
These Non-GAAP Financial Measures should not be relied upon to the exclusion of GAAP financial measures. These Non-
GAAP Financial Measures reflect an additional way of viewing aspects of our operations that, when viewed with our GAAP
results and the accompanying reconciliations to corresponding GAAP financial measures, provide a more complete
understanding of factors and trends affecting our business.
We believe the presentation of certain Non-GAAP Financial Measures are useful to investors and other external users of
our financial statements regarding our results of operations because:
•
•
they are widely used by investors and analysts in our industry as a supplemental measure to evaluate the overall
performance of companies in our industry without regard to items such as interest expense, net and depreciation and
amortization, which can vary substantially from company to company depending on the book value of assets, capital
structure and the method by which assets were acquired; and
they help investors evaluate and compare the results of our operations from period to period by removing the impact of
our capital structure and asset base from our operating results.
We use the Non-GAAP Financial Measures:
•
•
•
•
•
•
as measurements of our operating performance to assist us in comparing our operating performance on a consistent
basis;
to allocate resources to enhance the financial performance of our business;
to assess the value of a potential acquisition;
to assess the value of a transformed operation's performance;
to evaluate the effectiveness of our operational strategies; and
to compare our operating performance to that of our competitors.
We use certain Non-GAAP Financial Measures to compare the operating performance of each operation. These measures
are useful in this regard because they do not include such costs as net interest expense, income taxes, depreciation and
amortization expense, which may vary from period-to-period depending upon various factors, including the method used to
finance operations, the amount of debt that we have incurred, whether an operation is owned or leased, the date of acquisition of
a facility or business, and the tax law of the state in which a business unit operates.
We also establish compensation programs and bonuses for our leaders that are partially based upon the achievement of
Adjusted EBITDAR targets.
Despite the importance of these measures in analyzing our underlying business, designing incentive compensation and for
our goal setting, the Non-GAAP Financial Measures have no standardized meaning defined by GAAP. Therefore, certain of our
Non-GAAP Financial Measures have limitations as analytical tools, and they should not be considered in isolation, or as a
substitute for analysis of our results as reported in accordance with GAAP. Some of these limitations are:
•
•
•
•
•
•
•
they do not reflect our current or future cash requirements for capital expenditures or contractual commitments;
they do not reflect changes in, or cash requirements for, our working capital needs;
they do not reflect the 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.
69
We compensate for these limitations by using them only to supplement net income on a basis prepared in accordance with
GAAP in order to provide a more complete understanding of the factors and trends affecting our business.
Management strongly encourages investors to review our consolidated financial statements in their entirety and to not rely
on any single financial measure. Because these Non-GAAP Financial Measures are not standardized, it may not be possible to
compare these financial measures with other companies’ Non-GAAP financial measures having the same or similar names.
These Non-GAAP Financial Measures should not be considered a substitute for, nor superior to, financial results and measures
determined or calculated in accordance with GAAP. We strongly urge you to review the reconciliation of income from
operations to the Non-GAAP Financial Measures in the table below, along with our consolidated financial statements and
related notes included elsewhere in this document.
We use the following Non-GAAP financial measures that we believe are useful to investors as key valuation and operating
performance measures:
PERFORMANCE MEASURES:
EBITDA
We believe EBITDA is useful to investors in evaluating our operating performance because it helps investors evaluate and
compare the results of our operations from period to period by removing the impact of our asset base (depreciation and
amortization expense) from our operating results.
We calculate EBITDA as net income, adjusted for net losses attributable to noncontrolling interest, before (a) interest
expense, net, (b) provision for income taxes, and (c) depreciation and amortization.
Adjusted EBITDA
We adjust EBITDA when evaluating our performance because we believe that the exclusion of certain additional items
described below provides useful supplemental information to investors regarding our ongoing operating performance, in the
case of Adjusted EBITDA. We believe that the presentation of Adjusted EBITDA, when combined with EBITDA and GAAP
net income attributable to The Ensign Group, Inc., is beneficial to an investor’s complete understanding of our operating
performance.
Adjusted EBITDA is EBITDA adjusted for non-core business items, which for the reported periods includes, to the extent
applicable:
•
•
•
•
•
•
•
stock-based compensation expense;
costs incurred related to real estate due diligence;
business interruption gain;
results related to operations not at full capacity;
gain on sale of assets;
acquisition related costs; and
costs incurred related to new systems implementation.
Funds from Operations (FFO)
We consider FFO to be a useful supplemental measure of the operating performance of our real estate segment. Historical
cost accounting for real estate assets in accordance with U.S. GAAP implicitly assumes that the value of real estate assets
diminishes predictably over time as evidenced by the provision for depreciation. However, since real estate values have
historically risen or fallen with market conditions, many real estate investors and analysts have considered presentations of
operating results for real estate companies that use historical cost accounting to be insufficient. In response, the National
Association of Real Estate Investment Trusts (NAREIT) created FFO as a supplemental measure of operating performance for
REITs, which excludes historical cost depreciation from net income. We define (in accordance with the definition used by
NAREIT) FFO to consist of real estate segment income, excluding depreciation and amortization related to real estate, gains or
losses from sales of real estate, insurance recoveries related to real estate and impairment of depreciable real estate assets.
70
VALUATION MEASURE:
Adjusted EBITDAR
We use Adjusted EBITDAR as one measure in determining the value of prospective acquisitions. It is also a commonly
used measure by our management, research analysts and investors, to compare the enterprise value of different companies in the
healthcare industry, without regard to differences in capital structures and leasing arrangements. Adjusted EBITDAR is a
financial valuation measure that is not specified in GAAP. This measure is not displayed as a performance measure as it
excludes rent expense, which is a normal and recurring operating expense.
The adjustments made and previously described in the computation of Adjusted EBITDA are also made when computing
Adjusted EBITDAR. We calculate Adjusted EBITDAR by excluding rent-cost of services from Adjusted EBITDA.
We believe the use of Adjusted EBITDAR allows the investor to compare operational results of companies who have
operating and capital leases. A significant portion of capital lease expenditures are recorded in interest, whereas operating lease
expenditures are recorded in rent expense.
The table below reconciles net income to EBITDA, Adjusted EBITDA and Adjusted EBITDAR for the periods presented:
Consolidated statements of income data:
Net income
Less: net income attributable to noncontrolling interests
Add: Interest expense, net
Provision for income taxes
Depreciation and amortization
EBITDA
Stock-based compensation
Legal, transactional and other costs(a)
Business interruptions gain and gain on sale of assets
Results related to operations not at full capacity
Acquisition related costs(b)
Costs incurred related to new systems implementation
Rent related to items above
Adjusted EBITDA
Rent—cost of services
Less: rent related to items above
Adjusted rent
Adjusted EBITDAR
Year Ended December 31,
2021
2020
(In thousands)
$
197,725 $
171,364
3,073
2,461
60,279
55,985
886
5,549
46,242
54,571
$
313,377 $
276,840
18,678
5,689
(2,365)
585
384
186
38
14,524
—
—
1,183
104
—
100
$
336,572 $
292,751
139,371
(38)
139,333
475,905
$
129,926
(100)
129,826
(a) Legal, transactional and other costs incurred related to the formation of Standard Bearer REIT and other real estate related activities.
(b) Costs incurred to acquire operations which are not capitalizable.
71
Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020
The following table sets forth details of operating results for our revenue and earnings, and their respective components,
by our reportable segment for the periods indicated:
Total revenue
$ 2,523,234 $
65,536 $
88,242 $
(49,551) $ 2,627,461
Total expenses, including other expense, net
2,149,631
29,550
240,267
(49,551)
2,369,897
Year Ended December 31, 2021
Skilled
services
Real estate All Other(1)
Eliminations Consolidated
Segment income (loss)
Gain from sale of real estate(2)
Income before provision for income taxes
(1) General and administrative expense is included in the "all other" category.
(2) Gain from sale of real estate includes gains or losses from the sale of real estate, insurance recoveries related to real estate properties and impairment
charges from operations.
(152,025)
373,603
258,004
257,564
35,986
440
—
$
Total revenue
$ 2,288,182 $
61,275 $
99,257 $
(46,118) $ 2,402,596
Total expenses, including other expense, net
1,960,370
29,952
238,033
(46,118)
2,182,237
Year Ended December 31, 2020
Skilled
services
Real estate All Other(1)
Eliminations Consolidated
Segment income (loss)
Loss from sale of real estate and impairment charges(2)
Income before provision for income taxes
(1) General and administrative expense is included in the "all other" category.
(2) Gain from sale of real estate includes gains or losses from the sale of real estate, insurance recoveries related to real estate properties and impairment
charges from operations.
(138,776)
327,812
220,359
217,606
31,323
(2,753)
—
$
Our total revenue increased $224.9 million, or 9.4%, compared to the year ended December 31, 2020. The increase in
revenue from same facility and transitioning operations was primarily driven by the increase in skilled service revenue per
patient day, along with the impact of acquisitions. Total revenue from operations acquired on or subsequent to January 1, 2020
increased our consolidated revenue by $126.1 million during the year ended December 31, 2021, when compared to the same
period in 2020. In addition, we recorded $75.2 million of state relief revenue during the year ended in 2021 compared to $45.4
million in 2020, which correlated directly to the additional COVID-19 related expenses incurred. All state relief revenue is
included in Medicaid revenue.
Skilled Services Segment
Revenue
The following table presents the skilled services revenue and key performance metrics by category during the years ended
December 31, 2021 and 2020:
Total Facility Results:
Skilled services revenue
Number of facilities at period end
Number of campuses at period end*
Actual patient days
Occupancy percentage — Operational beds
Skilled mix by nursing days
Skilled mix by nursing revenue
Year Ended December 31,
2021
2020
Change % Change
(Dollars in thousands)
$ 2,523,234
2,288,182
$ 235,052
10.3 %
214
22
197
22
17
—
6,478,810
6,171,198
307,612
72.8 %
31.7 %
52.3 %
73.5 %
31.7 %
53.1 %
8.6 %
— %
5.0 %
(0.7) %
— %
(0.8) %
72
Same Facility Results(1):
Skilled services revenue
Number of facilities at period end
Number of campuses at period end*
Actual patient days
Occupancy percentage — Operational beds
Skilled mix by nursing days
Skilled mix by nursing revenue
Transitioning Facility Results(2):
Skilled services revenue
Number of facilities at period end
Number of campuses at period end*
Actual patient days
Occupancy percentage — Operational beds
Skilled mix by nursing days
Skilled mix by nursing revenue
Year Ended December 31,
2021
2020
Change % Change
(Dollars in thousands)
$ 2,006,609
$ 1,926,574
$
80,035
165
15
165
15
—
—
5,064,374
5,111,446
(47,072)
73.9 %
33.3 %
54.2 %
74.4 %
33.1 %
54.6 %
Year Ended December 31,
4.2 %
— %
— %
(0.9) %
(0.5) %
0.2 %
(0.4) %
2021
2020
Change % Change
(Dollars in thousands)
$ 368,849
$
338,138
$
30,711
27
6
27
6
—
—
992,762
986,798
5,964
69.5 %
27.8 %
47.6 %
69.2 %
25.4 %
45.9 %
Year Ended December 31,
9.1 %
— %
— %
0.6 %
0.3 %
2.4 %
1.7 %
2021
2020
Change % Change
Recently Acquired Facility Results(3):
(Dollars in thousands)
Skilled services revenue
Number of facilities at period end
Number of campuses at period end*
Actual patient days
Occupancy percentage — Operational beds
Skilled mix by nursing days
Skilled mix by nursing revenue
$ 147,776
$
23,470
$ 124,306
22
1
5
1
17
—
421,674
72,954
348,720
69.1 %
20.9 %
39.0 %
75.5 %
18.6 %
32.1 %
NM
NM
NM
NM
NM
NM
NM
*
Campus represents a facility that offers both skilled nursing and senior living services. Revenue and expenses related to skilled nursing and senior
living services have been allocated and recorded in the respective operating segment. In the first half of 2021, we converted two campuses into two skilled
nursing facilities.
(1) Same Facility results represent all facilities purchased prior to January 1, 2018.
(2) Transitioning Facility results represent all facilities purchased from January 1, 2018 to December 31, 2019.
(3) Recently Acquired Facility (Acquisitions) results represent all facilities purchased on or subsequent to January 1, 2020.
Skilled services revenue increased $235.1 million, or 10.3%, compared to the year ended December 31, 2020. The
primary changes were from increases in managed care revenue of $89.6 million or 24.4%, Medicaid custodial revenue of
$120.1 million or 13.5%, other skilled revenue of $22.9 million or 15.3%, and private and other payors revenue increased by
$2.7 million, or 1.7%. Medicare revenue remained consistent from the prior year.
The increase in revenue was primarily driven by strong performance across our skilled services operations. The negative
impact of COVID-19 on our census started in mid-February 2020 and continued into the first quarter of 2021. Census began to
recover in the second quarter of 2021 and continued throughout 2021. Our consolidated occupancy decreased by 0.7%, which
includes operations acquired at lower occupancy, compared to the same period in the prior year. Consolidated patient days
increased due to transitioning and newly acquired operations. The decline in consolidated occupancy was offset by the increase
in average daily revenue rates and skilled days due to a shift in higher acuity. As COVID-19 cases decline, we have experienced
a recovery in our census, which includes the return of our long-term care patients. This has a direct impact on our skilled days
percentage as our long-term care patient days continue to climb and make up a higher percentage of the total patient days. Our
73
ancillary revenue services also increased by 37.9%. In addition, we recorded $75.2 million of state relief revenue during the
year ended in 2021 compared to $45.4 million in 2020, which correlated directly to the additional COVID-19 related expenses
incurred.
Revenue in our Same Facilities increased $80.0 million, or 4.2% due to higher average daily revenue rates due to a shift
toward higher acuity patients, offset by the decrease in occupancy of 0.5%, which primarily declined in the first three months in
2021 and has steadily increased since April 2021. The decline in our occupancy is mainly in our non-skilled patient days, which
was offset by the shift toward higher acuity patients. Total revenue for Same Facilities included $58.4 million and $37.2 million
of Medicaid revenue related to state relief funding for the years ended December 31, 2021 and 2020, respectively. Managed
care revenue increased by $63.0 million or 19.8%, driven by increases in managed care days as our partnership with various
managed care organizations, hospitals and the local communities strengthened.
Revenue generated by our Transitioning Facilities increased $30.7 million, or 9.1%, primarily due to increases in our
daily rate and skilled mix days compared to the year ended December 31, 2020, demonstrating our ability to transition these
healthcare operations that were acquired two and three years ago. In addition, we experienced a shift toward higher acuity
patients as our skilled days increased by 10.1%.
Skilled services revenue generated by facilities purchased on or subsequent to January 1, 2020 (Recently Acquired
Facilities) increased by approximately $124.3 million compared to the year ended December 31, 2020. We acquired 17
operations between January 1, 2021 and December 31, 2021 across five states.
In the future, if we acquire additional facilities that are underperforming and need to be turned around or invest in start-up
operations, we expect to see lower occupancy rates and skilled mix and these metrics are expected to vary from period to period
based upon the maturity of the facilities within our portfolio. Historically, we have generally experienced lower occupancy rates
and lower skilled mix at Recently Acquired Facilities and therefore, we anticipate generally lower overall occupancy during
years of growth.
The following table reflects the change in skilled nursing average daily revenue rates by payor source, excluding services
that are not covered by the daily rate (1):
Year Ended December 31,
Same Facility
2020
2021
Transitioning
2020
2021
Acquisitions
Total
2021
2020
2021
2020
Skilled Nursing Average Daily
Revenue Rates:
Medicare
Managed care
Other skilled
$ 689.50 $ 664.75 $ 679.15 $ 648.10 $ 674.89 $ 520.05 $ 687.18 $ 660.78
503.31
494.19
478.30
472.82
475.07
517.92
498.97
491.53
545.88
534.56
425.87
358.37
520.18
293.04
534.40
525.51
Total skilled revenue
587.37
582.47
567.32
568.14
588.41
511.91
584.72
580.14
Medicaid
250.47
240.32
241.51
229.59
242.57
252.31
248.41
238.62
Private and other payors
237.35
232.80
234.39
220.31
242.32
230.30
237.21
230.52
Total skilled nursing revenue
$ 361.43 $ 352.69 $ 331.38 $ 314.49 $ 314.76 $ 297.01 $ 353.79 $ 345.92
(1) These rates exclude additional Federal Medical Assistance Percentages (FMAP) we recognized and include sequestration reversal of 2%.
Our Medicare
daily
rates
at Same Facilities
and Transitioning Facilities
increased
by
3.7%
and 4.8%, respectively, compared to the year ended December 31, 2020. The increase is attributable to the 1.2% net market
basket increase that became effective in October 2021 coupled with our continued shift towards higher acuity patients. Included
in revenue for the year ended December 31, 2021 is the twelve-month impact of the temporary suspension of the 2% Medicare
sequestration, which started on May 1, 2020 and was extended through April 1, 2022. Revenue for the year ended December
31, 2020 included eight months of impact from the temporary suspension of the 2% Medicare sequestration.
Our average Medicaid rates increased 4.1% due to state reimbursement increases and our participation in supplemental
Medicaid payment programs and quality improvement programs in various states. Medicaid rates exclude the amount of state
relief revenue we recorded.
Payor Sources as a Percentage of Skilled Nursing Services. We use our skilled mix as a measure of the quality of
reimbursements we receive at our affiliated skilled nursing facilities over various periods.
74
The following tables set forth our percentage of skilled nursing patient revenue and days by payor source:
Year Ended December 31,
Same Facility
Transitioning
Acquisitions
Total
2021
2020
2021
2020
2021
2020
2021
2020
Percentage of Skilled Nursing Revenue:
Medicare
Managed care
Other skilled
Skilled mix
Private and other payors
Medicaid
Total skilled nursing
Percentage of Skilled Nursing Days:
Medicare
Managed care
Other skilled
Skilled mix
Private and other payors
Medicaid
Total skilled nursing
Cost of Services
26.2 % 29.8 % 26.8 % 30.5 % 23.5 % 23.1 % 26.1 % 29.8 %
19.3
8.7
54.2
6.6
39.2
100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
9.2
6.3
39.0
8.3
52.7
8.4
0.6
32.1
12.8
55.1
17.1
3.7
47.6
7.7
44.7
13.7
1.7
45.9
8.5
45.6
16.4
8.4
54.6
7.0
38.4
16.0
7.3
53.1
7.3
39.6
18.4
7.8
52.3
6.9
40.8
Year Ended December 31,
Same Facility
Transitioning
Acquisitions
Total
2021
2020
2021
2020
2021
2020
2021
2020
13.7 % 15.8 % 13.1 % 14.8 % 11.0 % 13.2 % 13.5 % 15.6 %
13.9
5.7
33.3
10.1
56.6
100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
4.8
0.6
18.6
16.6
64.8
11.9
2.8
27.8
10.8
61.4
9.1
1.5
25.4
12.2
62.4
13.0
5.2
31.7
10.2
58.1
6.1
3.8
20.9
10.7
68.4
11.7
5.6
33.1
10.5
56.4
11.2
4.9
31.7
10.9
57.4
The following table sets forth total cost of services for our skilled services segment for the periods indicated (dollars in
thousands):
Cost of service
Revenue percentage
Year Ended December 31,
Change
2021
2020
$
%
$
1,944,461
$
1,770,336
$
174,125
77.1 %
77.4 %
9.8 %
(0.3) %
Cost of services related to our skilled services segment increased $174.1 million, or 9.8%, due primarily to additional
costs at new acquisitions, which accounted for $97.1 million of the increase. Cost of services as a percentage of revenue
decreased by 0.3% to 77.1%. We experienced a decrease in cost associated with operational improvements.
Real Estate Segment
Rental revenue generated from third-party tenants
Rental revenue generated from Ensign affiliated
operations
Total rental revenue
Segment income
Depreciation and amortization
FFO
$
$
$
Year Ended December 31,
Change
2021
2020
$
%
15,985 $
15,157 $
828
5.5 %
49,551
65,536 $
35,986
19,726
55,712 $
46,118
61,275 $
31,323
18,218
49,541 $
3,433
4,261
4,663
1,508
6,171
7.4
7.0 %
14.9
8.3
12.5 %
75
Rental revenue. Our rental revenue, including revenue generated from our affiliated facilities, increased by $4.3 million,
or 7.0% to $65.5 million, compared to the year ended December 31, 2020. The increase in revenue is primarily attributable to
acquisitions and CPI increases.
FFO. Our FFO increased $6.2 million, or 12.5% to $55.7 million, compared to the year ended December 31, 2020. The
increase in FFO is primarily related to the increase in rental revenue and the decrease in interest expense.
All Other Service Revenue
Our other revenue decreased by $11.0 million, or 11.1% to $88.2 million, compared to the year ended December 31,
2020. Other revenue for 2021 includes senior living revenue of $48.4 million and revenue from other ancillary services of $39.8
million. The decrease in revenue is due to the impact of COVID-19, which negatively impacted services in our other ancillary
services.
Consolidated Financial Expenses
Rent — cost of services. Our rent — cost of services as a percentage of total revenue decreased by 0.1% to 5.3%,
primarily due to the growth in revenue outpacing the increase in rent expense.
General and administrative expense. General and administrative expense increased $22.0 million or 17.0%, to $151.8
million. This increase was primarily due to increases in wages and benefits due to enhanced performance and growth, as well as
expenses incurred related to the formation of Standard Bearer REIT of $5.7 million. General and administrative expense
increased by 0.4% to 5.8%, as a percentage of revenue.
Depreciation and amortization. Depreciation and amortization expense increased $1.4 million, or 2.6%, to $56.0 million.
This increase was primarily related to the additional depreciation and amortization incurred as a result of our newly acquired
operations. Depreciation and amortization decreased 0.2%, to 2.1%, as a percentage of revenue.
Other expense, net. Other expense, net as a percentage of revenue decreased by 0.1%, to 0.1%. Other expense primarily
includes interest expense related to borrowings under mortgage debt. As there was no outstanding debt under the Credit
Facility, interest expense decreased.
Provision for income taxes. Our effective tax rate was 23.4% for the year ended December 31, 2021, compared to 21.3%
for the same period in 2020. The effective tax rate for both periods is driven by the impact of excess tax benefits from stock-
based compensation, partially offset by non-deductible expenses. See Note 14, Income Taxes, in the Notes to the Consolidated
Financial Statements for further discussion.
Liquidity and Capital Resources
Our primary sources of liquidity have historically been derived from our cash flows from operations and long-term debt
secured by our real property and our Credit Facility. Our liquidity as of December 31, 2021 is impacted by cash generated from
strong operational performance and the repayment of Medicare Accelerated and Advance Payment Program funds and deferral
of the employer portion of social security taxes.
Historically, we have primarily financed the majority of our acquisitions through the financing of our operating
subsidiaries through mortgages, our Credit Facility, and cash generated from operations. Cash paid to fund acquisitions was
$104.1 million and $11.0 million for the years ended December 31, 2021 and 2020, respectively. Total capital expenditures for
property and equipment were $69.6 million and $50.3 million for the years ended December 31, 2021 and 2020, respectively.
We currently have approximately $70.0 million budgeted for renovation projects for 2022. We believe our current cash
balances, our cash flow from operations and the amounts available under our Credit Facility will be sufficient to cover our
operating needs for at least the next 12 months.
We may, in the future, seek to raise additional capital to fund growth, capital renovations, operations and other business
activities, but such additional capital may not be available on acceptable terms, on a timely basis, or at all.
Our cash and cash equivalents as of December 31, 2021 consisted of bank term deposits, money market funds and U.S.
Treasury bill related investments. In addition, as of December 31, 2021, we held debt security investments of approximately
$50.3 million, which were split between AA, A and BBB rated securities. We believe our debt security investments that were in
76
an unrealized loss position as of December 31, 2021 were not other-than-temporarily impaired, nor has any event occurred
subsequent to that date that would indicate any other-than-temporary impairment.
As mentioned above, our primary sources of cash is from our ongoing operations. Our positive cash flows have supported
our business and have allowed us to pay regular dividends to our stockholders. We currently anticipate that existing cash and
total investments as of December 31, 2021, along with projected operating cash flows and available financing, will support our
normal business operations for the foreseeable future.
On October 21, 2021, the Board of Directors approved a stock repurchase program pursuant to which we may repurchase
up to $20.0 million of our common stock under the program for a period of approximately 12 months that starts on October 29,
2021. During the year ended December 31, 2021, we repurchased approximately 0.1 million shares of our common stock for
$10.1 million. Subsequent to December 31, 2021, we repurchased approximately 0.1 million shares of our common stock for
$9.9 million. This repurchase program expired upon the repurchase of the full authorized amount under the plan. On
February 9, 2022, the Board of Directors approved a stock repurchase program pursuant to which we may repurchase up to
$20.0 million of our common stock under the program for a period of approximately 12 months that starts on February 10,
2022. The share repurchase programs do not obligate us to acquire any specific number of shares. Under these programs, shares
may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1
under the Exchange Act.
The following table presents selected data from our consolidated statement of cash flows for the periods presented:
Net cash provided by/(used in):
Operating activities
Investing activities
Financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents beginning of period
Cash and cash equivalents at end of period
Operating Activities
Year Ended December 31,
2021
2020
(In thousands)
$
$
275,684 $
(173,907)
(76,138)
25,639
236,562
262,201 $
373,351
(58,666)
(137,298)
177,387
59,175
236,562
Cash provided by operating activities is net income adjusted for certain non-cash items and changes in operating assets
and liabilities.
The $97.7 million decrease in cash provided by operating activities for the year ended December 31, 2021 compared to
the same period in 2020, was primarily due to changes in working capital partially offset by higher net income. Changes in
working capital was driven by a payment on the deferred employer portion of social security taxes in December 2021, timing of
accounts receivable collections and payment of income taxes and expenses.
Investing Activities
Investing cash flows consist primarily of capital expenditures, investment activities, insurance proceeds and cash used for
acquisitions.
The $115.2 million increase in cash used in investing activities for the year ended December 31, 2021, compared to the
same period in 2020, was primarily due to an increase in cash used for acquisitions and capital expenditures of $93.1 million
and $19.2 million, respectively, which are partially offset by an increase in cash from insurance proceeds of $6.1 million.
Financing Activities
Financing cash flows consist primarily of payment of dividends to stockholders, issuance and repayment of short-term and
long-term debt, repayment of the Medicare Accelerated and Advance Payment Program funds and sale of shares of common
stock through employee equity incentive plans.
The $61.2 million decrease in cash used in financing activities for the year ended December 31, 2021, compared to the
same period in 2020, was primarily due to the proceeds and repayment of the Medicare Accelerated and Advance Payment
Program funds offset by net borrowing activity.
77
A discussion of our cash flows for the year ended December 31, 2019 is included in Part II, Item 7, Management’s
Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources, included in our
Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission on
February 3, 2021.
Material cash requirements from known contractual and other obligations
Total long-term debt obligations, net of debt discount, outstanding as of the end of each fiscal year were as follows:
2021
2020
2019
2018
2017
December 31,
(In thousands)
Credit facilities and term loans
$
— $
— $
210,000 $
123,125 $
190,625
Mortgage loan and promissory notes
159,967
117,806
120,350
122,955
125,394
Total
$
159,967 $
117,806 $
330,350 $
246,080 $
316,019
Significant contractual obligations as of December 31, 2021 were as follows, including the future periods in which
payments are expected:
2022
2023
2024
2025
2026
Thereafter
Total
(In thousands)
Operating lease obligations
$ 135,125 $ 133,389 $ 132,409 $ 132,304 $ 132,199 $ 1,173,645 $ 1,839,071
Long-term debt obligations
Interest payments on long-term debt
3,759
4,883
3,818
4,754
3,950
4,623
4,086
4,487
4,227
4,346
140,127
159,967
62,734
85,827
Total
$ 143,767 $ 141,961 $ 140,982 $ 140,877 $ 140,772 $ 1,376,506 $ 2,084,865
Not included in the table above are our actuarially determined self-insured general and professional malpractice liability,
workers' compensation and medical (including prescription drugs) and dental healthcare obligations, which are broken out
between current and long-term liabilities in our financial statements included in this Annual Report on Form 10-K.
Credit Facility with a Lending Consortium Arranged by Truist
We maintain the Credit Facility with a lending consortium arranged by Truist, which includes a revolving line of credit of
up to $350.0 million in aggregate principal amount. The maturity date of the Credit Facility is October 1, 2024. The interest
rates applicable to loans under the Credit Facility are, at the Company's option, equal to either a base rate plus a margin ranging
from 0.50% to 1.50% per annum or LIBOR plus a margin range from 1.50% to 2.50% per annum, based on the Consolidated
Total Net Debt to Consolidated EBITDA ratio (as defined in the agreement). In addition, we pay a commitment fee on the
unused portion of the commitments that ranges from 0.25% to 0.45% per annum, depending on the Consolidated Total Net
Debt to Consolidated EBITDA ratio.
As of December 31, 2021, we had approximately $6.7 million on the Credit Facility of borrowing capacity pledged as
collateral to secure outstanding letters of credit, which is a reduction of $0.9 million from 2020.
Subsequent to December 31, 2021, we amended our Credit Facility to include Standard Bearer REIT as a co-borrower.
All existing terms and conditions remained the same. As of December 31, 2021, and February 4, 2022, there was no
outstanding debt under the Credit Facility.
Mortgage Loans and Promissory Notes
During the year ended December 31, 2021, four of our subsidiaries entered into HUD mortgage loans in the aggregate
amount of $45.0 million. As a result, 23 of our subsidiaries have mortgage loans insured with HUD for an aggregate amount of
$156.6 million, as of December 31, 2021, which subjects these subsidiaries to HUD oversight and periodic inspections. The
mortgage loans bear effective interest rates range of 3.1% to 4.2%, including fixed interest rates range of 2.4% to 3.3% per
annum. Amounts borrowed under the mortgage loans may be prepaid, subject to prepayment fees of the principal balance on
the date of prepayment. For the majority of the loans, the prepayment fee is 10% during the first three years and is reduced by
3% in the fourth year of the loan, and reduced by 1% per year for years five through ten of the loan. There is no prepayment
penalty after year ten. The term of the mortgage loans are 25 to 35 years.
78
In addition to the HUD mortgage loans above, we have two promissory notes. The notes bear fixed interest rates of 5.0%
and 5.3% per annum and the term of the notes are ten months and 12 years, respectively. The 12-year note, which was used for
an acquisition, is secured by the real property comprising the facility and the rent, issues and profits thereof, as well as all
personal property used in the operation of the facility.
Operating Leases
During the fiscal year of 2021, 176 of our facilities are under long-term lease arrangements, of which 94 of the operations
are under nine triple-net Master Leases and one stand-alone lease with CareTrust REIT, Inc. (CareTrust). The Master Leases
consist of multiple leases, each with its own pool of properties, that have varying maturities and diversity in property
geography. Under each master lease, our individual subsidiaries that operate those properties are the tenants and CareTrust's
individual subsidiaries that own the properties subject to the Master Leases are the landlords. The rent structure under the
Master Leases includes a fixed component, subject to annual escalation equal to the lesser of the percentage change in the
Consumer Price Index (but not less than zero) or 2.5%. At our option, we can extend the Master Leases for two or three five-
year renewal terms beyond the initial term, on the same terms and conditions. If we elect to renew the term of a Master Lease,
the renewal will be effective as to all, but not less than all, of the leased property then subject to the Master Lease.
Additionally, four of the 95 facilities leased from CareTrust include an option to purchase that we can exercise starting on
December 1, 2024. In the second quarter of 2021, the Company added four operations and extended the term for one of the
Master Leases for an additional 15 years. In the third quarter of 2021, we also added two operations and extended the term for
one of the Master Leases for an additional 17 years. As a result, the total lease liabilities and right-of-use assets increased by
$54.7 million and $63.4 million, respectively, to reflect the new lease obligations.
We also lease certain affiliated facilities and our administrative offices under non-cancelable operating leases, most of
which have initial lease terms ranging from five to 20 years and is subject to annual escalation equal to the percentage change in
the Consumer Price Index with a stated cap percentage. In addition, we lease certain of our equipment under non-cancelable
operating leases with initial terms ranging from three to five years. Most of these leases contain renewal options, certain of
which involve rent increases.
Forty-three of our affiliated facilities, excluding the facilities that are operated under the Master Leases from CareTrust,
are operated under eight separate master lease arrangements. Under these master leases, a breach at a single facility could
subject one or more of the other affiliated facilities covered by the same master lease to the same default risk. Failure to comply
with Medicare and Medicaid provider requirements is a default under several of our leases, master lease agreements and debt
financing instruments. In addition, other potential defaults related to an individual facility may cause a default of an entire
master lease portfolio and could trigger cross-default provisions in our outstanding debt arrangements and other leases. With an
indivisible lease, it is difficult to restructure the composition of the portfolio or economic terms of the lease without the consent
of the landlord.
U.S. Department of Justice Civil Investigative Demand
On May 31, 2018, we received a Civil Investigative Demand (CID) from the U.S. Department of Justice stating that it is
investigating to determine whether we have violated the False Claims Act and/or the Anti-Kickback Statute with respect to the
relationships between certain of our skilled nursing facilities and persons who served as medical directors, advisory board
participants or other referral sources. The CID covered the period from October 3, 2013 through 2018, and was limited in scope
to ten of our Southern California skilled nursing facilities. In October 2018, the Department of Justice made an additional
request for information covering the period of January 1, 2011 through 2018, relating to the same topic. As a general matter,
our operating entities maintain policies and procedures to promote compliance with the False Claims Act, the Anti-Kickback
Statute, and other applicable regulatory requirements. We have fully cooperated with the U.S. Department of Justice and
promptly responded to its requests for information; in April 2020, we were advised that the U.S. Department of Justice declined
to intervene in any subsequent action based on or related to the subject matter of this investigation.
Inflation
We have historically derived a substantial portion of our revenue from the Medicare program. We also derive revenue
from state Medicaid and similar reimbursement programs. Payments under these programs generally provide for reimbursement
levels that are adjusted for inflation annually based upon the state’s fiscal year for the Medicaid programs and in each October
for the Medicare program. These adjustments may not continue in the future, and even if received, such adjustments may not
reflect the actual increase in our costs for providing healthcare services.
Labor and supply expenses make up a substantial portion of our cost of services. Those expenses can be subject to
increase in periods of rising inflation and when labor shortages occur in the marketplace. To date, we have generally been able
79
to implement cost control measures or obtain increases in reimbursement sufficient to offset increases in these expenses. There
can be no assurance that we will be able to anticipate fully or otherwise respond to any future inflationary pressures.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. We are exposed to risks associated with market changes in interest rates through our borrowing
arrangements and investments. In particular, our Credit Facility exposes us to variability in interest payments due to changes in
LIBOR interest rates. We manage our exposure to this market risk by monitoring available financing alternatives. Our
mortgages and 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 to make early repayment prior to a cutoff date. Where prepayment is permitted, we are
generally allowed to make prepayments only at a premium which is often designed to preserve a stated yield to the note holder.
These prepayment rights may afford us opportunities to mitigate the risk of refinancing our debts at maturity at higher rates by
refinancing prior to maturity.
As of December 31, 2021, there was no outstanding debt under our Credit Facility. We have outstanding indebtedness
under mortgage loans insured with HUD and two promissory notes to third parties of $160.0 million all of which are at fixed
interest rates.
Our cash and cash equivalents as of December 31, 2021 consisted of bank term deposits, money market funds and U.S.
Treasury bill related investments. In addition, as of December 31, 2021, we held debt security investments of approximately
$50.3 million which were split between AA, A, and BBB rated securities. We believe our debt security investments that were in
an unrealized loss position as of December 31, 2021 were not other-than-temporarily impaired, nor has any event occurred
subsequent to that date that would indicate any other-than-temporary impairment. Our market risk exposure is interest income
sensitivity, which is affected by changes in the general level of U.S. interest rates. The primary objective of our investment
activities is to preserve principal while at the same time maximizing the income we receive from our investments without
significantly increasing risk. Due to the low risk profile of our investment portfolio, an immediate 10.0% change in interest
rates would not have a material effect 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 degree by 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, 2021 and does not consider those exposures or
positions which could arise after that date. If we diversify our investment portfolio into securities and other investment
alternatives, we may face increased risk and exposures as a result of interest risk and the securities markets in general.
LIBOR Phase Out — LIBOR is expected to be phased out. Currently, our borrowings under our Credit Facility provide
us flexibility to choose floating rates, one of which is based on LIBOR. We currently expect that the determination of interest
under our credit agreement would be revised as provided under the agreement or amended as necessary to provide for an
interest rate that will attempt to approximate the existing interest rate as calculated in accordance with LIBOR for similar types
of loans.
The market transition from LIBOR to an alternative reference rate is expected to be complicated, including the
development of term rates and credit adjustments to accommodate differences between LIBOR and the alternatives. During the
transition period, LIBOR may exhibit increased volatility or become less representative. It is expected that U.S.-dollar LIBOR
will be replaced with the Secured Overnight Financing Rate (SOFR) or the Bloomberg Short-Term Bank Yield Index (BSBY).
The use of an alternative reference rate such as SOFR or BSBY (and the transition to that rate) will likely create uncertainty in
our interest rate associated with our variable interest debt. Due to these uncertainties, we cannot be sure that our determination
of interest under our agreement would materially approximate the current calculation in accordance with LIBOR.
80
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
THE ENSIGN GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 2021 and 2020
Consolidated Statements of Income for the Years Ended December 31, 2021, 2020 and 2019
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2021, 2020 and 2019
Consolidated Statements of Cash Flows for the Years Ended December 31, 2021, 2020 and 2019
Notes to Consolidated Financial Statements
82
84
85
86
87
89
81
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
The Ensign Group, Inc.
San Juan Capistrano, California
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of The Ensign Group, Inc. and subsidiaries (the "Company") as
of December 31, 2021 and 2020, the related consolidated statements of income, stockholders' equity, and cash flows for each of
the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the "financial
statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the
Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in
the period ended December 31, 2021, 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's internal control over financial reporting as of December 31, 2021, based on criteria established in
Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 9, 2022, expressed an unqualified opinion on the Company's internal control over
financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in 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 reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to 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 included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that
was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that
are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and
we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the
accounts or disclosures to which it relates.
Self-Insurance Liabilities (General and Professional Liability Claims) - Refer to Notes 2 and 18 to the financial
statements
Critical Audit Matter Description
The Company's self-insurance liabilities for general and professional liability claims totaled $69.7 million at December 31,
2021. The Company develops information about the size of the ultimate claims based on historical experience, current industry
information, and actuarial analysis.
The determination of case reserves for known general and professional liability claims, which is used in developing the
actuarial estimated liability, is highly subjective. Given the significant judgments in estimating the case reserves for known
claims, we have determined the reserve for general and professional liabilities to be a critical audit matter. This required a high
82
degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the reasonableness
of management estimates of case reserves for known claims.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures relating to management’s judgment regarding the estimation of the reserve for general and professional
liability claims included the following, among others:
• We tested the effectiveness of controls over the reserve for general and professional liabilities, including those over the
determination of the case reserves for known claims.
• We obtained an understanding of the factors considered and assumptions made by management and the actuaries in
developing the estimate of the general and professional liability reserves, the sources of data relevant to these factors
and assumptions and the procedures used to obtain the data, and the methods used to calculate the estimate.
• We performed a retrospective review in which we compared the current portion of the total liability at the end of the
prior year with what was actually paid in the current year in order to assess the ability of the Company to forecast the
timing of reserve payouts.
• We tested known case reserves by making selections and obtaining the associated notice of claim and settlement
support (if applicable), as well as inquiring with the Company as to the nature of each case reserve selection and the
judgment rationale for the established reserve amount. Additionally, we selected external legal counsel and inquired
about open cases handled by each legal firm and evaluated whether the information received from external legal
counsel supported the known case reserves.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
February 9, 2022
We have served as the Company's auditor since 1999.
83
THE ENSIGN GROUP, INC.
CONSOLIDATED BALANCE SHEETS
Assets
Current assets:
Cash and cash equivalents
Accounts receivable—less allowance for doubtful accounts of $11,213 and $8,718 at
December 31, 2021 and 2020, respectively
Investments—current
Prepaid income taxes
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Right-of-use assets
Insurance subsidiary deposits and investments
Escrow deposits
Deferred tax assets
Restricted and other assets
Intangible assets, net
Goodwill
Other indefinite-lived intangibles
Total assets
Liabilities and equity
Current liabilities:
Accounts payable
Accrued wages and related liabilities (Note 3)
Lease liabilities—current
Accrued self-insurance liabilities—current
Advance payment liabilities (Note 3)
Other accrued liabilities
Current maturities of long-term debt
Total current liabilities
Long-term debt—less current maturities
Long-term lease liabilities—less current portion
Accrued self-insurance liabilities—less current portion
Other long-term liabilities
Total liabilities
Commitments and contingencies (Notes 15, 17 and 20)
Equity
Ensign Group, Inc. stockholders' equity:
Common stock: $0.001 par value; 100,000 shares authorized; 58,134 and 55,190 shares
issued and outstanding at December 31, 2021, respectively, and 57,417 and 54,626 shares
issued and outstanding at December 31, 2020, respectively
Additional paid-in capital
Retained earnings
Common stock in treasury, at cost, 2,944 and 2,791 shares at December 31, 2021 and
2020, respectively (Note 21)
Total Ensign Group, Inc. stockholders' equity
Non-controlling interest
Total equity
Total liabilities and equity
December 31,
2021
2020
(In thousands, except par values)
$
262,201 $
236,562
328,731
13,763
5,452
29,562
639,709
888,434
1,138,872
36,567
—
33,147
47,046
2,652
60,469
3,727
2,850,623 $
58,116 $
278,770
52,181
40,831
—
89,410
3,760
523,068
152,883
1,056,515
69,308
27,135
1,828,909 $
58
369,760
733,992
(83,042)
1,020,768
946
1,021,714
2,850,623 $
305,062
13,449
1,224
26,659
582,956
778,244
1,025,510
32,105
100
32,424
33,155
2,899
54,469
3,716
2,545,578
50,901
236,614
48,187
34,396
102,023
87,318
2,960
562,399
112,544
950,320
62,402
39,686
1,727,351
58
338,177
551,055
(71,213)
818,077
150
818,227
2,545,578
$
$
$
$
See accompanying notes to consolidated financial statements.
84
THE ENSIGN GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Revenue:
Service revenue
Rental revenue
Total revenue
Expense:
Cost of services
Rent—cost of services
General and administrative expense
Depreciation and amortization
Total expenses
Income from operations
Other income (expense):
Interest expense
Other income
Other expense, net
Income before provision for income taxes
Provision for income taxes
Net income from continuing operations
Net income from discontinued operations, net of tax (Note 22)
Net income
Less:
Year Ended December 31,
2021
2020
2019
(In thousands, except per share data)
$
$
2,611,476 $
2,387,439 $
2,031,266
15,985
15,157
5,258
2,627,461 $
2,402,596 $
2,036,524
2,019,879
1,865,201
1,620,628
139,371
151,761
55,985
2,366,996
260,465
129,926
129,743
54,571
124,789
110,873
51,054
2,179,441
1,907,344
223,155
129,180
(6,849)
4,388
(2,461)
258,004
60,279
197,725
—
(9,362)
(15,662)
3,813
2,649
(5,549)
(13,013)
217,606
46,242
171,364
—
116,167
23,954
92,213
19,473
197,725
171,364
111,686
Net income attributable to noncontrolling interests in continuing operations
Net income attributable to noncontrolling interests in discontinued operations (Note
22)
Net income attributable to noncontrolling interests
Net income attributable to The Ensign Group, Inc.
3,073
—
3,073
886
—
886
523
629
1,152
$
194,652 $
170,478 $
110,534
Amounts attributable to The Ensign Group, Inc.:
Income from continuing operations attributable to The Ensign Group, Inc.
Income from discontinued operations, net of income tax (Note 22)
Net income attributable to The Ensign Group, Inc.
Net income per share attributable to The Ensign Group, Inc.:
Basic:
Continuing operations
Discontinued operations
Basic
Diluted:
Continuing operations
Discontinued operations
Diluted
Weighted average common shares outstanding:
Basic
Diluted
$
$
$
$
$
$
194,652 $
170,478 $
—
—
91,690
18,844
194,652 $
170,478 $
110,534
3.57 $
3.19 $
—
—
3.57 $
3.19 $
3.42 $
3.06 $
—
—
3.42 $
3.06 $
1.72
0.35
2.07
1.64
0.33
1.97
54,486
56,925
53,434
55,787
53,452
55,981
See accompanying notes to consolidated financial statements.
85
THE ENSIGN GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional
Paid-In
Capital
Shares Amount
Retained
Earnings
Shares Amount
Treasury Stock
Common Stock
Non-
Controlling
Interest
Total
(In thousands)
Balance - January 1, 2019
Issuance of common stock to employees and
directors resulting from the exercise of stock
options and grant of stock awards
Repurchase of common stock (Note 21)
Shares of common stock used to satisfy tax
withholding obligations
Dividends declared (0.1925 per share)
Employee stock award compensation
Distribution of net assets to Pennant (Note 22)
Dividends received from Pennant (Note 22)
Repurchase of common stock attributable to
subsidiary equity plan
Noncontrolling interest attributable to
subsidiary equity plan
Cumulative effect of accounting change, net of
tax (Note 17)
Distribution to noncontrolling interest holder
Net income attributable to noncontrolling
interest
Net income attributable to the Ensign Group,
Inc.
Balance - December 31, 2019
Issuance of common stock to employees and
directors resulting from the exercise of stock
options
Issuance of restricted stock, net of forfeitures
Shares of common stock used to satisfy tax
withholding obligations
Dividends declared ($0.2025 per share)
Employee stock award compensation
Repurchase of common stock (Note 21)
Net income attributable to noncontrolling
interest
Distribution to noncontrolling interest holder
Net income attributable to the Ensign Group,
Inc.
Balance - December 31, 2020
Issuance of common stock to employees and
directors resulting from the exercise of stock
options
Issuance of restricted stock, net of forfeitures
Shares of common stock used to satisfy tax
withholding obligations
Dividends declared ($0.2125 per share)
Employee stock award compensation
Repurchase of common stock (Note 21)
Deconsolidation of an ancillary business
Capital contribution from noncontrolling
interest holder
Net income attributable to noncontrolling
interest
Distribution to noncontrolling interest holder
Net income attributable to the Ensign Group,
Inc.
52,584 $
55 $
284,384 $ 344,901
1,932 $ (38,405) $
11,405 $ 602,340
1,050
(138)
(9)
—
—
—
—
—
—
—
—
—
—
1
—
—
—
—
—
—
—
—
—
—
—
—
11,784
—
—
—
—
—
—
(10,370)
11,746
—
—
—
—
—
—
—
—
(71,181)
11,600
—
(2,991)
9,030
—
—
—
110,534
—
138
9
—
—
—
—
—
—
—
—
—
—
—
(6,406)
(485)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
11,785
(6,406)
(485)
(10,370)
11,746
(13,252)
(84,433)
—
11,600
(394)
(394)
3,585
594
—
(549)
9,030
(549)
1,152
1,152
—
110,534
53,487 $
56 $
307,914 $ 391,523
2,079 $ (45,296) $
1,947 $ 656,144
979
872
(20)
—
—
(692)
—
—
—
1
1
—
—
—
—
—
—
—
12,654
3,085
—
—
14,524
—
—
—
—
—
—
(10,946)
—
—
—
—
—
170,478
—
—
20
—
—
—
—
(917)
—
—
692
(25,000)
—
—
—
—
—
—
12,655
3,086
(917)
(10,946)
14,524
(25,000)
—
—
—
—
—
—
886
886
(2,683)
(2,683)
—
170,478
54,626 $
58 $
338,177 $ 551,055
2,791 $ (71,213) $
150 $ 818,227
516
201
(21)
—
—
(132)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
9,180
3,725
—
—
18,678
—
—
—
—
—
—
—
—
(11,715)
—
—
—
—
—
—
—
194,652
—
—
21
—
—
132
—
—
—
—
—
—
—
(1,711)
—
—
(10,118)
—
—
—
—
—
—
—
—
—
—
—
9,180
3,725
(1,711)
(11,715)
18,678
(10,118)
(1,369)
(1,369)
2,000
2,000
3,073
(2,908)
3,073
(2,908)
—
194,652
Balance - December 31, 2021
55,190 $
58 $
369,760 $ 733,992
2,944 $ (83,042) $
946 $ 1,021,714
See accompanying notes to consolidated financial statements.
86
THE ENSIGN GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities:
Year Ended December 31,
2020
2019
2021
Net income
Net income from discontinued operations, net of tax
Adjustments to reconcile net income to net cash provided by operating activities:
$
197,725 $
—
171,364 $
—
111,686
(19,473)
55,985
—
859
485
—
(724)
2,609
18,678
2,382
(2,348)
(30,771)
(4,228)
(4,898)
(24,154)
(10,953)
(5,814)
11,078
7,117
47,701
1,297
13,724
(66)
275,684
—
275,684
(69,550)
(6,000)
(98,224)
100
—
6,899
1,854
(1,984)
(106)
(32,257)
27,481
(2,120)
(173,907)
—
(173,907)
54,571
2,681
840
451
—
(27,809)
7,058
14,524
—
625
2,171
(485)
(2,897)
48,309
(6,577)
(724)
6,615
6,627
68,365
17,536
10,293
(187)
373,351
—
373,351
(50,326)
—
(24,997)
(100)
14,050
800
412
—
—
(21,708)
24,479
(1,276)
(58,666)
—
(58,666)
51,054
4,144
1,090
318
329
3,490
2,444
11,322
1,599
(3,026)
(60,424)
5,600
(7,247)
—
—
(7,763)
—
4,457
47,386
11,353
6,286
4,302
168,927
23,296
192,223
(71,541)
(6,455)
(141,595)
(14,050)
7,271
644
7,407
—
(12,332)
8,857
(2,236)
(224,030)
(22,985)
(247,015)
Depreciation and amortization
Impairment of long-lived assets
Amortization of deferred financing fees
Non-cash leasing arrangement
Write-off of deferred financing fees
Deferred income taxes
Provision for doubtful accounts
Stock-based compensation
Cash received from insurance proceeds
(Gain)/loss on insurance claims and disposal of assets
Change in operating assets and liabilities
Accounts receivable
Prepaid income taxes
Prepaid expenses and other assets
Deferred employer portion of social security taxes
Cash surrender value of life insurance policy premiums
Operating lease obligations
Deferred compensation liability
Accounts payable
Accrued wages and related liabilities
Other accrued liabilities
Accrued self-insurance liabilities
Other long-term liabilities
Net cash provided by operating activities
Net cash provided by discontinued operating activities (Note 22)
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of property and equipment
Cash payments for business acquisitions (Note 8)
Cash payments for asset acquisitions (Note 8)
Escrow deposits
Escrow deposits used to fund acquisitions
Cash from insurance proceeds
Cash proceeds from the sale of assets and ancillary business
Deconsolidation of an ancillary business
Cash payments for Medicare and Medicaid licenses
Purchases of investments
Maturities of investments
Other restricted assets
Net cash used in investing activities
Net cash used in discontinued investing activities (Note 22)
Net cash used in investing activities
87
Cash flows from financing activities:
Proceeds from debt (Note 15)
Payments on debt (Note 15)
Issuance of common stock upon exercise of options
Repurchase of shares of common stock to satisfy tax withholding obligations
Repurchase of shares of common stock (Note 21)
Dividends paid
Dividends received from Pennant
Cash retained by Pennant at spin-off
Non-controlling interest distribution
Contribution from noncontrolling interest
Payments of deferred financing costs
Proceeds from CARES Act Provider Relief Fund and Medicare Advance Payment
Program (Note 3)
Repayments of CARES Act Provider Relief Fund and Medicare Advance Payment
Program (Note 3)
Net cash (used in)/provided by financing activities
Net cash used in discontinued financing activities
Net cash (used in)/provided by financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents beginning of period
Cash and cash equivalents end of period
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest
Income taxes
Lease liabilities
Non-cash financing and investing activity:
Accrued capital expenditures
Accrued dividends declared
Note receivable from insurance settlement
Right-of-use assets obtained in exchange for new and modified operating lease
obligations
Distribution of net assets to Pennant
45,218
(3,056)
9,180
(1,711)
(10,118)
(11,548)
—
—
(2,908)
2,000
(1,172)
417,200
(629,745)
12,654
(917)
(25,000)
(10,830)
—
—
(2,683)
—
—
1,380,000
(1,296,654)
8,503
(485)
(6,406)
(10,190)
11,600
(47)
(549)
—
(2,494)
11,637
246,955
—
(113,660)
(76,138)
—
(76,138)
25,639
236,562
262,201 $
(144,932)
(137,298)
—
(137,298)
177,387
59,175
236,562 $
—
83,278
(394)
82,884
28,092
31,083
59,175
5,690 $
9,920 $
14,275
65,547 $
74,365 $
20,158
138,795 $
129,569 $
141,541
3,700 $
3,035 $
— $
3,400 $
2,868 $
5,500 $
4,100
2,705
—
198,593 $
24,599 $
203,163
— $
— $
84,433
$
$
$
$
$
$
$
$
$
See accompanying notes to consolidated financial statements.
88
THE ENSIGN GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars, shares and options in thousands, except per share data)
1. DESCRIPTION OF BUSINESS
The Company — The Ensign Group, Inc. (collectively, Ensign or the Company), is a holding company with no direct
operating assets, employees or revenue. The Company, through its operating subsidiaries, is a provider of health care services
across the post-acute care continuum, engaged in the ownership, acquisition, development and leasing of skilled nursing, senior
living and other healthcare-related properties and other ancillary businesses. As of December 31, 2021, the Company operated
245 facilities and other ancillary operations located in Arizona, California, Colorado, Idaho, Iowa, Kansas, Nebraska, Nevada,
South Carolina, Texas, Utah, Washington and Wisconsin. The Company's operating subsidiaries, each of which strives to be the
operation of choice in the community it serves, provide a broad spectrum of skilled nursing, senior living and other ancillary
services. The Company's operating subsidiaries have a collective capacity of approximately 25,000 operational skilled nursing
beds and 2,200 senior living units. As of December 31, 2021, the Company operated 176 facilities under long-term lease
arrangements, and had options to purchase 11 of those 176 facilities. The Company's real estate portfolio includes 100 owned
real estate properties, which included 69 facilities operated and managed by the Company, 32 senior living operations leased to
and operated by The Pennant Group, Inc., or Pennant, as part of the spin-off transaction that occurred in October 2019, and the
Service Center location. Of those 32 senior living operations, two are located on the same real estate properties as skilled
nursing facilities that the Company owns and operates.
Certain of the Company’s wholly-owned independent subsidiaries, collectively referred to as the Service Center, provide
specific accounting, payroll, human resources, information technology, legal, risk management and other centralized services to
the other operating subsidiaries through contractual relationships with such subsidiaries. The Company also has a wholly-
owned captive insurance subsidiary (the Captive Insurance) that provides some claims-made coverage to the Company’s
operating subsidiaries for general and professional liabilities, as well as coverage for certain workers’ compensation insurance
liabilities.
On January 1, 2022, the Company completed its plan to form a captive real estate investment trust, which owns and
manages its real estate business, called Standard Bearer Healthcare REIT, Inc. (Standard Bearer REIT). Standard Bearer REIT
intends to qualify and elect to be taxed as a REIT, for U.S. federal income tax purposes, commencing with its taxable year
ending December 31, 2022.
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, nor should it be construed as meaning that The Ensign Group, Inc. has direct
operating assets, employees or revenue, or that any of the subsidiaries, are operated by The Ensign Group, Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation — The accompanying consolidated financial statements (the Financial Statements) have been
prepared in accordance with accounting principles generally accepted in the United States (GAAP). The Company is the sole
member or stockholder of various consolidated limited liability companies and corporations established to operate various
acquired skilled nursing operations, senior living operations and related ancillary services. All intercompany transactions and
balances have been eliminated in consolidation. The Company presents noncontrolling interests within the equity section of its
consolidated balance sheets and the amount of consolidated net income that is attributable 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 voting interest. Additionally, 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 are entitled to receive a majority of the entity's residual
returns, or both. The Company assesses the requirements related to the consolidation of VIEs, including a qualitative
assessment of power and economics that considers which entity has the power to direct the activities that "most significantly
impacts" the VIE's economic performance and has the obligation to absorb losses of, or the right to receive benefits that could
be potentially significant to, the VIE. On October 1, 2021, the Company deconsolidated its VIE as this entity no longer met the
requirements for consolidation. As of December 31, 2021, the Company has no VIEs. The Company's relationship with the VIE
prior to deconsolidation was not material during the years ended December 31, 2021, 2020, and 2019.
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During the first quarter of 2019, the Company completed the sale of one of its senior living operations for a sale price of
$1,838. Both the deconsolidation of the VIE and the sale transaction did not meet the criteria of discontinued operations as it
did not represent a strategic shift that had, or will have, a major effect on the Company's operations and financial results.
Estimates and Assumptions — The preparation of the Financial Statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the Financial Statements and the reported amounts of revenue and expenses during
the reporting periods. The most significant estimates in the Company’s Financial Statements relate to revenue, acquired
property and equipment, intangible assets and goodwill, right-of-use assets, impairment of long-lived assets, lease liabilities,
general and professional liabilities, workers' compensation and healthcare claims included in accrued self-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 security investments, 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. Contracts insuring the lives of certain employees who are eligible to participate in non-qualified
deferred compensation plans are held in a rabbi trust. Cash surrender value of the contracts is based on performance
measurement funds that shadow the deferral investment allocations made by participants in the deferred compensation plan.
The fair value of the pooled investment funds is derived using Level 2 inputs.
Service Revenue Recognition — The Company recognizes revenue in accordance with Financial Accounting Standards
Board (FASB) Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (ASC 606). See
Note 4, Revenue and Accounts Receivable.
Rental Revenue Recognition — The Company recognizes rental revenue for operating leases on a straight-line basis
over the lease term when collectability of all minimum lease payments is probable in accordance with FASB ASC Topic 842,
Leases (ASC 842). See Note 4, Revenue and Accounts Receivable.
Accounts Receivable and Allowance for Doubtful Accounts — Accounts receivable consist primarily of amounts due
from Medicare and Medicaid programs, other government programs, managed care health plans and private payor sources, net
of estimates for variable consideration. The allowance for doubtful accounts reflects the Company’s best estimate of probable
losses inherent in the accounts receivable balance. The Company determines the allowance based on known troubled accounts
and other currently available evidence.
Cash and Cash Equivalents — Cash and cash equivalents consist of bank term deposits, money market funds and
treasury bill related investments with original maturities of three months or less at time of purchase and therefore approximate
fair value. The fair values of money market funds and treasury bills are determined based on “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 investments are designated to support long-term insurance subsidiary liabilities and have been
classified as short-term and long-term assets based on the timing of expected future payments of the Company's captive
insurance liabilities. The majority of these deposits and investments are currently held in AA, A and BBB rated debt security
investments and the remainder is held in a bank account with a high credit quality financial institution.
The Company evaluates securities for other-than-temporary impairment (OTTI) on at least a quarterly basis, and more
frequently when economic or market conditions warrant such an evaluation. If securities are in an unrealized loss position, the
Company considers the extent and duration of the unrealized 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 likely than 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 regarding intent or
requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through
earnings. For the years ended December 31, 2021, 2020, and 2019, the Company did not recognize any OTTI for its
investments.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 depreciable 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 the remaining lease term.
Leases and Leasehold Improvements — The Company leases skilled nursing facilities, senior living facilities and
commercial office space. The Company determines if an arrangement is a lease at the inception of each lease. Leases
commencing prior to the ASC 842 adoption date were classified as operating lease under historical guidance. As the Company
has elected the package of practical expedients allowing it to not reassess lease classification, these leases are classified as
operating leases under ASC 842 as well. For leases commencing subsequent to the ASC 842 adoption date, the Company
performs an evaluation to determine whether the lease should be classified as an operating or finance lease at the inception of
the lease. As of December 31, 2021, the Company does not have any leases that are classified as finance leases. Rights and
obligations of operating leases are included as right-of-use assets, current lease liabilities and long-term lease liabilities on the
Company's consolidated balance sheet. As the Company's leases do not provide an implicit rate, the Company uses its
incremental borrowing rate based on the information available at lease commencement date in determining the present value of
future lease payments. The Company utilized a third-party valuation specialist to assist in estimating the incremental borrowing
rate.
The Company records rent expense for operating leases on a straight-line basis 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 leased premises through the
end of the lease term. Renewals are not assumed in the determination of the lease term unless they are deemed to be reasonably
assured at the inception of the lease. The lease term used for this evaluation also provides the basis for establishing depreciable
lives for buildings subject to lease and leasehold improvements.
The Company's real estate leases generally have initial lease terms of ten years or more and typically include one or more
options to renew, with renewal terms that generally extend the lease term for an additional ten to 15 years. Exercise of the
renewal options is generally subject to the satisfaction of certain conditions which vary by contract and generally follow
payment terms that are consistent with those in place during the initial term. The Company reassesses the renewal option using
a "reasonably certain" threshold, which is understood to be a high threshold. For leases where the Company is reasonably
certain to exercise its renewal option, the option periods are included within the lease term and, therefore, the measurement of
the right-of-use asset and lease liability. The Company's leases generally contain annual escalation clauses that are either fixed
or variable in nature, some of which are dependent upon published indices. The Company recognizes lease expense for leases
with an initial term of 12 months or less on a straight-line basis over the lease term. These leases are not recorded on the
consolidated balance sheet. Certain of the Company's lease agreements include rental payments that are adjusted periodically
for inflation. The lease agreements do not contain any material residual value guarantees or material restrictive covenants. The
Company does not have material subleases.
Impairment of Long-Lived Assets — The Company reviews the carrying value of long-lived assets that are held and used
in the Company’s operating subsidiaries 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 assets relate, utilizing management’s best estimate,
appropriate assumptions, and projections at the time. If the carrying value is determined to be unrecoverable from future
operating cash flows, the asset is deemed impaired and an impairment loss would be recognized to the extent the carrying value
exceeded the estimated fair value of the asset. The Company estimates the fair value of assets based on the estimated future
discounted cash flows of the asset. Management has evaluated its long-lived assets and determined there was no impairment
during the year ended December 31, 2021. The Company recorded an impairment charge of $2,681 and $3,203 during the years
ended December 31, 2021 and 2020, respectively. The Company also recorded an impairment charge of $443 to right-of-use
assets during the year ended December 31, 2019.
Intangible Assets and Goodwill — Definite-lived intangible assets consist primarily of patient base, facility trade names
and customer relationships. Patient base is amortized 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 the acquisition 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-lived intangible assets for impairment on an annual basis or more frequently if events or changes in
circumstances indicate that the carrying amount of the intangible asset may not be recoverable.
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Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business
combinations. Goodwill is subject to annual testing for impairment. In addition, goodwill is tested for impairment if events
occur or circumstances indicate that its carrying value may not be recoverable. The Company performs its annual test for
impairment during the fourth quarter of each year. The Company did not identify any goodwill or intangible asset impairment
during the years ended December 31, 2021 and 2020. During the year ended December 31, 2019, the Company recorded an
impairment charge of $498, to goodwill and intangible assets.
Self-Insurance — The Company is partially self-insured for general and professional liability claims 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.
The combined self-insured retention is $500 per claim, subject to an additional one-time deductible of $750 for California
affiliated operations and a separate, one-time, deductible of $1,000 for non-California operations. For all affiliated operations,
except those located in Colorado, the third-party coverage above these limits is $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 these limits is $1,000 per claim and $3,000 per operation, which is independent of the aforementioned
blanket aggregate limits that apply outside of Colorado.
The majority of the self-insured retention and deductible limits for general and professional liabilities and workers'
compensation liabilities are self-insured through the Captive Insurance, the related assets and liabilities of which are included in
the accompanying consolidated balance sheets. The Captive Insurance is subject to certain statutory requirements as an
insurance provider.
The Company’s policy is to accrue amounts equal to the actuarial estimated costs to settle open claims of insureds, as
well as an estimate of the cost of insured claims that have been incurred but not reported. The Company develops information
about the size of the ultimate claims based on historical experience, current industry information and actuarial analysis, and
evaluates the estimates for claim loss exposure on a quarterly basis. The Company uses actuarial valuations to estimate the
liability based on historical experience and industry information.
The Company’s operating subsidiaries are self-insured for workers’ compensation liabilities in California. To protect
itself against loss exposure in California with this policy, the Company has purchased individual specific excess insurance
coverage that insures individual claims that exceed $625 per occurrence. In Texas, the operating subsidiaries have elected non-
subscriber status for workers’ compensation claims and the Company has purchased individual stop-loss coverage that insures
individual claims that exceed $750 per occurrence. The Company’s operating subsidiaries in all other states, with the exception
of Washington, are under a loss sensitive plan that insures individual claims that exceed $350 per occurrence. In the state of
Washington, the Company is self insured and has purchased individual specific excess insurance coverage that insures
individual claims that exceed $500 per occurrence. For all of the self insured plans and retention, the Company accrues amounts
equal to the estimated costs to settle open 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 the liability based on historical experience and industry
information.
In addition, the Company has recorded an asset and equal liability of $6,755 and $7,138 as of December 31, 2021 and
2020, respectively, in order to present the ultimate costs of malpractice and workers' compensation claims and the anticipated
insurance recoveries on a gross basis. See Note 12, Restricted and Other Assets.
The Company self-funds medical (including prescription drugs) and dental healthcare benefits to the majority of its
employees. The Company is fully liable for all financial and legal aspects of these benefit plans. To protect itself against loss
exposure with this policy, the Company has purchased individual stop-loss insurance coverage that insures individual claims
that exceed $500 for each covered person for fiscal year 2021.
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 estimation process that uses information obtained from both company-specific and
industry data. This estimation process requires the Company to continuously monitor and 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 and other available industry information. The most significant assumptions used 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 or pay
damage awards with respect to unpaid claims. The self-insured liabilities are based upon estimates, and while management
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believes that the estimates of loss are reasonable, 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 the Company could
experience changes in estimated losses that could be material to net income. If the Company’s actual liabilities exceed its
estimates of losses, its future earnings, cash flows and 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 of the Company’s assets and liabilities at tax rates in effect when such temporary differences
are expected to reverse. The Company generally expects to fully utilize its deferred tax assets; however, when necessary, the
Company records a valuation allowance to reduce its 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,
the Company makes certain estimates and assumptions. These estimates and assumptions are based on, among other things,
knowledge of operations, markets, historical trends and likely future changes and, when appropriate, the opinions of advisors
with knowledge and expertise in certain fields. Due to certain risks associated with the Company’s estimates and assumptions,
actual results could differ.
Noncontrolling Interest — The noncontrolling interest in a subsidiary is initially recognized at estimated fair value on the
acquisition date and is presented within total equity in the Company's consolidated balance sheets. The Company presents the
noncontrolling interest and the amount of consolidated net income attributable to The Ensign Group, Inc. in its consolidated
statements of income. Net income per share is calculated based on net income attributable to The Ensign Group, Inc.'s
stockholders. The carrying amount of the noncontrolling interest is adjusted based on an allocation of subsidiary earnings based
on ownership interest.
Stock-Based Compensation — The Company measures and recognizes compensation expense for all stock-based
payment awards made to employees and directors including employee stock options based on estimated fair values, ratably over
the requisite service period of the award. Net income has been reduced 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 the number of future grants and other
variables.
Recent Accounting Pronouncements — Except for rules and interpretive releases of the Securities and Exchange
Commission (SEC) under authority of federal securities laws and a limited number of grandfathered standards, the FASB ASC
is the sole source of authoritative GAAP literature recognized by the FASB and applicable to the Company. For any new
pronouncements announced, the Company considers whether the new pronouncements could alter previous generally accepted
accounting principles and determines whether any new or modified principles will have a material impact on the Company's
reported financial position or operations in the near term. The applicability of any 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 Company
In December 2019, the FASB issued Accounting Standards Update (ASU) 2019-12 "Simplifying the Accounting for
Income Taxes (Topic 740)" as part of its simplification initiative to reduce the cost and complexity in accounting for income
taxes. ASU 2019-12 removes certain exceptions related to the approach for intra-period tax allocation, the methodology for
calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU
2019-12 also amends other aspects of the guidance to help simplify and promote consistent application of GAAP. The
Company adopted this standard on January 1, 2021 and determined there was no material impact on the Company's financial
position, results of operations and liquidity.
In May 2020, the SEC issued Final Rule Release No. 33-10786 “Amendments to Financial Disclosures about Acquired
and Disposed Businesses” (“SEC Rule 33-10786”), which amends the disclosure requirements applicable to acquisitions and
dispositions of businesses. Amendments within SEC Rule 33-10786 primarily impact (1) the tests and thresholds used to
determine the significance of acquisitions and dispositions; (2) the form and content of pro forma information required to be
disclosed in connection with significant acquisitions and dispositions; (3) acquiree financial statement requirements; and (4)
thresholds used to determine the significance of acquisitions and dispositions of real estate operations, and related financial
statement requirements, among others. The Company adopted this standard on January 1, 2021 and determined there was no
material impact on the Company's consolidated financial statements.
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THE ENSIGN GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In November 2020, the SEC issued final rules 33-10890 and 34-90459 “Management’s Discussion and Analysis, Selected
Financial Data, and Supplementary Financial Information,” which modernizes and simplifies certain disclosure requirements
of Regulation S-K. Certain key rule amendments eliminate the requirement to disclose Selected Financial Data; Selected
Quarterly Financial Data, with certain exceptions; the impact of inflation and changing prices, provided the impact is not
material; off-balance sheet arrangements in tabular form; and the aggregate amount of contractual obligations in tabular form.
The final rules also amended various aspects of Item 303, “Management’s Discussion and Analysis of Financial Condition and
Results of Operations,” among others. The Company adopted the final rules as part of this Annual Report on Form 10-K.
In July 2021, the FASB issued ASU 2021-05 “Lessors—Certain Leases with Variable Lease Payments (Topic 842),”
which amends the lessor classification guidance to introduce additional criteria when classifying leases with variable lease
payments that do not depend on a reference index or a rate. The Company early adopted this standard on October 1, 2021 and
determined there was no material impact on the Company's consolidated financial statements.
Accounting Standards Recently Issued but Not Yet Adopted by the Company
In February 2020, the FASB issued ASU 2020-04 "Reference Rate Reform (Topic 848)," which provides temporary,
optional practical expedients and exceptions to enable a smoother transition to reference rates which are expected to replace
LIBOR reference rates. Adoption of the provisions of ASU 2020-04 is optional. The amendments are effective for all entities
from the beginning of the interim period that includes the issuance date of the ASU. An entity may elect to apply the
amendments prospectively through December 31, 2022. The Company is currently evaluating the impact of ASU 2020-04 on
its financial position, results of operations and liquidity.
3. COVID-19 UPDATE
The Company's affiliated operations continued to be impacted by the worldwide outbreak of the 2019 coronavirus disease
(COVID-19). The Company received cash distributions of relief fund payments (Provider Relief Funds) from the Coronavirus
Aid, Relief, and Economic Security Act of 2020 (the CARES Act) and funds authorized by U.S. Department of Health and
Human Services (HHS) to be used to protect residents of nursing homes and long-term care facilities from the impact of
COVID-19 throughout 2020 and 2021. During the years ended December 31, 2021 and 2020, the Company received and
returned $11,637 and $141,700, respectively, in Provider Relief Funds. The Company may continue to receive additional
funding in future periods.
In fiscal year 2020, the Company applied for and received $105,255 through the Medicare Accelerated and Advance
Payment Program under the CARES Act. The purpose of the program is to assist in providing needed liquidity to care delivery
providers. The Company repaid $3,232 of the funds in 2020. In March 2021, the Company repaid the remaining funds of
$102,023.
The Family First Coronavirus Response Act was signed into law in 2020 to provide a temporary 6.2% increase to the
Federal Medical Assistance Percentage (FMAP) effective January 1, 2020. The law permits states to retroactively change their
state's Medicaid program rates effective as of January 1, 2020. The law provides discretion to each state and specifies the funds
are to be used to reimburse the recipient for healthcare related expenses that are attributable to COVID-19 and associated with
providing patient care. In addition, increases in Medicaid rates can come from other areas of the state's budget outside of FMAP
funding. Revenues from these additional payments are recognized in accordance with ASC 606, subject to variable
consideration constraints. In certain operations where the Company received additional payments that exceeded expenses
incurred related to COVID-19, the Company characterized such payments as variable revenue that required additional
consideration and accordingly, the amount of state relief revenue recognized is limited to the actual COVID-19 related expenses
incurred. As of December 31, 2021 and 2020, the Company had $1,781 and $6,520 in unapplied state relief funds, respectively.
During the year ended December 31, 2021 and 2020, the Company received an additional $70,484 and $51,927 in state relief
funding and recognized $75,231 and $45,407, respectively, as revenue.
The CARES Act also provides for deferred payment of the employer portion of social security taxes through the end of
2020, with 50% of the deferred amount due by December 31, 2021 and the remaining 50% due by December 31, 2022. The
Company recorded $48,309 of deferred payments of social security taxes as a liability during 2020. The Company paid $24,154
during the year ended December 31, 2021 and the remaining short-term balance of $24,155 is included in accrued wages and
related liabilities within the consolidated balance sheets as of December 31, 2021.
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THE ENSIGN GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
4. REVENUE AND ACCOUNTS RECEIVABLE
Service Revenue
The Company's service revenue is derived primarily from providing healthcare services to its patients. Revenue is
recognized when services are provided to the patients at the amount that reflects the consideration to which the Company
expects to be entitled from patients and third-party payors, including Medicaid, Medicare and insurers (private and Medicare
replacement plans), in exchange for providing patient care. The healthcare services in skilled patient contracts include routine
services in exchange for a contractual agreed-upon amount or rate. Routine services are treated as a single performance
obligation satisfied over time as services are rendered. As such, patient care services represent a bundle of services that are not
capable of being distinct. Additionally, there may be ancillary services which are not included in the daily rates for routine
services, but instead are treated as separate performance obligations satisfied at a point in time, if and when those services are
rendered.
Revenue recognized from healthcare services are adjusted for estimates of variable consideration to arrive at the
transaction price. The Company determines the transaction price based on contractually agreed-upon amounts or rate on a per
day basis, adjusted for estimates of variable consideration. The Company uses the expected value method in determining the
variable component that should be used to arrive at the transaction price, using contractual agreements and historical
reimbursement experience within each payor type. The amount of variable consideration which is included in the transaction
price may be constrained, and is included in net revenue only to the extent that it is probable that a significant reversal in the
amount of the cumulative revenue recognized will not occur in a future period. If actual amounts of consideration ultimately
received differ from the Company’s estimates, the Company adjusts these estimates, which would affect net revenue in the
period such variances become known.
Revenue from the Medicare and Medicaid programs accounted for 73.6%, 74.5% and 70.6% for the years ended
December 31, 2021, 2020, and 2019, respectively. Settlements with Medicare and Medicaid payors for retroactive adjustments
due to audits and reviews are considered variable consideration and are included in the determination of the estimated
transaction price. These settlements are estimated based on the terms of the payment agreement with the payor, correspondence
from the payor and the Company’s historical settlement activity. Consistent with healthcare industry practices, any changes to
these revenue estimates are recorded in the period the change or adjustment becomes known based on the final settlement. The
Company recorded adjustments to revenue which were not material to the Company's consolidated revenue for the years ended
December 31, 2021, 2020, and 2019.
Rental Revenue
The Company's rental revenues are primarily generated by leasing healthcare-related properties through triple-net lease
arrangements, under which the tenant is solely responsible for the costs related to the property. Revenue is recognized on a
straight-line basis over the lease term if it has been deemed probable of collection. The Company has elected the single
component practical expedient, which allows a lessor, by class of underlying asset, not to allocate the total consideration to the
lease and non-lease components based on their relative stand-alone selling prices where certain criteria are met. This single
component practical expedient requires the Company to account for the lease component and non-lease component(s)
associated with that lease as a single component if (1) the timing and pattern of transfer of the lease component and the non-
lease component(s) associated with it are the same and (2) the lease component would be classified as an operating lease if it
were accounted for separately. If the Company determines that the lease component is the predominant component, it accounts
for the single component as an operating lease in accordance with the new lease standards. Conversely, the Company is
required to account for the combined component under the revenue recognition standard if it determines that the non-lease
component is the predominant component. As a result of this assessment, rental revenues from the lease of real estate assets that
qualify for this expedient are accounted for as a single component under the new lease standards. The components of the
Company's operating leases qualify for the single component presentation.
Tenant reimbursements related to property taxes and insurance are neither considered lease nor non-lease components
under the new lease standards. Lessee payments for taxes and insurance paid directly to a third party, on behalf of the
Company, are excluded from variable lease payments and rental revenue in the Company’s consolidated statements of income.
Otherwise, tenant reimbursements for taxes and insurance that are paid by the Company directly to a third party are classified as
additional rental revenue and expense and recognized by the Company on a gross basis.
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THE ENSIGN GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Disaggregation of Revenue
The Company disaggregates revenue from contracts with its patients by payors. The Company determines that
disaggregating revenue into these categories achieves the disclosure objectives to depict how the nature, amount, timing and
uncertainty of revenue and cash flows are affected by economic factors.
Revenue by Payor
The Company’s revenue is derived primarily from providing healthcare services to patients and is recognized on the date
services are provided at amounts billable to individual patients, adjusted for estimates for variable consideration. For patients
under reimbursement arrangements with third-party payors, including Medicaid, Medicare and private insurers, revenue is
recorded based on contractually agreed-upon amounts or rate, adjusted for estimates for variable consideration, on a per patient,
daily basis or as services are performed.
Service revenue for the years ended December 31, 2021, 2020, and 2019 is summarized in the following tables:
Medicaid(1)
Medicare
Medicaid — skilled
Total Medicaid and Medicare
Managed care
Private and other(2)
Service revenue
2021
Year Ended December 31,
2020
2019
Revenue
$ 1,022,460
727,103
172,770
1,922,333
456,728
232,415
$ 2,611,476
% of
Revenue
Revenue
% of
Revenue
Revenue
% of
Revenue
39.2 % $ 900,249
727,374
27.8
149,846
6.6
73.6
1,777,469
367,095
17.5
242,875
8.9
100.0 % $ 2,387,439
37.7 % $ 802,952
499,353
30.5
132,889
6.3
1,435,194
74.5
351,054
15.4
10.1
245,018
100.0 % $ 2,031,266
39.5 %
24.6
6.5
70.6
17.3
12.1
100.0 %
(1) Medicaid payor includes revenue for senior living operations and revenue related to FMAP.
(2) Private and other payors also includes revenue from all payors generated in other ancillary services.
In addition to the service revenue above, the Company's rental revenue derived from triple-net lease arrangements with
third parties is $15,985, $15,157 and $5,258 for the years ended December 31, 2021, 2020, and 2019.
Balance Sheet Impact
Included in the Company’s consolidated balance sheets are contract balances, comprised of billed accounts receivable and
unbilled receivables, which are the result of the timing of revenue recognition, billings and cash collections, as well as, contract
liabilities, which primarily represent payments the Company receives in advance of services provided. The Company had no
material contract liabilities and contract assets as of December 31, 2021 and 2020, or activity during the years ended December
31, 2021, 2020, and 2019.
Accounts receivable as of December 31, 2021 and 2020, is summarized in the following table:
Medicaid
Managed care
Medicare
Private and other payors
Less: allowance for doubtful accounts
Accounts receivable, net
December 31, 2021 December 31, 2020
$
123,647 $
79,722
59,797
76,778
339,944
(11,213)
328,731 $
$
102,077
61,743
80,904
69,056
313,780
(8,718)
305,062
96
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THE ENSIGN GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Practical Expedients and Exemptions
As the Company’s contracts with its patients have an original duration of one year or less, the Company uses the practical
expedient applicable to its contracts and does not consider the time value of money. Further, because of the short duration of
these contracts, the Company has not disclosed the transaction price for the remaining performance obligations as of the end of
each reporting period or when the Company expects to recognize this revenue. In addition, the Company has applied the
practical expedient provided by ASC 340, Other Assets and Deferred Costs, and all incremental customer contract acquisition
costs are expensed as they are incurred because the amortization period would have been one year or less.
5. COMPUTATION OF NET INCOME PER COMMON SHARE
Basic net income per share is computed by dividing income from operations attributable to stockholders of The Ensign
Group, Inc. by the weighted average number of outstanding common shares for the period. The computation of diluted net
income per share is similar to the computation of basic net income per share, except that the denominator is increased to include
the number of additional common shares that would have been outstanding if the dilutive potential common shares had been
issued.
A reconciliation of the numerator and denominator used in the calculation of basic net income per common share follows:
Numerator:
Net income
Less: net income attributable to noncontrolling interests
Net income attributable to The Ensign Group, Inc.
Net income from discontinued operations, net of tax
Less: net income attributable to noncontrolling interests in discontinued
operations
Net income from discontinued operations, net of tax
Net income attributable to The Ensign Group, Inc.
Denominator:
Weighted average shares outstanding for basic net income per share
Basic net income per common share:
Income from discontinued operations
Net income attributable to The Ensign Group, Inc.
Year Ended December 31,
2020
2021
2019
$
$
$
$
$
197,725 $
171,364 $
92,213
3,073
886
194,652 $
—
170,478 $
—
523
91,690
19,473
—
—
194,652 $
—
—
170,478 $
629
18,844
110,534
54,486
53,434
53,452
3.57 $
—
3.57 $
3.19 $
—
3.19 $
1.72
0.35
2.07
97
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THE ENSIGN GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
A reconciliation of the numerator and denominator used in the calculation of diluted net income per common share
follows:
Numerator:
Net income
Less: net income attributable to noncontrolling interests
Net income attributable to The Ensign Group, Inc.
Net income from discontinued operations, net of tax
Less: net income attributable to noncontrolling interests in discontinued
operations
Net income from discontinued operations, net of tax
Net income attributable to The Ensign Group, Inc.
Denominator:
Weighted average common shares outstanding
Plus: incremental shares from assumed conversion (1)
Adjusted weighted average common shares outstanding
Diluted net income per common share:
Income from discontinued operations
Net income attributable to The Ensign Group, Inc.
Year Ended December 31,
2020
2021
2019
$
$
$
$
$
197,725 $
171,364 $
92,213
3,073
886
194,652 $
—
170,478 $
—
523
91,690
19,473
—
—
194,652 $
—
—
170,478 $
629
18,844
110,534
54,486
2,439
56,925
53,434
2,353
55,787
3.42 $
—
3.42 $
3.06 $
—
3.06 $
53,452
2,529
55,981
1.64
0.33
1.97
(1) Options outstanding which are anti-dilutive and therefore not factored into the weighted average common shares amount above were 198, 956 and 250 for
the years ended December 31, 2021, 2020 and 2019, respectively.
6. FAIR VALUE MEASUREMENTS
Fair value measurements are based on a three-tier hierarchy that prioritizes the inputs used to measure fair value. These
tiers include: Level 1, defined as observable inputs such as quoted market prices in active markets; Level 2, defined as inputs
other than quoted prices included within Level 1 that are observable 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 fair value of cash and cash equivalents of $262,201 and $236,562 as of December 31, 2021 and 2020, respectively, is
derived using Level 1 inputs. The Company's other financial assets include contracts insuring the lives of certain employees
who are eligible to participate in non-qualified deferred compensation plans which are held in a rabbi trust. The cash surrender
value of these contracts is based on performance measurement funds that shadow the deferral investment allocations made by
participants in the deferred compensation plan. As of December 31, 2021, and 2020, the fair value of the pooled investment
funds of $17,530 and $6,577, respectively, is derived using Level 2 inputs. The pooled investment funds are included in
restricted and other assets in the consolidated balance sheets. See Note 12, Restricted and Other Assets.
The Company's non-financial assets, which includes goodwill, intangible assets, property and equipment and right-of-use
assets, are not required to be measured at fair value on a recurring basis. However, on a periodic basis, or whenever events or
changes in circumstances indicate that their carrying value may not be recoverable, the Company assesses its long-lived assets
for impairment. When impairment has occurred, such long-lived assets are written down to fair value.
Debt Security Investments - Held to Maturity
As of December 31, 2021 and 2020, the Company had approximately $50,330 and $45,554, respectively, in debt security
investments which were classified as held to maturity and carried at amortized cost. The carrying value of the debt securities
approximates fair value based on Level 1 inputs. The Company has the intent and ability to hold these debt securities to
maturity. Further, as of December 31, 2021, the debt security investments were held in AA, A and BBB rated debt securities.
The Company believes its debt security investments that were in an unrealized loss position as of December 31, 2021 were not
other-than-temporarily impaired, nor has any event occurred subsequent to that date that would indicate any other-than-
temporary impairment.
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THE ENSIGN GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7. BUSINESS SEGMENTS
The Company has two reportable segments: (1) skilled services, which includes the operation of skilled nursing facilities
and rehabilitation therapy services and (2) real estate, which is comprised of properties owned by the Company and leased to
skilled nursing and assisted living operations where the properties are subject to triple-net long-term leases, including
operations that are owned and operated by the Company.
As of December 31, 2021, the skilled services segment includes 214 skilled nursing operations and 22 campus operations
that provide both skilled nursing and rehabilitative care services and senior living services. The Company's real estate segment
includes 100 owned real estate properties. These properties include 69 operations the Company operated and managed, real
estate properties of 32 senior living operations that are leased to and operated by Pennant and the Service Center location,
which continues to lease office space to various third parties. Of the 32 real estate operations leased to Pennant, two senior
living operations are located on the same real estate properties as skilled nursing facilities that the Company owns and operates.
The Company also reports an “All Other” category that includes results from its senior living operations, which includes nine
stand-alone senior living operations and 22 campus operations that provide both skilled nursing and rehabilitative care services
and senior living services, mobile diagnostics, medical transportation and other ancillary operations. Services included in the
“All Other” category are insignificant individually, and therefore do not constitute a reportable segment.
The Company’s reportable segments are significant operating segments that offer differentiated services. The Company's
CODM reviews financial information for each operating segment to evaluate performance and allocate capital resources. This
structure reflects its current operational and financial management and provides the best structure to maximize the quality of
care and investment strategy provided, while maintaining financial discipline. The Company's CODM does not review assets by
segment in his resource allocation and therefore assets by segment are not disclosed below.
With the exception of intercompany rental revenue, the accounting policies of the reportable segments are the same as
those described in Note 2, Summary of Significant Accounting Policies. Rental revenue from Ensign-affiliated operations are
based on mutually agreed-upon base rent that are subject to change from time to time. Intercompany revenue is eliminated in
consolidation, along with corresponding intercompany rent expenses of the related healthcare facilities. Included in the real
estate segment income is interest expense related to the borrowings to fund real estate acquisitions.
The following tables set forth financial information for the segments:
Service revenue
Rental revenue
Total revenue
Segment income (loss)
Gain on sale of real estate
Income before provision for income taxes
Year Ended December 31, 2021
Skilled
Services
Real Estate All Other(1)
Intercompany
Elimination(2)
Total
$ 2,523,234 $
— $
88,242 $
— $ 2,611,476
—
65,536
—
(49,551)
15,985
$ 2,523,234 $
65,536 $
88,242 $
(49,551) $ 2,627,461
373,603
35,986
(152,025)
—
—
—
—
—
—
—
—
257,564
440
— $
258,004
Depreciation and amortization
Other expense (income), net(3)
(1) General and administrative expense are included in the "all other" category.
(2) Intercompany elimination represents rental income at the real estate segment generated from triple-net lease arrangements with the Company's affiliated
wholly-owned healthcare facilities. Intercompany rental revenue is eliminated in consolidation, along with corresponding intercompany rent expenses of related
healthcare facilities.
(3) Other expense (income), net includes interest expense, interest income and gain and loss on investments.
(4,381) $
6,842 $
30,681
55,985
19,726
— $
— $
2,461
5,578
—
$
99
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THE ENSIGN GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Service revenue
Rental revenue
Total revenue
Year Ended December 31, 2020
Skilled
Services
Real Estate All Other(1)
Intercompany
Elimination(2)
Total
$ 2,288,182 $
— $
99,257 $
— $ 2,387,439
—
61,275
—
(46,118)
15,157
$ 2,288,182 $
61,275 $
99,257 $
(46,118) $ 2,402,596
Segment income (loss)
Loss on sale of real estate and impairment
charges
Income before provision for income taxes
327,812
31,323
(138,776)
—
—
—
—
—
—
—
—
220,359
(2,753)
— $
217,606
Depreciation and amortization
Other expense (income), net(3)
(1) General and administrative expense is included in the "all other" category.
(2) Intercompany elimination represents rental income at the real estate segment generated from triple-net lease arrangements with the Company's affiliated
wholly-owned healthcare facilities. Intercompany rental revenue is eliminated in consolidation, along with corresponding intercompany rent expenses of related
healthcare facilities.
(3) Other expense (income), net includes interest expense and interest income.
(3,801) $
9,350 $
54,571
28,585
18,218
— $
— $
5,549
7,768
—
$
Service revenue
Rental revenue
Total revenue
Segment income (loss)
Loss on sale of real estate and impairment
charges
Year Ended December 31, 2019
Skilled
Services
Real Estate All Other(1)
Intercompany
Elimination(2)
Total
$ 1,934,243 $
— $
97,023 $
— $ 2,031,266
—
49,868
—
(44,610)
5,258
$ 1,934,243 $
49,868 $
97,023 $
(44,610) $ 2,036,524
225,910
17,479
(125,797)
—
117,592
(1,425)
Income before provision for income taxes
Depreciation and amortization
Other expense (income), net(3)
(1) General and administrative expense is included in the "all other" category.
(2) Intercompany elimination represents rental income at the real estate segment generated from triple-net lease arrangements with the Company's affiliated
wholly-owned healthcare facilities. Intercompany rental revenue is eliminated in consolidation, along with corresponding intercompany rent expenses of related
healthcare facilities.
(3) Other expense (income), net includes interest expense and interest revenue.
—
15,196
15,612 $
—
8,021
(2,599) $
116,167
51,054
13,013
— $
—
— $
—
27,837
— $
$
Service revenue by major payor source were as follows:
Year Ended December 31, 2021
Skilled Services
All Other
Medicaid(1)
Medicare
Medicaid-skilled
Subtotal
Managed care
Private and other(2)
Total service revenue
$
$
1,007,061 $
727,103
172,770
1,906,934
456,728
159,572
2,523,234 $
Total Service Revenue
1,022,460
727,103
172,770
1,922,333
456,728
232,415
2,611,476
15,399 $
—
—
15,399
—
72,843
88,242 $
Revenue %
39.2 %
27.8
6.6
73.6
17.5
8.9
100.0 %
(1) Medicaid payor includes revenue generated from senior living operations and revenue related to FMAP for the year ended December 31, 2021.
(2) Private and other payors also includes revenue from senior living operations and all payors generated in other ancillary services for the year ended
December 31, 2021.
100
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THE ENSIGN GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Year Ended December 31, 2020
Skilled Services
All Other
Medicaid(1)
Medicare
Medicaid-skilled
Subtotal
Managed care
Private and other(2)
Total service revenue
$
$
886,991 $
727,374
149,846
1,764,211
367,095
156,876
2,288,182 $
Total Service Revenue
900,249
727,374
149,846
1,777,469
367,095
242,875
2,387,439
13,258 $
—
—
13,258
—
85,999
99,257 $
Revenue %
37.7 %
30.5
6.3
74.5
15.4
10.1
100.0 %
(1) Medicaid payor includes revenue generated from senior living operations and revenue related to FMAP for the year ended December 31, 2020.
(2) Private and other payors also includes revenue from senior living operations and all payors generated in other ancillary services for the year ended
December 31, 2020.
Year Ended December 31, 2019
Skilled Services
All Other
Medicaid(1)
Medicare
Medicaid-skilled
Subtotal
Managed care
Private and other(2)
Total service revenue
$
$
789,873 $
499,353
132,889
1,422,115
351,054
161,074
1,934,243 $
Total Service Revenue
802,952
499,353
132,889
1,435,194
351,054
245,018
2,031,266
13,079 $
—
—
13,079
—
83,944
97,023 $
Revenue %
39.5 %
24.6
6.5
70.6
17.3
12.1
100.0 %
(1) Medicaid payor includes revenue generated from senior living operations for the year ended December 31, 2019.
(2) Private and other payors also includes revenue from senior living operations and all payors generated in other ancillary services for the year ended
December 31, 2019.
In addition to the service revenue above, the Company's rental revenue derived from triple-net lease arrangements with
third parties is $15,985, $15,157 and $5,258 for the years ended December 31, 2021, 2020, and 2019, respectively.
8. OPERATION EXPANSIONS
The Company's subsidiaries expansion focus is to purchase or lease operations that are complementary to the current
affiliated operations, accretive to the business, or otherwise advance the Company's strategy. The results of all operating
subsidiaries are included in the Financial Statements subsequent to the date of acquisition. Acquisitions are accounted for using
the acquisition method of accounting. The Company's affiliated operations also enter into long-term leases that may include
options to purchase the facilities. As a result, from time to time, a real estate affiliated subsidiary will acquire the property of
facilities that have previously been operated under third-party leases.
FASB ASC Topic 805, Clarifying the Definition of a Business (ASC 805) defined the definition of a business to assist
entities with evaluating when a set of transferred assets and activities is deemed to be a business. Determining whether a
transferred set constitutes a business is important because the accounting for a business combination differs from that of an
asset acquisition. The definition of a business also affects the accounting for dispositions. When substantially all of the fair
value of assets acquired is concentrated in a single asset, or a group of similar assets, the assets acquired would not represent a
business and business combination accounting would not be required.
2021 Expansions
During the year ended December 31, 2021, the Company expanded its operations and real estate portfolio through a
combination of long-term leases and real estate purchases, with the addition of 17 stand-alone skilled nursing operations and
five real estate purchases, four of which the Company previously operated and continues to operate. The remaining real estate
purchase is operated by Pennant. These new operations added a total of 1,832 operational skilled nursing beds operated by the
Company's affiliated operating subsidiaries. The aggregate purchase price for these acquisitions during the year ended
December 31, 2021 was $104,224.
In connection with the new operations made through long-term leases, the Company did not acquire any material assets
or assume any liabilities other than the tenant's post-assumption rights and obligations under the long-term lease. The Company
entered into a separate operations transfer agreement with the prior operator as part of each transaction.
101
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THE ENSIGN GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The fair value of assets for 18 of the acquisitions was concentrated in property and equipment and as such, these
transactions were classified as asset acquisitions. The aggregate purchase price for the asset acquisitions during the year ended
December 31, 2021 was $98,224. The fair value of assets for the remaining four additions was concentrated in goodwill of
$6,000 and as such, the transaction was classified as a business combination.
Subsequent to December 31, 2021, the Company expanded its operations and real estate portfolio through a combination
of two long-term leases and one real estate purchase, which added three stand-alone skilled nursing operations. These new
operations added 379 operational skilled nursing beds to be operated by the Company's affiliated operating subsidiaries. The
aggregate purchase price for these acquisitions was approximately $27,400.
2020 Expansions
During the year ended December 31, 2020, the Company expanded its operations through a combination of long-term
leases and real estate purchases, with the addition of five stand-alone skilled nursing operations, one stand-alone senior living
operation and one campus operation. Of these additions, four are related to purchases of owned properties, further expanding
the Company's real estate portfolio. These new operations added a total of 507 operational skilled nursing beds and 298
operational senior living units to be operated by the Company's affiliated operating subsidiaries.The aggregate purchase price
for these acquisitions during the year ended December 31, 2020 was $24,997.
In connection with the new operations made through long-term leases, the Company did not acquire any material assets
or assume any liabilities other than the tenant's post-assumption rights and obligations under the long-term lease. The Company
entered into a separate operations transfer agreement with the prior operator as part of each transaction.
The fair value of assets for the purchases of these properties was concentrated in property and equipment and as such,
these transactions were classified as asset acquisitions.
During the first quarter of 2020, the Company entered into a long-term lease agreement to transfer two senior living
operations to Pennant. Ensign affiliates retained ownership of the real estate for these two senior living communities.
2019 Expansions
During the year ended December 31, 2019, the Company expanded its operations and real estate portfolio through a
combination of long-term leases and real estate purchases, with the addition of 22 stand-alone skilled nursing operations, one
stand-alone senior living operations and four campus operations. Of these acquisitions, 15 relate to purchases of owned
properties, further expanding our real estate portfolio. The addition of these operations added 3,142 operational skilled nursing
beds and 407 senior living units to be operated by the Company's affiliated operating subsidiaries. The Company also invested
in new ancillary services that are complementary to its existing businesses. In addition, the Company invested in real estate and
Medicare and Medicaid licenses during the year. The aggregate purchase price for these acquisitions during the year ended
December 31, 2019 was $148,974.
The Company did not acquire any material assets or assume any liabilities other than tenant's post-assumption rights and
obligations under the long-term lease. The Company entered into a separate operations transfer agreement with the prior
operator as part of each transaction.
The fair value of assets for 30 of the acquisitions was concentrated in property and equipment and as such, these
transactions were classified as asset acquisitions. The purchase price for the asset acquisitions was $141,595. The fair value of
assets for the remaining one acquisition was concentrated in goodwill and as such, the transaction was classified as a business
combination. The purchase price for the business combination was $7,379. The Company also entered into a note payable with
the seller of $924, which was subsequently paid off in the second quarter of 2019 and was included as payments of debt in the
consolidated statement of cash flows.
In connection with the Spin-Off, the Company transferred the assets of two stand-alone senior living operations, two
home health agencies, five hospice agencies and two home care agencies that were purchased for an aggregate price of $18,780.
The Company retained the real estate for one stand-alone senior living operation.
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THE ENSIGN GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The table below presents the allocation of the purchase price for the operations acquired during the years ended
December 31, 2021, 2020, and 2019, excluding assets that were contributed to Pennant that occurred during the Spin-Off.
Year Ended December 31,
2020
2021
2019
Land
Building and improvements
Equipment, furniture, and fixtures
Assembled occupancy
Definite-lived intangible assets
Goodwill
Favorable leases
Other indefinite-lived intangible assets
Total acquisitions
$
$
19,928 $
77,975
217
29
—
6,000
—
75
104,224 $
9,496 $
14,178
568
107
—
—
—
648
24,997 $
34,377
101,217
6,024
638
440
5,382
294
602
148,974
The Company’s acquisition strategy has been focused on identifying both opportunistic and strategic acquisitions within
its target markets that offer strong opportunities for return. The operations added by the Company are frequently
underperforming financially and can have regulatory and clinical challenges to overcome. Financial information, especially
with underperforming operations, is often inadequate, inaccurate or unavailable. Consequently, the Company believes that prior
operating results are not a meaningful representation of the Company’s current operating results or indicative of the integration
potential of its newly acquired operating subsidiaries. The assets added during the year ended December 31, 2021 were not
material operations to the Company individually or in the aggregate. Accordingly, pro forma financial information is not
presented. These additions have been included in the December 31, 2021 consolidated balance sheets of the Company, and the
operating results have been included in the consolidated statements of operations of the Company since the date the Company
gained effective control.
9. PROPERTY AND EQUIPMENT - NET
Property and equipment, net consists of the following:
Land
Buildings and improvements
Leasehold improvements
Equipment
Furniture and fixtures
Construction in progress
Less: accumulated depreciation
Property and equipment, net
December 31,
2021
2020
121,164 $
646,221
140,012
262,246
4,305
10,253
1,184,201
(295,767)
888,434 $
101,236
555,416
129,727
233,453
4,409
3,008
1,027,249
(249,005)
778,244
$
$
The Company completed the sale of real estate for $7,138 during the year ended December 31, 2019, of which a gain of
$2,861 was recognized during the year ended December 31, 2019 related to the transaction. In addition, the Company evaluated
its long-lived assets and did not record an impairment charge for the fiscal year ended 2021. The Company recorded
impairment charges of $2,681 and $3,203 for the fiscal years ended 2020 and 2019, respectively.
See also Note 8, Operation Expansions for information on acquisitions during the years ended December 31, 2021 and
2020.
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THE ENSIGN GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
10. INTANGIBLE ASSETS - NET
December 31,
2021
2020
Intangible Assets
Assembled occupancy
Facility trade name
Customer relationships
Total
Weighted
Average
Life (Years)
Gross
Carrying
Amount
Accumulated
Amortization
Net
Gross
Carrying
Amount
Accumulated
Amortization
Net
0.4 $
30.0
18.4
$
68 $
733
4,582
5,383 $
(68) $
(391)
(2,272)
(2,731) $ 2,652 $
— $
342
2,310
39 $
733
4,640
5,412 $
13
(26) $
367
(366)
(2,121)
2,519
(2,513) $ 2,899
During the years ended December 31, 2021, 2020, and 2019, amortization expense was $1,435, $1,813 and $3,660,
respectively, of which $1,158, $1,223 and 1,981 was related to the amortization of right-of-use assets, respectively. In addition,
the Company identified intangible assets which became fully amortized during the prior year and removed these fully amortized
balances from the gross asset and accumulated amortization amounts. The Company did not record any impairment charge to
intangible assets during the years ended December 31, 2021, 2020 and 2019.
Estimated amortization expense for each of the years ending December 31 is as follows:
Year
2022
2023
2024
2025
2026
Thereafter
Amount
234
234
234
234
234
1,482
2,652
$
11. GOODWILL AND OTHER INDEFINITE-LIVED INTANGIBLE ASSETS
The Company tests goodwill during the fourth quarter of each year or more often if events or circumstances indicate there
may be impairment. The Company performs its analysis for each reporting unit that constitutes a business for which discrete
financial information is produced and reviewed by operating segment management and provides services that are distinct from
the other components of the operating segment, in accordance with the provisions of FASB ASC Topic 350, Intangibles—
Goodwill and Other (ASC 350). This guidance provides the option to first assess qualitative factors to determine whether it is
more likely than not that the fair value of a reporting unit is less than its carrying value. 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 a
goodwill impairment test by comparing the carrying value of each reporting unit to its respective fair value. The Company
determines the estimated fair value of each reporting unit using a discounted cash flow analysis. The fair value of the reporting
unit is the implied fair value of goodwill. In the event a reporting unit's carrying value exceeds its fair value, an impairment loss
will be recognized. An impairment loss is measured by the difference between the carrying value of the reporting unit and its
fair value.
The Company performs its goodwill impairment test annually and evaluates goodwill when events or changes in
circumstances indicate that its carrying value may not be recoverable. The Company performs the annual impairment testing of
goodwill using October 1 as the measurement date. The Company completed its goodwill impairment test as of October 1, 2021
and did not record any impairment charge to goodwill or other intangible assets for the fiscal year 2021 or 2020. For fiscal year
2019, management determined that the improvements in operations and related forecasted cash flows were slower than
anticipated at the time of acquisition, resulting in the impairment to goodwill for the year ended December 31, 2019 for other
ancillary services. Since 1999, the Company has recognized cumulative goodwill impairment losses of $7,410.
The Company anticipates that the majority of total goodwill recognized will be fully deductible for tax purposes as of
December 31, 2021.
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THE ENSIGN GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
All of the Company's acquisitions during the year ended December 31, 2020 were classified as asset acquisitions and
accordingly, no goodwill was recognized for these acquisitions. There were no other activities in goodwill during the year
ended December 31, 2020. Provided that goodwill corresponds to the acquisition of a business and not merely the acquisition of
real estate property, the Company's real estate segment appropriately does not carry a goodwill balance. The following table
represents the goodwill value by skilled service segment and "all other" category, which includes other ancillary services, as of
and for the years ended December 31, 2021, 2020 and 2019:
January 1, 2019
Additions
Impairments
December 31, 2019
December 31, 2020
Additions
December 31, 2021
Skilled Services
Goodwill
All Other
Total
$
$
$
$
45,486 $
—
—
45,486 $
45,486 $
6,000
4,099 $
5,382
(498)
8,983 $
8,983 $
—
51,486 $
8,983 $
49,585
5,382
(498)
54,469
54,469
6,000
60,469
During the year ended December 31, 2021, the Company acquired $181 in Medicare and Medicaid licenses compared to
$648 and $602 in the fiscal years 2020 and 2019, respectively.
Other indefinite-lived intangible assets consist of the following:
Trade name
Medicare and Medicaid licenses
12. RESTRICTED AND OTHER ASSETS
Restricted and other assets consist of the following:
Debt issuance costs, net
Long-term insurance losses recoverable asset
Deposits with landlords
Capital improvement reserves with landlords and lenders
Deferred compensation plan investments
Restricted and other assets
December 31,
2021
2020
889 $
2,838
3,727 $
889
2,827
3,716
December 31,
2021
2020
1,953 $
6,755
13,705
7,103
17,530
47,046 $
2,664
7,138
12,400
4,376
6,577
33,155
$
$
$
$
Included in restricted and other assets as of December 31, 2021 and 2020 are anticipated insurance recoveries related to
the Company's workers' compensation liabilities and general and professional liability claims that are recorded on a gross rather
than net basis in accordance with ASU issued by the FASB.
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THE ENSIGN GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
13. OTHER ACCRUED LIABILITIES
Other accrued liabilities consists of the following:
Quality assurance fee
Refunds payable
Resident advances
Unapplied state relief funds
Cash held in trust for patients
Dividends payable
Property taxes
Other
Other accrued liabilities
December 31,
2021
2020
$
$
6,474 $
34,814
9,337
1,781
6,430
3,035
9,124
18,415
89,410 $
6,631
36,323
8,558
6,520
6,052
2,868
9,222
11,144
87,318
Quality assurance fee represents the aggregate of amounts payable to Arizona, California, Colorado, Idaho, Iowa, Kansas,
Nebraska, Nevada, Utah, Washington and Wisconsin as a result of a mandated fee based on patient days or licensed beds.
Refunds payable includes payables related to overpayments, duplicate payments and credit balances from various payor
sources. Resident advances occur when the Company receives payments in advance of services provided. Resident deposits
include refundable deposits to patients. Cash held in trust for patients reflects monies received from or on behalf of patients.
Maintaining a trust account for patients is a regulatory requirement and, while the trust assets offset the liabilities, the Company
assumes a fiduciary responsibility for these funds. The cash balance related to this liability is included in other current assets in
the consolidated balance sheets.
14. INCOME TAXES
The provision for income taxes on continuing operations for the years ended December 31, 2021, 2020 and 2019 is
summarized as follows:
Year Ended December 31,
2020
2021
2019
Current:
Federal
State
Deferred:
Federal
State
Total
$
49,105 $
60,591 $
14,363
11,898
61,003
13,460
74,051
5,425
19,788
(716)
(23,054)
4,451
(8)
(4,755)
(285)
(724)
(27,809)
4,166
$
60,279 $
46,242 $
23,954
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THE ENSIGN GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
A reconciliation of the federal statutory rate to the effective tax rate for income from continuing operations for the years
ended December 31, 2021, 2020 and 2019, respectively, is comprised as follows:
Income tax expense at statutory rate
State income taxes - net of federal benefit
Non-deductible expenses
Equity compensation
Other adjustments
Total income tax provision
December 31,
2020
2021
2019
21.0 %
21.0 %
21.0 %
3.7
2.4
(3.3)
(0.4)
3.2
1.8
(4.3)
(0.4)
3.5
3.1
(5.2)
(1.8)
23.4 %
21.3 %
20.6 %
The Company's effective tax rate was 23.4% for the year ended December 31, 2021, compared to 21.3% for the same
period in 2020 and 20.6% in 2019. The higher effective tax rate is due to lower tax benefits from stock compensation, offset by
higher tax expense from non-deductible expenses.
The Company's deferred tax assets and liabilities as of December 31, 2021 and 2020 are summarized below.
Deferred tax assets (liabilities):
Accrued expenses
Allowance for doubtful accounts
Tax credits
Insurance
Lease liability
State taxes
Valuation allowance
Total deferred tax assets
Depreciation and amortization
Prepaid expenses
Right of use asset
Total deferred tax liabilities
Net deferred tax assets
December 31,
2021
2020
$ 58,640 $ 54,700
13,171
11,598
2,138
8,712
2,497
7,686
285,643
256,216
(165)
223
368,139
332,920
(789)
(879)
367,350
(45,827)
332,041
(41,801)
(4,265)
(3,137)
(284,111) (254,679)
(334,203) (299,617)
$ 33,147 $ 32,424
The Company had state credit carryforwards as of December 31, 2021 and 2020 of $2,138 and $2,497, respectively. These
carryforwards almost entirely relate 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. As of
December 31, 2021 and 2020, the valuation allowance of $789 and $879, respectively, was primarily recorded against the
Enterprise Zone credits as the Company believes it 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 states were not material during the years ended December 31, 2021 and
2020.
As of December 31, 2021, 2020 and 2019, the Company did not have any unrecognized tax benefits, net of its state
benefits that would affect the Company's effective tax rate. The Company classifies interest and/or penalties on income tax
liabilities or refunds as additional income tax expense or income. Such amounts are not material.
The Federal statutes of limitations on the Company's 2017, 2016, and 2015 income tax years lapsed during the third
quarter of 2021, 2020, and 2019, respectively. During the fourth quarter of each year, various state statutes of limitations also
lapsed. The lapses for the years ended December 31, 2021 and 2020 had no impact on the Company's unrecognized tax
benefits.
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THE ENSIGN GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
During the year ended December 31, 2021, the state of Wisconsin initiated and completed an examination of the
Company's 2019, 2018, and 2017 state tax years with no adjustments. The Company is not under examination by any major
income tax jurisdiction.
15. DEBT
Debt consists of the following:
Mortgage loans and promissory notes
Less: current maturities
Less: debt issuance costs, net
Long-term debt less current maturities
Mortgage Loans and Promissory Notes
December 31,
2021
2020
$
$
159,967 $
(3,760)
(3,324)
152,883 $
117,806
(2,960)
(2,302)
112,544
As of December 31, 2021, the Company's operating subsidiaries had $159,967 outstanding under the mortgage loans and
notes, of which $3,760 is classified as short-term and the remaining $156,207 is classified as long-term. The Company was in
compliance with all loan covenants as of December 31, 2021.
During year ended December 31, 2021, four of the Company's subsidiaries entered into the Department of Housing and
Urban Development (HUD) mortgage loans in the aggregate amount of $44,990. As a result, 23 of the Company's subsidiaries
have mortgage loans insured with HUD in the aggregate amount of $156,636, as of December 31, 2021, which subjects these
subsidiaries to HUD oversight and periodic inspections. The mortgage loans bear effective interest rates in a range of 3.1% to
4.2%, including fixed interest rates in a range of 2.4% to 3.3% per annum. In addition to the interest rate, we incur other fees for
HUD placement, including but not limited to audit fees. Amounts borrowed under the mortgage loans may be prepaid, subject
to prepayment fees based on the principal balance on the date of prepayment. For the majority of the loans, during the first three
years, the prepayment fee is 10.0% and is reduced by 3.0% in the fourth year of the loan, and reduced by 1.0% per year for
years five through ten of the loan. There is no prepayment penalty after year ten. The terms for all the mortgage loans are 25 to
35 years.
In addition to the HUD mortgage loans above, the Company has two promissory notes. The notes bear fixed interest rates
of 5.0% and 5.3% per annum and the term of the notes are ten months and 12 years, respectively. The 12 year note which was
used for an acquisition is secured by the real property comprising the facility and the rent, issues and profits thereof, as well as
all personal property used in the operation of the facility.
Credit Facility with a Lending Consortium Arranged by Truist
The Company maintains a revolving credit facility under the Third Amended and Restated Credit Agreements, dated as of
October 1, 2019, between the Company and Truist Financial Corporation (Truist) (formerly known as SunTrust Bank, Inc.) (the
Credit Facility). The Credit Facility includes a revolving line of credit of up to $350,000 in aggregate principal amount. The
maturity date of the Credit Facility is October 1, 2024. Borrowings are supported by a lending consortium arranged by Truist.
The interest rates applicable to loans under the Credit Facility are, at the Company's option, equal to either a base rate plus a
margin ranging from 0.50% to 1.50% per annum or LIBOR plus a margin range from 1.50% to 2.50% per annum, based on the
Consolidated Total Net Debt to Consolidated EBITDA ratio (as defined in the agreement). In addition, the Company pays a
commitment fee on the unused portion of the commitments that ranges from 0.25% to 0.45% per annum, depending on the
Consolidated Total Net Debt to Consolidated EBITDA ratio.
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 of the Company's material operating subsidiaries as well as a first lien on substantially all of its
personal property. The Credit Facility contains customary covenants that, among other things, restrict, subject to certain
exceptions, the ability of the Company and its operating subsidiaries to grant liens on their assets, incur indebtedness, sell
assets, make investments, engage in acquisitions, mergers or consolidations, amend certain material agreements and pay certain
dividends and other restricted payments. Under the Credit Facility, the Company must comply with financial maintenance
covenants to be tested quarterly, consisting of (i) a maximum consolidated total net debt to consolidated EBITDA ratio (which
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THE ENSIGN GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
shall not be greater than 3.00:1.00; provided that if the aggregate consideration for approved acquisitions in a six month period
is greater than $50,000, then the ratio can be increased at the election of the Company with notice to the administrative agent to
3.50:1.00 for the first fiscal quarter and the immediately following three fiscal quarters), and (ii) a minimum interest/rent
coverage ratio (which cannot be less than 1.50:1.00). Subsequent to December 31, 2021, we amended our Credit Facility to
include Standard Bearer REIT as a co-borrower. All existing terms and conditions remained the same. As of December 31,
2021, and February 4, 2022, there was no outstanding debt under the Credit Facility. The Company was in compliance with all
loan covenants as of December 31, 2021.
Future principal payments due under the long-term debt arrangements discussed above are as follows:
Years Ending December 31,
2022
2023
2024
2025
2026
Thereafter
$
Amount
3,759
3,818
3,950
4,086
4,227
140,127
$
159,967
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 presented based upon the interest rates that the Company believes it can currently obtain for similar debt.
Off-Balance Sheet Arrangements
As of December 31, 2021, the Company had approximately $6,710 on the Credit Facility of borrowing capacity pledged
as collateral to secure outstanding letters of credit, which is a reduction of $870 from 2020.
16. OPTIONS AND AWARDS
Stock-based compensation expense consists of stock-based payment awards made to employees and directors, including
employee stock options and restricted stock awards, based on estimated fair values. As stock-based compensation expense
recognized in the Company’s consolidated statements of income for the years ended December 31, 2021, 2020, and 2019 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.
2017 Omnibus Incentive Plan - The Company has one active stock incentive plan, the 2017 Omnibus Incentive Plan (the
2017 Plan). The 2017 Plan provided for the issuance of 6,881 shares of common stock which are to be proportionally adjusted
in the event of any Equity Restructuring. The number of shares available to be issued under the 2017 Plan were adjusted to
8,118 shares of common stock in order to reflect the proportional adjustments as part of the spin-off transaction that occurred in
October 2019. The number of shares available to be issued under 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 share which relates to an award other than
a stock option or stock appreciation right award (a full-value award). Granted non-employee director options vest and become
exercisable in three equal annual installments, or the length of the term if less than three years, on the completion of each year
of service measured from the grant date. All other options generally vest over five years at 20% per year on the anniversary of
the grant date. Options expire ten years from the date of grant. As of December 31, 2021, there were approximately 2,114
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 stock option awards. Determining the appropriate fair-value model and calculating the fair value of stock option awards at
the grant date requires judgment, including estimating stock price volatility, expected option life, and forfeiture rates. The fair-
value of the restricted stock awards at the grant date is based on the market price on the grant date, adjusted for forfeiture rates.
The Company develops estimates based on historical data and market information, 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.
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THE ENSIGN GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
•
•
•
•
The Company utilizes its own 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 expected term.
Estimated forfeiture rate of approximately 7.79% per year is based on the Company's historical forfeiture activity of
unvested stock options.
Modifications of Equity Awards
Effective at the time of the consummation of the Spin-Off, all holders of the Company's restricted stock awards on the
date of record for the Spin-Off, received Pennant restricted stock awards consistent with the distribution ratio, with terms and
conditions substantially similar to the terms and conditions applicable to the Company's restricted stock awards. For purposes of
the vesting of these equity awards, continued employment or service with Ensign or with Pennant is treated as continued
employment for purposes of both Ensign's and Pennant's equity awards and the vesting terms of each converted grant remained
unchanged. Also, effective with the Spin-Off, the holders of the Company's stock options on the date of record received stock
options consistent with a conversion ratio that was necessary to maintain the pre Spin-Off intrinsic value of the options. The
stock options terms and conditions are based on the preexisting terms in the 2017 Plan, including nondiscretionary antidilution
provisions. In order to preserve the aggregate intrinsic value of the Company's stock options held by such persons, the exercise
prices of such awards were adjusted by using the proportion of the Pennant closing stock price to the total Company closing
stock prices on the distribution date. All of these adjustments were designed to equalize the fair value of each award before and
after Spin-Off. These adjustments were accounted for as modifications to the original awards. Due to the modification of the
equity options as a result of the Spin-Off, the Company compared the fair value of the original equity awards immediately
before and after the Spin-Off and no incremental fair value was recognized as a result of the above adjustments due to
immateriality. Accordingly, the Company did not record any incremental compensation expense as a result of the modifications
to the awards on the date of the Spin-Off.
Stock Options
The Company granted 621 stock options during the year ended December 31, 2021. The Company used the following
assumptions for stock options granted during the years ended December 31, 2021, 2020, and 2019:
Grant Year
2021
2020
2019
Options
Granted
Weighted Average
Risk-Free Rate
Expected Life
Weighted Average
Volatility
Weighted Average
Dividend Yield
621
669
776
1.0%
0.6%
2.0%
6.2 years
6.2 years
6.2 years
42.4%
39.4%
34.0%
0.3%
0.4%
0.4%
For the years ended December 31, 2021, 2020, and 2019, the following represents the exercise price and fair value
displayed at grant date for stock option grants:
Grant Year
2021
2020
2019
Granted(1)
621
669
776
Weighted Average
Exercise Price(2)
Weighted Average Fair
Value of Options(3)
$
$
$
80.19 $
52.20 $
44.31 $
32.82
19.52
15.71
(1) Options granted from January 1, 2019 through September 30, 2019 represent historical grant values prior to the impact of the Spin-Off. Options granted
subsequent to October 1, 2019 represent grant values reflective of the Spin-Off.
(2) Weighted average exercise price was calculated using exercise prices reflective of the Spin-Off Conversion for all periods presented.
(3) Weighted average fair value of options was calculated using the fair values reflective of the Spin-Off Conversion for all periods presented.
The weighted average exercise price equaled the weighted average fair value of common stock on the grant date for all
options granted during the periods ended December 31, 2021, 2020 and 2019 and therefore, the intrinsic value was $0 at the
date of grant.
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THE ENSIGN GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table represents the employee stock option activity during the year ended December 31, 2021, 2020 and
2019:
January 1, 2019
Granted
Forfeited
Exercised
Equitable adjustment(2)
December 31, 2019
Granted
Forfeited
Exercised
December 31, 2020
Granted
Forfeited
Exercised
December 31, 2021
Number of Options
Outstanding(1)
Weighted Average
Exercise Price(3)
Number of
Options Vested(1)
Weighted Average Exercise
Price of Options Vested(3)
4,188 $
776
(63)
(809)
336
4,428 $
669
(80)
(979)
4,038 $
621
(105)
(516)
4,038 $
14.71
44.31
26.84
8.83
N/A
20.85
52.20
33.68
12.93
27.71
80.19
44.76
17.80
36.60
2,431 $
10.48
2,557 $
12.82
2,148 $
16.66
2,183 $
21.02
(1) Options activity from January 1, 2019 through September 30, 2019 represents historical grant values prior to the impact of the Spin-Off as discussed above.
Options activity subsequent to October 1, 2019 represent values reflective of the Spin-Off.
(2) The equitable adjustment represents equity awards modifications upon the Spin-Off Conversion related to fiscal years prior to October 1, 2019.
(3) Weighted average exercise prices were calculated using exercise prices reflective of the Spin-Off Conversion for all periods presented.
The following summary information reflects stock options outstanding, vested and related details as of December 31, 2021:
Stock Options Outstanding
Stock Options Vested
Year of Grant
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Total
Exercise Price
5.56
6.76
8.94
-
-
6.75
9.74
- 16.05
18.20 - 21.39
15.93 - 16.86
15.80 - 19.41
22.49 - 32.71
41.07 - 45.76
44.84 - 59.49
$73.47 - $83.64
Number
Outstanding
Black-
Scholes
Fair Value
Remaining
Contractual
Life (Years)
Vested and
Exercisable
66
140
616
270
249
308
525
652
602
610
199
539
2,964
2,095
1,468
1,812
5,074
10,237
11,837
19,999
4,038 $ 56,224
1
2
3
4
5
6
7
8
9
10
66
140
616
270
249
223
275
233
111
—
2,183
The aggregate intrinsic value of options outstanding, vested and expected to vest as of December 31, 2021, 2020 and
2019 is as follows:
Options
Outstanding
Vested
Expected to vest
2021
$
December 31,
2020
191,242 $
137,382
48,548
182,552 $
120,867
53,366
2019
108,623
83,243
22,399
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THE ENSIGN GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The intrinsic value is calculated as the difference between the market value of the underlying common stock and the
exercise price of the options. The aggregate intrinsic value of options that vested during the years ended December 31, 2021,
2020, and 2019 was $27,731, $26,030 and $21,952, respectively. The total intrinsic value of options exercised during the years
ended December 31, 2021, 2020, and 2019 was $34,278, $45,081 and $29,032, respectively.
Restricted Stock Awards
The Company granted 222, 281 and 290 restricted stock awards during the years ended December 31, 2021, 2020 and
2019, respectively. All awards were granted at an issue price of $0 and generally vest over five years. The fair value per share
of restricted awards granted during the years ended December 31, 2021, 2020 and 2019 ranged from $72.84 to $93.31, $35.47
to $58.06 and $35.33 to $48.64, 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, 2021 and changes
during the year ended December 31, 2021, 2020 and 2019 is presented below:
Non-Vested
Restricted Awards
Weighted Average Grant
Date Fair Value(1)
Nonvested at January 1, 2019
Granted
Vested
Forfeited
Nonvested at December 31, 2019
Granted
Vested
Forfeited
Nonvested at December 31, 2020
Granted
Vested
Forfeited
Nonvested at December 31, 2021
(1) Weighted average grant date fair value was calculated using the fair values reflective of the Spin-Off Conversion.
573 $
290
(241)
(12)
610 $
281
(280)
(20)
591 $
222
(244)
(20)
549 $
24.84
43.51
30.24
28.49
31.35
48.73
32.84
31.71
38.90
81.65
47.45
45.64
52.16
During the year ended December 31, 2021, the Company granted 21 automatic quarterly stock awards to non-employee
directors for their service on the Company's board of directors. The fair value per share of these stock awards was $72.84 to
$93.31 based on the market price on the grant date.
Long-Term Incentive Plan
On August 27, 2019, the Board approved the Long-Term Incentive Plan (the 2019 LTI Plan). The 2019 LTI Plan
provides that certain employees of the Company who assisted in the consummation of the spin-off transaction that occurred in
October 2019 are granted shares of restricted stock upon the successful completion of the spin-off. The 2019 LTI Plan provides
for the issuance of 500 shares of Pennant restricted stock. The shares are vested over five years at 20% per year on the
anniversary of the grant date. If a recipient is terminated or voluntarily leaves the Company, all shares subject to restriction or
not yet vested shall be entirely forfeited. The total stock-based compensation related to the 2019 LTI Plan was approximately
$854, $881 and $271 for the years ended December 31, 2021, 2020, and 2019, respectively.
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THE ENSIGN GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Stock-based compensation expense recognized for the Company's equity incentive plans and long-term incentive plan for
the years ended December 31, 2021, 2020, and 2019 was as follows:
Stock-based compensation expense related to stock options
Stock-based compensation expense related to restricted stock awards
Stock-based compensation expense related to stock options and restricted stock
awards to non-employee directors
Total
Year Ended December 31,
2021
2020
2019(1)
$
8,459 $
6,132 $
8,385
7,373
5,148
4,955
1,834
1,019
1,219
$
18,678 $
14,524 $
11,322
(1) The amount of stock-based compensation expense that was classified as discontinued operations was $424 for the year ended December 31, 2019.
In future periods, the Company expects to recognize approximately $34,978 and $26,038 in stock-based compensation
expense for unvested options and unvested restricted stock awards, respectively, that were outstanding as of December 31,
2021. Future stock-based compensation expense will be recognized over 3.7 and 3.5 weighted average years for unvested
options and restricted stock awards, respectively. There were 1,855 unvested and outstanding options as of December 31, 2021,
of which 1,750 shares are expected to vest. The weighted average contractual life for options outstanding, vested and expected
to vest as of December 31, 2021 was 6.0 years.
Equity Instrument Denominated in the Shares of a Subsidiary
On May 26, 2016, the Company granted stock options and restricted stock awards under the Subsidiary Equity Plan to
employees and management of the subsidiary. During 2019, the Company contributed the net assets of the subsidiary to
Pennant prior to the consummation of the Spin-Off on October 1, 2019. Effective upon the Spin-Off, all shares under the
Subsidiary Equity Plan were converted to Pennant shares and Pennant's Board of Directors hold full administrative authority of
the Subsidiary Equity Plan. No additional shares will be granted under this plan.
The Company did not grant any new restricted shares during the year ended December 31, 2019. The awards granted
generally vested over a period of three to five years, or upon the occurrence of certain prescribed events. During the year ended
December 31, 2019, there were 976 restricted stock awards that vested.
The Company did not grant any options during the fiscal year 2019. The value of the stock options and restricted stock
awards had been tied to the value of the common stock of the subsidiary. Prior to the Spin-Off, the awards could be put to the
Company at various prescribed dates, which in no event was earlier than six months after vesting of the restricted awards or
exercise of the stock options. The Company had the ability to call the awards, generally upon employee termination.
Prior to the Spin-Off, the grant-date fair value of the awards was recognized as compensation expense over the relevant
vesting periods, with a corresponding adjustment to noncontrolling interests. As a result of the conversion of the Subsidiary
Equity Plan, the Company's noncontrolling interest in the subsidiary was eliminated. The grant values were determined based
on an independent valuation of the subsidiary shares. For the year ended December 31, 2019, the Company expensed $594 in
stock-based compensation related to the Subsidiary Equity Plan.
During the year ended December 31, 2019, the Company repurchased 534 shares of common stock under the Subsidiary
Equity Plan for $2,687. The Company subsequently sold the shares and received net proceeds of $2,293 during the year ended
December 31, 2019. Stock-based compensation expense related to the Subsidiary Equity Plan, payments from the repurchase of
shares and the proceeds from the sale of the repurchased shares related to the Subsidiary Equity Plan are all included within the
Company's consolidated financial statements as discontinued operations.
17. LEASES
The Company leases from CareTrust REIT, Inc. (CareTrust) real property associated with 95 affiliated skilled nursing
and senior living facilities used in the Company’s operations, 94 of which are under nine “triple-net” master lease agreements
(collectively, the Master Leases), which range in terms from 13 to 20 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 the same 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 of the Master
Leases having occurred and being continuing; and (2) the tenants providing timely notice of their intent to renew. The term of
the Master Leases is 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 applicable cure periods set forth in the Master Leases. If the Company elects to renew the
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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. Additionally, four of the 95 facilities leased from CareTrust include an option to purchase that the Company can
exercise starting on December 1, 2024. In the second quarter of 2021, the Company added four operations and extended the
term for one of the Master Leases for an additional 15 years. In the third quarter of 2021, the Company added two operations
and extended the term for one of the Master Leases for an additional 17 years. As a result, the total lease liabilities and right-of-
use assets increased by $54,716 and $63,374, respectively, to reflect the new lease obligations.
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 Master Lease is terminated prior to its expiration other than with CareTrust’s consent, the Company
may be liable for damages and incur charges such as continued payment of rent through the end of the lease term as well as
maintenance and repair costs for the leased property.
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 services necessary or appropriate for the leased properties and the business
conducted on the leased properties; (3) all insurance required in connection with the leased properties and the business
conducted on the leased properties; (4) all facility maintenance and repair costs; and (5) all fees in connection with any licenses
or authorizations necessary or appropriate for the leased properties and the business conducted on the leased properties. The
terms and conditions of the one stand-alone lease are substantially the same as those for the master leases described above.
Total rent expense for continuing operations under the Master Leases was approximately $59,571, $52,838 and $55,644 for the
years ended December 31, 2021, 2020 and 2019, respectively.
Among other things, under the Master Leases, the Company must maintain compliance with specified financial covenants
measured on a quarterly basis, including a portfolio coverage ratio and a minimum rent coverage ratio. The Master Leases also
include certain reporting, legal and authorization requirements. The Company is in compliance with requirements of the Master
Leases as of December 31, 2021.
In connection with the spin-off transaction that occurred in October 2019, the Company guaranteed certain leases of
Pennant based on the underlying terms of the leases. The Company does not consider these guarantees to be probable and the
likelihood of Pennant defaulting is remote, and therefore no liabilities have been accrued.
The Company also leases certain affiliated operations and certain administrative offices under non-cancelable operating
leases, most of which have initial lease 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. The term of each
lease is 15 years with two five-year renewal options and is subject to annual escalation equal to the percentage change in the
Consumer Price Index with a stated cap percentage. In addition, the Company leases certain of its equipment under non-
cancelable operating leases with initial terms ranging from three to five years. Most of these leases contain renewal options,
certain of which involve rent increases. Total rent expense for continuing operations inclusive of straight-line rent adjustments
and rent associated with the Master Leases noted above, was $139,458, $129,990 and $125,167 for the years ended December
31, 2021, 2020, and 2019, respectively.
Forty-three of the Company’s affiliated facilities, excluding the facilities that are operated under the Master Leases with
CareTrust, are operated under eight separate master lease arrangements. Under these master leases, a breach at a single facility
could subject one or more of the other facilities covered by the same master lease to the same default risk. Failure to comply
with Medicare and Medicaid provider requirements is a default under several of the Company’s leases, master lease agreements
and debt financing instruments. In addition, other potential defaults related to an individual facility may cause a default of an
entire master lease portfolio and could trigger cross-default provisions in the Company’s outstanding debt arrangements and
other leases. With an indivisible lease, it is difficult to restructure the composition of the portfolio or economic terms of the
lease without the consent of the landlord.
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The components of operating lease expense are as follows:
Rent - cost of services(1)
General and administrative expense
Depreciation and amortization(2)
Variable lease costs(3)
Year Ended December 31,
2020
2019
2021
$
$
139,371 $
87
1,158
14,077
154,693 $
129,926 $
64
1,223
12,774
143,987 $
124,789
378
1,981
12,194
139,342
(1) Rent - cost of services includes deferred rent expense adjustments of $485, $451 and $318 for the years ended December 31, 2021, 2020 and 2019,
respectively. Additionally, rent - cost of services includes other variable lease costs such as consumer price index increases and short-term leases of
$3,702, $2,394 and $1,486 for the years ended December 31, 2021, 2020 and 2019, respectively.
(2) Depreciation and amortization is related to the amortization of favorable and direct lease costs.
(3) Variable lease costs, including property taxes and insurance, are classified in cost of services in the Company's consolidated statements of income.
Future minimum lease payments for all leases as of December 31, 2021 are as follows:
Year
2022
2023
2024
2025
2026
Thereafter
Total lease payments
Less: present value adjustment
Present value of total lease liabilities
Less: current lease liabilities
Long-term operating lease liabilities
Amount
135,125
133,389
132,409
132,304
132,199
1,173,645
1,839,071
(730,375)
1,108,696
(52,181)
1,056,515
$
$
Operating lease liabilities are based on the net present value of the remaining lease payments over the remaining lease
term. In determining the present value of lease payments, the Company used its incremental borrowing rate based on the
information available at the lease commencement date. As of December 31, 2021, the weighted average remaining lease term
is 14.8 years and the weighted average discount rate used to determine the operating lease liabilities is 7.6%.
Subsequent to December 31, 2021, the Company expanded its operations through long-term leases with the addition of
two stand-alone skilled nursing operations. The Company added one of these additions to an existing master lease agreement
and amended the terms of the master lease for an additional five years. The aggregate impact to the fair value of lease liabilities
and right-of-use assets related to the new long-term lease and amended master lease arrangement is estimated to be
approximately $101,955.
Lessor Activities
In connection with the spin-off transaction that occurred in October 2019, Ensign affiliates retained ownership of the real
estate at 29 senior living operations that were contributed to Pennant. During the year ended December 31, 2021, the Company
acquired and transferred the operations of one senior living operation to Pennant. During the year ended December 31, 2020,
the Company transferred the operations of two senior living operations to Pennant, respectively. Ensign affiliates retained
ownership of the real estate for these 32 senior living communities. All of these properties are leased to Pennant on a triple-net
basis, whereas the respective Pennant affiliates are responsible for all costs at the properties including: (1) all impositions and
taxes levied on or with respect to the leased properties (other than taxes on the income of the lessor); (2) all utilities and other
services necessary or appropriate for the leased properties and the business conducted on the leased properties; (3) all insurance
required in connection with the leased properties and the business conducted on the leased properties; (4) all facility
maintenance and repair costs; and (5) all fees in connection with any licenses or authorizations necessary or appropriate for the
leased properties and the business conducted on the leased properties. The initial terms range between 14 to 16 years.
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Total rental income from all third-party sources for the years ended December 31, 2021, 2020, and 2019 is as follows:
Pennant(1)
Other third-party
Year Ended December 31,
2020
2019
2021
$
$
14,073 $
13,163 $
1,912
1,994
15,985 $
15,157 $
3,041
2,217
5,258
(1) Pennant rental income includes variable rent such as property taxes of $1,199 and $1,224 for the years ended December 31, 2021 and
2020, respectively. Variable rent was immaterial for the year ended December 31, 2019.
Future annual rental income for all leases as of December 31, 2021 were as follows:
Year
2022
2023
2024
2025
2026
Thereafter
Total
$
Amount(1)
16,659
16,319
15,632
15,237
15,026
93,622
$
172,495
(1) Annual rental income includes base rents and variable rental income pursuant to existing leases as of December 31, 2021.
18. SELF INSURANCE LIABILITIES
The following table represents activity in our insurance liabilities as of and for the years ended December 31, 2021 and
2020:
Balance January 1, 2020
Current year provisions
Claims paid and direct expenses
Change in long-term insurance losses recoverable
Balance December 31, 2020
Current year provisions
Claims paid and direct expenses
Change in long-term insurance losses recoverable
Balance December 31, 2021
General and
Professional Liability
Workers'
Compensation
Health
Total
$
$
$
50,068 $
30,334 $
6,964 $
87,366
38,741
13,397
49,213
101,351
(28,097)
(14,317)
(48,644)
(91,058)
182
(1,043)
—
(861)
60,894 $
28,371 $
7,533 $
96,798
34,712
17,339
62,856
114,907
(26,182)
(14,503)
(60,498)
(101,183)
324
(707)
—
(383)
69,748 $
30,500 $
9,891 $ 110,139
Included in long-term insurance losses recoverable as of December 31, 2021 and 2020 are anticipated insurance
recoveries related to the Company's general and professional liability claims that are recorded on a gross rather than net basis in
accordance with GAAP.
19. DEFINED CONTRIBUTION PLANS
The Company has a 401(k) defined contribution plan (the 401(k) Plan), whereby eligible employees may contribute up to
15% of their annual basic earnings. Additionally, the 401(k) Plan provides for discretionary matching contributions (as defined
in the 401(k) Plan) by the Company. The Company expensed matching contributions to the 401(k) Plan of $2,121, $1,889 and
$1,328 during the years ended December 31, 2021, 2020 and 2019, respectively. The 401(k) Plan allowed eligible employees to
contribute up to 90% of their eligible compensation, subject to applicable annual Internal Revenue Code limits.
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During the year ended December 31, 2019, the Company implemented non-qualified deferred compensation plan (the
DCP) that was effective in 2019 for certain executives. The plan was then offered to other highly compensated employees,
which went into effect on January 1, 2020. These individuals are otherwise ineligible for participation in the Company's 401(k)
plan. The DCP allows participating employees to defer the receipt of a portion of their base compensation and certain
employees up to 100% of their eligible bonuses. Additionally, the plan allows for the employee deferrals to be deposited into a
rabbi trust and the funds are generally invested in individual variable life insurance contracts owned by the Company that are
specifically designed to informally fund savings plans of this nature. The Company paid for related administrative costs, which
were not significant during fiscal years 2021, 2020 and 2019.
As of the years ended December 31, 2021 and 2020, the Company accrued $26,832 and $14,232, respectively as long
term deferred compensation in other long term liabilities on the consolidated balance sheet. Cash surrender value of the
contracts is based on performance measurement funds that shadow the deferral investment allocations made by participants in
the deferred compensation plan. For the years ended December 31, 2021 and 2020, the Company recorded net income on the
investment acquired in connection with our deferred compensation plan of $1,612 and $1,396, respectively, which is included
in other income (expense), net, and an offsetting expense of $1,758 and $1,355, respectively, which is split between cost of
services and general and administrative expenses. No such gain nor offsetting expense occurred for the year ended December
31, 2019.
20. COMMITMENTS AND CONTINGENCIES
Regulatory Matters — Laws and regulations governing Medicare and Medicaid programs are complex and subject to
review and interpretation. Compliance with such laws and regulations is evaluated regularly, the results of which can be subject
to future governmental review and interpretation, and can include significant regulatory action including fines, penalties, and
exclusion from certain governmental programs. Included in these laws and regulations is monitoring performed by the Office of
Civil Rights which covers the Health Insurance Portability and Accountability Act of 1996, the terms of which require
healthcare providers (among other things) to safeguard the privacy and security of certain patient protected health information.
Cost-Containment Measures — Both government and private pay sources have instituted cost-containment measures
designed to limit payments made to providers of healthcare services, and there can be no assurance that future measures
designed to limit payments made to providers will not adversely affect the Company.
Indemnities — From time to time, the Company enters into certain types of contracts that contingently require the
Company to indemnify parties against third-party claims. These contracts primarily include (i) certain real estate leases, under
which the Company may be required to indemnify property owners or prior facility operators for post-transfer environmental or
other liabilities and other claims arising from the Company’s use of the applicable premises, (ii) operations transfer agreements,
in which the Company agrees to indemnify past operators of facilities the Company acquires against certain liabilities arising
from the transfer of the operation and/or the operation thereof after the transfer to the Company's independent operating
subsidiary, (iii) certain lending agreements, under which the Company may be required to indemnify the lender against various
claims and liabilities, and (iv) certain agreements with the Company’s officers, directors and others, under which the Company
may be required to indemnify such persons for liabilities arising out of the nature of their relationship to the Company. The
terms of such obligations vary by contract and, in most instances, do not expressly state or include a specific or maximum
dollar amount. Generally, amounts under these contracts cannot be reasonably estimated until a specific claim is asserted.
Consequently, because no claims have been asserted, no liabilities have been recorded for these obligations on the Company’s
consolidated balance sheets for any of the periods presented.
In connection with the spin-off transaction that occurred in October 2019, certain landlords required, in exchange for their
consent to the transaction, that the Company's lease guarantees remain in place for a certain period of time following the spin-
off. These guarantees could result in significant additional liabilities and obligations for the Company if Pennant were to default
on their obligations under their leases with respect to these properties.
U.S. Department of Justice Civil Investigative Demand — On May 31, 2018, the Company received a Civil Investigative
Demand (CID) from the U.S. Department of Justice stating that it was investigating whether there had been a violation of the
False Claims Act and/or the Anti-Kickback Statute with respect to relationships between certain of the Company’s
independently operated skilled nursing facilities and persons who serve or have served as medical directors, advisory board
participants or other potential referral sources. The CID covered the period from October 3, 2013 through 2018, and was limited
in scope to ten of the Company’s Southern California independent operating entities. In October 2018, the Department of
Justice made an additional request for information covering the period of January 1, 2011 through 2018, relating to the same
topic. As a general matter, the Company’s independent operating entities have established and maintain policies and procedures
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to promote compliance with the False Claims Act, the Anti-Kickback Statute, and other applicable regulatory requirements. The
Company fully cooperated with the U.S. Department of Justice and promptly responded to its requests for information; in April
2020, the Company was advised that the U.S. Department of Justice declined to intervene in any subsequent action filed by a
relator in connection with the subject matter of this investigation.
U.S. House of Representatives Select Subcommittee Request — In 2020, the U.S. House of Representatives Select
Subcommittee on the Coronavirus Crisis launched a nation-wide investigation into the COVID-19 pandemic, which included
the impact of the coronavirus on residents and employees in nursing homes. In June 2020, the Company received a document
and information request from the House Select Subcommittee in connection with its investigation. The Company has
cooperated in responding to this inquiry. However, it is not possible to predict the ultimate outcome of any such investigation or
whether and what other investigations or regulatory responses may result from the investigation, which could have a material
adverse effect on our reputation, business, financial condition, and results of operations.
Litigation — The skilled nursing business involves a significant risk of liability given the age and health of the patients
and residents served by the Company's independent operating subsidiaries. The Company, its independent operating
subsidiaries, and others in the industry are subject to an increasing number of claims and lawsuits, including professional
liability claims, alleging that services provided have resulted in personal injury, elder abuse, wrongful death or other related
claims. In addition, the Company, its independent operating subsidiaries, and others in the industry are subject to claims and
lawsuits in connection with COVID-19 and a facility's preparation for and/or response to COVID-19. The defense of these
lawsuits may result in significant legal costs, regardless of the outcome, and can result in large settlement amounts or damage
awards.
In addition to the potential lawsuits and claims described above, the Company and its independent operating subsidiaries
are also subject to potential lawsuits under the Federal False Claims Act and comparable state laws alleging submission of
fraudulent claims for services to any healthcare program (such as Medicare or Medicaid) or other payor. A violation may
provide the basis for exclusion from Federally-funded healthcare programs. Such exclusions could have a correlative negative
impact on the Company’s financial performance. Under the qui tam or "whistleblower" provisions of the False Claims Act, a
private individual with knowledge of fraud or potential fraud may bring a claim on behalf of the Federal Government and
receive a percentage of the Federal Government's recovery. Due to these whistleblower incentives, qui tam lawsuits have
become more frequent. For example, and despite the decision of the U.S. Department of Justice to decline to participate in
litigation based on the subject matter of its previously issued Civil Investigative Demand, the involved qui tam relator has
continued on with the lawsuit and is pursuing claims that the Company and certain of its independent operating subsidiaries
have allegedly violated the False Claims Act and/or the Anti-Kickback Statute.
In addition to the Federal False Claims Act, some states, including California, Arizona and Texas, have enacted similar
whistleblower and false claims laws and regulations. Further, the Deficit Reduction Act of 2005 created incentives for states to
enact anti-fraud legislation modeled on the Federal False Claims Act. As such, the Company and its independent operating
subsidiaries could face increased scrutiny, potential liability and legal expenses and costs based on claims under state false
claims acts in markets in which its independent operating subsidiaries do business.
In May 2009, Congress passed the Fraud Enforcement and Recovery Act (FERA) which made significant changes to the
Federal False Claims Act and expanded the types of activities subject to prosecution and whistleblower liability. Following
changes by FERA, health care providers face significant penalties for the knowing retention of government overpayments, even
if no false claim was involved. Health care providers can now be liable for knowingly and improperly avoiding or decreasing an
obligation to pay money or property to the government. This includes the retention of any government overpayment. The
government can argue, therefore, that a Federal False Claims Act violation can occur without any affirmative fraudulent action
or statement, as long as the action or statement is knowingly improper. In addition, FERA extended protections against
retaliation for whistleblowers, including protections not only for employees, but also contractors and agents. Thus, an
employment relationship is generally not required in order to qualify for protection against retaliation for whistleblowing.
Healthcare litigation (including class action litigation) is common and is filed based upon a wide variety of claims and
theories, and the Company's independent operating subsidiaries are routinely subjected to varying types of claims, including
class action "staffing" suits where the allegation is understaffing at the facility level. These class-action “staffing” suits have the
potential to result in large jury verdicts and settlements, and may result in significant legal costs. The Company expects the
plaintiffs' bar to continue to be aggressive in their pursuit of these staffing and similar claims. While the Company has been able
to settle these claims without an ongoing material adverse effect on its business, future claims could be brought that may
materially affect its business, financial condition and results of operations.
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Other claims and suits, including class actions, continue to be filed against the Company and other companies in its
industry. The Company and its independent operating subsidiaries have been subjected to, and are currently involved in, class
action litigation alleging violations (alone or in combination) of state and federal wage and hour laws as related to the alleged
failure to pay wages, to timely provide and authorize meal and rest breaks, and related causes of action. The Company does not
believe that the ultimate resolution of these actions will have an ongoing material adverse effect on the Company’s business,
cash flows, financial condition or results of operations.
The Company and its independent operating subsidiaries have been, and continue to be, subject to claims and legal actions
that arise in the ordinary course of business, including potential claims filed by residents and responsible parties related to
patient care and treatment (professional negligence claims), as well as employment related claims filed by current or former
employees. A significant increase in the number of these claims, or an increase in the amounts owing should plaintiffs be
successful in their prosecution of these claims, could materially adversely affect the Company’s business, financial condition,
results of operations and cash flows.
The Company and its independent subsidiaries are also subject to requests for information and investigations by other
State and Federal governmental entities (e.g., offices of the attorney general and offices of the inspector general). The Company
cannot predict or provide any assurance as to the possible outcome of any inquiry, investigation or litigation. If any such
inquiry, investigation or litigation were to proceed, and the Company and its independent operating subsidiaries are subjected
to, alleged to be liable for, or agree to a settlement of, claims or obligations under Federal Medicare statutes, the Federal False
Claims Act, or similar state and federal statutes and related regulations, or if the Company or its independent operating
subsidiaries are alleged or found to be liable on theories of general or professional negligence or wage and hour violations, the
Company's business, financial condition and results of operations and cash flows could be materially and adversely affected and
its stock price could be adversely impacted. Among other things, any settlement or litigation could involve the payment of
substantial sums to settle any alleged violations, and may also include the assumption of specific procedural and financial
obligations by the Company or its independent operating subsidiaries under a corporate integrity agreement and/or other such
arrangement.
Medicare Revenue Recoupments — The Company's independent operating entities are subject to regulatory reviews
relating to the provision of Medicare services, billings and potential overpayments as a result of Recovery Audit Contractors
(RAC), Program Safeguard Contractors, and Medicaid Integrity Contractors programs (collectively referred to as Reviews). For
several months during the COVID-19 pandemic, the Centers for Medicare and Medicaid Services (CMS) suspended its
Targeted Probe and Educate Program. Beginning in August 2020, CMS resumed Targeted Probe and Educate Program activity.
If an operation fails a Review and/or subsequent Reviews, the operation could then be subject to extended review or an
extrapolation of the identified error rate to billings in the same time period. The Company anticipates that these Reviews could
increase in frequency in the future. As of December 31, 2021 and subsequently, thirteen of the Company's independent
operating subsidiaries had Reviews scheduled, on appeal, or in a dispute resolution process.
Concentrations
Credit Risk — The Company has significant accounts receivable balances, the collectability of which is dependent on the
availability of funds from certain governmental programs, primarily Medicare and Medicaid. These receivables represent the
only significant concentration of credit risk for the Company. The Company does not believe there are significant credit risks
associated with these governmental programs. The Company believes that an appropriate allowance has been recorded for the
possibility of these receivables proving uncollectible, and continually monitors and adjusts these allowances as necessary. The
Company’s receivables from Medicare and Medicaid payor programs accounted for 54.0% and 58.3% of its total accounts
receivable as of December 31, 2021 and 2020, respectively. Revenue from reimbursement under the Medicare and Medicaid
programs accounted for 73.6%, 74.5% and 70.6% of the Company's revenue for the years ended December 31, 2021, 2020 and
2019, 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 outside the U.S. As of February 4, 2022, the Company had approximately
$2,042 in uninsured cash deposits. All uninsured bank deposits are held at high quality credit institutions.
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21. COMMON STOCK REPURCHASE PROGRAM
As approved by the Board of Directors on October 21, 2021, the Company entered into a stock repurchase program
pursuant to which the Company may repurchase up to $20,000 of its common stock under the program for a period of
approximately 12 months that started on October 29, 2021. Under this program, the Company is authorized to repurchase its
issued and outstanding common shares from time to time in open-market and privately negotiated transactions and block trades
in accordance with federal securities laws. During the year ended December 31, 2021, the Company repurchased 132 shares of
its common stock for $10,118. Subsequent to December 31, 2021, the Company repurchased 133 shares of its common stock
for $9,882. This repurchase program expired upon the repurchase of the full authorized amount under the plan.
On February 9, 2022, the Board of Directors approved the Company to enter into a stock repurchase program pursuant to
which the Company may repurchase up to $20,000 of its common stock under the program for a period of approximately 12
months that starts on February 10, 2022. Under this program, the Company is authorized to repurchase its issued and
outstanding common shares from time to time in open-market and privately negotiated transactions and block trades in
accordance with federal securities laws.
As approved by the Board of Directors on March 4, 2020 and March 13, 2020, the Company entered into two stock
repurchase programs pursuant to which the Company was authorized to repurchase up to $20,000 and $5,000, respectively, of
its common stock under the programs for a period of approximately 12 months. Under these programs, the Company was
authorized to repurchase its issued and outstanding common shares from time to time in open-market and privately negotiated
transactions and block trades in accordance with federal securities laws. During the first quarter of 2020, the Company
repurchased 503 and 189 shares of its common stock for $20,000 and $5,000, respectively. These repurchase programs expired
upon the repurchase of the full authorized amount under the two plans.
As approved by the Board of Directors on August 26, 2019, the Company entered into a stock repurchase program
pursuant to which the Company may repurchase up to $20,000 of its common stock under the program for a period of
approximately 12 months. Under this program, the Company is authorized to repurchase its issued and outstanding common
shares from time to time in open-market and privately negotiated transactions and block trades in accordance with federal
securities laws. The Company repurchased 138 shares of its common stock for a total of $6,406 in fiscal year 2019 before the
repurchase program was cancelled in the first quarter of 2020.
22. SPIN-OFF OF SUBSIDIARIES
On October 1, 2019, the Company completed the separation of its transitional and skilled nursing services, ancillary
businesses, home health and hospice operations and substantially all of its senior living operations into two separate, publicly
traded companies:
•
•
Ensign, which includes skilled nursing and senior living services, physical, occupational and speech therapies and
other rehabilitative and healthcare services at 245 healthcare facilities and campuses, post-acute-related ancillary
operations and real estate investments; and
The Pennant Group, Inc. (Pennant), which is a holding company of operating subsidiaries that provide home health,
hospice and senior living services.
The Company completed the separation through a tax-free distribution of substantially all of the outstanding shares of
common stock of Pennant to Ensign stockholders on a pro rata basis. Ensign stockholders received one share of Pennant
common stock for every two shares of Ensign common stock held at the close of business on September 20, 2019, the record
date for the Spin-Off. The number of shares of Ensign common stock each stockholder owns and the related proportionate
interest in Ensign did not change as a result of the Spin-Off. Each Ensign stockholder received only whole shares of Pennant
common stock in the distribution, as well as cash in lieu of any fractional shares. The Spin-Off was effective October 1, 2019,
with shares of Pennant common stock distributed on October 1, 2019. Pennant is listed on the NASDAQ Global Select Market
(NASDAQ) and trades under the ticker symbol “PNTG”.
In connection with the Spin-Off, Pennant's operations consist of 63 home health, hospice and home care agencies and 52
senior living communities. Ensign affiliates retained ownership of all the real estate, which includes the real estate of 29 of the
52 senior living operations that were contributed to Pennant. These assets are leased to Pennant on a triple-net basis. Pennant
affiliates are responsible for all costs at the properties, including property taxes, insurance and maintenance and repair costs.
The initial terms range between 14 to 16 years. Pennant's remaining 23 senior living operations are leasing the underlying real
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
estate from unrelated third parties. Subsequent to the Spin-Off, Ensign affiliates acquired the real estate of an additional three
senior living operations operated by Pennant.
The Company received $11,600 from Pennant as a dividend payment in connection with the distribution of assets to
Pennant. The Company used the funds to repay certain outstanding third-party bank debt. The assets and liabilities were
contributed to Pennant based on their historical carrying values, which were as follows:
Cash and cash equivalents
Accounts receivable, net
Prepaid expenses and other current assets
Property and equipment, net
Right-of-use assets
Goodwill and intangibles, net
Accounts payable
Accrued wages and related liabilities
Other accrued liabilities - current
Lease liabilities, net
Net contribution
$
$
47
30,064
4,483
13,728
150,385
74,747
(4,725)
(14,544)
(17,531)
(152,221)
84,433
In accordance with FASB ASC Subtopic 505-60, Spinoffs and Reverse Spinoffs, the accounting for the separation of the
Company follows its legal form, with Ensign as the legal and accounting spinnor and Pennant as the legal and accounting
spinnee, due to the relative significance of Ensign’s healthcare business, the relative fair values of the respective companies,
the retention of all senior management and other relevant indicators.
As a result of the Spin-Off, the Company recorded a $71,181 reduction in retained earnings, which included net assets of
$84,433 as of October 1, 2019. The Company transferred cash of $47 to Pennant, with the remainder considered a non-cash
activity in the consolidated statements of cash flows. The Spin-Off also resulted in a reduction of noncontrolling interest of
$13,252.
Ensign and Pennant entered into several agreements in connection with the Spin-Off, including a transition services
agreement (TSA), separation and distribution agreement, tax matters agreement and an employee matters agreement. Pursuant
to the TSA, Ensign, Pennant and their respective subsidiaries are providing various services to each other on an interim,
transitional basis. Services being provided by Ensign include, among others, certain finance, information technology, human
resources, employee benefits and other administrative services. The TSA is no longer in place as of December 31, 2021.
Billings by Ensign under the TSA were not material during the years ended December 31, 2021, 2020 and 2019.
Prior to the consummation of the Spin-Off, Pennant granted awards to certain employees and directors of Ensign under
the 2019 LTI Plan, in recognition of their performance in assisting with the Spin-Off. These awards were exchanged for
Pennant common stock prior to the distribution.
Immediately after the Spin-Off, Ensign ceased to consolidate the results of Pennant operations into its financial results.
Pennant's operating results and cash flows for the year ended December 31, 2019 presented have been classified as discontinued
operations within the Consolidated Financial Statements.
121
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THE ENSIGN GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table presents the financial results of Pennant for the indicated period and does not include overhead
allocations:
Service revenue
Expense:
Cost of services
Rent—cost of services
General and administrative expense
Depreciation and amortization
Total expenses
Income from discontinued operations
Interest income
Provision for income taxes
Income from discontinued operations, net of tax
Net income attributable to discontinued noncontrolling interests
Net income attributable to The Ensign Group, Inc.
Year Ended December 31, 2019
(In thousands)
$
$
249,039
187,560
17,295
16,672
2,402
223,929
25,110
26
5,663
19,473
629
18,844
The Company incurred transaction costs of $9,119 related to the Spin-Off since commencing in 2018, of which $7,909 are
reflected in the Company's consolidated statement of operations as discontinued operations for the year ended December 31,
2019. Transaction costs primarily consist of third-party advisory, consulting, legal and professional services, as well as other
items that are incremental and one-time in nature that are related to the separation. Transaction costs for 2019 incurred prior to
October 1, 2019 are reflected in discontinued operations.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
Item 9A. CONTROLS AND PROCEDURES
(a) Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information we are required
to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the
time periods specified in Securities and Exchange Commission rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the
reports that it files or submits under the Exchange Act is accumulated and communicated to its management, including its
principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management
recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to
apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
In connection with the preparation of this Annual Report on Form 10-K our management evaluated, with the participation
of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as
such term is defined under Rule 13a-15(e) promulgated under the Exchange Act. Based on this evaluation, our Chief Executive
Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end
of the period covered by this Annual Report on Form 10-K.
(b) Management's Report on Internal Control over Financial Reporting
Our 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 a process designed
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to
122
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THE ENSIGN GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the
effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control - Integrated Framework (2013). As a result of this assessment,
management concluded that, as of December 31, 2021, our internal control over financial reporting was effective in providing
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles.
Our independent registered public accounting firm, Deloitte & Touche LLP, has audited the consolidated financial
statements included in this Annual Report 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 financial reporting. Their report is set forth below.
(c) Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting, as defined in Rule 13a-15(f) promulgated under
the Exchange Act, that occurred during the fourth quarter of fiscal 2021 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
(d) Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of
The Ensign Group, Inc.
San Juan Capistrano, California
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of The Ensign Group, Inc. and subsidiaries (the “Company”) as of
December 31, 2021, based on criteria 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, 2021, based on 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 financial statements as of and for the year ended December 31, 2021 of the Company and our report dated
February 9, 2022, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report
on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control
over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
123
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THE ENSIGN GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely 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 of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
February 9, 2022
Item 9B. OTHER INFORMATION
None.
Item 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III.
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item is hereby incorporated by reference to our definitive proxy statement for the 2022
Annual Meeting of Stockholders.
We have adopted a code of ethics and business conduct that applies to all employees, including our Chief Executive
Officer (our principal executive officer) and Chief Financial Officer (our principal financial officer), and employees of our
subsidiaries, as well as each member of our Board of Directors. The code of ethics and business conduct is available on 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 by posting such
information on our website, at the address specified above.
Item 11.
EXECUTIVE COMPENSATION
The information required by this Item is hereby incorporated by reference to our definitive proxy statement for the 2022
Annual Meeting of Stockholders.
Item 12.
RELATED STOCKHOLDER MATTERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
The information required by this Item is hereby incorporated by reference to our definitive proxy statement for the 2022
Annual Meeting of Stockholders.
Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
The information required by this Item is hereby incorporated by reference to our definitive proxy statement for the 2022
Annual Meeting of Stockholders.
124
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THE ENSIGN GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Item 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is hereby incorporated by reference to our definitive proxy statement for the 2022
Annual Meeting of Stockholders. Our principal accountant is Deloitte & Touche LLP (PCAOB ID No.34).
Item 15. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES
PART IV.
The 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 81 are filed as part of this
Annual Report on Form 10-K.
(a) (3) Exhibits: The following exhibits are filed or furnished with or incorporated by reference this Annual Report on
Form 10-K.
Exhibit
No.
3.1
3.2
3.3
3.4
4.1
Exhibit Description*
Fifth Amended and Restated Certificate of Incorporation of
The Ensign Group, Inc., filed with the Delaware Secretary of
State on November 15, 2007
Certificate of Amendment to the Fifth Amended and Restated
Certificate of Incorporation of The Ensign Group, Inc., filed
with the Delaware Secretary of State on February 4, 2020
Amendment to the Amended and Restated Bylaws, dated
August 5, 2014
Amended and Restated Bylaws of The Ensign Group, Inc.
File
Exhibit
Filing
Filed
Form
10-Q 001-33757
No.
No.
3.1 12/21/2007
Date
Herewith
10-K 001-33757
3.2
2/5/2020
8-K 001-33757
3.2
8/8/2014
10-Q 001-33757
3.2 12/21/2007
Description of the Common stock of The Ensign Group, Inc.
10-K 001-33757
S-1 333-142897
4.1
4.1
2/5/2020
10/5/2007
S-1 333-142897 10.3
10/5/2007
8-K 001-33757 99.2
7/28/2009
S-1 333-142797 10.4
10/5/2007
S-1 333-142897 10.5
10/5/2007
S-1 333-142897 10.6
10/5/2007
S-1 333-142897 10.41
5/14/2007
S-1 333-142897 10.48 10/19/2007
S-1 333-142897 10.49 10/19/2007
S-1 333-142897 10.50 10/19/2007
Specimen common stock certificate
4.2
10.1 + The Ensign Group, Inc. 2007 Omnibus Incentive Plan
10.2 + Amendment to The Ensign Group, Inc. 2007 Omnibus
Incentive Plan
10.3 + Form of 2007 Omnibus Incentive Plan Notice of Grant of
Stock Options; and form of Non-Incentive Stock Option
Award Terms and Conditions
10.4 + Form of 2007 Omnibus Incentive Plan Restricted Stock
Agreement
10.5 + Form of Indemnification Agreement entered into between
10.6
10.7
10.8
10.9
The Ensign Group, Inc. and its directors, officers and certain
key employees
Form of Independent Consulting and Centralized Services
Agreement between Ensign Facility Services, Inc. and certain
of its subsidiaries
Form of Health Insurance Benefit Agreement pursuant to
which certain subsidiaries of The Ensign Group, Inc.
participate in the Medicare program
Form of Medi-Cal Provider Agreement pursuant to which
certain subsidiaries of The Ensign Group, Inc. participate in
the California Medicaid program
Form of Provider Participation Agreement pursuant to which
certain subsidiaries of The Ensign Group, Inc. participate in
the Arizona Medicaid program
125
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THE ENSIGN GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Exhibit
No.
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
Exhibit Description*
Form of Contract to Provide Nursing Facility Services under
the Texas Medical Assistance Program pursuant to which
certain subsidiaries of The Ensign Group, Inc. participate in
the Texas Medicaid program
Form of Client Service Contract pursuant to which certain
subsidiaries of The Ensign Group, Inc. participate in the
Washington Medicaid program
Form of Provider Agreement for Medicaid and UMAP
pursuant to which certain subsidiaries of The Ensign Group,
Inc. participate in the Utah Medicaid program
Form of Medicaid Provider Agreement pursuant to which a
subsidiary of The Ensign Group, Inc. participates in the Idaho
Medicaid program
Corporate Integrity Agreement between the Office of
Inspector General of the Department of Health and Human
Services and The Ensign Group, Inc. dated October 1, 2013.
Settlement agreement dated October 1, 2013, entered into
among the United States of America, acting through the
United States Department of Justice and on behalf of the
Office of Inspector General ("OIG-HHS") of the Department
of Health and Human Services ("HHS") (collectively the
"United States") and the Company.
Form of Master Lease by and among certain subsidiaries of
The Ensign Group, Inc. and certain subsidiaries of CareTrust
REIT, Inc.
Form of Guaranty of Master Lease by The Ensign Group,
Inc. in favor of certain subsidiaries of CareTrust REIT, Inc.,
as landlords under the Master Leases
Amended and Restated Credit Agreement as of February 5,
2016, by and among The Ensign Group, Inc., SunTrust Bank,
now known as Truist, as administrative agent, and the lenders
party thereto
Second Amended Credit Agreement as of July 19, 2016, by
and among The Ensign Group, Inc., SunTrust Bank, now
known as Truist, as administrative agent, and the lenders
party thereto
10.20
The Ensign Group, Inc. 2017 Omnibus Incentive Plan
10.21
10.22
10.23
10.24
10.25
10.26
10.27
Form of 2017 Omnibus Incentive Plan Notice of Grant of
Stock Options; and form of Non-Incentive Stock Option
Award Terms and Conditions
Form of 2017 Omnibus Incentive Plan Restricted Stock
Agreement
Form of U.S. Department of Housing and Urban
Development Healthcare Facility Note and schedule of
individual subsidiary loans, by and among The Ensign
Group, Inc.'s subsidiaries listed therein and U.S. Department
of Housing and Urban Development
Form of U.S. Department of Housing and Urban
Development Security Instrument/Mortgage/Deed of Trust
Transition Services Agreement, dated as of October 1, 2019,
by and between The Ensign Group, Inc. and The Pennant
Group, Inc
Tax Matters Agreement, dated as of October 1, 2019, by and
between The Ensign Group, Inc. and The Pennant Group,
Inc.
Employee Matters Agreement, dated as of October 1, 2019,
by and between The Ensign Group, Inc. and The Pennant
Group, Inc.
126
Form
File
No.
Exhibit
No.
Filing
Date
Filed
Herewith
S-1 333-142897 10.51 10/19/2007
S-1 333-142897 10.52 10/19/2007
S-1 333-142897 10.53 10/19/2007
S-1 333-142897 10.54 10/19/2007
10-K 001-33757 10.74
2/13/2014
8-K 001-33757 10.75
5/8/2014
8-K 001-33757 10.1
6/5/2014
8-K 001-33757 10.2
6/5/2014
8-K 001-33757 10.1
2/8/2016
8-K 001-33757 10.1
7/25/2016
001-33757
DEF
14A
10-K 001-33757 10.87
A 4/13/2017
2/8/2018
10-K 001-33757 10.88
2/8/2018
8-K 001-33757 10.1
1/3/2018
8-K 001-33757 10.2
1/3/2018
8-K 001-33757 10.1
10/1/2019
8-K 001-33757 10.2
10/1/2019
8-K 001-33757 10.3
10/1/2019
Table Contents
THE ENSIGN GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Exhibit
No.
10.28
10.29
Exhibit Description*
Third Amended and Restated Credit Agreement, dated as of
October 1, 2019, by and among The Ensign Group, Inc.,
SunTrust Bank, now known as Truist, as administrative
agent, and the lenders party thereto
Lease Agreement, dated as of October 1, 2019, by and
between The Ensign Group, Inc. and The Pennant Group,
Inc.
File
Exhibit
Filing
Filed
Form
8-K 001-33757 10.4
No.
No.
Date
10/1/2019
Herewith
8-K 001-33757 10.5
10/1/2019
10.30 + The Ensign Services, Inc. Deferred Compensation Plan
10.31 + First Amendment to The Ensign Services, Inc. Deferred
10-K 001-33757 10.1
10-K 001-33757 10.2
2/3/2021
2/3/2021
Compensation Plan
First Amendment to Third Amended and Restated Credit
Agreement, dated as of February 8, 2022, by and among The
Ensign Group, Inc., Standard Bearer Healthcare REIT, Inc.,
Truist Bank (as successor by merger to SunTrust Bank), as
administrative agent, and the lenders party thereto
Subsidiaries of The Ensign Group, Inc., as amended
Consent of Deloitte & Touche LLP
Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
Interactive data file (furnished electronically herewith
pursuant to Rule 406T of Regulations S-T)
Cover Page Interactive Data File (formatted as Inline XBRL
and contained in Exhibit 101)
Indicates management contract or compensatory plan.
Documents not filed herewith are incorporated by reference to the prior filings identified in the table above.
10.32
21.1
23.1
31.1
31.2
32.1
32.2
101
104
+
*
X
X
X
X
X
X
X
Item 16.
FORM 10-K SUMMARY
Not applicable
127
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THE ENSIGN GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
February 9, 2022
THE ENSIGN GROUP, INC.
BY:
/s/ SUZANNE D. SNAPPER
Suzanne D. Snapper
Chief Financial Officer, Executive Vice President
and Director (Principal Financial Officer and
Accounting Officer and Duly Authorized 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 the Registrant in the capacities and on the dates indicated.
Signature
Title
Date
/s/ BARRY R. PORT
Barry R. Port
/s/ SUZANNE D. SNAPPER
Suzanne D. Snapper
Chief Executive Officer and Director (principal
executive officer)
February 9, 2022
Chief Financial Officer, Executive Vice President and
Director (principal financial officer and accounting
officer and duly authorized officer)
February 9, 2022
/s/ CHRISTOPHER R. CHRISTENSEN
Executive Chairman and Chairman of the Board
February 9, 2022
Christopher R. Christensen
/s/ ANN S. BLOUIN
Ann S. Blouin
/s/ SWATI B. ABBOTT
Swati B. Abbott
/s/ DAREN J. SHAW
Daren J. Shaw
/s/ LEE A. DANIELS
Lee A. Daniels
/s/ BARRY M. SMITH
Barry M. Smith
Director
Director
Director
Director
Director
February 9, 2022
February 9, 2022
February 9, 2022
February 9, 2022
February 9, 2022
128
2 017 A n n ual R e port
BR29358P-0422-10K