Acquisitions and the federal nursing home staffing mandate were top of mind for leaders of Ensign Group (Nasdaq: ENSG), with CEO Barry Port suggesting that the highly contested national staffing rule may be overturned in federal court or thrown out altogether.

“We’re encouraged to see bipartisan support in the legislature that could result in this rule being overturned or significantly altered,” Port said during the company’s quarterly earnings call on Thursday. And, a three-year runway on top of numerous upcoming elections could alter what the industry will have to adhere to ultimately when it comes to minimum staffing levels, he said.

Executives also discussed the slew of acquisitions for the REIT recently. Ensign added seven properties to its portfolio, with six more for its subsidiary, Standard Bearer REIT, during the first quarter of 2024.

Transitioning and newly acquired “buckets” now represent more than 25% of Ensign’s total operational beds, Port said during the call. There’s “enormous organic growth potential” as its geographic teams unlock significant upside as they mature.

Acquisitions span Nevada, Colorado, Utah, Arizona, Tennessee, Texas, Kansas and Iowa, some of which were just announced yesterday. The additions bring the San Juan Capistrano, Calif.-based company’s growing portfolio to 310 healthcare operations across 14 states.

“When the industry is out of favor, or regulatory uncertainty leads to less capital being invested in our space, our local acquisition approach has allowed us to continue to add new operations at attractive prices,” said Port.

Ensign’s local teams have demonstrated their capabilities to health care partners and grown market share, he said. The latest acquisitions represent an opportunity to strengthen current clusters or establish new clusters in new markets, said Chad Keetch, Ensign Chief Investment Officer. They were also chosen for their “huge clinical and financial potential,” he noted.

The additions total 1,216 new skilled nursing beds.

“We continue to prioritize growth in our established geographies as it allows our clusters to work together with their acute care partners and to provide a comprehensive solution to their healthcare needs,” said Keetch. Building clusters in new states, he said, or markets where there’s room to add density, are happening in Nevada and Tennessee.

Litigation is likely for the staffing rule

In terms of the recently finalized federal minimum staffing mandate for nursing homes, Port said he’s optimistic that the rule will either be eliminated entirely or its effects will be mitigated long before the rule takes effect in three years.

“Our industry representatives and their legal experts have been preparing to challenge this rule in the courts on several grounds,” he said.

Industry lobbying groups and their legal representatives believe the rule is highly likely to be overturned in federal court, Port said. And, he said, the rule is being driven by political ideologies – its survival and outcome will depend on the results of local and federal elections that will take place before the rule goes into effect.

The sector is expected to be a major talking point in upcoming election cycles.

Given this scenario, Ensign won’t need to do any “shuffling” of its staffing makeup quite yet as a result of the rule, at least not until 2026, Port said, with implementation expected to start up in 2027 for the states Ensign operates in.

“We don’t anticipate doing a whole lot different operationally in the next couple of years other than focusing on the things that we know we can control and get better at, which really include all the different dynamics around labor control and also being an employee-centric, customer-second environment where we focus relentlessly on people systems and making sure we’ve got world class orientation and training and support for our employees,” said Port.

The other half of their focus will be on eliminating third-party staffing agencies in the next couple years, Port added.

The rule mandates a minimum of 3.48 hours per resident per day (HPRD) of total staffing, with specific allocations for registered nurses (RN) and nurse aides.

This standard encompasses 0.55 HPRD of direct RN care and 2.45 HPRD of direct nurse aide care. The Centers for Medicare & Medicaid Services (CMS) said that facilities can use a mix of nurse staff, including RNs, LPNs/LVNs, or nurse aides, to meet this standard. This is a change from the proposed version of the rule that CMS put forward in Sept. 2023, which called for 3 HPRD of care and excluded licensed practical nurses.

In the meantime, Port said the company’s locally-driven operational model is destined to respond to changes like these, pointing to the implementation of the Patient Driven Payment Model (PDPM) and frequent regulatory changes during the height of the pandemic.

Local leaders have been able to adjust individual operations strategies and rapidly respond to shifting market dynamics, he noted.

“While we are deeply committed to increasing access to quality care for our seniors, we strongly disagree with this rule and believe especially in light of the nationwide shortage of nursing labor, that the rule only exacerbates an already precarious staffing problem,” said Port. “If it survives as is, [the rule] would severely limit the ability of the skilled nursing industry to serve the growing long-term care population.”

The industry would be better served by policy which rewards quality outcomes and assists providers to increase the supply of caregivers, he said.

Port expects smaller and more thinly capitalized operators to experience the greatest impact from the rule.

The final rule was very much in line with the proposed rule, with few differences despite an “overwhelming amount of feedback” from operators of all sizes and geographies, he said.

Performance as wage inflation slows

Ensign reported a 59% reduction in agency usage among its properties, improving for the fifth financial quarter in a row since its peak in December 2022. The company is seeing less turnover as well for the 10th quarter in a row, a result of its focus on local leaders and “customer second” philosophy, he said.

The pace of wage inflation is slowing too, as Ensign recruits new talent.

Ensign reaffirmed its annual 2024 guidance of $5.29 to $5.47 per diluted share and annual revenue guidance of $4.13 billion to $4.17 billion. The company also reported GAAP diluted earnings per share of $1.19 and adjusted earnings per share of $1.30 for Q1, a 13.3% and 15% increase respectively compared to Q4 of 2023.

GAAP net income was $68.8 million, also a 15% increase over the prior year quarter. Adjusted net income was $75.4 million for Q1, a 16.6% increase compared to the prior year quarter.

Facility skilled revenue increased by 3.8% in Q1 compared to Q1 2023 and increased by 5.6% compared to Q4 2023. Total skilled services revenue was $969.6 million for Q1, a 13.9% increase compared to Q1 2023.

“This performance is not due to some large event or a single transformative transaction, but instead as a result of consistent growth and performance quarter after quarter,” said Port.

Managed care census for existing and transitioning facilities increased by 4.8% and 27.8% respectively, compared to Q1 2023.

Standard Bearer revenue was $22.2 million for Q1, a 12.6% increase compared to Q1 2023. Finds from operations for the REIT was $14.1 million for Q1, a 6.8% increase compared to Q1.