Tallgrass Economics Finance & Politics
February 4, 2023
THE ENSIGN GROUP 4TH QUARTER REPORT: MARVELOUS IF YOU ARE AN INVESTOR (BUT NOT IF YOU ARE AN EMPLOYEE AND/OR A TAXPAYER).
[This the most recent blog posted by Dave Kingsley, a principal with Tallgrass Economics Finance & Politics.]
As I noted a couple of days ago, The Ensign Group (Ensign) was scheduled to release its 4th quarter financial report and hold a conference call. They did that. This blog post will provide a basic overview of their 4th quarter and annual results. I will be reporting on the Centene Corporation and the real estate investment trusts in the weeks ahead.
It is important to note that the late Roy Christensen, Ensign founder, and current/past Ensign executives were and are very sophisticated financiers. Christensen founded Beverly Enterprises in the 1960s, sold it, and taught business at Brigham Young University until he founded the Ensign Group in 1999. Most Ensign executives and board members have an association with the Marriot School of Business at BYU. There is no other nursing home corporation like the complexly organized Ensign. It is becoming increasingly complex to the advantage of shareholders and executives but apparently not to taxpayers, patients, and employees (as I will demonstrate below).
Highlights of Ensign 4th Quarter Results
- Earnings per share of $4.14 – an increase of 13.7% over the prior year.
- Earnings per share for the quarter of $1.06 – an increase of 23.3%.
- Consolidated revenues for the year were $3.025 billion – an increase of 398.5 million or 15.1% over the prior year.
- Net income was $60.5 million for the quarter – an increase of 24.1% over the prior year quarter.
- For the year, adjusted net income was $235.7 million – an increase of 13.8% over the prior year. Given an annual 2022 revenue of 3.025 billion and a net income of $235.7 million, percent net income was 7.8%. However, Earnings Before Interest, Taxes, Depreciation & Amortization EBITDA – a more important cash flow statistic – was $383.5 million or 12.6%).
- The company’s liquidity is increasingly strong with $316 million in cash and cash equivalents on its balance sheet and a $593.3 million line of credit.
It’s All About the Real Estate
Quarterly reports, annual reports, and proxy statements can become eye glazing for the public. The way we need to look at Ensign and the rest of the nursing home industry is this: Medicaid and Medicare (mostly Medicaid) provide revenue that sustains a real estate industry. Hence, direct care services are robbed for the sake of shareholder interests.
In the past couple of decades, tax code adjustments have resulted in a financial transformation of long-term and skilled nursing business. Limited liability entities, private equity firms, real estate investment trusts, and individual/family trusts have blossomed like tulips in Springtime. Ensign is a cutting-edge bellwether of financialization, and the tax arbitrage associated with it. Let’s take the separation of property from operations (OPCO/PROPCO). Property has been increasingly separated into separate subsidiaries of parent corporations or sold to REITs and leased back. However, Ensign has upped that game. The following indicates the segmentation of the company into separate entities – most of which were not discussed in the quarterly report.
The above graphic does not include a couple of later entities – Standard Bearer (a captive REIT) and a captive insurance company. A spinoff has tax advantages for shareholders. Added advantages for Ensign in its spinoff of property into CareTrust REIT include avoidance of capital gains taxes and increased corporate assets/value. CareTrust is an “umbrella partnership real estate investment trust,” otherwise known as an UPREIT. By transferring property to an UPREIT, rather than selling it, capital gains taxes are avoided, the transferee receives “operating units” (OPUs), and receives returns from the triple net leases to other nursing homes (under triple net leases, leasees pay insurance, maintenance, and taxes – what a deal!).
As the above diagram indicates, Ensign undertook a spinoff in 2016 by spinning out its assisted living facilities into the Pennant Group – an Ensign spinoff. Ensign leases property to the Pennant Group and retains a major share of the stock. This model illustrates the OPCO/PROPCO set up in which property becomes a tradable commodity rather than a necessary tool for producing care. Finance dominates production.
Financialization throughout the U.S. economy has dampened economic growth. Furthermore, stagnant wages, a diminishing upwardly mobile middle-income class, wealth transfer to super-rich individuals and corporations, and a low-wage underclass are due to the separation of finance from productivity. Nowhere is that phenomenon more apparent than in the U.S. government-funded healthcare system. The massive real estate substrate of industrialized medical care is draining resources from care. There is no rational justification for exceedingly low pay, and poor care when so few are making so much from the trillions of dollars poured by Americans into the health care system.
From a financial and technical perspective, this post has been somewhat superficial. Nevertheless, we need to outline the overall financialized, industrialized, government-funded U.S. healthcare system and have a very serious public conversation about how the hardworking and patriotic people of the U.S. are being fleeced. I will be clarifying and filling in the concepts that I have introduced in this post. In the future you will see more regarding UPREITs and OPUs, shell companies (Ensign has over 400 subsidiaries, all are LLCs, all incorporated in Nevada), and other financial machinations that are robbing American taxpayers.
Listen to the conference call and download the text of the call
 For a very good discussion of REITs, Financialization, and nursing homes, see Rosemary Batt & Eileen Applebaum (July 9th, 2022), “The Role of Public REITs in Financialization and Industry Restructuring.” Working Paper No. 189. Washington, D.C.: Institute for New Economic Thinking.
 A REIT with the property of only one corporation – The Ensign Group in this case.
 An insurance company that underwrites only the entity that incorporates it.
 For a very good discussion of financialization, see: Rana Foroohar (2017), Makers and Takers: How Wall Street Destroyed Main Street. New York: Crown Publishing.
Visit the Tall Grass Economics website.
United States Government Accountability Office
February 3, 2023
[Editor’s note: The Consumer Voice provided the following text.]
On Thursday, February 3, 2023, the Government Accountability Office (GAO) released a new report, “Nursing Homes: CMS Should Make Ownership Information More Transparent for Consumers,” finding fault with how the Centers for Medicare & Medicaid Services (CMS) currently provides information to consumers regarding nursing home ownership. The report noted that ample evidence demonstrated that different ownership types often lead to disparate health outcomes for nursing home residents. For instance, non-profit homes generally perform better on measures of quality than for-profit nursing homes. The GAO report acknowledged these differences in care quality and emphasized the importance of accurate and accessible ownership interests to consumers.
The report’s primary focus was on how CMS provides ownership information on its Care Compare website. Echoing concerns of Consumer Voice and other advocates, the GAO report found that CMS:
- Was not providing information in plain language with clear graphics. For instance, the GAO noted terms such as “5% owners or greater indirect ownership interest” and “operational/managerial control.” These terms are vague and undefined and not easily understandable to consumers.
- Failed to organize information to highlight patterns. The GAO report found that “the presentation of ownership information on Care Compare does not allow consumers to easily identify relationships and patterns related to quality across nursing homes under common ownership.”
- Did not explain the purpose and value of ownership information on Care Compare. Nowhere on Care Compare is there an explanation of how the type of ownership may result in worse care. This absence of an explanation may result in consumers overlooking its importance.
- Did not disclose the key strengths and limitations of the data. This failure is significant because, as noted by the GAO, nursing home ownership data is often incomplete and inaccurate. CMS admitted in the report that the ownership structures for some nursing homes are so nebulous that they are sometimes unable to ascertain who owns a nursing home. Despite this fact, CMS does not disclose the unreliability of the data to the public on Care Compare.
The GAO report made two recommendations:
- Use plain language to define key terms in the ownership section of Care Compare.
- Organize ownership information by providing consumers easy access to a list of all facilities under common ownership, their respective star ratings, and a distribution of star ratings across nursing homes with common ownership to allow consumers to examine quality patterns across such facilities.
CMS concurred with both recommendations. Additionally, the Biden Administration announced last year that it would address the issue of inaccurate and incomplete ownership information and take steps to make ownership data available to consumers. The GAO report noted that CMS had taken some steps to release more ownership data, but CMS admitted this data was for researchers and not consumers. However, CMS has promised more action to ensure access to residents and their families.
Consumer Voice has long advocated for all consumers to have access to reliable and relevant ownership information for individual nursing homes with care quality information for all nursing homes under common ownership. When deciding on a nursing home, residents and their families must have access to ownership data that is reliable and accurate. It is currently impossible to easily access care quality information across nursing homes with common owners. Further, until CMS ensures that ownership information for all nursing homes is accurate, the system’s utility, as a whole, will be undermined.
While the GAO report finds fault with CMS’ current system of providing nursing home ownership information, Consumer Voice has been encouraged by the steps the agency has taken over the past year. Nevertheless, CMS has significant work to do to realize the goals announced by President Biden and laid out in the GAO report.