Ensign CEO: Federal Staffing Minimums Are ‘Not the Way to Drive Quality’

While the skilled nursing industry faces unprecedented staffing challenges, The Ensign Group (Nasdaq: ENSG) has been able to increase its frontline workforce by 3% – a feat achieved thanks to local recruiting and retention efforts supported by the company’s regional market strategy.

Ensign’s reliance on agency has also decreased — a trend CEO Barry Port expects will continue.

“In the same way that Covid required our facilities to improve their infection control and clinical systems early in the pandemic, the staffing shortage has pushed our facilities to innovate and improve their systems around recruiting and retaining staff,” Port said during the company’s Q1 2022 earnings call.

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The San Juan Capistrano, Calif.-based post-acute health care services provider and investor also touched on some major industry announcements, namely the Biden administration’s proposed industry reforms and a 4.6% recalibration to the Patient-Driven Payment Model (PDPM).

Port said he isn’t worried about the federal initiative to establish a staffing minimum ratio next spring, since Ensign facilities already operate at an increased staffing rate to accommodate higher acuity patients.

“A federal staff mandate, it has to contemplate all types of providers and the vast majority have a lower acuity level than what we typically see. We try not to focus too much on the what-ifs, especially when there’s very little detail given around it, but we feel okay,” Port said during the call. “It’s certainly not a model we necessarily agree with. That’s not the way to drive quality, in our opinion.”

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Ensign CFO Suzanne Snapper said the company is reaffirming its 2022 annual earnings guidance of $4.01-$4.13 per diluted share despite the PDPM announcement, taking into account the “larger than normal” payment rate increase by 3.9% as part of the SNF Final Rule.

“The net rate in the final rule could either be a negative 0.7% or could be less, or even could be a net positive change depending upon the timing and the amount of the final adjustment,” Snapper said.

Snapper said there’s also the possibility that the Centers for Medicare & Medicaid Services (CMS) will recalibrate PDPM over a two to three year period, while CMS Administrator Chiquita Brooks-LaSure told SNN that is unlikely.

Brooks-LaSure said the agency’s hands are effectively tied in terms of timing, given statutory obligations to make the model budget neutral.

In terms of M&A growth, Ensign is in a position to further consolidate “weaker peers,” according to Stifel, and maintain current positive momentum – all without the use of CARES Act funds.

“The company’s consistent performance stands in stark contrast to many other health care services providers that have struggled in the recent labor crunch, illustrating the benefits of the localized strategy and the quality of management,” Stifel analysts wrote in a Friday note.

Ensign has added nine properties/operations to its newly formed captive real estate investment trust (REIT) Standard Bearer, year-to-date. Ensign has increased its SNF assets from 58 upon its IPO in 2007 to 251 operations today.

Assets are overwhelmingly in the skilled nursing sector with 215 buildings, followed by 25 hospital campuses and 11 senior living facilities.

Ensign beat “the highest” analyst expectations by two cents, according to Seeking Alpha and Stifel. GAAP diluted earnings per share (EPS) for Q1 was 89 cents, an increase of 3.5% from Q1 2021, Ensign said in its earnings report.

Consolidated GAAP revenues and adjusted revenues for the quarter were $713.4 million, a 13.5% increase compared to Q1 2021.

Skilled nursing revenue was $686.8 million, an increase of more than 13.5% from Q1 2021. Skilled services income increased $98.3 million, or 10.5%, from Q1 2021.

Regional approach in action

Ensign prides itself on its regional approach to the skilled nursing market, especially given its recent connection to staffing success in suburban, metropolitan and rural areas.

Port gave two examples of how Ensign’s market-centric model continues to shine, first with suburban, Dallas metro area-based Willow Bend Nursing and Rehabilitation.

Recruiting efforts at Willow Bend resulted in a more than 8% growth in care staff during Q1, in spite of the Dallas-Fort Worth area being “one of the most competitive hiring environments we’ve seen in decades,” Port said.

Coupled with staff growth, the 162-bed facility managed to increase occupancy by more than 8% and managed care occupancy by upwards of 17% during the first quarter – Willow Bend’s pre-tax earnings increased by 28%.

“These incredible results were made possible because of the team at Willowbend’s relentless focus on hiring and retaining high caliber staff,” Port said.

Owyhee Health and Rehab, a rural operator in Homedale, Idaho, saw staff turnover at less than one-fourth of the industry average thanks to retention efforts, Port said.

Owyhee’s “family environment” helps create a safe environment where staff feel valued, he added.

The Idaho operator increased occupancy to 92%, a 9% improvement compared to Q1 2021. Medicare skilled census “skyrocketed” by 47% during the same time period, Port said.

Progress at Owyhee and Willowbend reflects Ensign’s global progress in Q1 alone, Port added.

Poised for growth in a seller’s market

Ensign CIO Chad Keetch said the company plans to expand operations into new states and regional markets, but is being very deliberate in choosing partnerships or closing on M&A deals. At the same time, sellers are being “unrealistic” in their pricing, he said.

“We continue to see some sellers coming to market with really high expectations … we’re going to stay disciplined and think that at some point, that’s going to have to correct,” Keetch added.

While Ensign has had to pass on a variety of opportunities due to pricing, there are plenty of deals to execute on, Keetch said. Ensign has “a dozen or so” deals in the works, according to Keetch.

“[We are] excited about the additions to our real estate portfolio during the quarter, and the many more additions that we expect to add this spring and summer,” Keetch said of Standard Bearer.

Its nine latest acquisitions include a SNF and two senior living operations in Arizona, two SNFs and two senior living facilities in California, a SNF in Texas, and one senior living facility in Washington.

Ensign formally established the REIT in the first financial quarter of 2022 with 95 properties and has plans to grow with like-minded operators – more deals are expected during the first half of the year.

Analysts expect Standard Bearer to be with up to $20 per share, based on current valuation.

“It’s a lot of work to get to know an entirely new regulatory environment, new managed care partners, new hospital systems. It takes … many years to really develop your reputation in a new state,” Keetch said.

Still, that doesn’t mean the company is shying away from deals outside their current footprint.

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