Genesis Healthcare, Inc. - Annual Report: 2019 (Form 10-K)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

 

 

For the fiscal year ended December 31, 2019.

or

 

Commission file number: 001-33459

Genesis Healthcare, Inc.

(Exact name of registrant as specified in its charter)

 

(610) 444-6350

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

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.    Yes  ☐     No  ☑

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ☐     No  ☑

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the 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.    Yes  ☑    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☑    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a 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.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ☐    No  ☑

As of June 30, 2019, the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of the shares of Class A common stock, par value $0.001 per share, held by non-affiliates of the registrant, computed based on the closing sale price of $1.24 per share on June 30, 2019, as reported by The New York Stock Exchange, was approximately $115.6 million. The aggregate number of shares held by non-affiliates is calculated by excluding all shares held by executive officers, directors and holders known to hold 5% or more of the voting power of the registrant’s common stock. As of March 13, 2020, there were 108,163,948 shares of the registrant’s Class A common stock issued and outstanding, 744,396 shares of the registrant’s Class B common stock issued and outstanding, and 55,902,144 shares of the registrants Class C common stock, par value $0.001 per share, issued and outstanding. 

Documents Incorporated by Reference:

The information called for by Part III is incorporated by reference to the Definitive Proxy Statement for the 2020 Annual Meeting of Stockholders of the Registrant which will be filed with the U.S. Securities and Exchange Commission not later than April 29, 2020.

 

Genesis Healthcare, Inc.

Annual Report

Index

 

 

 

 

 

 

Forward-Looking Statements

Statements made by us in this report and in other reports and statements released by us that are not historical facts constitute "forward-looking statements" within the meaning of the federal securities laws, including the Private Securities Reform Act of 1995. You can identify these statements by the fact that they do not relate strictly to historical or current facts. These statements contain words such as "may," "will," "project," "might," "expect," "believe," "anticipate," "intend," "could," "would," "estimate," "continue," "pursue,” "plans" or "prospect," or the negative or other variations thereof or comparable terminology. These forward-looking statements are necessarily estimates and expectations reflecting the best judgment of our senior management based on our current estimates, expectations, forecasts and projections, and include comments that express our current opinions about trends and factors that may impact future operating results. Such statements rely on a number of assumptions concerning future events, many of which are outside of our control, and involve known and unknown risks and uncertainties that could cause our actual results, performance or achievements, or industry results, to differ materially from any anticipated future results, performance or achievements, expressed or implied by such forward-looking statements. Any such forward-looking statements, whether made in this report or elsewhere, should be considered in the context of the various disclosures made by us about our business and other matters. These risks and uncertainties include, but are not limited to, those described in Item 1A. “Risk Factors" and elsewhere in this report and those described from time to time in our future reports filed with the U.S. Securities and Exchange Commission (SEC).

Any forward-looking statements contained herein are made only as of the date of this report. We expressly disclaim any duty to update the forward-looking statements and other information contained in this report, except as required by law. Investors are cautioned not to place undue reliance on these forward-looking statements.

 

PART I

Item 1. Business

 

Company Overview

Genesis Healthcare, Inc. (Genesis) is a holding company with subsidiaries that, on a consolidated basis, comprise one of the nation's largest post-acute care providers.  As used in this report, the terms “we,” “us,” “our,” and the “Company,” and similar terms, refer collectively to Genesis and its consolidated subsidiaries, unless the context requires otherwise.  We offer inpatient services through our network of 381 skilled nursing and assisted/senior living facilities located in 26 states.  We also supply rehabilitation and respiratory therapy to approximately 1,200 locations in 44 states, the District of Columbia and China as of December 31, 2019.  In addition, we provide a full complement of administrative and consultative services to our affiliated operators through our administrative services subsidiaries and to third-party operators with whom we contract through our management services subsidiary. There were 19 facilities subject to such management services agreements with unaffiliated or jointly owned skilled nursing facility operators as of December 31, 2019. All of our healthcare operating subsidiaries focus on providing quality care to the people we serve, and our skilled nursing facility subsidiaries, which comprise the largest portion of our consolidated business, have a strong commitment to treating patients who require a high level of skilled nursing care and extensive rehabilitation therapy, whom we refer to as high-acuity patients.  For additional information regarding our financial condition, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Business Overview.”

 

Operations

As of December 31, 2019, we offered inpatient services through our network of 381 skilled nursing and assisted/senior living facilities across 26 states, consisting of 357 skilled nursing facilities and 24 stand-alone assisted/senior living facilities. Of the 381 facilities, 299 are leased, 30 are owned, 13 are managed and 39 are joint ventures. Additionally, we have fixed-price options to purchase the real property of 23 of our leased facilities and 33 of our joint venture facilities. Collectively, our skilled nursing and assisted/senior living facilities have 45,136 licensed beds, approximately 70% of which are concentrated in the states of California, Connecticut, Maryland, Massachusetts, New Hampshire, New Jersey, New Mexico, Pennsylvania, and West Virginia. See Item 2. “Properties” for the full count of facilities by state.  Our skilled nursing and assisted/senior living facilities are generally clustered in large urban or suburban markets.    For the year ended December 31, 2019, we generated approximately 84% of our revenue from our skilled nursing facilities, with the remainder primarily being generated from our assisted/senior living facilities, rehabilitation therapy services provided to third-party facilities, and other ancillary services.

Our services focus primarily on the medical and physical issues facing elderly patients and are provided by the employees of our skilled nursing facilities, assisted/senior living communities, integrated and third-party rehabilitation therapy business, and other ancillary services.

As of December 31, 2019, we had three reportable operating segments: (1) inpatient services, which includes the operation of skilled nursing facilities and assisted/senior living facilities and is the largest portion of our business; (2) rehabilitation therapy services, which includes our integrated and third-party rehabilitation and respiratory therapy services; and (3) all other services. For the year ended December 31, 2019, the inpatient services segment generated approximately 87% of our revenue, the rehabilitation therapy services segment generated approximately 10% of our revenue and all other services accounted for the remaining balance of our revenue. For additional information regarding the financial performance of our reportable operating segments, see Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations” and Note 7 –  “Segment Information,” in the notes to our consolidated financial statements included elsewhere in this report.

Inpatient Services Segment

Skilled Nursing Facilities

As of December 31, 2019, our skilled nursing facilities provided skilled nursing care at 357 regionally clustered facilities, having 41,977 licensed beds, in 26 states.  We have developed programs for, and actively market our services to, high-acuity patients who are typically admitted to our facilities as they recover from strokes, other neurological conditions, cardiovascular and respiratory ailments, joint replacements and other muscular or skeletal disorders.  We also provide 24-hour long-term care services for elderly residents and people with chronic conditions or prolonged illnesses. Our staff is devoted to providing a comforting environment and focused on helping each person achieve their highest level of independence and vitality.

We use interdisciplinary teams of experienced medical professionals to provide services prescribed by physicians. These teams include registered nurses, licensed practical nurses, certified nursing assistants and other professionals who 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 to each of our skilled nursing patients, including room and board, special nutritional programs, social services, recreational activities and related healthcare and other services.

Our PowerBack Rehabilitation branded facilities are designed to provide short-stay skilled nursing facilities that deliver a comprehensive rehabilitation regimen in accommodations specifically designed to serve high-acuity patients. We believe that having PowerBack Rehabilitation facilities enables us to more effectively serve higher acuity patients and achieve a higher skilled mix than a traditional hybrid skilled nursing facility, which in turn results in higher reimbursement rates. Skilled mix is the average daily number of Medicare and insurance patients we serve at our skilled nursing facilities divided by the average daily number of total patients we serve at our skilled nursing facilities.  Insurance as a payor source includes both traditional commercial insurance programs as well as managed care plans, including Medicare Advantage plans.  As of December 31, 2019, we operated 10 PowerBack Rehabilitation facilities with 1,075 beds.

As of December 31, 2019, we have 19 facilities subject to management agreements with unaffiliated or jointly owned skilled nursing facility operators. The income associated with the management services provided to the third-party facility operator is included in inpatient services in our segment reporting as services are performed primarily by personnel supporting the inpatient services segment.

Our administrative service company provides a full complement of administrative and consultative services to our affiliated operators to allow them to better focus on the delivery of healthcare services.

Assisted/Senior Living Facilities

We complement our skilled nursing care business by providing assisted/senior living services at 24 stand-alone facilities with 1,941 beds and offer an additional 1,218 assisted/senior living beds within our skilled nursing facilities as of December 31, 2019. Our assisted/senior living facilities provide residential accommodations, activities, meals, security, housekeeping and assistance in the activities of daily living to seniors who are independent or who require some support, but not the level of nursing care provided in a skilled nursing facility.

Rehabilitation Therapy Services

As of December 31, 2019, we provided rehabilitation therapy services, including speech-language pathology (SLP), physical therapy (PT), occupational therapy (OT) and respiratory therapy, to approximately 1,200 healthcare locations in 44 states, the District of Columbia and China, including 349 facilities operated by us. We provide rehabilitation therapy services at our skilled nursing facilities and assisted/senior living facilities as part of an integrated service offering in connection with our skilled nursing care.  We believe that an integrated approach to treating high-acuity patients enhances our ability to achieve successful patient outcomes and enables us to

identify and treat patients who can benefit from our rehabilitation therapy services. We believe hospitals and physician groups often refer high-acuity patients to our skilled nursing facilities because they recognize the value of an integrated approach to providing skilled nursing care and rehabilitation therapy services. 

We believe that we have also established a strong reputation as a premium provider of rehabilitation therapy services to third-party skilled nursing operators in our local markets, with a recognized ability to provide these services to high-acuity patients. Our approach to providing rehabilitation therapy services for third-party operators emphasizes quality treatment and successful clinical outcomes.

In addition to our rehabilitation therapy services in the United States, we have a presence in China and Hong Kong with initiatives to develop a rehabilitation therapy care delivery model and other services.  The revenues generated and long-lived assets associated with this expansion are immaterial as of December 31, 2019.

Other Services

As of December 31, 2019, we provided an array of other specialty medical services, including physician services, staffing services, and other healthcare related services.

 

Employees and Labor Relations

As of December 31, 2019, we employed an aggregate of approximately 55,000 active employees as follows:  36,250 in our inpatient services segment, 11,800 (primarily therapists) in our rehabilitation therapy segment, and 6,950 in our all other services segment, which includes our administrative services subsidiaries. 

Our most significant operating cost is labor, which accounted for approximately 65% of our operating expenses for the year ended December 31, 2019.  The healthcare industry as a whole has been challenged by shortages of qualified healthcare professionals, resulting in increased competition for staffing services and increased employee turnover.  Consequently, we have instituted various strategies, such as maintaining competitive labor rates and benefits, that seek to improve employee retention and reduce reliance on overtime compensation and temporary staffing services.  Most of our skilled nursing facilities are subject to state-mandated minimum staffing requirements, so our ability to reduce labor costs by decreasing staff is limited and subject to government audits and penalties.  Managing labor costs is proving to be increasingly difficult as reimbursement rate increases are often significantly exceeded by the annual inflationary wage increases. The issue is compounded by the shift in payor mix to lower reimbursed Medicaid as well as increases in the federal or state minimum wage rates.

As of December 31, 2019, we had 83 collective bargaining agreements with unions covering approximately 5,200 active employees at our skilled nursing facilities. As these agreements are renegotiated, we may be subject to wage increases in excess of market rates. We consider our relationship with our employees to be good.

 

Customers

With the exception of our rehabilitation therapy services segment, no individual customer or client accounts for a significant portion of our revenue. We do not expect that the loss of a single customer or client within our inpatient services segment would have a material adverse effect on our business, financial condition or results of operations.  Within the rehabilitation services business, there are over 140 distinct customers, many of which are chain operators with more than one location.  One customer, which is a related party of ours, comprises $28.9 million, approximately 34%, of the gross outstanding contract receivables in the rehabilitation services business at December 31, 2019.  See Note 16 – “Related Party Transactions.”  One former customer comprises $7.0 million, approximately 8%, of the gross outstanding contract receivables in the rehabilitation services business at December 31, 2019.

 

Business Strategy

We believe that we are well positioned to succeed in what will be an increasingly integrated healthcare delivery system.  Our core strategy is to provide superior clinical outcomes with an approach that is patient-centered and focused on lowering costs by reducing lengths of stay and improving outcomes by developing programs to prevent avoidable rehospitalizations.

The key elements of our business strategy include:

Commitment to quality care.  We are focused on qualitative and quantitative clinical performance measures in order to enhance and improve the care provided in our facilities.  We continually seek to enhance our reputation for providing clinical capabilities and favorable outcomes.  Among other things, we have and will continue to increase our professional nursing mix and integrate nurse practitioners and employed physicians into our clinical model.  We have incentivized our management team to improve clinical performance to further ensure accountability for the quality of care.

Position ourselves for success in a value-based environment.  As healthcare reform continues to be implemented, we believe post-acute healthcare providers who provide quality diversified care, have density and strong reputations in local markets, have good relationships with acute care hospitals and operate with scale will have a competitive advantage in an episodic payment environment.  Our ongoing clinical and operational initiatives position us as a valuable partner to acute care hospitals and managed care organizations that are seeking to increase care coordination, reduce lengths of stay, more effectively manage healthcare costs and develop new care delivery and payment models.

Improve operating efficiency.  We are continually focused on improving operating efficiency and controlling costs, while maintaining quality patient care.  Investments in information systems, the development of tools to more effectively manage operating costs and the reengineering of key business and operating processes are an effective way to grow cash flow and improve operating margins.  Such investments involve significant upfront costs that must be assessed on a long-term cost-benefit basis and can be limited due to our available liquidity.

Focusing on core markets by optimizing our facility portfolio.  We are continually evaluating the long-term strategic value of our portfolio of facilities and other operating businesses.  In this regard, we will continue to pursue the sale, divestiture, closure or reconfiguration of facilities or businesses that are unprofitable, located in unattractive or saturated markets, physically obsolete or not core to our business strategy.  Shedding non-core or non-strategic assets increases our focus and resources to assets in markets where we have geographic density, strong hospital partnerships and the greatest growth potential.  Between January 1, 2017 and December 31, 2019, we have divested, sold or closed the operations of 129 facilities.  We seek strategic acquisitions in selected target markets with strong demographic trends for growth in our service population.  Expansion of existing facility clusters and the creation of new clusters in local markets will allow us to leverage existing operations and to achieve greater operating efficiencies.

 

Improving overall capital structure and focusing on real estate ownership and strategic partnerships. In early 2018,  we executed a number of restructuring activities to provide increased liquidity and reduce annual cash fixed charges.  These activitities included closing on a new asset based lending facility, expansion of an existing term loan agreement, and the restructuring of several significant master leases, which resulted in more favorable terms. We currently lease the majority of the facilities used in our operations, many of which are subject to annual rent escalation clauses.  We are continually focused on reducing the impact of rising rents through the restructuring of existing lease arrangements, the acquisition of real estate, and the execution of other strategic partnerships. Further, we seek to own facilities or acquire fixed price options to purchase them, thus allowing us to participate in the upside appreciation of the facilities and the opportunity to lower our future costs by replacing rent subject to escalators with debt financing.

Since January 1, 2019, we entered into two strategic partnerships that provide us with fixed price options to purchase the underlying real property of an aggregate of 34 facilities and contain rental terms with no annual escalators for at least four years.   See Note 4 – “Significant Transactions and Events – Strategic Partnerships” and Note 23 – “Subsequent Events.”

Subsequent to December 31, 2019, we entered into an additional strategic partnership under which we transferred operational responsibility for 19 facilities to an operator with local market expertise and relationships.  Under the terms of the arrangement, we will continue to provide administrative support to the facilities and also provide certain ancillary services.  See Note 23 – “Subsequent Events.”

Competitive Strengths

We believe that the following competitive strengths support our business strategy:

Quality Patient Care, Differentiated Clinical Capabilities and Clinical Specialization. To ensure clinical oversight and continuity of patient care, our facilities contract with our physician services division to obtain services of physicians, physician assistants and nurse

practitioners that are primarily involved in providing medical direction and/or direct patient care. Utilization of physicians and non-physician practitioners allows for significant patient involvement at all levels of the organization, thus ensuring an emphasis on quality care is maintained.  In an effort to further enhance the quality of care we provide to our patients, we have made investments to expand rehabilitation gym capacity and develop clinical specialty units. The development of clinical specialty units in our facility portfolio has allowed us to better meet the needs of our patients.  These specialty units, along with our advanced capabilities in post-acute cardiac and pulmonary management, differentiate us in local areas, as competitors often do not offer these programs.  Our focus on quality patient care, differentiated clinical capabilities and clinical specialization allows us to care for higher acuity patients who are typically reimbursed by Medicare or managed care payors.

Strong Geographic Density in Regional Markets.  We have developed geographic density in markets with 70% of our total licensed skilled nursing beds located in nine states: California, Connecticut, Maryland, Massachusetts, New Hampshire, New Jersey, New Mexico, Pennsylvania and West Virginia.  Within these and other states, we seek to cluster our facilities to create a dense, localized footprint.   By clustering our facilities, we are able to provide a larger and more diverse number of clinical services within a regional market.  As a result, we are often the leading skilled nursing facility operator in many of the regional markets in which we operate, based on number of beds.  Strategically clustered facilities in single or contiguous markets also allow us to achieve lower operating costs through greater purchasing power and operating efficiencies, facilitate the development of strong relations with state and local regulators and provide us with the ability to coordinate sales and marketing strategies.  Our strong reputation and operating performance in regional markets also allows us to develop relationships with key referral sources, including hospitals and other managed care payors.

Experienced Management Team with Proven Operating Performance. We have an experienced management team with deep post-acute experience. Our management team has demonstrated an ability to adapt to a rapidly changing business climate, providing a distinct competitive advantage in navigating the complex and evolving post-acute care industry.

Key Partnerships and Relationships. We have partnered with hospitals in our local markets to enhance the coordination of patient care during and after a post-acute rehabilitation stay. The goal of these relationships is to provide quality care while lowering hospital readmission rates and reducing overall healthcare costs.  Further, these relationships allow us to manage patient outcomes and coordinate care once a patient leaves the acute care setting and enters one of our facilities.  We have also forged key relationships with managed care payors to better align quality goals and reimbursement, resulting in a more coordinated care approach that reduces hospital readmissions.  As an increasing number of patients gain access to health insurance through healthcare reform or move to managed Medicare and Medicaid programs, we are poised to capture additional market share as managed care companies look to match quality patient care with a cost efficient setting. In addition, we created our own Accountable Care Organization (ACO).  As the industry continues to migrate from fee-for-service to pay-for-value, our unique capabilities in the area of physician services has given us a competitive advantage in advancing participation in value-based programs.  We offer the only captive SNFist company in the industry and the only post-acute sponsored ACO in the United States.

Leading Post-Acute Provider Well Positioned for Increased Demand for Post-Acute Care. As life expectancy continues to increase in the United States and seniors account for a higher percentage of the U.S. population, we believe overall demand for the services we provide will increase.  As one of the largest operators of skilled nursing facilities and post-acute rehabilitation therapy services in the U.S., we are well positioned to benefit from these trends by delivering cost effective, high quality services.

Competition

Our skilled nursing facilities compete primarily on a local and regional basis with other skilled nursing facilities and with assisted/senior living facilities, from national and regional chains to smaller providers owning as few as a single facility. Competitors include other for-profit providers as well as non-profits, religiously-affiliated facilities, and government-owned facilities. We also compete under certain circumstances with inpatient rehabilitation facilities (IRF) and long-term acute care (LTAC) hospitals. Increasingly, we are competing with home health and community based providers who have developed programs designed to provide services to seniors outside an institutional setting, extending the time period before they need the higher level of care provided in a skilled nursing facility.  In addition, some competitors are implementing vertical alignment strategies, such as hospitals who provide long-term care services. Our ability to compete successfully varies from location to location and depends on a number of factors, including the number of competing facilities in the local market and the types of services available at those facilities, our local reputation for quality care of patients, the commitment and expertise of our caregivers, our local service offerings and treatment programs, the cost of care in each locality, and the physical appearance, location, age and condition of our facilities.

We seek to compete effectively in each market by establishing a reputation within the local community for quality of care, attractive and comfortable facilities, and providing specialized healthcare with an emphasized focus on high-acuity patients. Programs targeting high-acuity patients, including our PowerBack Rehabilitation facilities, generally have a higher staffing level per patient than our other inpatient facilities and compete more directly with an IRF or LTAC hospitals, in addition to other skilled nursing facilities. We believe that the average cost to a third-party payor for the treatment of our typical high-acuity patient is lower if that patient is treated in one of our skilled nursing facilities than if that same patient were to be treated in an IRF or LTAC hospital.

 

Our other services, such as assisted/senior living facilities and rehabilitation therapy provided to third-party facilities, 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 to provide the services, quality of clinical services, responsiveness to patient/resident needs, location and the ability to provide support in other areas such as information management and patient recordkeeping.

 

Increased competition could limit our ability to attract and retain patients, attract and retain employees 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 do and may as a result be more attractive to our current patients, to potential patients and to referral sources.

Industry Trends

We believe the following post-acute care industry trends are likely to impact our business:

 

Increased Demand Due to Favorable Demographics. The majority are our services are provided to individuals aged 75 and older.  This population is one of the fastest growing segments in the United States. We expect that as the number of individuals aged 75 and older continues to increase, we will experience an increase in demand for our services.

 

Shift of Care to Lower Cost Alternatives. In response to rising healthcare costs, governmental and other payors have adopted various cost-containment measures that serve to reduce admissions and encourage reduced lengths of stay in hospitals and other post-acute settings.  Consequently, these providers are discharging patients earlier and referring incremental high-acuity patients to lower cost settings, such as skilled nursing facilities.

 

Limited Supply of Facilities. There has been a moderate decline in the number of skilled nursing facilities over the past several years. Additionally, most states impose strict regulations that limit or restrict the development or expansion of healthcare projects.  Consequently, we believe that as the industry demographics continue to trend positively, the supply and demand balance in the industry will continue to improve.

 

Reduced Reliance on Family Care. We believe that increases in the percentage of dual income earning families, reductions in the average family size, and an increased mobility in society will lessen seniors’ reliance on family as a form of care.  We believe that it will be necessary for more seniors to seek alternative care options as they age, which will increase the demand for our services.

 

Healthcare Reform and Reimbursement Trends.  In recent years, healthcare reforms and other policy changes have reshaped the healthcare payment and delivery landscape in the United States.  A significant objective of these reforms is to transform delivery of and payment for healthcare services by holding providers accountable for the cost and quality of care provided.  In response to these reforms, Medicare and many commercial third party payors have implemented ACO models in which groups of providers share in the benefit and risk of providing care to an assigned group of individuals.  Other reimbursement methodology reforms include value-based purchasing, in which a portion of provider reimbursement is redistributed based on relative performance on designated economic, clinical quality and patient satisfaction metrics.  In addition, the Centers for Medicare and Medicaid Services (CMS) has implemented demonstration and mandatory programs to bundle acute care and post-acute care reimbursement to hold providers accountable for costs across a broader continuum of care. These reimbursement methodologies and similar programs are likely to continue and expand, both in public and commercial health plans.  As alternative payment models seek to incentivize delivery of better care at lower costs, providers are making fundamental changes in their day-to-day operations to better coordinate and manage the care of patients, improve care transitions, reduce lengths of stay and prevent avoidable rehospitalizations.

 

Further, continuing efforts of governmental and private third party payors to contain the rate of payment for the provision of healthcare services has impacted providers like us.  Federal Medicare and Medicaid reimbursement rates in many states are based upon fixed payment systems. Generally, these rates are adjusted annually for inflation. In recent years, those adjustments have not reflected actual increases in the cost of providing healthcare services. In addition to rate pressure, in recent years we have continued to see a shift from “traditional” Fee-for-Service (FFS) Medicare patients to Medicare Advantage patients.  Reimbursement rates and average lengths of stay are generally lower for services provided to Medicare Advantage patients than they are for the same services provided to traditional FFS Medicare patients, negatively impacting our profitability.  In addition to the federal Medicare program, a number of states use managed care to coordinate long-term care support services and many states are interested in implementing or expanding existing ones.  The emergence of managed Medicaid programs has resulted in lower rates of reimbursement for our services and has introduced new challenges and complexities with respect to billings and collections. We expect further migration towards managed Medicare and Medicaid programs.

 

Revenue Sources

 

We derive revenue primarily from the following programs: Medicaid, Medicaid Managed Care, Medicare, Medicare Advantage Plans, commercial insurance payors and private pay patients.

   

 Medicaid

 

Medicaid, which is the largest source of funding for skilled nursing facilities, typically covers patients that require standard room and board services, and provides reimbursement rates that are generally lower than rates earned from other sources. Medicaid is a program financed by state funds and matching federal funds administered by the states and their political subdivisions. 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 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. Reimbursement rates are subject to a number of factors, such as a state’s annual budgetary requirements and funding, statutory and regulatory changes and interpretations and rulings by authoritative agencies.

 

Medicaid Managed Care

 

Medicaid Managed Care is a health care delivery system of Medicaid health benefits and additional services through contracted arrangements between state Medicaid agencies and managed care organizations (MCOs) designed to manage cost, utilization and quality of care.  The delivery of long-term care services is provided through capitated payment programs.  Such programs are in place in the majority of states in which we operate and states may implement such programs in the future if approved by CMS.

 

Medicare

 

Medicare is a federal program that provides healthcare benefits to individuals who are aged 65 years and older or are disabled. To achieve and maintain Medicare certification, a skilled nursing facility must sign a Medicare provider agreement and meet the CMS “Requirements 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). The prospective payment for each beneficiary is based upon the medical condition of and care needed by the beneficiary. 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.

 

 

Medicare reimbursed our skilled nursing facilities under PPS for a defined bundle of inpatient covered services. Medicare coverage criteria require that a beneficiary spend at least three qualifying days in an inpatient acute setting before Medicare will cover the skilled nursing service. While beneficiaries are eligible for up to 100 days per episode of illness of skilled nursing care services (defined as requiring daily skilled nursing and/or skilled rehabilitation services), current law imposes a daily co-payment after the 20th day of covered services. Under PPS, facilities are paid a predetermined amount per patient, per day, for certain services based on the anticipated costs of treating patients.  Effective October 1, 2019, the amount to be paid is determined based on a new case-mix classification system known as the Patient-Driven Payment Model (PDPM). Prior to this date, payment rates were determined by classifying each patient into a resource utilization group (RUG) category based upon each patient's acuity level.

 

Medicare rules and reimbursement rates are subject to 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 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 be provided under Medicare Part B, subject to specific coverage and payment requirements.

 

Patient-Driven Payment Model (PDPM)

 

Effective October 1, 2019, a new case-mix classification system called PDPM replaced the existing case-mix classification system, RUG-IV.  PDPM is designed to increase focus on patients’ conditions and clinical needs, as opposed to the volume of services provided, thereby improving payment accuracy and encouraging a more patient-driven care model.  Under PDPM, there are only two required minimum data set (MDS) assessments, the admission assessment and discharge assessment, with one optional MDS assessment, the interim payment assessment.

 

PDPM utilizes a combination of six components to determine the amount of the per diem payment.  Five of the components are case-mix adjusted, meaning they are intended to cover the utilization of skilled nursing facility resources that vary according to patient characteristics. These components are as follows:  PT, OT, SLP, non-therapy ancillary (NTA) services, and nursing. The sixth component is non-case-mix adjusted, meaning it is intended to cover those skilled nursing facility resources that do not vary by patient.  The PT, OT, and NTA components are also subject to a variable adjustment factor that serves to adjust the per diem payment over the course of the patient’s stay. PT and OT services have variable per diem adjustments beginning on the 21st day of the Medicare stay and

further adjusted every seven days thereafter.  NTA services have variable per diem adjustments beginning on the 4th day of the Medicare stay.  PDPM utilizes patient specific, data-driven characteristics to classify patients into payment groups within each of the six components, which are used as the basis for the payment amount.

 

Effective October 1, 2019, CMS has also revised the definition of skilled nursing facility group therapy so that it aligns with the group therapy definition used in the inpatient rehabilitation facility setting.  The new definition defines group therapy in the skilled nursing facility Medicare Part A setting as a qualified rehabilitation therapist or therapy assistant treating two to six patients at the same time who are performing the same or similar activities.

 

PDPM also revises the limits on group and concurrent therapy.  RUG-IV included a 25% limit per discipline (PT, OT, SLP), for group therapy and did not impose a limit for concurrent therapy.  PDPM includes a 25% limit per discipline (PT, OT, SLP) for both combined group and concurrent therapy.

 

CMS has finalized the implementation of PDPM in a budget neutral manner and has updated the unadjusted federal per diems and related case mix groups (CMGs) and related Case Mix Indices (CMIs).  Under CMIs, there are differences between RUG-IV and PDPM in terms of patient classifications and billing.  CMS has reflected these differences by modifying the PDPM case mixed adjusted federal rates and associated indexes through the application of a CMI multiplier for each PDPM Group.

 

Part B Rehabilitation Requirements

 

We receive payment for certain of our services from the Medicare Part B program under a fee schedule. The payments we received for these services was limited by separate “therapy caps” for combined SLP and PT services and OT services. The therapy caps were implemented under the authority of the Balanced Budget Amendments of 1997. 

 

Congress has historically interceded on several occasions to suspend the therapy caps, offering an exceptions process to permit the processing of claims in excess of the therapy cap. The Deficit Reduction Act of 2005 directed CMS to develop a process that allows exceptions to therapy cap limits when continued therapy is deemed medically necessary.  Specifically, the Middle Class Tax Relief and Job Creation Act of 2012 extended the exceptions process but added a second tier cap mandating manual medical review (MMR) for claims submitted that exceeded $3,700 for combined SLP and PT services and a separate threshold of $3,700 for OT services. In April 2015, The Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) was signed into law. MACRA authorized payment reforms for physicians and other professional services, including SLP, PT, and OT services. Further, it included provisions to not only stabilize the professional fee schedules, but also to extend the therapy cap exceptions process through December 31, 2017.

 

In February 2018, the Bipartisan Budget Act of 2018 was signed into law, which provides for the repeal of all therapy caps retroactively to January 1, 2018. The new law preserves the former therapy cap amounts as thresholds above which claims must include a modifier as a confirmation that services are medically necessary as justified by appropriate documentation in the medical record. The law retained the MMR process for claims over the threshold, but reduced the claim threshold to $3,000. Just as with the incurred expenses for the therapy cap amounts, there is one amount for PT and SLP services combined and a separate amount for OT services. This amount is indexed annually by the Medicare Economic Index.  The modifier threshold amount for both combined SLP and PT services and OT services is $2,080 in 2020 compared to $2,040 in 2019.

 

In November 2019, CMS issued the calendar year 2020 Physician Fee Schedule Final Rule establishing that therapy assistant claim modifiers will be required starting in calendar year 2020. This rule is consistent with the requirement of the Balanced Budget Act of 2018, which requires a 15% payment reduction when a physical therapist assistant (PTA) or occupational therapy assistant (OTA) provides services “in whole or in part” on a given day. While the modifiers are required to be applied to the claims beginning in calendar year 2020, the 15% therapist assistant payment reduction will not be applied until calendar year 2022. The final rule clarified the meaning of “in whole or in part” to mean when 10% or more of the services are provided by a PTA or OTA.

 

The FY 2020 Physician Fee Schedule (PFS), indicates that there will be no decrease in PT and OT code payments in 2020. However, CMS also indicated its intent to make changes to reimbursement rates that would become effective January 1, 2021. These changes, if finalized, will effectively lower the reimbursement rate for Medicare Part B specialty providers; specific to our industry, CMS is proposing cuts to Part B therapy services by 8%.

 

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 SLP, OT, and PT 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.

 

Medicare Annual Market Basket

 

Current law requires CMS to calculate an annual market basket update to the payment rates. Provisions of the Patient Protection and Affordable Care Act of 2010 (PPACA) directed the agency to reduce that payment level by a calculated multi-factor productivity adjustment. The agency also retains the authority to review and adjust payments for corrections to previous year market baskets where over/under payment exceeded 0.05% between the projected market basket and the actual performance. Annually, on a federal fiscal year basis (October 1), the agency makes its payment changes. Normally, CMS issues proposed rules during April, providing 60-days for stakeholder input, and issues finalized rules 60 days prior to the start of the fiscal year. If there are no substantive changes in rules and regulations, the agency has the authority to issue rate adjustments in a notice, rather than a proposed rule. The notice must be issued 60 days before the beginning of the fiscal year.

 

On July 31, 2017, CMS issued a final rule for fiscal year 2018 outlining Medicare payment rates for skilled nursing facilities.  The final rule uses a market basket percentage of 1.0% effective October 1, 2017.

 

On August 8, 2018, CMS issued a final rule for fiscal year 2019 outlining Medicare payment rates for skilled nursing facilities.  A market basket increase of 2.4% was mandated by the Bipartisan Budget Act of 2018 effective October 1, 2018. Reimbursement for fiscal year 2019 was based on the current payment methodology using the Resource Utilization Group, Version IV (RUG-IV) model with one significant change, the addition of the Skilled Nursing Facility Value-Based Purchasing (see below) incentive multiplier.

 

On July 30, 2019, CMS released a final rule for skilled nursing facilities prospective payment services (SNF PPS) for fiscal year 2020 Medicare Part A services.  The final rule made revisions from the proposed rule for the PDPM market basket increase and additional modifications to the skilled nursing facility Quality Reporting Program (QRP).  PDPM replaced the existing case-mix classification methodology, RUG-IV, effective October 1, 2019.  The final rule addresses specific issue areas, discussed below, related to the fiscal year 2020 requirements. 

 

The final rule provides for a net SNF PPS market basket update factor for skilled nursing facilities of 2.4% effective October 1, 2019.  This is a full market basket update of 2.8% with no forecast error incurred and a 0.4% multifactor productivity adjustment.

 

Skilled Nursing Facility - Quality Measures Reporting Program (SNF QRP)

 

The Improving Medicare Post-Acute Care Transformation Act of 2014 (IMPACT Act) imposed data reporting requirements for skilled nursing facilities and certain other post-acute care providers in an effort to improve Medicare beneficiary outcomes through shared-decision making, care coordination, and enhanced discharge planning. Beginning with federal fiscal year 2018, skilled nursing facilities that fail to submit required quality data are subject to a 2.0% reduction to the annual market basket update.

 

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

 

The Protecting Access to Medicare Act of 2014 (PAMA) required the establishment of a SNF-VBP Program. Effective October 1, 2018, the SNF-VBP Program allowed skilled nursing facilities to earn incentive payments based on the quality of care they provide to Medicare beneficiaries, as measured by a specified quality measure related to hospital readmissions. In order to fund the incentive payment pool, CMS withholds 2.0% of Medicare payments and then redistributes 60% of the withheld payments to skilled nursing facilities.  Skilled nursing facilities are evaluated based on both improvement and achievement of their hospital readmission measure. Skilled nursing facilities also receive quarterly confidential feedback reports regarding their performance.  CMS periodically publishes updates regarding the program’s administrative matters, such as scoring methodology.

 

Sequestration of Medicare Rates

 

The Budget Control Act of 2011 required mandatory reductions in federal spending, known as sequestration.  Sequestration

imposed Medicare spending reductions of up to 2.0% per fiscal year, with a uniform percentage reduction across all Medicare programs. CMS began imposing a 2.0% reduction on Medicare FFS payments beginning in April 2013. These reductions have been extended through 2023.

 

Medicare Advantage Plans

 

Medicare Advantage Plans, sometimes called Medicare Part C or MA Plans, are offered by private companies that are approved by CMS.  Medicare Advantage Plans cover all Medicare services and manage care of patients through a network of doctors, hospitals and other providers. Reimbursement rates for nursing care are negotiated with the plans and are not set by skilled nursing facility PPS rules of payments. CMS has indicated that Medicare Advantage Plans can determine whether to incorporate any aspects of PDPM into their reimbursement methodology or use other appropriate reimbursement methodologies.

 

Commercial Insurance

 

A different type of insurance, commercial long-term care insurance, is also available to consumers. However, its role as a significant contributor to industry revenues has not been fully realized. Factors contributing to the lack of revenues include high premium costs and intermittent, often significant premium rate increases throughout the life of the policy and denials of coverage.

 

Private and Other Payors

 

Private and other payors consist primarily of self-pay individuals, family members or other third parties who directly pay for the services we provide.

 

Reimbursement for our Services

 

Reimbursement for Skilled Nursing Facilities

 

The majority of skilled nursing facility revenues in the U.S. come from Medicare and Medicaid, with the remainder of revenues derived from managed care and commercial insurance, other third-party sources and private pay.  Typically, all patients that enter a skilled nursing facility begin as a short-term acute care patient and either get discharged or become long-term care residents.  After a patient no longer qualifies for skilled care under Medicare, the reimbursement of costs incurred by a skilled nursing facility patient will be shifted to private pay (out of pocket) resources and then Medicaid if the patient qualifies. 

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 Assisted/Senior Living Facilities

 

Assisted/senior living facilities generate revenues primarily from private pay sources, including third-party insurance and self-pay, with only a small portion derived from government sources.

 

Reimbursement for Rehabilitation Services

 

Outside of therapy received during a Medicare Part A covered stay of up to 100 days, most of our rehabilitation therapy services are typically reimbursed under the Medicare Part B program. The payments made to our rehabilitation therapy services segment for services it provides to skilled nursing facilities are determined by negotiated patient per diem rates or a negotiated fee schedule based on the type of service rendered. In addition, this segment is also directly reimbursed from the Medicare Part B program, Medicaid, and other insurance companies through its certified outpatient rehabilitation agencies and group practices for services provided in assisted living facilities, homes and the community.

Recent Legislative, Regulatory and other Governmental Actions Affecting Revenue

 

The revenue and operating environment for the post-acute and long-term care services we deliver has been significantly shaped by a series of healthcare laws passed by Congress and implemented by government entities. The broad healthcare reforms enacted as part of PPACA have been among the most significant of revisions. Embedded in this complex legislation were provisions redesigning the private insurance market place, expanding the obligations of Medicaid, empowering changes in Medicare and stimulating innovations in payment and care delivery. The implementation of the provisions of PPACA has shaped the policy landscape.

 

Our operating environment has been further influenced by specific provisions in other legislation, such as:

 

Medicaid Fiscal Accountability Regulation (MFAR)

 

In November 2019, CMS issued a proposed rule, the Medicaid Fiscal Accountability Regulation (MFAR), regarding the use of Medicaid supplemental payment programs and financing arrangements.  The proposed rule could negatively impact Medicaid revenue for our facilities that currently rely upon provider taxes, intergovernmental transfers (IGTs), and upper payment limit (UPL) payments if states fail to meet the new requirements within a two to three year period after the proposed rule is finalized.  The proposed rule clarified certain definitions with respect to these topics and imposed new requirements on certain financing mechanisms. Additionally, MFAR introduced new reporting requirements with respect to Medicaid supplemental payment programs, such as the requirement for states to furnish provider-level data in lieu of aggregated data and the use of an approved template for certain payment demonstration programs. These requirements are intended to allow CMS to better track payments and analyze payment detail.  The proposed rule also clarifies that providers must receive and retain 100 percent of the payment, helping to prevent states and other units of government from reusing Medicaid payments as a source of state financing for additional payments.  Further, existing and new supplemental payment methodologies would be phased out after no more than 3 years and states would be required to request a new CMS approval to continue a supplemental payment beyond the maximum 3 year approved period. Currently, the majority of the states in which we operate could be impacted by the proposed provider tax regulations, which if implemented, would become effective three years after the effective date of the regulation. Additionally, we operate one center in Indiana that could be impacted by the proposed changes in the IGT regulations. The comment period for the proposed rule closed during the first quarter of 2020.

 

Medicaid Healthy Adult Opportunity (HAO) Demonstration Initiative

 

In January 2020, CMS announced an optional demonstration initiative, the Healthy Adult Opportunity (HAO), that would permit states to pursue a capped Medicaid financing model for certain Medicaid populations and the opportunity to share in program savings. The HAO will utilize Section 1115 waiver authority to provide coverage to adults not eligible for benefits under the state’s Medicaid

state plan, while offering states increased flexibility in administering the benefits of such individuals. Specifically, the HAO targets adults under age 65 who are not eligible for Medicaid on the basis of disability or their need for long-term care services and supports, and who are not eligible under a state plan. Other very low-income parents, children, pregnant women, elderly adults, and people eligible on the basis of a disability will not be directly affected – except from the improvements that result from states reinvesting savings into strengthening their overall programs. Under this initiative, states may implement an “aggregate” (commonly referred to as a “block grant”) or per capita cap financing model.  The HAO demonstrations generally will be approved for an initial five-year period from the date of implementation, and successful demonstrations may be renewed for a period of up to 10 years.

 

Skilled Nursing Facilities

 

Healthcare Reform Initiatives

 

We believe we have positioned our business and operations for success in a healthcare environment that rewards quality outcomes as opposed to volume of services provided.  We believe that post-acute healthcare providers who provide quality diversified care, have density and strong reputations in local markets, have good relationships with acute care hospitals and payors and operate with scale will have a competitive advantage in an episodic payment environment.  We believe our business strategies should position us to become a valuable partner to acute care hospitals and managed care organizations that are seeking to increase care coordination, reduce lengths of stay and hospital readmissions, more effectively manage healthcare costs and develop new care delivery and payment models. As the industry and its regulators continue to engage in this environment, we will continue to adapt to changes that are ultimately made to the delivery system. For example, several of our skilled nursing facilities successfully participated in the CMS Bundled Payment for Care Improvement (BPCI) demonstration, which encouraged coordination of care amongst providers for certain episodes of care. The latest demonstration term for the program expired on September 30, 2018.  We are not participating in the new BPCI Advanced model, which commenced October 1, 2018, as it precludes post-acute providers from participating in a manner similar to the original program.

Medicare Shared Savings Program (MSSP)

The Medicare Shared Savings Program (MSSP) is an alternative payment model created by CMS that moves the payment system towards a more value-based model through the promotion of accountability for a patient population, coordination of care for Medicare beneficiaries, and encouragement of investment in high quality and efficient services. Under MSSP, providers and suppliers are able to create an ACO, which in turn agrees to be held accountable for the quality, cost, and experience of care of an assigned Medicare FFS beneficiary population. MSSP has various risk-sharing tracks that allow ACOs to select an arrangement. Participation in the program grants certain advantages to ACOs. For example, eligible ACOs may apply for a waiver to the 3-day qualifying stay rule.

 

Effective January 1, 2016, LTC ACO, LLC (formerly known as Genesis Healthcare ACO, LLC) began participating in MSSP through our physician services division.  Successful participation requires us to carefully document delivery, meet specific performance criteria and meet specific savings targets. Our physician services providers make more than half a million visits annually to both short- and long-stay patients, helping them improve overall healthcare quality and reduce unnecessary hospital readmissions.  As of December 2019, LTC ACO had contracted with nearly 200 new unaffiliated long-term care facilities. LTC ACO has plans to significantly expand its resident attribution beginning in 2020, not only inside Genesis but also more broadly throughout the skilled nursing industry. 

 

2019 Performance Year

Effective July 1, 2019, we entered into a new MSSP agreement with CMS, which is scheduled to remain in effect through December 31, 2024. Under this agreement, we can share in up to 75% of the savings with CMS, but we are also at risk for 40% of any costs in excess of CMS-defined targets, which is further capped at 15% of our annualized benchmark costs under management. For the first half of 2019, we operated under our initial MSSP agreement, which allowed us to share in up to 50% of the savings with CMS, while assuming no downside risk.

With four years of participation under MSSP, we have gained valuable experience driving better outcomes and improved quality, managing episodic cost and developing in-house capabilities to predict program performance.  Based upon the data available to us with respect to the 2019 performance year, we have recognized $6.6 million of cumulative MSSP income, net of expenses and provider distributions.  The final reconciliation and settlement of the 2019 performance year is expected to be received from CMS in the third quarter of 2020.  We will continue to closely monitor and evaluate our estimated performance under the 2019 performance year and will adjust our MSSP income accordingly.

Past Performance Years

During 2018 and the first half of 2019, we managed, under an upside-only risk track, approximately 6,400 and 6,000, respectively, Medicare FFS beneficiaries under MSSP with annualized Medicare spend of more than $155.0 million.  In August 2019, we were informed by CMS that we reached the minimum savings rate set by CMS required for MSSP gain share for 2018.  As a result, in the third quarter of 2019, we recognized MSSP income of approximately $1.7 million, net of expenses and provider distributions.  We did not generate savings in the 2017 performance year, and in the 2016 performance year, we generated savings, but did not achieve the minimum savings target and therefore, did not share in any of the savings.

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 our methods and costs of doing business.  Our subsidiaries that provide healthcare services are subject to federal, state and local laws relating to, among other things, licensure, delivery, quality and adequacy of care, physical plant requirements, life safety, personnel and operating policies.  In addition, our provider subsidiaries are subject to federal and state laws that govern billing and reimbursement, relationships with vendors and business relationships with physicians.  Such laws include, but are not limited to, the Anti-Kickback Statue, the federal False Claims Act (FCA), the Stark Law and state corporate practice of medicine statutes.

Governmental and other authorities periodically inspect our skilled nursing facilities, assisted/senior living facilities and outpatient rehabilitation agencies to verify that we continue to comply with the applicable regulations and standards. We must pass these inspections to remain licensed under state laws, to comply with our Medicare and Medicaid provider agreements, and, in some instances, to continue our participation in the Veterans Administration program. We can only participate in these third-party payment programs if inspections by regulatory authorities reveal that our facilities and agencies are in substantial compliance with applicable requirements. In the ordinary course of business, we may receive notices from federal or state regulatory authorities alleging deficiencies in certain regulatory practices. These statements of deficiency may require us to take corrective action to regain and maintain compliance.  In some cases, federal or state regulators may impose other remedies including imposition of CMPs, temporary payment bans, loss of certification as a provider in the Medicare and/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 HHS Office of the Inspector General (OIG) audits, state Medicaid agencies, 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 CMPs that extend over long periods of time and date back to incidents long before surveyor visits, Medicare and Medicaid payment bans and terminations from the Medicare and Medicaid programs. We vigorously contest these matters where 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 our operations.

Five-Star Quality Rating

 

In 2008, CMS created the Five-Star Quality Rating System (the Star Ratings) to help consumers, families and caregivers compare skilled nursing facilities and choose providers more easily.  Skilled nursing facilities receive an overall star rating from one to five stars based on three components: health inspection rating (survey results), quality measure calculations and staffing data. Each of the components receives star rankings as well. Skilled nursing facilities with five stars are considered to have much above average quality and skilled nursing facilities with one star are considered to have quality much below average. Families are increasingly consulting the Star Ratings prior to placing a family member in a skilled nursing facility and hospital referral partners are increasingly narrowing their panels of skilled nursing facilities to include only those with at least a three-star overall rating. However, CMS has acknowledged that there are limitations in using the Star Ratings to make inferences about nursing center quality, including (i) variations by state in survey processes, (ii) the use of payroll based data that may not fully reflect actual staffing patterns and (iii) quality measures do not represent all aspects of care that could be important to consumers.  The foundation of the Star Ratings is the annual survey.

 

In April 2016, CMS added six quality measures to the Nursing Home Compare website. These quality measures include:  successful discharges to the community; visits to the emergency department; rehospitalizations; improvements in function; long-stay residents whose ability to move independently worsened; and antianxiety or hypnotic medications.  Five quality measures were used to compute Star Ratings in July 2016 (antianxiety or hypnotic medications were excluded).  Starting in January 2017, the five quality measures have the same weight as the other quality measures.  This change was the largest addition of quality measures to Nursing Home Compare since 2003 and nearly doubles the number of short-stay measures about key short-stay outcomes. Short-stay measures reflect care provided to residents who are in the nursing home for 100 days or less, while long-stay measures reflect care for residents who are in the nursing home for more than 100 days.  The health inspection star rating for surveys was frozen in February 2018 and did not reflect surveys conducted between November 28, 2017 through the first quarter of 2019. This freeze was in anticipation of the phase 2 implementation of the Requirements of Participation on the same date, as well as the implementation of the new Long-Term Care Survey Process. CMS notified providers that all surveys conducted during the freeze would be incorporated into the health inspection star.

 

In April 2019, CMS implemented changes to the Five-Star Quality Rating System. These changes included a lifting of the freeze, revisions to the inspection process, adjustment of staffing rating thresholds, including increased emphasis on registered nurse staffing, implementation of new quality measures and changes in the scoring of various quality measures. CMS added two new quality measures: long-stay emergency department transfers and long-stay hospitalizations. CMS also established separate quality ratings for short-stay and long-stay residents and will now provide separate short-stay and long-stay ratings in addition to the overall quality measure rating.

 

The impact of the most recent five star rating methodology was significant across the industry. CMS initially estimated the changes would cause 47% of all nursing centers to lose stars in their "Quality" ratings. In addition, 33% would lose stars in their "Staffing" ratings, and 36% would lose stars in their "Overall" ratings. Accordingly, despite no significant changes in our staffing levels or quality of our care, these changes to the staffing and quality thresholds had a negative impact on our star rating in 2019.

The table below summarizes the Star Ratings of our qualified skilled nursing facilities:

 

Payroll-Based Journal

One of the CMS initiatives authorized by the PPACA was to improve the accuracy of nursing home staffing data. CMS initiated and rolled-out an electronic payroll-based journal (PBJ) requirement effective July 1, 2016. This system allows staffing and census information to be collected on a regular and more frequent basis than previously collected. It is also auditable to ensure accuracy.  All long-term care facilities have access to this system at no cost to facilities. Effective January 2018, the Staffing Star component of 5 star is calculated using the data collected from PBJ coupled with MDS data.

 

Requirements of Participation

 

In October 2016, CMS published a final rule to make major changes to improve the care and safety of residents in long-term care facilities that participate in the Medicare and Medicaid programs. The policies in this final rule are targeted at reducing unnecessary hospital readmissions and infections, improving the quality of care, and strengthening safety measures for residents in these facilities.

 

Changes finalized in this rule include:

 

The new requirements were implemented in three phases. The regulations included in the first phase were effective November 28, 2016; the regulations included in the second phase were effective November 28, 2017; the regulations included in third phase were effective November 28, 2019, despite recent proposals to delay implementation of certain aspects of the rule.  The total costs associated with implementing the new regulations have been absorbed into our general operating costs.  Failure to comply with the new regulations could result in exclusion from the Medicare and Medicaid programs and have an adverse impact on our business, financial condition or results of operations. We have timely implemented the changes required under the three phases, in all material respects. In July 2019, CMS proposed revisions to the requirements of participation, which if finalized, would result in the removal or simplification of certain requirements that could potentially impede or divert resources away from the provision of high-quality resident care, thus increasing facilities’ ability to devote their resources to improving resident care.

Civil and Criminal Fraud and Abuse Laws and Enforcement

Federal and state healthcare fraud and abuse laws regulate both the provision of services to government program beneficiaries and the methods and requirements for submitting claims for services rendered to such beneficiaries. Under these laws, individuals and organizations can be penalized for submitting claims for services that are not provided; that have been inadequately provided; billed in an incorrect manner, intentionally or accidentally, or other than as actually provided; not medically necessary; provided by an improper person; accompanied by an illegal inducement to utilize or refrain from utilizing a service or product; or billed or coded in a manner that does not otherwise comply with applicable governmental requirements. Penalties also may be imposed for violation of anti-kickback and patient referral laws.

Federal and state governments have a range of criminal, civil and administrative sanctions available to penalize and remediate healthcare fraud and abuse, including exclusion of the provider from participation in the Medicare and Medicaid programs, imposition of civil and criminal fines, suspension of payments and, in the case of individuals, imprisonment.

We have internal policies and procedures, including a program designed to facilitate compliance with and to reduce exposure for violations of these and other laws and regulations. However, because enforcement efforts presently are widespread within the industry and may vary from region to region, there can be no assurance that our internal policies and procedures will significantly reduce or eliminate exposure to civil or criminal sanctions or adverse administrative determinations.

Anti-Kickback Statute

Federal law commonly referred to as the Anti-Kickback Statute prohibits the knowing and willful offer, payment, solicitation or receipt of anything of value, directly or indirectly, in return for the referral of patients or arranging for the referral of patients, or in return for the recommendation, arrangement, purchase, lease or order of items or services that are covered by a federal healthcare program such as Medicare or Medicaid. Violation of the Anti-Kickback Statute is a felony, and sanctions for each violation include imprisonment of up to five years, significant criminal fines, significant CMPs plus three times the amount claimed or three times the remuneration offered, and exclusion from federal healthcare programs (including Medicare and Medicaid). Additionally, violation of the Anti-Kickback Statute constitutes a false or fraudulent claim under the FCA.  Many states have adopted similar prohibitions against kickbacks and other practices that are intended to induce referrals applicable to all payors.

We are required under the Medicare Requirements of Participation and some state licensing laws to contract with numerous healthcare providers and practitioners, including physicians, hospitals and hospice agencies and to arrange for these individuals or entities to provide services to our residents and patients. In addition, we have contracts with other suppliers, including pharmacies, laboratories, x-ray companies, ambulance services and medical equipment companies. Some of these individuals or entities may refer, or be in a position to refer, patients to us, and we may refer, or be in a position to refer, patients to these individuals or entities. Certain safe harbor provisions have been created so that although a relationship could potentially implicate the federal anti-kickback statute, it would not be treated as an offense under the statute. We attempt to structure these arrangements in a manner that falls within one of the safe harbors. Some of these arrangements may not ultimately satisfy the applicable safe harbor requirements, but failure to meet the safe harbor does not necessarily mean an arrangement is illegal.

We believe that our arrangements with providers, practitioners and suppliers are in compliance with the Anti-Kickback Statute and similar state laws. However, if any of our arrangements with third parties were to be challenged and found to be in violation of the Anti-Kickback Statute, we could be required to repay any amounts we received, subject to criminal penalties, and we could be excluded from participating in federal and state healthcare programs such as Medicare and Medicaid. The occurrence of any of these events could significantly harm our business, financial condition or results of operations.

Stark Law

Federal law commonly known as the Stark Law prohibits a physician from making referrals for particular healthcare services to entities with which the physician (or an immediate family member of the physician) has a financial relationship if the services are payable by Medicare or Medicaid. If an arrangement is covered by the Stark Law, the requirements of a Stark Law exception must be met for the physician to be able to make referrals to the entity for designated health services and for the entity to be able to bill for these services. Although the term “designated health services” does not include long-term care services, some of the services provided at our skilled nursing facilities and other related business units are classified as designated health services, including PT, SLP and OT services. The term “financial relationship” is defined very broadly to include most types of ownership or compensation relationships. The Stark Law also prohibits the entity receiving the referral from seeking payment from the patient or the Medicare and Medicaid programs for services rendered pursuant to a prohibited referral.

The Stark Law contains exceptions for certain physician ownership or investment interests in, and certain physician compensation arrangements with, certain entities. If a compensation arrangement or investment relationship between a physician, or immediate family member, and an entity satisfies the applicable requirements for a Stark Law exception, the Stark Law will not prohibit the physician from referring patients to the entity for designated health services. The exceptions for compensation arrangements cover employment relationships, personal services contracts and space and equipment leases, among others.

If an entity violates the Stark Law, it could be subject to significant civil penalties. The entity also may be excluded from participating in federal and state healthcare programs, including Medicare and Medicaid. If the Stark Law were found to apply to our relationships with referring physicians and no exception under the Stark Law were available, we would be required to restructure these relationships or refuse to accept referrals for designated health services from these physicians. If we were found to have submitted claims to Medicare or Medicaid for services provided pursuant to a referral prohibited by the Stark Law, we would be required to repay any amounts we received from Medicare or Medicaid for those services and could be subject to CMPs. Further, we could be excluded from participating in Medicare and Medicaid and other federal and state healthcare programs. If we were required to repay any amounts to Medicare or Medicaid, subjected to fines, or excluded from the Medicare and Medicaid Programs, our business, financial condition or results of operations could be harmed significantly.

As directed by PPACA, in 2010 CMS released a self-referral disclosure protocol (SRDP) for potential or actual violations of the Stark Law. Under SRDP, CMS states that it may, but is not required to, reduce the amounts due and owing for a Stark Law violation, and will consider the following factors in deciding whether to grant a reduction: (1) the nature and extent of the improper or illegal practice; (2) the timeliness of the self-disclosure; (3) the cooperation in providing additional information related to the disclosure; (4) the litigation risk associated with the matter disclosed; and (5) the financial position of the disclosing party.

Many states have physician relationship and referral statutes that are similar to the Stark Law. These laws generally apply regardless of the payor. We believe that our operations are structured to comply with the Stark Law and applicable state laws with respect to physician relationships and referrals. However, any finding that we are not in compliance with these laws could require us to change our operations or could subject us to penalties. This, in turn, could significantly harm our business, financial condition or results of operations.

False Claims Act

Federal and state laws prohibit the submission of false claims and other acts that are considered fraudulent, wasteful or abusive. Under the federal FCA, actions against a provider can be initiated by the federal government or by a private party on behalf of the federal government. These private parties, who are often referred to as “qui tam relators” or “relators,” are entitled to share in any amounts recovered by the government. Both direct enforcement activity by the government and qui tam relator actions have increased significantly in recent years. The use of private enforcement actions against healthcare providers has increased dramatically, in part because the relators are entitled to share in a portion of any settlement or judgment.

An FCA violation occurs when a provider knowingly submits a claim for items or services not provided.  The Fraud Enforcement and Recovery Act of 2009 expanded the scope of the FCA by creating liability for knowingly retaining an overpayment received from the government and broadening protections for whistleblowers. The submission of false claims or the failure to timely repay

overpayments may lead to the imposition of significant CMPs, significant criminal fines and imprisonment, and/or exclusion from participation in state and federally-funded healthcare programs, including the Medicare and Medicaid programs.

Allegations of poor quality of care can also lead to FCA actions under a theory of worthless services.  Worthless services cases allege that although care was provided it was so deficient that it was tantamount to no service at all.   

In recent years, prosecutors and relators are increasingly bringing FCA claims based on the implied certification theory as an expansion of the scope of the FCA.  Under the implied certification theory, a violation of the FCA occurs when a provider’s request for payment implies a certification of compliance with the applicable statutes, regulations or contract provisions that are preconditions to payment.  This development has increased the risk that a healthcare company will have to defend a false claims action, pay fines and treble damages or settlement amounts or be excluded from the federal and state healthcare programs as a result of an investigation arising out of the FCA. Many states have enacted similar laws providing for imposition of civil and criminal penalties for the filing of fraudulent claims.

Because we submit thousands of claims to Medicare each year, and there is a relatively long statute of limitations under the FCA, there is a risk that intentional, or even negligent or recklessly submitted claims that prove to be incorrect, or even billing errors, cost reporting errors or lapses in statutory or regulatory compliance with regard to the provision of healthcare services (including, without limitation the Anti-Kickback Statue and the federal self-referral law discussed above), could result in significant civil or criminal penalties against us.  For information regarding matters in which the government is pursuing, or has expressed an intent to pursue, legal remedies against us under the FCA and similar state laws, see Note 21 – "Commitment and Contingencies - Legal Proceedings."

We believe that our operations comply with the FCA and similar state laws. However, if our claims practices were challenged and found to violate the applicable laws, any finding that we are not in compliance with these laws could require us to change our operations or could subject us to penalties or make us ineligible to participate in certain government funded healthcare programs, which could in turn significantly harm our business, financial condition or results of operations.

Patient Privacy and Security Laws

There are numerous legislative and regulatory requirements at the federal and state levels addressing patient privacy and security of health information.  The Health Insurance Portability and Accountability Act of 1996 (HIPAA) contains provisions that require us to adopt and maintain business procedures 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.

HIPAA's security standards were designed to protect specified information against reasonably anticipated threats or hazards to the security or integrity of the information and to protect the information against unauthorized use or disclosure.  These standards have had and are expected to continue to have a significant impact on the healthcare industry because they impose extensive requirements and restrictions on the use and disclosure of identifiable patient information.  In addition, HIPAA established uniform standards governing the conduct of certain electronic healthcare transactions and protecting the privacy and security of certain individually identifiable health information.

The Health Information Technology for Clinical Health Act of 2009 (HITECH Act) expanded the requirements and noncompliance penalties under HIPAA and require correspondingly intensive compliance efforts by companies such as ours, including self-disclosures of breaches of unsecured health information to affected patients, federal officials, and, in some cases, the media.  These laws make unauthorized employee access illegal and subject to self-disclosure and penalties.  Other states may adopt similar or more extensive breach notice and privacy requirements. Compliance with these regulations could require us to make significant investments of money and other resources. We believe that we are in substantial compliance with applicable state and federal regulations relating to privacy and security of patient information.  However, if we fail to comply with the applicable regulations, we could be subject to significant penalties and other adverse consequences.

Certificates of Need (CON) and Other Regulatory Matters

There are CON programs in the majority of states and the District of Columbia, many of which are states in which we operate skilled nursing facilities.  We are required in these jurisdictions to obtain CON approval or exemption prior to certain changes including without limitation, change in ownership, capital expenditures over certain limits, development of a new facility or expansion of services of an existing facility or service in order to control overdevelopment of healthcare projects. Certain states that do not have CON programs may have other laws or regulations that limit or restrict the development or expansion of healthcare projects. In the event we choose to develop or expand the operations of our subsidiaries, the development or expansion could be affected adversely by the inability to obtain the necessary approvals, changes in the standards applicable to such approvals or possible delays and expenses

associated with obtaining such approvals.  Failure to comply with state requirements with CON or other regulations that address development or expansion of services could adversely affect the progress or completion of a healthcare project.

State Operating License Requirements

We are required to obtain state licenses, certificates or permits to operate each of our skilled nursing facilities. Many states require similar licenses or certificates for assisted/senior living facilities, and some states require a license to operate outpatient agencies. Medicare requires compliance with applicable state laws as a requirement of participation.  In addition, healthcare professionals and practitioners are required to be licensed in most states. We take measures to ensure that our healthcare professionals are properly licensed and participate in required continuing education programs. We believe that our operating companies and personnel that provide these services have required licenses or certifications necessary for our current operations. Failure to obtain, maintain or renew a required license, permit or certification could adversely affect our ability to bill for services or operate in the ordinary course of business.

 

Federal Health Care Reform

In addition to the matters described above affecting Medicare and Medicaid participating providers, PPACA enacted several reforms with respect to skilled nursing facilities, including payment measures to realize significant savings of federal and state funds by deterring and prosecuting fraud and abuse in both the Medicare and Medicaid programs. While many of the provisions of PPACA will not take effect for several years or are subject to further refinement through the promulgation of regulations, some key provisions of PPACA are presently effective.

The provisions of PPACA discussed above are examples of recently enacted federal health reform provisions that we believe may have a material impact on the long-term care industry generally and on our business. However, the foregoing discussion is not intended to constitute, nor does it constitute, an exhaustive review and discussion of PPACA. It is possible that other provisions of PPACA may be interpreted, clarified, or applied to our businesses in a way that could have a material adverse impact on our business, financial condition and results of operations. Similar federal and/or state legislation that may be adopted in the future could have similar effects.

 

Insurance and Related Risks

We maintain a variety of types of insurance, including general and professional liability, workers' compensation, fiduciary liability, property, cyber/privacy liability, directors' and officers' liability, crime, boiler and machinery, automobile liability, employment practices liability and earthquake and flood. We believe that our insurance programs are adequate and where there has been a direct transfer of risk to the insurance carrier, our risk is limited to the cost of the premium. We self-insure a significant portion of our potential liabilities for several risks, including certain types of general and professional liability, workers’ compensation, automobile liability and health benefits. To the extent our insurance coverage is insufficient or unavailable to cover losses that would otherwise be insurable, or to the extent that our estimates of anticipated liabilities that we self-insure are significantly lower than the actual self-insured liabilities that we incur, our business, financial condition or results of operations could be materially and adversely affected.  For additional information regarding our insurance programs, see Note 21 – “Commitments and Contingencies – Loss Reserves for Certain Self-Insured Programs,” in the financial statements included elsewhere in this report.

We have developed a risk management program intended to control our insurance and professional liability costs.  As part of this program, we have implemented an arbitration agreement program at each of our nursing facilities under which, upon admission and to the extent permitted under existing regulations, patients are requested (but not required) to execute an agreement that requires disputes to be arbitrated instead of litigated in court. We believe that this program accelerates resolution of disputes and reduces our liability exposure and related costs. We have also established an incident reporting process that involves the provision of tracking and trending data to our facility administrators for purposes of quality assurance and improvement. We apply an enterprise risk management program to continually evaluate risks and opportunities impacting the business.

 

Environmental Matters

We are subject to a wide variety of federal, state and local environmental and occupational health and safety 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.

In our role as owner of subsidiaries which operate our facilities (including our leased facilities), we also may be required to investigate and remediate hazardous substances that are located on the property, including any such substances that may have migrated off, or discharged or transported from the property. Part of our operations involves the handling, use, storage, transportation, disposal and/or discharge of hazardous, infectious, toxic, flammable and other hazardous materials, wastes, pollutants or contaminants. These activities may result in damage to individuals, property or the environment; may interrupt operations and/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, there can be no assurance that we will not incur environmental liabilities in the future, and such liabilities may result in material adverse consequences to our business, financial condition or results of operations.

Available Information

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are filed with the SEC. Such reports and other information filed by us with the SEC are available free of charge at the investor relations section of our website at www.genesishcc.com as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. Copies are also available, without charge, by writing to Genesis Healthcare, Inc. Investor Relations, 101 East State Street, Kennett Square, PA

19348. The SEC also maintains a website, www.sec.gov, which contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.  The inclusion of our website address in this annual report does not include or incorporate by reference the information on our website into this annual report.

 

Company History

Genesis Healthcare, Inc., a Delaware corporation, was incorporated in October 2005 under the name of SHG Holding Solutions, Inc., and subsequently changed its name to Skilled Healthcare Group, Inc. (Skilled).  On February 2, 2015, Skilled combined its businesses and operations (the Combination) with FC-GEN Operations Investment, LLC, a Delaware limited liability company (FC-GEN), pursuant to a Purchase and Contribution Agreement dated August 18, 2014. In connection with the Combination, Skilled changed its name to Genesis Healthcare, Inc.

In 2007, private equity funds managed by affiliates of Formation Capital, LLC and certain other investors acquired all the outstanding shares of Genesis HealthCare Corporation (GHC).  In 2011, (i) GHC transferred to FC-GEN its business of operating and managing senior housing and care facilities, its joint venture entities and its other ancillary businesses, (ii) all the outstanding shares of GHC were sold to Welltower Inc. (Welltower) for purposes of transferring the ownership of GHC’s senior housing facilities to Welltower and (iii) FC-GEN entered into a master lease agreement with Welltower pursuant to which FC-GEN leased back the senior housing facilities that it had transferred ownership to Welltower.

Unless the context otherwise requires, references in this report to the "Company" include the predecessors of Genesis Healthcare, Inc., including GHC, prior to 2011.

 

Item 1A. Risk Factors

 

In addition to the other information set forth in this report, you should carefully consider the following factors, which could materially affect our business, financial condition, results of operations or liquidity in future periods.  We operate in a rapidly changing and highly regulated environment that involves a number of risks and uncertainties, some of which are highlighted below and others are discussed elsewhere in this report.  These risks and uncertainties could materially and adversely affect our business, financial condition, prospects, operating results or cash flows. The following risk factors are not the only ones facing us. Our business is also subject to the risks that affect many other companies, such as employment relations, natural disasters, general economic conditions and geopolitical events. Further, additional risks not currently known to us or that we currently believe are immaterial may in the future materially and adversely affect our business, results of operations, liquidity and stock price.

Risks Related to Reimbursement and Regulation of our Business

Reductions in Medicare reimbursement rates, or changes in the rules governing the Medicare program could have a material adverse effect on our revenues, financial condition and results of operations.

We receive a significant portion of our revenue from Medicare, which accounted for 20% of our consolidated revenue during 2019 and 21% in 2018.  In addition, many private payors base their reimbursement rates on the published Medicare rates or, in the case of our rehabilitation therapy services customers, are themselves reimbursed by Medicare for the services we provide. Accordingly, if Medicare reimbursement rates are reduced or fail to increase as quickly as our costs, or if there are changes in the rules governing the Medicare program that are disadvantageous to our business or industry, 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), 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, due to the federal sequestration, an automatic 2% reduction in Medicare spending took effect beginning in April 2013.  Subsequent actions by Congress extended sequestration through 2023. 

In addition, CMS often changes the rules governing the Medicare program, including those governing reimbursement. Changes 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;

•  the reduction or elimination of annual rate increases; or

•  an increase in co-payments or deductibles payable by beneficiaries.

Among the important changes in statute that are being implemented by CMS include 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 is in the process of promulgating 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. 

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. 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 revenues, financial condition and results of operations.

A significant portion of reimbursement for long-term care services comes from Medicaid, a joint federal-state program purchasing healthcare services for the low income and indigent as well as certain higher-income individuals with significant health needs.  Under broad federal criteria, states establish rules for eligibility, services and payment.  Medicaid is our largest source of revenue, accounting for 58% of our consolidated revenue during 2019 and 57% in 2018.  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. This, combined with slower state revenue growth, 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.  We expect these state and federal efforts to continue for the foreseeable future. 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, such as PDPM.

Effective October 1, 2019, a new case-mix classification system called PDPM replaced the existing case-mix classification system, RUG-IV.  PDPM will focus more on the clinical condition of the patient and less on the volume of services provided.  The following represent examples of potential risks associated with PDPM:

 

 

 

 

 

Reforms to the U.S. healthcare system have imposed new requirements upon us.

PPACA and the Health Care and Education Reconciliation Act of 2010 (the Reconciliation Act) included sweeping changes to how healthcare is paid for and furnished in the U.S. It has imposed new obligations on skilled nursing facilities, requiring them to disclose information regarding ownership, expenditures and certain other information. Moreover, the law requires skilled nursing facilities to electronically submit verifiable data on direct care staffing. CMS rules implementing these reporting requirements became effective on July 1, 2016.

To address potential fraud and abuse in federal healthcare programs, including Medicare and Medicaid, PPACA includes provider screening and enhanced oversight periods for new providers and suppliers, as well as enhanced penalties for submitting false claims. It also provides funding for enhanced anti-fraud activities. PPACA imposes an enrollment moratoria in elevated risk areas by requiring providers and suppliers to establish compliance programs. PPACA also provides the federal government with expanded authority to suspend payment if a provider is investigated for allegations or issues of fraud. PPACA provides that Medicare and Medicaid payments may be suspended pending a “credible investigation of fraud,” unless the Secretary of HHS determines that good cause exists not to suspend payments. If one or more of our affiliated facilities were to experience an extended payment suspension for allegations of fraud, such a suspension could adversely affect our consolidated results of operations and liquidity.

PPACA gave authority to the HHS to establish, test and evaluate alternative payment methodologies for Medicare services. Various payment and services models have been developed by the Centers for Medicare and Medicaid Innovations. Current models provide incentives for providers to coordinate patient care across the continuum and to be jointly accountable for an entire episode of care centered around a hospitalization.

PPACA attempts to improve the healthcare delivery system through incentives to enhance quality, improve beneficiary outcomes and increase value of care. One of these key delivery system reforms is the encouragement of ACOs, which will facilitate coordination and cooperation among providers to improve the quality of care for Medicare beneficiaries and reduce unnecessary costs. Participating ACOs that meet specified quality performance standards will be eligible to receive a share of any savings if the actual per capita expenditures of their assigned Medicare beneficiaries are a sufficient percentage below their specified benchmark amount. Quality performance standards will include measures in such categories as clinical processes and outcomes of care, patient experience and utilization of services.  Initiatives by managed care payors, conveners and referring acute care hospital systems to reduce lengths of stay and avoidable hospital readmissions and to divert referrals to home health or other community-based care settings may have an adverse impact on our census and length of stays. 

In addition, PPACA required HHS to develop a plan to implement a value-based purchasing program for Medicare payments to skilled nursing facilities, including measures and performance standards regarding preventable hospital readmissions. Beginning October 1, 2018, HHS began withholding 2% of Medicare payments from all skilled nursing facilities and distributing this pool of payment to skilled nursing facilities as incentive payments for preventing readmissions to hospitals.  In addition to the requirements that are being implemented, legislation is pending in Congress to broaden the value-based purchasing requirements featuring a payment withholding designed to fund the program across all post-acute services.  We are unable to determine the degree to which our participation in innovative “pay for value” programs with other providers of service will affect our financial results versus traditional business models for the long-term care industry.

The provisions of PPACA discussed above are examples of some federal health reform provisions that we believe may have a material impact on the long-term care industry and on our business. However, the foregoing discussion is not intended to constitute, nor does it constitute, an exhaustive review and discussion of PPACA. It is possible that these and other provisions of PPACA may be interpreted, clarified, or applied to our affiliated facilities or operating subsidiaries in a way that could have a material adverse impact on the results of operations.

We currently cannot predict the full effect that all of these changes 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 laws may reduce reimbursement and adversely affect our business.

PPACA and the implementation of provisions not yet effective could impact our business.

PPACA has resulted in and could continue to result in sweeping changes to the existing U.S. system for the delivery and financing of healthcare. As an employer, we must abide by the numerous reporting requirements imposed by the law and regulations implementing PPACA. These provisions could impact our compensation costs and force changes in how the company supports health benefits for its employees. The details for implementation of many of the requirements under PPACA will depend on the promulgation of regulations by a number of federal government agencies, including the HHS. It is impossible to predict the outcome of these changes, what many of the final requirements of PPACA will be, and the net effect of those requirements on us. As such, we cannot fully predict the impact of PPACA on our business, operations or financial performance.

Our business may be materially impacted if certain aspects of PPACA are amended, repealed, or successfully challenged.

A number of lawsuits have been filed challenging various aspects of PPACA and related regulations. In addition, the efficacy of PPACA is the subject of much debate among members of Congress and the public. The outcome of the 2016 election altered leadership in the executive branch of  the government. New leaders in CMS have begun making revisions to some of the demonstrations supported by the previous leaders. These revisions could result in significant changes in, and uncertainty with respect to, legislation, regulation and government policy that could significantly impact our business and the health care industry. In the event that legal challenges are successful or PPACA is repealed or materially amended, particularly any elements of PPACA that are beneficial to our business or that cause changes in the health insurance industry, including reimbursement and coverage by private, Medicare or Medicaid payors, 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, such changes could harm our business, operating results and financial condition. In addition, even if PPACA is not amended or repealed, the executive branch of the federal government has significant influence on the implementation of the provisions of PPACA, and the administration could make changes impacting the implementation and enforcement of PPACA, 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.  PPACA significantly expanded Medicaid and it provided states incentives

for broadening coverage beyond the traditional Medicaid program assisting eligible aged, blind and disabled individuals. Major Medicaid policy revisions under consideration could potentially alter fundamental structure of the Medicaid program; such revisions could be significantly challenging with the potential of undermining funding adequacy and essential coverage requirements.

Revenue we receive from Medicare and Medicaid is subject to potential retroactive reduction.

Payments we receive from Medicare and Medicaid can be retroactively adjusted after examination during the claims settlement process or as a result of post-payment audits. Payors may disallow our requests for reimbursement, or recoup amounts previously reimbursed, based on determinations by the payors or their third-party audit contractors that certain costs are not reimbursable because either adequate or additional documentation was not provided or because certain services were not covered or deemed to not be medically necessary. Significant adjustments, recoupments or repayments of our Medicare or Medicaid revenue, and the costs associated with complying with investigative audits by regulatory and governmental authorities, could adversely affect our business, financial condition or results of operations.

Additionally, from time to time we become aware, either based on information provided by third parties and/or the results of internal audits, of payments from payor sources that were either wholly or partially in excess of the amount that we should have been paid for the service provided.  Overpayments may result from a variety of factors, including insufficient documentation supporting the services rendered or medical necessity of the services, other failures to document the satisfaction of the necessary requirements for payment, or in some cases providing services that are deemed to be worthless. We are required by law in most instances to refund the full amount of the overpayment after becoming aware of it, and failure to do so within requisite time limits imposed by the law could lead to significant fines and penalties being imposed on us. Furthermore, our initial billing of and payments for services that are unsupported by the requisite documentation and satisfaction of any other requirements for payment, regardless of our awareness of the failure at the time of the billing or payment, could expose us to significant fines and penalties, including pursuant to the FCA and the Federal Civil Monetary Penalties Law (FCMPL).  Violations of the FCA could lead to any combination of a variety of criminal, civil and administrative fines and penalties.  CMPs under the FCA range from approximately $11,600 to $23,000 and are adjusted annually for inflation. Treble damages can be assessed on each claim that was submitted to the government for payment.  We and/or certain of our operating companies could also be subject to exclusion from participation in the Medicare or Medicaid programs in some circumstances as well, in addition to any monetary or other fines, penalties or sanctions that we may incur under applicable federal and/or state law.  Our repayment of any such amounts, as well as any fines, penalties or other sanctions that we may incur, could be significant and could have a material and adverse effect on our business, financial condition or results of operations.

From time to time we are also involved in various external governmental investigations, audits and reviews. Reviews, audits and investigations of this sort can lead to government actions, which can result in the assessment of damages, civil or criminal fines or penalties, or other sanctions, including restrictions or changes in the way we conduct business, loss of licensure or exclusion from participation in government programs. For example, the OIG conducts a variety of routine, regular and special investigations, audits and reviews across our industry. Failure to comply with applicable laws, regulations and rules could have a material and adverse effect on our business, financial condition or results of operations. Furthermore, becoming subject to these governmental investigations, audits and reviews can also require us to incur significant legal and document production expenses as we cooperate with the government authorities, regardless of whether the particular investigation, audit or review leads to the identification of underlying issues. For example, as discussed in Note 21 – “Commitments and Contingencies - Legal Proceedings – Settlement Agreement,” in the notes to the consolidated financial statements included elsewhere in this report, in June 2017, we and the U.S. Department of Justice (the DOJ) entered into a settlement agreement regarding four matters arising out of the activities of Skilled or Sun Healthcare Group, Inc. prior to their operations becoming part of our operations (collectively, the Successor Matters).  We have agreed to the settlement in order to resolve the allegations underlying the Successor Matters and to avoid the uncertainty and expense of litigation.  The settlement agreement calls for payment of a collective settlement amount of $52.7 million (the Settlement Amount), including separate Medicaid repayment agreements with each affected state Medicaid program.  We will continue to remit the remaining Settlement Amount balance of $25.7 million as of December 31, 2019 through 2022. 

Changes in Medicare reimbursements for physician and non-physician services could impact reimbursement for medical professionals.

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 impacted payment provisions for medical professional services. 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

Bipartisan Budget Act of 2018 was signed into law, which provides for the repeal of all therapy caps retroactively to January 1, 2018.  The law retained the MMR process reducing the threshold on claims for SLP and PT at $3,000 and OT at $3,000. Prior to January 1, 2018, the MMR requirement generally provided that, on a per beneficiary basis and subject to limited exceptions, services above $3,700 for PT and SLP services combined and/or $3,700 for OT services would be subject to MMR. The reduction in the MMR services threshold could result in increased number of reviews, which could in turn have a negative effect on our business, financial condition or results of operations. 

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 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.

Many of these laws and regulations are expansive, and we do not always have the benefit of significant guidance or judicial interpretation of these laws and regulations. In addition, many of these laws and regulations evolve to include additional obligations and restrictions, sometimes with retroactive effect. Certain other regulatory developments, such as revisions in the building code requirements for assisted/senior living and skilled nursing facilities, mandatory increases in scope and quality of care to be offered to residents, revisions in licensing and certification standards, mandatory staffing levels, regulations regarding conditions for payment and regulations restricting those we can hire could also have a material adverse effect on us. 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.

In addition, federal and state government agencies have increased and coordinated civil and criminal enforcement efforts as part of numerous ongoing investigations of healthcare companies, including skilled nursing facilities. This includes investigations of:

•  fraud and abuse;

•  quality of care;

•  financial relationships with referral sources; and

•  the medical necessity of services provided.

In the ordinary course of our business, we are subject regularly to inquiries, investigations, and audits by federal and state agencies that oversee applicable healthcare program participation and payment regulations. Audits may include enhanced medical necessity reviews pursuant to the Medicare, Medicaid, and the SCHIP Extension Act of 2007 (the SCHIP Extension Act) and audits under the CMS Recovery Audit Contractor (RAC) program.

We believe that the regulatory environment surrounding most segments of the healthcare industry remains intense. Federal and

state governments continue to impose intensive enforcement policies resulting in a significant number of inspections, citations of regulatory deficiencies, and other regulatory penalties, including demands for refund of overpayments, terminations from the Medicare and Medicaid programs, bars on Medicare and Medicaid payments for new admissions, and CMPs. These enforcement policies, along with the costs incurred to respond to and defend reviews, audits, and investigations, could have a material adverse effect on our business, financial position, results of operations, and liquidity. We vigorously contest such penalties where appropriate; however, these cases can involve significant legal and other expenses and consume our resources.

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, home health services, and clinical laboratory 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 must be repaid to Medicare or Medicaid, any other third-party payor, and the patient. In addition, CMPs, which are adjusted for annual inflation, and treble damages may be imposed for presenting or causing to be presented, a claim for a service rendered in violation of the Stark Law. 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.

The Anti-Kickback Statute, Section 1128B of the Social Security Act (the 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. Potential fines under the Anti-Kickback Statute range from $25,000 to $100,000 per violation, up to ten years in prison, or both. 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. State Medicaid programs are required to enact an anti-kickback statute. Many states 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.

The DOJ 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 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.  CMPs under the FCA range from approximately $11,600 to $23,000 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.

In addition to the penalties described above, if we violate any of these laws, we may be excluded from participation in federal and/or state healthcare programs. These 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.

 

We are unable to predict the future course of federal, state and local regulation or legislation, including Medicare and Medicaid statutes and regulations, 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, legal proceedings such as those described in Note 21 – “Commitments and Contingencies - Legal Proceedings,” or otherwise, we could be deemed to be in default under some of our agreements, including agreements governing outstanding indebtedness and the report of such issues at one of our facilities could harm our reputation for quality care and lead to a reduction in our patient referrals and ultimately our revenue and operating income.

Our physician services operations are subject to corporate practice of medicine laws and regulations. Our failure to comply with these laws and regulations could have a material adverse effect on our business and operations.

One line of our business that we continue to develop is physician services.  Certain states have laws and regulations prohibiting the corporate practice of medicine and fee-splitting, which generally prohibit business entities from owning or controlling medical practices or may limit the ability of clinical professionals to share professional service income with non-professional or business interests. These requirements may vary significantly from state to state.  Compliance with applicable regulations may cause us to incur expenses that we have not anticipated, and if we are unable to comply with these additional legal requirements, we may incur liability, which could have a material adverse effect on our business, financial condition or results of operations.

We face inspections, reviews, audits and investigations under federal and state government programs and contracts. These audits could have adverse findings that may negatively affect our business, including our results of operations, liquidity, financial condition and reputation.

As a result of our participation in the Medicare and Medicaid programs, we are subject to various governmental inspections, reviews, audits and investigations to verify our compliance with these programs and applicable laws and regulations. Managed care payors may also reserve the right to conduct audits. We also periodically conduct internal audits and reviews of our regulatory compliance.  An adverse inspection, review, audit or investigation could result in:

•  refunding amounts we have been paid pursuant to the Medicare or Medicaid programs or from managed care payors;

•  state or federal agencies imposing fines, penalties and other sanctions on us;

•  temporary suspension of payment for new patients to the facility or agency;

•  decertification or exclusion from participation in the Medicare or Medicaid programs or one or more managed care payor networks;

•  self-disclosure of violations to applicable regulatory authorities;

•  damage to our reputation;

•  the revocation of a facility's or agency's license; and

•  loss of certain rights under, or termination of, our contracts with managed care payors.

We have in the past and will likely in the future be required to refund amounts we have been paid and/or pay fines and penalties, as a result of these inspections, reviews, audits and investigations.  If adverse inspections, reviews, audits or investigations occur and any of the results noted above occur, it could have a material adverse effect on our business and operating results.  Furthermore, the legal, document production and other costs associated with complying with these inspections, reviews, audits or investigations could be significant.

Our operations are subject to environmental and occupational health and safety regulations, which could subject us to fines, penalties and increased operational costs.

We are subject to a wide variety of federal, state and local environmental and occupational health and safety laws and regulations. Regulatory requirements faced by healthcare providers such as us include those relating to air emissions, wastewater discharges, air and water quality control, occupational health and safety (such as standards regarding blood-borne pathogens and ergonomics), management and disposal of low-level radioactive medical waste, biohazards and other wastes, management of explosive or combustible gases, such as oxygen, specific regulatory requirements applicable to asbestos, lead-based paints, polychlorinated biphenyls and mold, other occupational hazards associated with our workplaces, and providing notice to employees and members of the public about our use and storage of regulated or hazardous materials and wastes. Failure to comply with these requirements could subject us to fines, penalties and increased operational costs. Moreover, changes in existing requirements or more stringent enforcement of them, as well as discovery of currently unknown conditions at our owned or leased facilities, could result in additional cost and potential liabilities, including liability for conducting cleanup, and there can be no guarantee that such increased expenditures would not be significant.

Risks Relating to Our Operations

Our substantial indebtedness, scheduled maturities, lease obligations and disruptions in the U.S. and global financial markets could affect our ability to obtain financing or to extend or refinance debt as it matures, which could negatively impact our results of operations, liquidity, financial condition and the market price of our common stock.

We have now and will for the foreseeable future continue to have a significant amount of indebtedness and lease obligations. At December 31, 2019, our total indebtedness was $1.6 billion, excluding debt issuance costs and other non-cash debt discounts and premiums, and our total lease obligations are $5.0 billion.  Our substantial indebtedness and lease obligations could have important consequences. For example, it could:

•  increase our vulnerability to adverse economic and industry conditions;

•  require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness and lease obligations, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;

•  limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

•  place us at a competitive disadvantage compared to our competitors that have less debt or lease obligations;

•  increase the cost or limit the availability of additional financing, if needed or desired, to fund future working capital, capital expenditures and other general corporate requirements, or to carry out other aspects of our business plan;

•  require us to maintain debt coverage and financial ratios at specified levels, reducing our financial flexibility; and

•  limit our ability to make strategic acquisitions and develop new or expanded facilities.

Our ability to service our financial obligations, in addition to our ability to comply with the financial and restrictive covenants contained in our leases and loans is dependent upon, among other things, our ability to attain a sustainable capital structure.  We have recently restructured agreements with certain of our landlord and lenders in an effort to attain a sustainable capital structure.  However, there can be no assurance that the reduction in our annual fixed charges that we have projected in connection with such restructuring will be realized or will be sufficient to sustain us in the event our business suffers from reductions in occupancy and/or inflation in costs continues to outpace the rate of third party reimbursement rate growth.

If we are unable to extend (or refinance, as applicable) any of our maturing credit facilities prior to their scheduled maturity or accelerated maturity dates, our liquidity and financial condition will be adversely impacted. In addition, even if we are able to extend or refinance our maturing debt credit facilities, the terms of the new financing may be less favorable to us than the terms of the existing financing.

Much of our indebtedness is subject to floating interest rates and/or payment in kind features.  Changes in interest rates or discontinuation of payment in kind terms could result in increased interest payments, and accordingly, reduce our future earnings and cash flows limiting our ability to obtain additional financing.  Payment in kind terms defer cash payment obligations until maturity of

the debt instrument.  Such a feature increases the debt obligation due at maturity, which could make it difficult to obtain additional financing.

Our lease obligations often include annual fixed rent escalators ranging between 2.0% and 2.5% or variable rent escalators based on a consumer price index. These contractual obligation increases may outpace any increase in our results of our operations placing an additional burden on our results of operations, liquidity and financial position.  Such a burden could limit our ability to obtain additional financing.

In recent years, the United States stock and credit markets have experienced significant price volatility, dislocations and liquidity disruptions, which caused market prices of many stocks to fluctuate substantially and the spreads on prospective debt financings to widen considerably. These circumstances materially impacted liquidity in the financial markets, making terms for certain financings less attractive, and in some cases resulted in the unavailability of financing. Continued uncertainty in the stock and credit markets may negatively impact our ability to access additional financing (including any refinancing or extension of our existing debt) on reasonable terms, which may negatively affect our business.

A prolonged downturn in the financial markets may cause us to seek alternative sources of potentially less attractive financing, and may require us to further adjust our business plan accordingly. These events also may make it more difficult or costly for us to raise capital, including through the issuance of common stock. Disruptions in the financial markets could have an adverse effect on us and our business. If we are not able to obtain additional or replacement financing on favorable terms, we also may have to delay or abandon some or all of our growth strategies, which could adversely affect our revenues and results of operations.

We lease a significant number of our facilities and may experience risks relating to lease termination, lease expense escalators, lease extensions and special charges.

We face risks because of the number of facilities we lease.  As of December 31, 2019, we leased approximately 78% of our centers; 45% were leased pursuant to master lease agreements with four landlords.  The loss or deterioration of a favorable relationship with any of such landlords may adversely affect our business.

Each of our lease agreements provides that the lessor may terminate the lease, subject to applicable cure provisions, for a number of reasons, including, the defaults in any payment of rent, taxes or other payment obligations or the breach of any other covenant or agreement in the lease.  Termination of certain of our lease agreements could result in a cross-default under our debt agreements or other lease agreements.

Our lease obligations often include annual fixed rent escalators ranging between 2.0% and 2.5% or variable rent escalators based on a consumer price index. These escalators could impact our ability to satisfy certain obligations and covenants, specifically coverage ratios.  If the results of our operations do not increase at or above the escalator rates, it would place an additional burden on our results of operations, liquidity and financial position.  Our annual rent escalators are oftentimes outpacing our annual reimbursement escalators.  This issue is compounded by the shift in payor mix to lower reimbursed Medicaid.

Our leases generally provide for renewal or extension options. There can be no assurance that these rights will be exercised in the future or that we will be able to satisfy the conditions precedent to exercising any such renewal or extension.  In addition, if we are unable to renew or extend any of our master leases, we may lose all of the facilities subject to that master lease agreement.  If we are not able to renew or extend our leases at or prior to the end of the existing lease terms, or if the terms of such options are unfavorable or unacceptable to us, our business, financial condition and results of operation could be adversely affected.

Leasing facilities pursuant to master lease agreements may limit our ability to exit markets.  For instance, if one facility under a master lease becomes unprofitable, we may be required to continue operating such facility or, if allowed by the landlord to close such facility, we may remain obligated for the lease payments on such facility.   We could incur special charges relating to the closing of such facility, including lease termination costs, impairment charges and other special charges that would reduce our profits and could have a material adverse effect on our business, financial condition or results of operations.

Our failure to pay the rent or otherwise comply with the provisions of any of our lease agreements could result in an “event of default” under such lease agreement and also could result in a cross default under other master lease agreements and agreements for our indebtedness. Upon an event of default, remedies available to our landlords generally include, without limitation, terminating such lease

agreement, repossessing and reletting the leased properties and requiring us to remain liable for all obligations under such lease agreement, including the difference between the rent under such lease agreement and the rent payable as a result of reletting the leased properties, or requiring us to pay the net present value of the rent due for the balance of the term of such lease agreement. The exercise of such remedies would have a material adverse effect on our business, financial position, results of operations and liquidity.

We are subject to numerous covenants and requirements under our various credit and leasing agreements and a breach of any such covenants or requirements could, unless timely and effectively remediated, lead to default and potential cross default under such agreements.

Our credit and leasing agreements contain various covenants, restrictions and events of default.  Among other things, these provisions require us to maintain certain financial ratios.  Breaches of these covenants could result in defaults under the instruments governing the applicable loans and leases, in addition to any other indebtedness or leases cross-defaulted against such instruments.  These defaults could have a material adverse impact on our business, results of operations and financial condition.

Despite our substantial indebtedness, we may still be able to incur more debt. This could intensify the risks associated with this indebtedness.

The terms of our credit facilities contain restrictions on our ability to incur additional indebtedness. These restrictions are subject to a number of important qualifications and exceptions, and the indebtedness incurred in compliance with these exceptions could be substantial. Accordingly, we could incur significant additional indebtedness in the future. The more we become leveraged, the more we become exposed to the risks described above under “Our substantial indebtedness, scheduled maturities, lease obligations and disruptions in the U.S. and global financial markets could affect our ability to obtain financing or to extend or refinance debt as it matures, which could negatively impact our results of operations, liquidity, financial condition and the market price of our common stock.”

Our credit and leasing agreements may restrict our current and future operations, which could adversely affect our ability to respond to changes in our business and manage our operations.

The terms of our credit and leasing agreements include a number of restrictive covenants that impose significant operating and financial restrictions on us and our restricted subsidiaries, including restrictions on our and our restricted subsidiaries’ ability to, among other things:

•  incur additional indebtedness;

•  consolidate or merge;

•  make or incur capital improvements;

•  sell assets; and

•  make investments, loans and acquisitions.

These restrictions could have an adverse effect on our business by limiting our ability to take advantage of financing, merger and acquisition or other opportunities.

Floating rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase.

We have significant indebtedness in multiple instruments that bear interest at variable rates. Interest rate changes could affect the amount of our interest payments, and accordingly, our future earnings and cash flows, assuming other factors are held constant. As a result, an increase in interest rates, whether because of an increase in market interest rates or an increase in our own cost of borrowing, would increase the cost of servicing our debt and could have a material adverse effect on our liquidity, financial condition and results of operations. See Item 7.  “Management’s Discussion and Analysis of Financial Conditions and Results of Operations - Liquidity and Capital Resources” for a description of the types and level of indebtedness.

We may be adversely affected by changes in the method of determining LIBOR, or the replacement of LIBOR with an alternative reference rate.

 

In 2017, the United Kingdom’s Financial Conduct Authority announced that after 2021 it would no longer compel banks to submit the rates required to calculate the London Interbank Offered Rate (LIBOR). This announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021.  We have a significant number of debt instruments with attributes that are dependent on LIBOR. The transition from LIBOR to an alternative reference rate could have a material adverse effect on our liquidity, financial condition and results of operations.

 

We are presently operating under waivers of certain of our master leases.  There can be no assurance such waivers will be received in future periods.  In the event future waivers are not extended and our creditors accelerate our loan and lease obligations, it would have a material adverse effect on our liquidity,  financial condition and results of operations.

At December 31, 2019, we did not meet certain of the financial covenants contained under certain of our lease agreements.  Although we have received waivers with our counterparties to these agreements related to our breach of financial covenants at December 31, 2019, there can be no assurance such waivers will be received in future periods.  If future defaults are not cured within applicable cure periods, if any, and if waivers or other forms of relief are not obtained, the defaults can cause acceleration of our financial obligations, which we may not be in a position to satisfy.  In the event this occurs and we are unable to satisfy an acceleration of our financial obligations, we may be forced to seek reorganization under the U.S. Bankruptcy Code.

 

Significant legal actions, which are commonplace in our industry, could subject us to increased operating costs, which would materially and adversely affect our results of operations, liquidity, financial condition and reputation.

The long-term care industry has experienced an increasing trend in the number and severity of litigation claims. We believe that this trend is endemic to the industry and is a result of a variety of factors, including the number of large verdicts, including large punitive damage awards, against long-term care providers in recent years resulting in an increased awareness by plaintiffs' lawyers of potentially large recoveries. While some states have enacted tort reform legislation that limits plaintiffs' recoveries in some respects, should our professional liability and general liability costs increase significantly in the future our operating income could suffer.

We also may be subject to lawsuits under the FCA and comparable state laws for submitting allegedly fraudulent or otherwise inappropriate bills for services to the Medicare and Medicaid programs. These lawsuits, which may be initiated by government authorities as well as private party relators, can involve significant monetary damages, fines, attorney fees and the award of bounties to private plaintiffs who successfully bring these suits, as well as to the government programs. In recent years, government oversight and law enforcement have become increasingly active and aggressive in investigating and taking legal action against potential fraud and abuse. See Note 21 - “Commitments and Contingencies - Legal Proceedings,” in the notes to the consolidated financial statements included elsewhere in this report for pending litigation and investigations which, based upon information currently available, could have a potentially material adverse effect on our results of operations, liquidity and financial condition.

We may incur significant liabilities in conjunction with legal actions against us, including as a result of damages, fines and penalties that may be assessed against us, as well as a result of the sometimes significant commitments of financial and management resources that are often required to defend against such legal actions.  The incurrence of such liabilities and related commitments of resources could materially and adversely affect our business, financial condition and results of operations.

Insurance coverages, including professional liability coverage, may become increasingly expensive and difficult to obtain for healthcare companies, and our self-insurance may expose us to significant losses.

It may become more difficult and costly for us to obtain coverage for patient care liabilities and certain other risks, including property and casualty insurance. Insurance carriers may require healthcare companies to increase significantly their self-insured retention levels and/or pay substantially higher premiums for reduced coverage for most insurance coverages, including workers' compensation, employee healthcare and patient care liability.

We self-insure a significant portion of our potential liabilities for several risks, including certain types of professional and general liability, workers' compensation and employee healthcare benefits. Due to our self-insured retentions under many of our professional and general liability, workers' compensation and employee healthcare benefits programs, there is no limit on the maximum number of

claims or amount for which we can be liable in any policy period. We base our loss estimates and related accruals on actuarial analyses, which determine expected liabilities on an undiscounted basis, including incurred but not reported losses, based upon the available information on a given date. It is possible, however, for the ultimate amount of losses to exceed our estimates and related accruals, as well as our insurance limits as applicable. In the event our actual liability exceeds our estimates for any given period, our results of operations and financial condition could be materially adversely impacted. Additionally, we may from time to time need to increase our accruals as a result of future actuarial reviews and claims that may develop. Such increases could have an adverse impact on our business and results of operations.  An adverse determination in legal proceedings, whether currently asserted or arising in the future, could have a material adverse effect on our business, liquidity, financial condition and results of operations.

Changes in the acuity mix of patients as well as payor mix and payment methodologies may significantly reduce our profitability or cause us to incur losses.

Our revenue is affected by our ability to attract a favorable patient acuity mix and by our mix of payment sources. Changes in the type of patients we attract, as well as our payor mix among private payors, managed care companies, Medicare (both traditional Medicare and Medicare Advantage) and Medicaid significantly affect our profitability because not all payors reimburse us at the same rates. Particularly, if we fail to maintain our proportion of high-acuity patients or if there is any significant increase in the percentage of our population for which we receive Medicaid reimbursement, our financial position, results of operations and liquidity may be adversely affected. Furthermore, in recent periods we have continued to see a shift from “traditional” FFS Medicare patients to Medicare Advantage patients.  Reimbursement rates are generally lower for services provided to Medicare Advantage patients than they are for the same services provided to traditional FFS Medicare patients.  This trend may continue in future periods.  Our financial results have been negatively affected by this shift to date.  Our financial results will continue to be negatively affected if the trend towards Medicare Advantage continues, and particularly if it accelerates.

Federal, state and local employment-related laws and regulations could increase our cost of doing business and subject us to significant back pay awards, fines and lawsuits.

Our operations are subject to a variety of federal, state and local employment-related laws and regulations, including, but not limited to, the U.S. Fair Labor Standards Act, which governs such matters as minimum wages, the Family Medical Leave Act, overtime pay, compensable time, recordkeeping and other working conditions, Title VII of the Civil Rights Act, the Employee Retirement Income Security Act, the Americans with Disabilities Act, the National Labor Relations Act, regulations of the Equal Employment Opportunity Commission, regulations of the Office of Civil Rights, regulations of the Department of Labor (DOL), regulations of state attorneys general, federal and state wage and hour laws, and a variety of similar laws enacted by the federal and state governments that govern these and other employment-related matters. Because labor represents such a large portion of our operating costs, compliance with these evolving federal and state laws and regulations could substantially increase our cost of doing business while failure to do so could subject us to significant back pay awards, fines and lawsuits. We are currently subject to employee-related claims in connection with our operations. These claims, lawsuits and proceedings are in various stages of adjudication or investigation and involve a wide variety of claims and potential outcomes. 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. Our failure to comply with federal and state employment-related laws and regulations could have a material adverse effect on our business, financial position, results of operations and liquidity.

It can be difficult to attract and retain qualified nurses, therapists, healthcare professionals and other key personnel, which, along with a growing number of minimum wage and compensation related regulations, can increase our costs related to these employees.

Our employees are our most important asset. We rely on our ability to attract and retain qualified nurses, therapists and other healthcare professionals. The market for these key personnel is highly competitive, and we could experience significant increases in our operating costs due to shortages in their availability. Like other healthcare providers, we have at times experienced difficulties in attracting and retaining qualified personnel, especially center executive directors, nurses, therapists, certified nurses' aides and other important healthcare personnel. We may continue to experience increases in our labor costs, primarily due to higher wages and greater benefits required to attract and retain qualified healthcare personnel, and such increases may adversely affect our profitability. Furthermore, while we attempt to manage overall labor costs in the most efficient way, our efforts to manage them through wage freezes and similar means may have limited effectiveness and may lead to increased turnover and other challenges.

Tight labor markets and high demand for such employees can contribute to high turnover among clinical professional staff. A shortage of qualified personnel at a facility could result in significant increases in labor costs and increased reliance on overtime and expensive temporary staffing agencies, and could otherwise adversely affect operations at the affected facilities. In addition, turnover of such employees will result in additional expenses related to recruiting and training replacement employees. If we are unable to attract and retain qualified professionals, our ability to provide adequate services to our residents and patients may decline and our ability to grow may be constrained.

Our cost of labor may be influenced by unanticipated factors in certain markets or, with respect to collective bargaining agreements that we are a party to, we may experience above-market increases.  A substantial number of our employees are hourly employees whose wage rates are affected by increases in the federal or state minimum wage rate.  As collective bargaining agreements are renegotiated or minimum wage rates increase we may need to increase the wages paid to employees.  This may be applicable to not only minimum wage employees but also to employees at wage rates which are currently above the minimum wage. 

Because we are largely funded by government programs, we do not have an ability to pass such wage increases through to revenue sources.  Any such mandated wage increases could have a material adverse effect on our results of operations, liquidity and financial condition.

If we are unable to comply with state minimum staffing requirements at one or more of our facilities, we could be subject to fines or other sanctions.

In most of the states where we operate, our skilled nursing facilities are subject to state mandated staffing ratios that require minimum nursing hours of direct care per resident per day. Our ability to satisfy any minimum staffing requirements depends upon our ability to attract and retain qualified healthcare professionals, including nurses, certified nurse's assistants and other personnel. Attracting and retaining qualified personnel is difficult, given a tight labor market for these professionals in many of the markets in which we operate. Furthermore, if states do not appropriate additional funds (through Medicaid program appropriations or otherwise) sufficient to pay for any additional operating costs resulting from minimum staffing requirements, our profitability may be materially adversely affected.  Failure to comply with these requirements can, among other things, jeopardize a facility's compliance with the Requirements 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/or the termination of Medicaid participation, or the suspension, revocation or nonrenewal 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.

If we fail to attract patients and residents and to compete effectively with other healthcare providers, our revenue and profitability may decline and we may incur losses.

The healthcare services industry is highly competitive. Our skilled nursing facilities compete primarily on a local and regional basis with other skilled nursing facilities and with assisted/senior living facilities, from national and regional chains to smaller providers owning as few as a single facility. Competitors include other for-profit providers as well as non-profits, religiously-affiliated facilities, and government-owned facilities. We also compete under certain circumstances with IRFs and LTAC hospitals. Increasingly, we are competing with home health and community based providers who have developed programs designed to provide services to seniors outside an institutional setting, extending the time period before they need the higher level of care provided in a skilled nursing facility.  In addition, some competitors are implementing vertical alignment strategies, such as hospitals who provide long-term care services.  Our ability to compete successfully varies from location to location and depends on a number of factors, including the number of competing facilities in the local market and the types of services available at those facilities, our local reputation for quality care of patients, the commitment and expertise of our caregivers, our local service offerings and treatment programs, the cost of care in each locality, and the physical appearance, location, age and condition of our facilities. If we are unable to attract patients, particularly high-acuity patients, to our facilities and agencies, our revenue and profitability will be adversely affected. Some of our competitors may have greater recognition and be more established in their respective communities than we are, and may have greater financial and other resources than we have. Competing long-term care companies may also offer newer facilities or different programs or services than we do, which, combined with the foregoing factors, may result in our competitors being more attractive to our current patients, potential patients and referral sources. Furthermore, while we budget for routine capital expenditures at our facilities to keep them competitive in

their respective markets, to the extent that competitive forces cause those expenditures to increase in the future, our financial condition may be negatively affected.

 

We believe we adhere to a conservative approach in complying with laws prohibiting kickbacks and referral payments to referral sources.  If our competitors use more aggressive methods than we do with respect to obtaining patient referrals, our competitors may from time to time obtain patient referrals that are not otherwise available to us.

The primary competitive factors for our assisted/senior living and rehabilitation therapy services are similar to those for our skilled nursing businesses and include reputation, the cost of services, the quality of services, responsiveness to patient/resident needs and the ability to provide support in other areas such as third-party reimbursement, information management and patient recordkeeping. Furthermore, given the relatively low barriers to entry and continuing healthcare cost containment pressures, we expect that the markets we service will become increasingly competitive in the future. Increased competition in the future could limit our ability to attract and retain patients and residents, maintain or increase our fees, or expand our business.

If our referral sources fail to view us as an attractive healthcare provider, our patient base would likely 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 the kinds of patients we target. Our referral sources are not obligated to refer business to us and generally also 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 them. 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 for any reason as not providing quality patient care, our volume of referrals would likely decrease, the quality of our patient mix could suffer and our revenue and results of operations could be adversely affected.

If we do not achieve or maintain a reputation for providing quality of care, our business may be negatively affected.

Our ability to achieve and to maintain a reputation for providing quality of care to our patients at each of our skilled nursing and assisted/senior living facilities, or through our rehabilitation therapy, is important to our ability to attract and retain patients, particularly high-acuity patients. In some instances, our referral sources are affiliated with healthcare systems that may have affiliated businesses that offer services that compete with ours, and the frequency of this occurring may increase in the future as ACOs are formed in the markets we serve.  We believe that the perception of our quality of care by a potential patient or potential patient's family seeking to contract for our services is influenced by a variety of factors, including physician and other healthcare professional referrals, community information and referral services, newspapers and other print and electronic media, results of patient surveys, recommendations from family and friends, and quality care statistics or rating systems compiled and published by CMS or other industry data. Through our focus on retaining quality staffing, reviewing feedback and surveys from our patients and referral sources to highlight areas of improvement and integrating our service offerings at each of our facilities, we seek to maintain and to improve on the outcomes from each of the factors listed above in order to build and to maintain a strong reputation at our facilities. If we fail to achieve or to maintain a reputation for providing quality care, or are perceived to provide a lower quality of care than competitors within the same geographic area, our ability to attract and to retain patients would be adversely affected. If our businesses fail to maintain a strong reputation in the areas in which we operate, our business, revenue and profitability could be adversely affected.

If we do not achieve and maintain competitive quality of care ratings from CMS and private organizations engaged in similar monitoring activities, or if the frequency of CMS surveys and enforcement sanctions increases, our business may be negatively affected.

 

CMS, as well as certain private organizations engaged in similar monitoring activities, provides comparative data available to the public on its website, rating every skilled nursing facility operating in each state based upon quality of care indicators.  These quality of care indicators include such measures as percentages of patients with infections, bedsores and unplanned weight loss.  In addition, CMS previously increased the number of Medicaid and Medicare surveys and enforcement activities, to focus more survey and enforcement efforts on facilities with findings of substandard care or repeat violations of Medicaid and Medicare standards, and to require state agencies to use enforcement sanctions and remedies more promptly when substandard care or repeat violations are identified.  We have found a correlation between negative Medicaid and Medicare surveys and the incidence of professional liability litigation.  From time to time, we experience a higher than normal number of negative survey findings in some of our affiliated facilities.

 

CMS publishes Star Ratings to help consumers, their families and caregivers compare nursing homes more easily.  The Star Ratings give each nursing home a rating of between one and five stars for (i) staffing, (ii) health inspections, (iii) quality measures and (iv) overall score.  In cases of acquisitions, the previous operator's clinical ratings are included in our overall Star Ratings.  The prior operator's results will impact our rating until we have sufficient clinical measurements subsequent to the acquisition date.  CMS from time to time revises the manner in which the Star Ratings are calculated, and such revisions could have a negative impact on our Star Ratings. If we are unable to achieve and to maintain Star Ratings that are comparable or superior to those of our competitors, our ability to attract and to retain patients could be adversely affected.

 

Failure to maintain effective internal control over our financial reporting could have an adverse effect on our ability to report our financial results on a timely and accurate basis.

We produce our consolidated financial statements in accordance with the requirements of accounting principles generally accepted in the United States of America (U.S. GAAP). Effective internal control over financial reporting is necessary for us to provide reliable financial reports, to help mitigate the risk of fraud and to operate successfully. We are required by federal securities laws to document and test our internal control procedures in order to satisfy the requirements of the Sarbanes-Oxley Act of 2002, which requires annual management assessments of the effectiveness of our internal control over financial reporting.

Testing and maintaining our internal control over financial reporting can be expensive and divert our management's attention from other matters that are important to our business. We may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with applicable law or if our independent registered public accounting firm does not issue an unqualified attestation report. See Item 9A.  "Controls and Procedures—Management's Report on Internal Control over Financial Reporting," for management’s disclosure on its responsibility for establishing and maintaining adequate internal controls.

We also cannot provide assurance that our internal control over financial reporting will be operating effectively in the future. If we fail to maintain effective internal control over financial reporting, or our independent registered public accounting firm is unable to provide us with an unqualified attestation report on our internal control, we could be required to take costly and time-consuming corrective measures, be required to restate the affected historical financial statements, be subjected to investigations and/or sanctions by federal and state securities regulators, and be subjected to civil lawsuits by security holders. Any of the foregoing could also cause investors to lose confidence in our reported financial information and in our company and would likely result in a decline in the market price of our stock and in our ability to raise additional financing if needed in the future.

 

Our success is dependent upon retaining key executives and personnel.

 

Our senior management team has extensive experience in the healthcare industry. We believe that they have been instrumental in guiding our businesses, instituting valuable performance and quality monitoring, and driving innovation. Our future performance is substantially dependent upon the continued services of our senior management team or their successors. The loss of the services of any of these persons could have a material adverse effect upon us.

We may be unable to reduce costs to offset decreases in our patient census levels or other expenses completely.

We depend on implementing adequate cost management initiatives in response to fluctuations in levels of patient census in our businesses in order to maintain our current cash flow and earnings levels. Fluctuation in our patient census levels may become more common as we continue our emphasis in our skilled nursing facilities on patients with shorter stays but higher acuities. A decline in patient census levels would likely result in decreased revenue. If we are unable to put in place corresponding reductions in costs in response to decreases in our patient census or other revenue shortfalls, our financial condition and operating results would be adversely affected.  There are limits in our ability to reduce the costs of our centers because we must maintain required staffing levels.

Consolidation of managed care organizations and other third-party payors or reductions in reimbursement from these payors may adversely affect our revenue and income or cause us to incur losses.

Managed care organizations and other third-party payors have in many instances consolidated in order to enhance their ability to influence the delivery of healthcare services. Consequently, the healthcare needs of a large percentage of the United States population are increasingly served by a small number of managed care organizations. These organizations generally enter into service agreements with a limited number of providers for needed services. These organizations have become an increasingly important source of revenue

and referrals for us. To the extent that such organizations terminate us as a preferred provider or engage our competitors as a preferred or exclusive provider, our business could be materially adversely affected.

In addition, private third-party payors, including managed care payors, are continuing their efforts to control healthcare costs through direct contracts with healthcare providers, increased utilization reviews, or reviews of the propriety of, and charges for, services provided, and greater enrollment in managed care programs and preferred provider organizations. As these private payors increase their purchasing power, they are demanding discounted fee structures and the assumption by healthcare providers of all or a portion of the financial risk associated with the provision of care. Significant reductions in reimbursement from these sources could materially adversely affect our business and financial condition.

MLTSS programs granted under waivers of the Social Security Act are currently being extended and or modified in some states with approval by CMS.  SNF-VBP programs are therefore being submitted by some states which may include changes from Any Willing Provider, a model that permits all licensed providers to serve the Medicaid population, to programs that may exclude nursing home providers that do not score high enough under certain metrics thus causing a narrowing of network participation for some providers.  The narrowing of a skilled nursing facility’s participation in MLTSS would cause providers not to be able to accept Medicaid Managed Care enrollees into their facility until the facility meets the metrics standard as set by the state’s Medicaid program.

Under Section 1115 of the Social Security Act, the Secretary of HHS can waive specific provisions of the Medicaid program and that in order to apply for the Section 1115 waivers states must follow specific procedures for notice and stakeholder input established by CMS.  Giving states permission to use federal Medicaid funds in ways that are not otherwise allowed under the federal rules, as long as the Secretary of HHS determines that the initiative is an experimental or demonstration project that is likely to assist in promoting the objectives of the Medicaid program.  States can obtain Section 1115 waivers that make broad changes in Medicaid eligibility, benefits and cost-sharing, and provider payments.  CMS has recently approved, in some Section 1115 waivers, the elimination of retroactive eligibility benefits for Medicaid beneficiaries.

Delays in reimbursement may cause liquidity problems.

If we have information systems problems or payment or other issues arise with Medicare, Medicaid or other payors that affect the amount or timeliness of reimbursements, we may encounter delays in our payment cycle. On occasion, states have delayed reimbursement at fiscal year ends for budget balancing purposes.  Any significant payment timing delay could cause us to experience working capital shortages. As a result, working capital management, including prompt and diligent billing and collection, is an important factor in our consolidated results of operations and liquidity. Our working capital management procedures may not successfully mitigate the effects of any delays in our receipt of payments or reimbursements. Accordingly, such delays could have an adverse effect on our liquidity and financial condition.

Our rehabilitation and other related healthcare services are also subject to delays in reimbursement, as we act as vendors to other providers who in turn must wait for reimbursement from other third-party payors. Each of these customers is therefore subject to the same potential delays to which our nursing homes are subject, meaning any such delays would further delay the date we would receive payment for the provision of our related healthcare services. To the extent we grow and expand the rehabilitation and other complementary services that we offer to third parties, these payment delays could have an increased adverse effect on our liquidity and financial condition. We may also experience delays in reimbursement related to change of ownership applications for our acquired facilities, as well as changes in fiscal intermediaries.

We are exposed to the credit and non-payment risk of our contracted customer relationships, including as a result from bankruptcy, receivership, liquidation, reorganization or insolvency, especially during times of systemic industry pressures, economic conditions, regulatory uncertainty and tight credit markets, which could result in material losses.

 

Deterioration in the financial condition of our customer relationships due to systemic industry pressures, economic conditions, regulatory uncertainty and tight credit markets may result in a reduction in services provided, an inability to collect receivables and payment delays or losses due to a customer’s bankruptcy, receivership, liquidation, reorganization or insolvency. Such actions could result in our customers seeking to cancel or to renegotiate the terms of current agreements or renewals, and failure to meet contractual obligations.  Our inability to collect receivables may decrease profitability and liquidity.

We provide rehabilitation therapy services and other healthcare related services to numerous customers of varying size and

significance on unsecured credit, with terms that vary depending upon the customer’s credit history, solvency and credit limits, as well as prevailing terms with customers having similar characteristics.  Despite an initial credit assessment, customers deemed creditworthy may experience an undetected decline in their financial condition while contracting with us.  Our rehabilitation therapy services segment, in particular, has several significant contracts with national skilled nursing home chains that increases our exposure to potential material losses.  Even when existing contract customers exhibit factors indicating negative credit trends, it can be costly to implement measures to reduce our exposure to those customers.  Challenging systemic industry pressures, economic conditions, regulatory uncertainty and tight credit markets may impair the ability of our customers to pay for services that have been provided by us, and as a result, our write-off of accounts receivable could increase. Our exposure to credit risks may increase if such unpaid balances serve as collateral under our revolving credit facilities and we have drawn funds thereunder. If one or more of these customers delay payments or default on credit extended to them, it could adversely impact our business, financial condition, operating results and liquidity.

 

We are subject to federal and state income taxes.  Changes in tax laws and regulations and the interpretation of those tax law changes could have a material adverse effect on our effective tax rate, provision for income taxes and income tax obligations.

 

We are a U.S. domiciled company subject to income tax in multiple U.S. tax jurisdictions and China. Significant judgment is required in determining our provision for income taxes, deferred tax assets or liabilities and in evaluating our tax positions on a worldwide basis. While we believe our tax positions are consistent with the tax laws in the jurisdictions in which we conduct our business, it is possible that these positions may be contested or overturned by jurisdictional tax authorities, which may have a significant impact on our provision for income taxes.

 

Tax laws are dynamic and subject to change as new laws are passed and new interpretations of the law are issued or applied. The U.S. recently enacted significant tax reform, and certain provisions of the new law may adversely affect us. In addition, governmental tax authorities are increasingly scrutinizing the tax positions of companies.  If U.S. or China tax authorities change applicable tax laws, our overall taxes could increase, and our business, financial condition or results of operations may be adversely impacted.

 

The Tax Cuts and Jobs Act of 2017 (Tax Act) resulted in significant changes to the Internal Revenue Code.  During the second half of the year ended December 31, 2018, the U.S. Treasury issued temporary and final regulations for various provisions contained within the Tax Act. Of the provisions, the reduction in corporate dividends received deduction, the Net Operating Loss limitation to 80% of taxable income, the business interest limitation and the bonus depreciation expensing could result in a material adverse effect to the Company’s income taxes.  Management has reviewed these provisions and their supporting regulations and has developed positions claimed in the Company’s income tax provision.

 

Throughout the year ended December 31, 2018, the U.S. states in which the Company has the most business presence, enacted various statutes and supporting regulations to many of the significant provisions of the Tax Act.  Many of the state statutes could result in a material adverse effect to the Company’s income taxes.  Management has reviewed the significant state statutes and regulations in its preparation of the Company’s income tax provision.

 

The various provisions within the Tax Act, the supporting regulations and U.S. state statutes enacted in response to the significant provisions within the Tax Act are still being developed.  It is anticipated that the application of the provisions will continue to be refined by the U.S. Treasury and U.S. states.  It cannot be predicted how refinements may impact the Company’s income taxes.  Management will continue to monitor and review any changes to assess the effect upon the Company’s income taxes. 

 

Completed and future acquisitions may use significant resources, may be unsuccessful and could expose us to unforeseen liabilities and integration risks.

We have in the past pursued, and expect to pursue in the future, selective acquisitions and the development of skilled nursing facilities, contract rehabilitation therapy businesses, and other related healthcare operations. Acquisitions may involve significant cash expenditures, debt incurrence, operating losses and additional expenses that could have a material adverse effect on our financial position, results of operations and liquidity. Acquisitions, including our recently completed acquisitions, involve numerous risks, including:

•  difficulties integrating acquired operations, personnel and accounting and information systems, or in realizing projected efficiencies and cost savings;

•  diversion of management's attention from other business concerns;

•  potential loss of key employees or customers of acquired companies;

•  entry into markets in which we may have limited or no experience;

•  increased indebtedness and reduced ability to access additional capital when needed;

•  assumption of unknown liabilities or regulatory issues of acquired companies, including failure to comply with healthcare regulations or to establish internal financial controls; and

•  straining of our resources, including internal controls relating to information and accounting systems, regulatory compliance, logistics and others.

Furthermore, certain of the foregoing risks could be exacerbated when combined with other growth measures that we may pursue.

Certain events or circumstances could result in the impairment of our assets or other charges, including, without limitation, impairments of goodwill and identifiable intangible assets that result in material charges to earnings.

We review the carrying value of certain long-lived assets, definite-lived intangible assets and indefinite-lived intangible assets with respect to any events or circumstances that indicate an impairment or an adjustment to the amortization period may be necessary, such as when the market value of our common stock is below book equity value. On an ongoing basis, we also evaluate, based upon the fair value of our reporting units, whether the carrying value of our goodwill is impaired. If circumstances suggest that the recorded amounts of any of these assets cannot be recovered based upon estimated future cash flows, the carrying values of such assets are reduced to fair value. If the carrying value of any of these assets is impaired, we may incur a material charge to earnings.  See Note 19 – “Asset Impairment Charges.”  

Future adverse changes in the operating environment and related key assumptions used to determine the fair value of our reporting units and indefinite-lived intangible assets or a decline in the value of our common stock may result in future impairment charges for a portion or all of these assets. Moreover, the value of our goodwill and indefinite-lived intangible assets could be negatively impacted by potential healthcare reforms. Any such impairment charges could have a material adverse effect on our business, financial position and results of operations.

A portion of our workforce is unionized and our operations may be adversely affected by work stoppages, strikes or other collective actions.

As of December 31, 2019, approximately 5,200 of our 55,000 active employees were represented by unions and covered by collective bargaining agreements.  In addition, certain labor unions have publicly stated that they are concentrating their organizing efforts within the long-term healthcare industry. We cannot predict the effect that continued union representation or future organizational activities will have on our business or future operations. There can be no assurance that we will not experience a material work stoppage in the future.

Disasters and similar events may seriously harm our business.

Natural and man-made disasters and similar events, including terrorist attacks and acts of nature such as hurricanes, tornados, earthquakes, floods and wildfires, may cause damage or disruption to us, our employees and our facilities, which could have an adverse impact on our patients and our business. In order to provide care for our patients, we are dependent on consistent and reliable delivery of food, pharmaceuticals, utilities and other goods to our facilities, and the availability of employees to provide services at our facilities and other locations. If the delivery of goods or the ability of employees to reach our facilities and patients were interrupted in any material respect due to a natural disaster or other reasons, it could have a significant impact on our business. Furthermore, the impact, or impending threat, of a natural disaster has in the past and may in the future require that we evacuate one or more facilities, which would be costly and would involve risks, including potentially fatal risks, for the patients and employees. The impact of disasters and similar events is inherently uncertain. Such events could harm our patients and employees, severely damage or destroy one or more of our facilities, harm our business, reputation and financial performance, or otherwise cause our business to suffer in ways that we currently cannot predict.

A pandemic, epidemic or outbreak of a contagious illness, such as COVID-19, could adversely impact our business, operating results and financial condition.

 

If a pandemic, epidemic, or other outbreak of an infectious illness or other public health crisis were to occur in areas in which we operate, our business, operations and financial condition could be materially and adversely impacted.  Federal, state or local health departments may require a ban or limit admissions to our facilities as a precautionary measure in a crisis to avoid the spread of a contagious illness or other public health crisis.  Patients may postpone or refuse necessary care in an attempt to avoid possible exposure, thereby reducing occupancy.  If the residents in any of our facilities test positive for a contagious illness, it would result in increased costs of caring for the residents in that facility and, in all likelihood, a reduced occupancy at that facility.  Further, a pandemic, epidemic or other outbreak might adversely impact our operations by causing staffing and supply shortages. In addition, outbreaks, such as the recent coronavirus (COVID-19), cause our facilities and our management to spend considerable time planning for such events, which diverts their attention from other business concerns.  We are continuing to evaluate and consider the potential impact of the COVID-19 outbreak, which could result in some or all of these negative outcomes and adversely impact our business, operating results and financial condition.  There can be no assurances that a pandemic, epidemic or outbreak of a contagious illness, such as COVID-19, will not have a material and adverse impact on our business, operating results and financial condition in the future.

 

The operation of our business is dependent on effective and secure information systems.

 

Our business is dependent on the proper functioning, reliability and availability of our business systems and technology.  While we have implemented strong security controls and continue to enhance those controls to protect the safety and security of our information systems, and the patient health information, personal 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.

 

If our business and technology systems are compromised and personal or other protected information regarding patients, employees or others with whom we do business is stolen, tampered with or otherwise improperly accessed, our ability to conduct our business and our reputation may be impaired. If personal or other protected information of our patients, employees or others with whom we do business is tampered with, stolen or otherwise improperly accessed, we may incur significant costs to remediate possible injury to the affected persons, compensate the affected persons, pay any applicable fines, or take other action with respect to judicial or regulatory actions arising out of the incident, including under HIPAA, the HITECH Act or any other similar federal or state privacy laws, as applicable.  Any of the foregoing could have a material adverse effect on our financial position, results of operations and liquidity.

 

Furthermore, while we budget for changes and upgrades to our business and technology systems, it is possible that we may underestimate the actual costs of those changes and upgrades.  Failure to make necessary changes and upgrades due to financial or other concerns could negatively impact the effectiveness of our business and technology systems, as well as our operations and financial performance. The board of directors is kept abreast of significant changes, updates or issues regarding our information systems as the need arises.

 

We employ a wide range of perimeter, endpoint, infrastructure, and business application controls, and device, email, file and website encryption to limit our risk and exposure.  As our third party software suppliers move the services we use to public cloud services, we are implementing security configurations and conducting appropriate reviews to ensure the protection of our data and compliance with our security policies and business continuity plans.

 

We conducted annual internal and third party cybersecurity risk assessments with the goal of identifying any areas of exposure, focusing our resources on remediating those risks, and strengthening our overall cybersecurity profile and infrastructure.

 

Risks Related to Ownership of Our Class A Common Stock

We are subject to the Continued Listing Criteria of the New York Stock Exchange (NYSE), and our failure to satisfy these criteria may result in the delisting of our common stock.

 

On March 13, 2020, the closing sales price of our Class A common stock on the NYSE was $1.15 per share. There can be no assurance that our stock price will continue to close above $1.00 per share and we will remain compliant with the Continued Listing Criteria of the NYSE.  If our common stock is ever delisted and we are not able to list our common stock on another national securities exchange, we expect our securities would be quoted on an over-the-counter market. If this were to occur, our stockholders could face significant material adverse consequences, including limited availability of market quotations for our common stock and reduced liquidity for the trading of our securities. In addition, we could experience a decreased ability to issue additional securities and obtain additional financing in the future. There can be no assurance that an active trading market for our common stock will develop or be sustained.

 

The issuance and subsequent conversion or exercise of debt securities or stock warrants, respectively, into our common stock may dilute the ownership of existing stockholders.

 

We may, from time to time, issue convertible debt securities or common stock warrants. For example, in connection with a transaction with Welltower we issued a note, which was subsequently converted into our common stock. The conversion, if any, of such convertible debt or exercise of stock warrants may dilute the ownership interest of our existing stockholders. Any sales in the public market of the shares of common stock issuable upon such conversion or exercise could adversely affect prevailing market prices of our common stock. In addition, the existence of the notes and stock warrants may encourage short selling by market participants because the conversion of the notes or exercise of stock warrants could depress the market price of our common stock. Issuance of such common stock upon conversion or exercise also may affect our earnings (loss) on a per share basis.

A small group of stockholders owns a large quantity of our common stock, thereby potentially exerting significant influence over the Company.

 

The holders of a majority of the voting power of our common stock had previously entered into a voting agreement governing the election of our directors, which resulted in our being deemed a “controlled company.”  Although the voting agreement expired in 2018 and we are no longer a “controlled company,” ownership of our common stock remains concentrated among certain stockholders. The five largest holders of our common stock beneficially own shares representing approximately 48% of the Company’s voting power as of March 13, 2020.  This concentration of ownership could influence matters requiring approval by our stockholders and/or our board of directors, including the election of directors and the approval of business combinations or dispositions and other extraordinary transactions.  Accordingly, this concentration of ownership may impact the market price of our common stock. In addition, the interest of our significant stockholders may not always coincide with the interest of our other stockholders. In deciding how to vote on such matters, they may be influenced by interests that conflict with our other stockholders.

 

Some of our directors are significant stockholders or representatives of significant stockholders, which may present issues regarding the diversion of corporate opportunities and other potential conflicts.

Our board of directors includes certain of our significant stockholders and representatives of certain of our significant stockholders. Those stockholders and their affiliates may invest in entities that directly or indirectly compete with us, companies in which we transact business, or companies in which they are currently invested or in which they serve as an officer or director may already compete with us. As a result of these relationships, when conflicts between the interests of those stockholders or their affiliates and the interests of our other stockholders arise, these directors may not be disinterested.

Also, in accordance with Delaware law, our board of directors adopted resolutions to specify the obligation of certain of our directors to present certain corporate opportunities to us.  Such directors are required to present any corporate opportunities in our main lines of business, which may be expanded by our board of directors, as well as any other opportunity that is expressly offered for us. The resolutions renounce our rights to certain other business opportunities that do not meet those criteria.  The resolutions further provide that such directors will not be liable to us or to our stockholders for breach of any fiduciary duty that would otherwise exist by reason of the fact that any such individual directs a corporate opportunity (other than those certain types of opportunities set forth in the resolutions) to any person instead of us or is engaged in certain current business activities, or does not refer or communicate information

regarding certain corporate opportunities to us.  Accordingly, we may not be presented with certain corporate opportunities that we may find attractive and may wish to pursue.

Purchasers of our Class A common stock could incur substantial losses because of the volatility of our stock price.

Our stock price has been and is likely to continue to be volatile. The stock market in general often experiences substantial volatility that is seemingly unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our Class A common stock. The price for our Class A common stock may be influenced by many factors, including:

•  the depth and liquidity of the market for our Class A common stock;

•  developments generally affecting the healthcare industry;

•  investor perceptions of us and our business;

•  actions by institutional or other large stockholders;

•  strategic actions, such as acquisitions or restructurings, or the introduction of new services by us or our competitors;

•  new laws or regulations or new interpretations of existing laws or regulations applicable to our business;

•  litigation and governmental investigations;

•  changes in accounting standards, policies, guidance, interpretations or principles;

•  adverse conditions in the financial markets, state and federal government or general economic conditions, including those resulting from statewide, national or global financial and deficit considerations, overall market conditions, war, incidents of terrorism and responses to such events;

•  sales of Class B common stock;

•  sales of units by certain significant stockholders and members of our management team;

•  additions or departures of key personnel; and

•  our results of operations, financial performance and future prospects.

These and other factors may cause the market price and demand for our Class A common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of Class A common stock and may otherwise negatively affect the liquidity of our Class A common stock. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have sometimes instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending or settling the lawsuit. Such a lawsuit could also divert the time and attention of our management from our business.

If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our stock or if our operating results do not meet their expectations, our stock price and trading volume could decline.

The trading market for our Class A common stock is significantly influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if one or more of the analysts who cover us downgrade our stock or if our operating results do not meet their expectations, our stock price could decline.

We do not intend to pay dividends on our common stock.

We do not anticipate paying any cash dividends on our common stock in the foreseeable future. We currently anticipate that we will retain all of our available cash, if any, for use as working capital and for other general purposes, including to service or repay our debt and lease obligations as well as to fund the operation and expansion of our business. Any payment of future dividends will be at the

discretion of our board of directors and will depend on, among other things, our earnings, financial condition, capital requirements, level of indebtedness, lease obligations, statutory and contractual restrictions applying to the payment of dividends and other considerations that our board of directors deems relevant.

Our amended and restated certificate of incorporation, 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 Class A common stock.

In addition to the effect that the concentration of ownership and voting power in our significant stockholders may have, our amended and restated certificate of incorporation and our amended and restated bylaws contain provisions that may enable our management 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 Class A common stock. The provisions in our amended and restated certificate of incorporation or 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 our Class A common stock, Class B common stock and Class C 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 of the members of our board of directors 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;

•  special meetings of the stockholders are permitted to be called only by the chairman of our board of directors, our chief executive officer, a majority of our board of directors or a majority of the voting power of the shares entitled to vote in connection with the election of our 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 will be filled only by majority vote of the remaining directors;

•  a majority of our board of directors is expressly authorized to make, alter or repeal our bylaws; and

•  the affirmative vote of the holders of at least 66 2/3% of the combined voting power of the shares entitled to vote in connection with the election of our directors is required to amend, alter, change, or repeal, or to adopt any provision inconsistent with the purpose and intent of certain articles of the Restated Charter relating to the management of our business and conduct of the affairs; the rights to call special meetings of the stockholders; the ability to take action by written consent in lieu of a meeting of stockholders; our obligations to indemnify our directors and officers; amendments to the bylaws; and amendments to the certificate of incorporation.

We are also subject to the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock. 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 Class A common stock to decline.

Risks Related to Our Organizational Structure

We will be required to pay the members of FC-GEN for certain tax benefits we may claim as a result of the tax basis step-up we receive in connection with exchanges of the members of FC-GEN for our shares. In certain circumstances, payments under the tax receivable agreement may be accelerated and/or significantly exceed the actual tax benefits we realize.

FC-GEN Class A Common Units may be exchanged for shares of Class A common stock. Such exchanges of Class A Common Units in FC-GEN may result in increases in the tax basis of the assets of FC-GEN that otherwise would not have been available. Such increases in tax basis are likely to increase (for tax purposes) depreciation and amortization deductions and therefore reduce the amount of income tax we would otherwise be required to pay in the future. These increases in tax basis may also decrease gain (or increase loss) on future dispositions of certain capital assets to the extent the increased tax basis is allocated to those capital assets.

On February 2, 2015 we entered into a tax receivable agreement (the TRA) with the members of FC-GEN that provides for the payment by us to such members of FC-GEN of 90% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that we actually realize as a result of (a) the increases in tax basis attributable to the members of FC-GEN and (b) tax benefits related to imputed interest deemed to be paid by us as a result of this TRA. While the actual increase in tax basis, as well as the amount and timing of any payments under the TRA, will vary depending upon a number of factors, the payments that we may make to the members of FC-GEN could be substantial.

Although we are not aware of any issue that would cause the Internal Revenue Service (the IRS) to challenge a tax basis increase, the IRS may challenge all or part of these tax basis increases, and a court could sustain such a challenge.  In such event, the FC-GEN members generally will not reimburse us for any payments that may previously have been made to them under the TRA. As a result, in certain circumstances we could make payments to the FC-GEN members under the TRA in excess of our cash tax savings.

In addition, the TRA provides that, upon a merger, asset sale or other form of business combination or certain other changes of control or if, at any time, we elect an early termination of the TRA, our (or our successor's) obligations with respect to exchanged or acquired Class A Common Units (whether exchanged or acquired before or after such change of control or early termination) would be based on certain assumptions, including that (i) in a case of an early termination, we would have sufficient taxable income to fully utilize the deductions arising from the increased tax deductions and tax basis and other benefits related to entering into the TRA; (ii) in the case of a change of control, we would have taxable income at least equal to our taxable income for the 12-month period ending on the last day of the month immediately preceding the change of control; and (iii) any Class A Common Units that have not been exchanged will be deemed exchanged for the market value of the Class A common stock at the time of early termination or change of control. Consequently, it is possible, in these circumstances also, that the actual cash tax savings realized by us may be significantly less than the corresponding TRA payments.

If we were deemed an “investment company” under the Investment Company Act of 1940 as a result of our ownership of FC-GEN, applicable restrictions could make it impractical for us to continue our business as contemplated and could materially and adversely affect our operating results.

If we were to cease participation in the management of FC-GEN, our interests in FC-GEN could be deemed an "investment security" for purposes of the Investment Company Act of 1940 (the 1940 Act).  Generally, a person is deemed to be an "investment company" if it owns investment securities having a value exceeding 40% of the value of our total assets (exclusive of U.S. government securities and cash items), absent an applicable exemption.  We have substantially no assets other than our equity interests in the managing member of FC-GEN and FC-GEN’s interests in our subsidiaries. A determination that this interest in FC-GEN was an investment security could result in our being an investment company under the 1940 Act and becoming subject to the registration and other requirements of the 1940 Act.  We intend to conduct our operations so that we will not be deemed an investment company.  However, if we were to be deemed an investment company, restrictions imposed by the 1940 Act, including limitations on our capital structure and our ability to transact with affiliates, could make it impractical for us to continue our business as contemplated and have a material adverse effect on our business and operating results and the price of our Class A common stock.

 

Item 1B. Unresolved Staff Comments

 

None.

 

Item 2. Properties

 

As of December 31, 2019, our 381 long-term care facilities consisted of 30 which were owned, 299 which were leased, 13 which were managed and 39 which were joint ventures.  As of December 31, 2019, our operated facilities had a total of 45,136 licensed beds. 

The following table provides the facility count and licensed beds by state as of December 31, 2019 for all owned, leased, managed or joint venture skilled nursing and assisted/senior living facilities.

 

 

The following table provides the leased and joint venture facility count and licensed beds by state as of December 31, 2019, for our four master lease agreements in which we have a fixed-price purchase option.

 

 

Our executive offices are located in Kennett Square, Pennsylvania and we have several other corporate offices, including Andover, Massachusetts; Towson, Maryland; Albuquerque, New Mexico; and Irvine, California. We own our executive offices in Kennett Square, Pennsylvania.

 

Item 3. Legal Proceedings

 

For information regarding certain pending legal proceedings to which we are a party or our property is subject, see Note 21 - “Commitments and Contingencies – Legal Proceedings,” to our consolidated financial statements included elsewhere in this report, which is incorporated herein by reference.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Market Information

 

Our Class A common stock is listed on the NYSE under the symbol "GEN." Information with respect to sales prices and record holders of our Class A common stock is set forth below. There is no established trading market for our Class B common stock or Class C common stock. 

Holders

On March 13, 2020, there were 70 holders of record of our Class A common stock, 10 holders of record of our Class B common stock, and 63 holders of record of our Class C common stock.

Dividends

We do not anticipate paying any cash dividends on our common stock in the foreseeable future. We have made and will continue to make distributions on the behalf of FC-GEN members to satisfy tax obligations. We currently anticipate that we will retain all of our available cash, if any, for use as working capital and for other general purposes, including to service or repay our debt and to fund the operation and expansion of our business.

Securities Authorized for Issuance Under Equity Compensation Plans

We primarily issue restricted stock units under our share-based compensation plans, which are part of a broad-based, long-term retention program that is intended to attract and retain talented employees and directors, and align stockholder and employee interests.

Our 2015 Omnibus Equity Incentive Plan (2015 Plan) provides for the grant of incentive and non-qualified stock options as well as stock appreciation rights, restricted stock, restricted stock units, performance units and shares, and other stock-based awards. Generally, restricted stock unit grants to employees vest over three years. Approximately 50% of our awards to executives and certain employees have performance based criteria that must be met in order for the awards to vest. The Board of Directors may terminate the 2015 Plan at any time. Only shares of our Class A common stock can be issued or transferred pursuant to awards under the 2015 Plan. 

Additional information regarding our stock plan activity for fiscal year 2019 and 2018 is provided in the notes to our consolidated financial statements in this annual report. See Note 14 - “Stock-Based Compensation."

The equity compensation plan information set forth in Item 12. "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters"   of this report contains information concerning securities authorized for issuance under our equity compensation plans.

 

 

Item 6. Selected Financial Data

 

We derived the selected historical consolidated financial data below as of and for the years ended December 31, 2019 and 2018 from our audited consolidated financial statements included elsewhere in this report. We derived the selected historical consolidated financial data as of and for the years ended December 31, 2017, 2016, and 2015 from our consolidated financial statements not included in this report. Historical results are not necessarily indicative of future performance.

 

Please refer to the information set forth below in conjunction with other sections of this report, including Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated historical financial statements and related notes included elsewhere in this report.

 

 

(1) The Company adopted Topic 606 effective January 1, 2018, the effects of which have not been reflected in prior periods.  For the years ended December 31, 2019 and 2018, respectively, the Company recorded approximately $74.0 million and $95.8 million of implicit price concessions as a direct reduction of net revenues that would have been recorded as expenses prior to the adoption of Topic 606.

(2) Working capital at December 31, 2019 and 2018, respectively, excludes the outstanding revolving credit facility borrowings balance of $136.0 million and $105.6 million classified in current installments of long-term debt due to a swinging lockbox arrangement under our asset based lending facilities despite a maturity date of March 6, 2023.

(3) The Company adopted Topic 842 effective January 1, 2019, the effects of which resulted in $140.9 million of current operating lease liability at December 31, 2019.  For purposes of comparability, the $140.9 million of current operating lease liability was excluded from the working capital calculation.