Ensign Going ‘Up the Acuity Chain,’ Expects Medicaid Support for Soft Landing as PHE Ends 

Following the Biden administration’s plans to end the public health emergency (PHE) on May 11, leaders at Ensign Group (Nasdaq: ENSG) are bullish that state assistance will create a soft landing.

Ensign CEO Barry Port has seen operators in the sector bolstered by enhanced Federal Medical Assistance Percentage (FMAP) funding during the pandemic; this federally supported funding will be replaced “in large part” by appropriate state-based funding, he believes.

Port discussed the PHE and state Medicaid rebasing during Ensign’s fourth financial quarter earnings call on Friday.

Ensign reported GAAP diluted earnings per share at $1.06 for the quarter and $3.95 for the year, a 13.7% increase compared to 2021, according to a statement issued ahead of the earnings call. Skilled services revenue was $2.9 billion for the year, a 15.2% increase over the prior year, and $777.6 million for Q4 2022.

Revenue beat analyst expectations for the quarter by $7 million. Stifel analysts expect a strong 2023 with revenue between $3.55 and $3.62 billion, a 17.3% to 17.9% growth year-over-year. “Record pace” of acquisitions drives the best year of growth for Ensign since 2016, Stifel said in a note prior to the earnings call.

Ensign’s improvement in skilled mix — up 9.1% for same-store operations year-over-year — points to a strategic direction for Ensign, which intends to keep targeting higher-acuity patients.

Port said he was pleased that Ensign continued to achieve sequential growth in overall occupancy for the eighth quarter in a row – the company is inching toward pre-pandemic occupancy, reaching 77.8%. Occupancy was 80.1% in March 2020.

Turning to the labor environment, Port said improvements in some key internal performance areas – rate of wage inflation and less reliance on agency staff – indicate stabilization.

Employee turnover has decreased as well, with leadership focused on implementing culture that more closely aligns with Ensign’s collective core values, according to Port.

A Medicaid pathway

As Ensign leadership looks ahead to the May end of the PHE, states that have previously shown financial support have also been breaking away from tying anything to the state of emergency, according to Ensign CFO Suzanne Snapper. She named California, Arizona and Texas in particular that are going this route.

“They’ve said that they’re going to be supportive for the remainder of the year,” noted Snapper of the three states. “As they look to put the dollars more into the rate, we’ve already started to see some of that come through in Arizona – Texas is the last one out there. They’ve also done some grants that we’re expecting to see come in through the year.”

A gap between federal funding and state Medicaid dollars may not cover a portion of September, Snapper said, but the team is feeling good about how states are lining up.

“There’s a pretty clear pathway for us to not have massive blips on the state reimbursement front as FMAP fades,” noted Port, referring to the elevated levels of federal funding tied to the Covid emergency.

Going up the acuity chain

Ensign was able to keep its skilled mix elevated compared to pre-Covid levels, despite “a lot of noise” around potential shifts to home-based care stemming from a lack of support for inpatient post-acute care from hospitals and managed care providers, Port said.

“Our local team has demonstrated over and over that they can achieve successful outcomes for sicker patients that need more advanced care,” noted Port. “We’re very pleased to see this continuous fundamental growth in skilled mix, as it demonstrates the increasing and sustainable demand for skilled post acute services without a significant impact from Covid.”

Skilled mix revenue grew by 9.1% from Q4 2021 to Q4 2022. Ultimately, Ensign will continue “up the acuity chain” and attract sicker patients in order to be the best resource for hospitals and Medicare partners, Port said.

That’s without as much dependence on PHE waivers the last couple quarters, Snapper said. Skilled mix and Covid aren’t as aligned as they were in early pandemic years, she noted.

Ensign has recently taken over operations of some facilities formerly operated by North American Health Care, and owned by Sabra Health Care REIT (Nasdaq: SBRA). These buildings feature higher acuity levels, and Ensign is learning lessons from these operations as it considers a model for delivering more advanced clinical services, Sabra CEO Rick Matros recently told Skilled Nursing News.

Spencer Burton, Ensign COO, highlighted an operation that also fits into the higher-acuity storyline.

The property – Surprise Rehabilitation – had previously been shuttered due to “prior owner struggles with local licensing and regulatory authorities,” Burton said. Ensign acquired the property in August 2019 with no residents and no staff.

Now, the five-star facility has increased capacity to treat high acuity patients, including those that need ventilators and other respiratory care. Occupancy at Surprise went from 57% in 2020 to more than 95% in 2022, Burton said, and EBIT improved 73% in Q4.

“Rolling a facility from zero to 95% occupancy is an impressive feat in normal times. To do it in the midst of a global pandemic, and unprecedented healthcare staffing challenges, it’s truly incredible,” said Burton.

Staffing initiatives have helped reduce turnover and reliance on agency use too, he said, with the center’s certified nursing assistant (CNA) training school recognized as a model throughout the state.

The program at Surprise has produced more than 150 new CNAs and been duplicated at other Ensign affiliate properties in the state, with 500 graduates to date, Burton said.

Acquisition amid uncertainty

Port believes Ensign’s acquisition resiliency comes from local leaders’ ability to transform struggling operations, even as other operators are choosing or are being forced to exit the industry.

With its 17 operational transitions completed on Feb. 1, Ensign has added 37 affiliated operations since July 1, Port said. That deal involves 20 communities total, which previously were operated by North American Health Care; three of the properties will be subleased to Aspen Skilled Healthcare, with Sabra’s consent.

During Q4, Ensign added 12 new operations, including three SNFs in South Carolina, one in Arizona, six in Texas and two in Colorado – adding 1,505 operational beds to its roster, Ensign CIO Chad Keetch said during the call.

“We always place the highest priority on growth opportunities within our existing footprint and are very excited about the additions to some of our most mature markets like Arizona and Colorado,” noted Keetch.

Of note, Ensign hasn’t completed acquisitions in South Carolina since it entered the state seven years ago, according to Keetch. He hopes the deal will continue to strengthen the company’s footprint in the mid-Atlantic region.

Each operator will form their own market-specific strategy and adjust to the needs of their local medical communities, according to Port.

“These transitions will take time particularly given a higher than normal reliance on agency staffing prior to the acquisition,” said Port.

Investors have questioned Ensign on its ability to execute on larger transactions like the California portfolio, bringing up the 2016 Legend Healthcare transaction that took several financial quarters to produce expected results.

“We were very open about the lessons we learned that made that transition a little more challenging than we anticipated,” said Port. “As we look back, we worry we haven’t done a good enough job at telling the massive success story that the Legend operations have become – those operations have been contributing a significant amount to our earnings for several years now.”

Since Ensign has acquired the Texas SNFs, EBITDA growth through the end of 2022 has increased by more than 160%, Port said.

“I point to this example not to suggest that we expect the exact same results in this new portfolio. I do so only to underline how we look at acquisitions, including larger portfolios,” said Port. “We never acquire something for a short-term impact … we see significant opportunities to create lasting long-term value for our portfolio.”

Ensign is preparing for even more growth in 2023, Keetch said, although he expects the pace of acquisitions in the coming months to slow somewhat. The company is looking at SNF portfolios of every size, especially as operators continue to experience low occupancy and high utilization of contract labor.

But the company also is undeterred by challenging turnarounds, Burton emphasized in his remarks.

“Those of you who are familiar with Ensign’s history know that our organization was born in challenging times. Our model has proven time and time again that industry challenges present great opportunities to innovate and thrive,” said Burton.