Pennant Group Inc

Previous wording

•competition from other healthcare providers, state efforts to regulate or deregulate the healthcare services industry, or the construction or expansion of the number of home health, hospice or senior living operations;

Current wording

•competition from other healthcare providers, federal and state efforts to regulate or deregulate the healthcare services industry, including through staffing levels and requirements, or the construction or expansion of the number of home health, hospice or senior living operations;

Previous wording

•uncertainties related to the lingering effect of the COVID-19 pandemic, including new regulatory risks impacting our operations, potential litigation, and vaccination mandates

Current wording

•uncertainties related to the lingering effect of the COVID-19 pandemic, including new regulatory risks impacting our operations, the effects of Medicaid disenrollment, potential litigation, and vaccination mandates

Previous wording

We are a leading provider of high-quality healthcare services to patients of all ages, including the growing senior population, in the United States. We strive to be the provider of choice in the communities we serve through our innovative operating model. We operate in multiple lines of businesses including home health, hospice and senior living services across Arizona, California, Colorado, Idaho, Montana, Nevada, Oklahoma, Oregon, Texas, Utah, Washington, Wisconsin and Wyoming. As of March 31, 2024, our home health and hospice business provided home health, hospice and home care services from 112 agencies operating across these 13 states, and our senior living business operated 53 senior living communities throughout six states.

Current wording

We are a leading provider of high-quality healthcare services to patients of all ages, including the growing senior population, in the United States. We strive to be the provider of choice in the communities we serve through our innovative operating model. We operate in multiple lines of businesses including home health, hospice and senior living services across Arizona, California, Colorado, Idaho, Montana, Nevada, Oklahoma, Oregon, Texas, Utah, Washington, Wisconsin and Wyoming. As of June 30, 2024, our home health and hospice business provided home health, hospice and home care services from 117 agencies operating across these 13 states, and our senior living business operated 54 senior living communities throughout six states.

Previous wording

Acquisitions. During the three months ended March 31, 2024, we expanded our operations with the addition of one home health agency and two senior living communities. A subsidiary of the Company entered into a separate operations transfer agreement with the prior operator of each acquired operation as part of each transaction.

Current wording

Acquisitions. During the six months ended June 30, 2024, we expanded our operations with the addition of four home health agencies, two hospice agencies, and three senior living communities. A subsidiary of the Company entered into a separate operations transfer agreement with the prior operator of each acquired operation as part of each transaction.

Previous wording

We have experienced modest senior living occupancy improvement through the three months ended March 31, 2024, as a result of renewed consideration of senior living communities as a home-based care setting as the negative impacts of the global pandemic have subsided. Though we have seen steady improvements in occupancy throughout 2023 and the first quarter of 2024, the highly competitive environment for senior living residents and inflationary factors will continue to impact the rate at which we return our occupancy levels in our senior living communities to pre-pandemic levels.

Current wording

We have experienced modest senior living occupancy improvement for the six months ended June 30, 2024, compared to the same period in 2023. Though we have seen improvements in occupancy year over year, the highly competitive environment for senior living residents and inflationary factors will continue to impact the rate at which increase our occupancy levels in our senior living communities.

Previous wording

On March 28, 2024, CMS issued the 2025 Hospice Payment Rate Update proposed rule (the “Hospice Payment Proposed Rule”). The Hospice Payment Proposed Rule’s payment update percentage is 2.6%, which is an estimated increase of $705 million in payments from fiscal year 2024. The payment update percentage is based on a 3.0% market basket percentage increase, which is reduced by a 0.4% productivity adjustment. Hospices that fail to meet quality reporting requirements will receive a 4% reduction to the annual hospice payment update percentage increase for that year, which would more than negate the payment update percentage for fiscal year 2025 contained in the Hospice Payment Proposed Rule for hospices that fail to submit required quality reporting data to CMS. In addition, the Hospice Payment Proposed Rule updates the statutory aggregate cap that limits the overall payments per patient that may be made to a hospice annually. The proposed hospice cap amount for the 2025 fiscal year is $34,364.85. The Hospice Payment Proposed Rule also proposes clarifying revisions to the hospice conditions of payment, proposes to update statistical area delineations, and solicits comments regarding a proposed separate payment mechanism for certain high-intensity hospice palliative care services. As this is a proposed rule, the final rule that is expected later in 2024 may contain significant changes, or even remove, the provisions contained within the Hospice Payment Proposed Rule.

Current wording

On July 31, 2024, CMS issued the 2025 Hospice Payment Rate Update final rule (the “Hospice Payment Final Rule”). The Hospice Payment Final Rule’s payment update percentage is 2.9%, which is an estimated increase of $790 million in payments from fiscal year 2024. The payment update percentage is based on a 3.4% market basket percentage increase, which is reduced by a 0.5% productivity adjustment. Hospices that fail to meet quality reporting requirements under the Hospice Quality Reporting Program (HQRP) will receive a 4% reduction to the annual hospice payment update percentage increase for that year. Such a reduction would more than negate the payment update percentage for fiscal year 2025 contained in the Hospice Payment Final Rule for hospices that fail to submit required quality reporting data to CMS. The Hospice Payment Final Rule also adds two new process measures to HQRP, timely reassessment of pain impact, and timely reassessment of non-pain symptom impact, which are both expected to begin in fiscal year 2028. In addition, the Hospice Payment Final Rule updates the statutory aggregate cap that limits the overall payments per patient that may be made to a hospice annually. The hospice cap amount for the 2025 fiscal year is $34,465.34. The Hospice Payment Final Rule also includes clarifying revisions to the hospice conditions of participation; updates statistical area delineations; and makes changes to the Consumer Assessment of Healthcare Providers and Systems (CAHPS) Hospice Survey.

Previous wording

On April 22, 2024, CMS published the Ensuring Access to Medicaid Services (the “Access Rule”) which creates new obligations for providers of home- and community-based services (“HCBS”), including non-skilled personal care services in the home. The Access Rule requires that, beginning in 2030, states must implement data collection and monitoring systems to ensure that, subject to exceptions, Medicaid-funded HCBS providers spend at least 80% of their Medicaid HCBS reimbursement on compensation for direct care workers, as opposed to administrative overhead or profits. The Access Rule further requires states to establish hardship exemptions and separate requirements for small providers. The Company anticipates potential changes to the Access Rule, or offsetting Medicaid rate increases, before its ultimate implementation in six years.

Current wording

On April 22, 2024, CMS published the Ensuring Access to Medicaid Services (the “Access Rule”) which creates and, over the course of five years, implements new obligations for providers of home- and community-based services (“HCBS”), including non-skilled personal care services in the home. The Access Rule requires that, beginning in 2030, states must implement data collection and monitoring systems to ensure that, subject to exceptions, Medicaid-funded HCBS providers spend at least 80% of their Medicaid HCBS reimbursement on compensation for direct care workers, as opposed to administrative overhead or profits. The Access Rule further requires states to establish a grievance system for addressing services provided in the fee-for-service context, publish fee-for-service payment rates paid by Medicaid, publish the average hourly rate paid to HCBS care providers, and develop hardship exemptions and separate requirements for small providers. The Company anticipates potential changes to the Access Rule, or offsetting Medicaid rate increases, before its ultimate implementation in six years.

Previous wording

We have two reportable segments: (1) home health and hospice services, which includes our home health, home care and hospice businesses; and (2) senior living services, which includes the operation of assisted living, independent living and memory care communities. Our Chief Executive Officer, who is our Chief Operating Decision Maker (“CODM”), reviews financial information at the operating segment level. We also report an “all other” category that includes general and administrative expense from our Service Center.

Current wording

We have two reportable segments: (1) home health and hospice services, which includes our home health, home care and hospice businesses; and (2) senior living services, which includes the operation of assisted living, independent living and memory care communities. Our Chief Executive Officer, who is our CODM, reviews financial information at the operating segment level. We also report an “all other” category that includes general and administrative expense from our Service Center.

Previous wording

CMS has established a two-tiered payment system for RHC. Hospices are reimbursed at a higher rate for RHC services provided from days of service one through 60 and a lower rate for all subsequent days of service. CMS also provides for a Service Intensity Add-On, which increases payments for certain RHC services provided by registered nurses and social workers to hospice patients during the final seven days of life.

Current wording

CMS has established a two-tiered payment system for RHC services. Hospices are reimbursed at a higher rate for RHC services provided from days of service one through 60 and a lower rate for all subsequent days of service. CMS also provides for a Service Intensity Add-On, which increases payments for certain RHC services provided by registered nurses and social workers to hospice patients during the final seven days of life.

Previous wording

Senior Living Services. As of March 31, 2024, we provided assisted living, independent living and memory care services in 53 communities. Within our senior living operations, we generate revenue primarily from private pay sources, with a portion earned from Medicaid or other state-specific programs.

Current wording

Senior Living Services. As of June 30, 2024, we provided assisted living, independent living and memory care services in 54 communities. Within our senior living operations, we generate revenue primarily from private pay sources, with a portion earned from Medicaid or other state-specific programs.

Previous wording

The following table presents our consolidated GAAP Financial measures for the three months ended March 31, 2024 and 2023:

Current wording

The following table presents our consolidated GAAP Financial measures for the three and six months ended June 30, 2024 and 2023:

Previous wording

Depreciation and Amortization. Depreciation and amortization expense was essentially flat.

Current wording

Depreciation and Amortization. Depreciation and amortization expense remained consistent with the comparable period.

Previous wording

Provision for Income Taxes. We recorded income tax expense of $1.8 million and $0.9 million, or 25.8% and 31.2% of earnings before income taxes, for the three months ended March 31, 2024 and 2023, respectively. The decrease in the effective tax rate is primarily due to the increase in deductible equity compensation.

Current wording

Provision for Income Taxes. We recorded income tax expense of $1.8 million and $1.9 million or 23.2% and 39.7% of earnings before income taxes for the three months ended June 30, 2024 and 2023, respectively. The decrease in the effective tax rate is primarily due to the non-deductibility of equity compensation of certain executives in the prior year.

Previous wording

Our total revenue increased $30.5 million, or 24.1%, during the three months ended March 31, 2024. The increase in revenue was driven by increases in key metrics for home health and hospice and senior living, including hospice admissions, hospice revenue per day, hospice average daily census, senior living occupancy, and senior living revenue per occupied room.

Current wording

Our total revenue increased $66.9 million, or 25.9%, during the six months ended June 30, 2024. The increase in revenue was driven by increases in key metrics for home health and hospice and senior living, including hospice admissions, hospice revenue per day, hospice average daily census, senior living occupancy, and senior living revenue per occupied room.

Previous wording

Home health and hospice revenue increased $25.4 million, or 27.9% during the three months ended March 31, 2024 compared to the same period in the prior year primarily due to an increase in hospice average daily census of 21.4%, an increase of 34.3% in home health admissions, inclusive of an increase in total Medicare home health admissions of 28.3%, and an increase of 25.7% in hospice admissions. The addition of sixteen home health and hospice operations between March 31, 2023 and March 31, 2024, added revenue of $12.8 million or 14.1%.

Current wording

Home health and hospice revenue increased $55.7 million, or 29.9% during the six months ended June 30, 2024 compared to the same period in the prior year primarily due to an increase in hospice average daily census of 25.3%, an increase of 34.8% in home health admissions, inclusive of an increase in total Medicare home health admissions of 23.3%, and an increase of 28.5% in hospice admissions. The addition of sixteen home health and hospice operations between June 30, 2023 and June 30, 2024, added revenue of $29.0 million, or 15.6%.

Previous wording

Senior living revenue increased $5.0 million, or 14.2%, for the three months ended March 31, 2024 compared to the same period in the prior year primarily due to an increase of 8.5% in average monthly revenue per occupied unit and an increase of 40 basis points in the occupancy rate between March 31, 2023 and March 31, 2024. The acquisition of two senior living communities between March 31, 2023 and March 31, 2024, added $1.5 million or 4.1% in revenue.

Current wording

Senior living revenue increased $11.2 million, or 15.4%, for the six months ended June 30, 2024 compared to the same period in the prior year primarily due to an increase of 8.6% in average monthly revenue per occupied unit and an increase of 60 basis points in the occupancy rate between June 30, 2023 and June 30, 2024. The acquisition of three senior living communities between June 30, 2023 and June 30, 2024, added $4.7 million, or 6.5%, in revenue.

Previous wording

Consolidated cost of services increased $23.4 million, or 22.8%, during the three months ended March 31, 2024 compared to the same period in the prior year. Cost of services as a percentage of revenue for the three months ended March 31, 2024 decreased by 80 basis points to 80.3% from 81.1% compared to the three months ended March 31, 2023.

Current wording

Consolidated cost of services increased $52.5 million, or 25.2%, during the six months ended June 30, 2024 compared to the same period in the prior year. Cost of services as a percentage of revenue for the six months ended June 30, 2024 decreased by 50 basis points to 80.2% from 80.7% compared to the six months ended June 30, 2023.

Previous wording

Cost of services related to our Home Health and Hospice services segment increased $19.9 million, or 25.7%, compared to the same period in the prior year primarily due to the increased volume of services from the growth in admissions and average daily census. Cost of services as a percentage of revenue for the three months ended March 31, 2024 decreased by 150 basis points compared to the three months ended March 31, 2023 primarily due to decreased wages and benefits as a percent of revenue.

Current wording

Cost of services related to our Home Health and Hospice services segment increased $44.4 million, or 28.2%, compared to the same period in the prior year primarily due to the increased volume of services from the growth in admissions and average daily census. Cost of services as a percentage of revenue for the six months ended June 30, 2024 decreased by 110 basis points compared to the six months ended June 30, 2023 primarily due to decreased wages and benefits as a percent of revenue.

Previous wording

Cost of services related to our Senior Living services segment increased $3.5 million, or 13.8%, during the three months ended March 31, 2024 compared to the same period in the prior year primarily due to higher occupancy and wage rate increases. As a percentage of revenue, costs of service decreased by 30 basis points during the three months ended March 31, 2024 when compared to the three months ended March 31, 2023.

Current wording

Cost of services related to our Senior Living services segment increased $8.1 million, or 15.9%, during the six months ended June 30, 2024 compared to the same period in the prior year primarily due to higher occupancy and wage rate increases. As a percentage of revenue, costs of service increased by 30 basis points during the six months ended June 30, 2024 when compared to the six months ended June 30, 2023.

Previous wording

Rent—Cost of Services. Rent increased 8.2% from $9.6 million to $10.4 million during the three months ended March 31, 2024 compared to the same period in the prior year, primarily as a result of the newly acquired senior living communities. As a percentage of revenue, rent—cost of services decreased 100 basis points when compared to the three months ended March 31, 2023 due to improved senior living performance.

Current wording

Rent—Cost of Services. Rent increased 7.6% from $19.4 million to $20.9 million during the six months ended June 30, 2024 compared to the same period in the prior year, primarily as a result of the new leases on the acquired home health and hospice operations and senior living community. As a percentage of revenue, rent—cost of services decreased 110 basis points when compared to the six months ended June 30, 2023 due to improved senior living performance.

Previous wording

General and Administrative Expense. Our general and administrative expense increased $2.7 million, or 31.4%, from $8.7 million to $11.4 million for the three months ended March 31, 2024 when compared to the three months ended March 31, 2023. The increase in general and administrative expense was due to an increase of $2.2 million in payroll and related benefits, for the three months ended March 31, 2024 when compared to the three months ended March 31, 2023.

Current wording

General and Administrative Expense. Our general and administrative expense increased $5.8 million, or 33.3%, from $17.5 million to $23.3 million for the six months ended June 30, 2024 when compared to the six months ended June 30, 2023. The increase in general and administrative expense was due to an increase of $2.2 million in payroll and related benefits, for the six months ended June 30, 2024 when compared to the six months ended June 30, 2023.

Previous wording

Gain on disposition of property and equipment, net. We recorded a gain of $0.8 million for insurance proceeds received in excess of the carrying values of related assets during the three months ended March 31, 2024. No gain on disposition of property and equipment was recorded during the three months ended March 31, 2023.

Current wording

Gain on disposition of property and equipment, net. We recorded a gain of $0.8 million for insurance proceeds received in excess of the carrying values of related assets during the six months ended June 30, 2024. No gain on disposition of property and equipment was recorded during the six months ended June 30, 2023.

Previous wording

As of March 31, 2024, we had $2.7 million of cash and $61.6 million of available borrowing capacity on our Revolving Credit Facility.

Current wording

As of June 30, 2024, we had $3.0 million of cash and $62.8 million of available borrowing capacity on our Revolving Credit Facility. As described in Note 11, Debt, to the Interim Financial Statements in Part I of this Quarterly Report, on July 31, 2024, Pennant entered into an amendment to the Credit Agreement which provides for a revolving credit facility with a borrowing capacity of $250,000.

Previous wording

We believe that our existing cash, cash generated through operations, and access to available borrowing capacity under our existing Credit Agreement, will be sufficient to provide adequate liquidity for the next twelve months for our operating activities and for opportunities of acquisition growth.

Current wording

We believe that our existing cash, cash generated through operations, and access to available borrowing capacity under our Amended Credit Agreement, will be sufficient to provide adequate liquidity for the next twelve months for our operating activities and for opportunities of acquisition growth.

Previous wording

Our net cash flow from operating activities for the three months ended March 31, 2024 decreased by $8.5 million when compared to the three months ended March 31, 2023. The primary driver of this difference was a decrease in cash flows from the change in operating assets and liabilities of $10.5 million net and a decrease of $1.0 million in non-cash expenses partially offset by an increase in Net income of $3.1 million.

Current wording

Our net cash flow from operating activities for the six months ended June 30, 2024 decreased by $4.5 million when compared to the six months ended June 30, 2023. The primary driver of this difference was a decrease in cash flows from the change in operating assets and liabilities of $8.0 million, net, and a decrease of $2.7 million in non-cash expenses, partially offset by an increase in net income of $6.2 million.

Previous wording

Our net cash used in investing activities for the three months ended March 31, 2024 increased by $21.3 million compared to the three months ended March 31, 2023, primarily driven by an increase in business and asset acquisitions.

Current wording

Our net cash used in investing activities for the six months ended June 30, 2024 increased by $22.1 million compared to the six months ended June 30, 2023, primarily driven by an increase in business and asset acquisitions.

Previous wording

Our net cash used in financing activities increased by approximately $25.6 million for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. The increase was primarily due to a net increase in the balance on our line of credit during the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

Current wording

Our net cash used in financing activities increased by approximately $22.8 million for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. The increase was primarily due to a net increase in the balance on our line of credit during the six months ended June 30, 2024 compared to the six months ended June 30, 2023.