Part III of this Form 10-K incorporates information by reference from the Registrant's definitive proxy statement for the Registrant's 2019 Annual Meeting of Stockholders to be filed within 120 days after the close of the fiscal year covered by this annual report.

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Shift of Patient Care to Lower Cost Alternatives. The growth of the senior population in the United States continues to increase healthcare costs, often faster than the available funding from government-sponsored healthcare programs. In response, federal and state governments have adopted cost-containment measures that encourage the treatment of patients in more cost-effective settings such as skilled nursing facilities, for which the staffing requirements and associated costs are often significantly lower than acute care hospitals, and other post-acute care settings. As a result, skilled nursing facilities are generally serving a larger population of higher-acuity patients than in the past.

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Significant Acquisition and Consolidation Opportunities. The skilled nursing industry is large and highly fragmented, characterized predominantly by numerous local and regional providers. Due to the increasing demands from hospitals and insurance carriers to implement sophisticated and expensive reporting systems, we believe this fragmentation provides significant acquisition and consolidation opportunities for us.

•	Improving Supply and Demand Balance. The number of skilled nursing facilities has declined modestly over the past several years. We expect that the supply and demand balance in the skilled nursing industry will continue to improve due to the shift of patient care to lower cost settings, an aging population and increasing life expectancies.

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Increased Demand Driven by Aging Populations. As seniors account for an increasing percentage of the total U.S. population, we believe the demand for skilled nursing and senior living services will continue to increase. According to the census projection released by the U.S. Census Bureau in early 2018, between 2010 and 2030, the number of individuals over 65 years old is projected to be one of the fastest growing segments of the United States population, growing from 13% to 21%. The Bureau expects this segment to increase nearly 90% to 73 million, as compared to the total U.S. population which is projected to increase by 17% over that time period. Furthermore, the generation currently retiring has accumulated less savings than prior generations, creating demand for more affordable senior housing and skilled nursing services. As a high quality provider in lower cost settings, we believe we are well-positioned to benefit from this trend.

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Transition to Value-Based Payment Models. In response to rising healthcare spending in the United States, commercial, government and other payors are generally shifting away from fee-for-service payment models towards value-based models, including risk-based payment models that tie financial incentives to quality, efficiency and coordination of care. We believe that patient-centered outcomes driven reimbursement models will continue to grow in prominence. Many of our operations already receive value-based payments, and as valued-based payment systems continue to increase in prominence, it is our view that our strong clinical outcomes will be increasingly rewarded.

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Accountable Care Organizations and Reimbursement Reform. A significant goal of U.S. federal health care reform is to transform the delivery of health care by changing reimbursement to reflect and support the quality and safety of care that providers deliver, increase efficiency, and reduce growth in spending. Reimbursement models that provide financial incentives to encourage efficiency, affordability, and high-quality care have been developed and implemented by government and commercial third-party payers. The most prolific of these models, the Accountable Care Organization (ACO) model, incentivizes groups of providers to share in savings that are achieved through the coordination of care and chronic disease management of an assigned patient population.  Reimbursement methodology reform includes Value-Based Purchasing (VBP), in which a portion of provider reimbursement is redistributed based on relative performance, or improvement on designated economic, clinical quality, and patient satisfaction metrics.  In addition, CMS has implementing Episode-based demonstration, voluntary and mandatory payment initiatives that bundle acute care and post-acute care reimbursement. These bundled payment models incentivize cross-continuum care coordination and include financial and performance accountability for episodes of care. These reimbursement methodologies and similar programs are likely to continue and expand, both in government and commercial health plans. Many of our operations already participate in ACOs. With our focus on quality care and strong clinical outcomes, Ensign is well-positioned to benefit from these outcome-based payment models.

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•	ability to attract and to retain qualified management and caregivers;

•	reputation and achievements of quality healthcare outcomes;

•	attractiveness and location of facilities;

•	the expertise and commitment of the management team and employees; and

•	community value, including amenities and ancillary services.

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•	In 2015, changes include the use of antipsychotics in calculating the star ratings, modified calculations for staffing levels and reflect higher standards for nursing homes to achieve a high rating on the quality measure dimension.

•	In 2016, the addition of six new quality measures to the Nursing Home Five-Star Quality Ratings, including the rate of hospitalization, emergency room use, community discharge, improvements in function, independently worsened and anxiety or hypnotic medication among nursing home residents.

•	In 2018, (i) a freeze of the Health Inspection Five Star Ratings; (ii) the addition of Payroll Based Journals (PBJ) data to calculate the staffing ratings in the Nursing Home Five Star Quality Rating System; and (iii) the addition of two claims data measures: Medicare spending per beneficiary and rate of successful return to home or community from a skilled nursing facility for quality measures.

•	In 2019, (i) the addition of separate ratings for short stay and long stay care; (ii) changes in staffing thresholds; and (iii) modifications to put more emphasis on registered nurse (RN) staffing, including a set rating for nursing homes that report four or more days in the quarter with no RN on site.

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•	administrative or legislative changes to base rates or the bases of payment;

•	limits on the services or types of providers for which Medicare will provide reimbursement;

•	changes in methodology for patient assessment and/or determination of payment levels;

•	the reduction or elimination of annual rate increases (See also, Item 1., Government Regulation); or

•	an increase in co-payments or deductibles payable by beneficiaries.

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Transition to a new reimbursement model. There is a short-term risk related to decreased accuracy due to the inherent learning curve associated with the implementation of a new reimbursement system and the corresponding process changes required to ensure that all the clinical conditions affecting the patient are accurately captured. During the initial transition from RUG IV to PDPM, it is possible that providers may not capture all aspects of a patient’s condition, resulting in lower reimbursement under PDPM. However, this risk should subside over time as providers gain experience with the new system.

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Future reimbursement levels. The final rule indicates that payments under PDPM will be budget neutral. CMS has made assumptions in the final rule as to the comparison of payments under RUG-IV to PDPM in fiscal year 2020. This estimate determined that a parity adjustment would be required to increase PDPM payments to bring them equal to what they would have been under RUG-IV payments. This increase, for fiscal year 2020, would achieve budget neutrality. However, the risk to providers is that going forward from fiscal year 2020 a lower parity adjustment could be applied to recapture any exceptional overpayments to providers caused by overestimating the parity adjustment. With the increased focus on therapy utilization under RUGs IV, there is concern as to the accuracy of the parity adjustment and how closely it will reflect the data that will be captured under PDPM where the focus is on the clinical condition of the patient in lieu of resource utilization. In addition, the entire parity adjustment could be removed by CMS and this would cause a drastic reduction in payments.

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Medicare Managed Care Programs and Rates. The introduction of PDPM could pose an indirect risk on existing Medicare Managed Care Plans. For example, many of the Medicare Managed Care Plans have relied upon the existing RUG-IV rates to set their own rates. Medicare Managed Care Plan contracts with providers may even make reference to RUG-IV rates. With the implementation of PDPM, CMS will no longer support the RUG-IV system after fiscal year 2020. This will leave providers to negotiate individual Medicare Managed Care reimbursement rates not based on the traditional Medicare Part A program. The risk is that the Medicare Managed Care Plans could negotiate much lower reimbursement rates and or leave providers without a contract for their Medicare Managed Care patients because the reimbursement rates would be too low to cover the cost of care.

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Impact on Medicaid Reimbursement. Various state Medicaid programs have used data collected using the MDS based on RUG-IV. With the shift to PDPM, some or all of that data will no longer be collected by CMS and made available to the states. In addition, CMS has notified state Medicaid programs that they will no longer support the RUG-IV system after fiscal year 2020 and recommended that states make changes to their Medicaid reimbursement programs to accommodate the upcoming changes. Consequently, there is a risk to providers that states may not have sufficient time to address the changes required to transition to a different Medicaid reimbursement methodology. We may be adversely affected by the rates at which our services are reimbursed by state Medicaid plans.

•	Imposed new reporting obligations on SNFs, requiring them to (i) disclose information regarding ownership, expenditures and certain other information, and (ii) electronically submit verifiable data on direct care staffing.

•	Sought to address potential fraud and abuse in federal healthcare programs by, among other things, (i) implementing screenings and enhanced oversight periods for new providers and suppliers, (ii) providing enhanced penalties for

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•	Gave authority to United States Department of Health and Human Services (HHS) to establish, test and evaluate alternative payment methodologies for Medicare services, many of which have been developed, focusing on incentives for providers to coordinate patient care across the continuum and to be jointly accountable for an entire episode of care centered around a hospitalization.

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Working to improve the healthcare delivery system through incentives to enhance quality, improve beneficiary outcomes and increase value of care, with one of these key delivery system reforms being the encouragement of ACOs to facilitate coordination and cooperation among providers to improve the quality of care for Medicare beneficiaries and reduce unnecessary costs. Participating ACOs that meet specified quality performance standards are eligible to receive a share of any savings if the actual per capita expenditures of their assigned Medicare beneficiaries are a sufficient percentage below their specified benchmark amount.

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Required HHS to develop a plan to implement a value-based purchasing program for Medicare payments to skilled nursing facilities, including measures and performance standards regarding preventable hospital readmissions. As part of this program, the skilled nursing facility value-based purchasing (SNF VBP) program rewards skilled nursing facilities with incentive payments based on the quality of care they provide to Medicare beneficiaries, as measured by a hospital readmissions measure. CMS withholds 2% of skilled nursing facilities’ fee-for-service Part A Medicare payments to fund the program, referred to as the “withhold.” CMS then redistributes 60% of the withhold to skilled nursing facilities as incentive payments.

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•	an obligation to refund amounts previously paid to us pursuant to the Medicare or Medicaid programs or from private payors, in amounts that could be material to our business;

•	state or federal agencies imposing fines, penalties and other sanctions on us;

•	loss of our right to participate in the Medicare or Medicaid programs or one or more private payor networks;

•	an increase in private litigation against us; and

•	damage to our reputation in various markets.

•	cost reporting and billing practices;

•	quality of care;

•	financial relationships with referral sources; and

•	medical necessity of services provided.

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•	licensure and certification;

•	adequacy and quality of healthcare services;

•	qualifications of healthcare and support personnel;

•	quality of medical equipment;

•	confidentiality, maintenance and security issues associated with medical records and claims processing;

•	relationships with physicians and other referral sources and recipients;

•	constraints on protective contractual provisions with patients and third-party payors;

•	operating policies and procedures;

•	addition of facilities and services; and

•	billing for services.

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•	we experience higher-than-expected professional liability, property and casualty, or other types of claims or losses;

•	we receive survey deficiencies or citations of higher-than-normal scope or severity;

•	we acquire especially troubled operations or facilities that present unattractive risks to current or prospective insurers;

•	insurers tighten underwriting standards applicable to us or our industry; or

•	insurers or reinsurers are unable or unwilling to insure us or the industry at historical premiums and coverage levels.

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•	our Board of Directors is authorized, without prior stockholder approval, to create and issue preferred stock, commonly referred to as “blank check” preferred stock, with rights senior to those of common stock;

•	advance notice requirements for stockholders to nominate individuals to serve on our Board of Directors or to submit proposals that can be acted upon at stockholder meetings;

•	our Board of Directors is classified so not all members of our board are elected at one time, which may make it more difficult for a person who acquires control of a majority of our outstanding voting stock to replace our directors;

•	stockholder action by written consent is limited;

•	special meetings of the stockholders are permitted to be called only by the chairman of our Board of Directors, our chief executive officer or by a majority of our Board of Directors;

•	stockholders are not permitted to cumulate their votes for the election of directors;

•	newly created directorships resulting from an increase in the authorized number of directors or vacancies on our Board of Directors are filled only by majority vote of the remaining directors;

•	our Board of Directors is expressly authorized to make, alter or repeal our bylaws; and

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•	stockholders are permitted to amend our bylaws only upon receiving the affirmative vote of at least a majority of our outstanding common stock.

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they are widely used by investors and analysts in our industry as a supplemental measure to evaluate the overall performance of companies in our industry without regard to items such as interest expense, net and depreciation and amortization, which can vary substantially from company to company depending on the book value of assets, capital structure and the method by which assets were acquired; and

•	they help investors evaluate and compare the results of our operations from period to period by removing the impact of our capital structure and asset base from our operating results.

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•	as measurements of our operating performance to assist us in comparing our operating performance on a consistent basis;

•	to allocate resources to enhance the financial performance of our business;

•	to assess the value of a potential acquisition;

•	to assess the value of a transformed operation's performance;

•	to evaluate the effectiveness of our operational strategies; and

•	to compare our operating performance to that of our competitors.

•	they do not reflect our current or future cash requirements for capital expenditures or contractual commitments;

•	they do not reflect changes in, or cash requirements for, our working capital needs;

•	they do not reflect the net interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

•	they do not reflect rent expenses, which are necessary to operate our leased operations, in the case of Adjusted EBITDAR;

•	they do not reflect any income tax payments we may be required to make;

•	although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and do not reflect any cash requirements for such replacements; and

•	other companies in our industry may calculate these measures differently than we do, which may limit their usefulness as comparative measures.

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•	results related to closed operations and operations not at full capacity;

•	results related to start-up operations;

•	return of unclaimed class action settlement funds;

•	charges related to the settlement of the class action lawsuit and insurance claims;

•	share-based compensation expense;

•	expenses incurred in connection with the completed spin-off transaction;

•	gain on sale and impairment charges on fixed assets;

•	impairment of intangible assets and goodwill;

•	acquisition related costs;

•	business interruption recoveries and losses;

•	bonus accrual as a result of the Tax Act;

•	operating results and gain on sale of urgent care centers;

•	costs incurred related to system implementation and professional service fee and

•	breakup fee, net of costs, received in connection with a public auction

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(a)

Represents results at closed operations and operations not at full capacity during the years ended December 31, 2019, 2018, 2017, and 2016 including the fair value of continued obligation under the lease agreement and related closing expenses of $4.0 million and $7.9 million for the years ended December 31, 2017 and 2016, respectively. Included in the year ended December 31, 2017 results is the loss recovery of $1.3 million of certain losses related to a closed facility in 2016.

(b)	Represents results related to facilities currently in the start up phase after construction was completed. This amount excludes rent, depreciation and interest expense.

(c)	Costs incurred in connection with the completed Spin-Off transaction of our home health and hospice operations and substantially all of our senior living operations to a newly formed publicly traded company. Transaction costs incurred prior to Spin-Off date are included in discontinued operations as an adjustment.

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(d)	Costs incurred to acquire operations which are not capitalizable.

(e)	Costs incurred related to systems implementation and professional fees associated with income tax credits, tax reform impacts and adoption of the new revenue recognition standard; and expenses incurred in connection with the stock-split effected in December 2015.

(f)	Break-up fee, net of costs, received in connection with a public auction in which we were the priority bidder.

(g)	Impairment charges, net of gain on sale, to fixed assets includes a gain recognized for the sale of land of $2.9 million, offset by impairment charges to fixed assets at two of our senior living operations and one of our skilled nursing operation of $3.2 million during the year ended December 31, 2019.

(h)	Impairment charges to goodwill and intangible assets during the year ended December 31, 2019 and 2018.

Item 7.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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•	Ensign, which includes skilled nursing and senior living services, physical, occupational and speech therapies and other rehabilitative and healthcare services at 223 healthcare facilities and campuses, post-acute-related new business ventures and real estate investments; and

•	The Pennant Group, Inc. (Pennant), which is a holding company of operating subsidiaries that provide home health, hospice and senior living services.

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We made an accounting policy election to keep leases with an initial term of 12 months or less off of the balance sheet and recognize those lease payments in the condensed consolidated statement of income on a straight-line basis over the lease term. We also elected the practical expedient to not separate lease and non-lease components for all our leases as the non-lease components are not significant to the overall lease costs.

•	Prior period results reflect historical lease classification, under which all our leases were classified as operating leases.

•	The adoption of this standard resulted in recognition of net lease assets and lease liabilities both of $1.0 billion on our consolidated balance sheets as of January 1, 2019. These adoption numbers have not been adjusted to reflect the impact of the Spin-Off.

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We recorded an adjustment, net of tax, of $9.0 million to retained earnings, on the adoption date, related to a deferred gain on a previous sale-leaseback transaction, which resulted in an increase in rent expense of $0.7 million annually, as we are no longer able to recognize the gain in our consolidated statement of income as a result of the new lease standard. In addition, initial direct costs associated with our lease agreements and favorable lease assets of $26.9 million were classified into right-of-use assets on the adoption date. See further discussion at Note 17, Leases.

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Routine revenue. Routine revenue is generated by the contracted daily rate charged for all contractually inclusive skilled nursing services. The inclusion of therapy and other ancillary treatments varies by payor source and by contract. Services provided outside of the routine contractual agreement are recorded separately as ancillary revenue, including Medicare Part B therapy services, and are not included in the routine revenue definition.

•	Skilled revenue. The amount of routine revenue generated from patients in the skilled nursing facilities who are receiving higher levels of care under Medicare, managed care, Medicaid, or other skilled reimbursement programs. The other skilled patients who are included in this population represent very high acuity patients who are receiving high levels of nursing

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Skilled mix. The amount of our skilled revenue as a percentage of our total skilled nursing routine revenue. Skilled mix (in days) represents the number of days our Medicare, managed care, or other skilled patients are receiving skilled nursing services at the skilled nursing facilities divided by the total number of days patients from all payor sources are receiving skilled nursing services at the skilled nursing facilities for any given period.

•	Average daily rates. The routine revenue by payor source for a period at the skilled nursing facilities divided by actual patient days for that revenue source for that given period.

•	Occupancy percentage (operational beds). The total number of patients occupying a bed in a skilled nursing facility as a percentage of the beds in a facility which are available for occupancy during the measurement period.

•	Number of facilities and operational beds. The total number of skilled nursing facilities that we own or operate and the total number of operational beds associated with these facilities.

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•	Revenue recognition - the estimate of variable considerations to arrive at the transaction price, including methods and assumptions used to determine settlements with Medicare and Medicaid payors or retroactive adjustments due to audits and reviews;

•	Self-insurance - the valuation methods and assumptions used in estimating costs to settle open claims of insureds, as well as an estimate of the cost of insured claims that have been incurred but not reported;

•	Leases - the incremental borrowing rate determination;

•	Acquisition accounting - the assumptions used to allocate the purchase price paid for assets acquired and liabilities assumed in connection with our acquisitions; and

•	Income taxes - the estimation of valuation allowance or the need for and magnitude of liabilities for uncertain tax position.

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(1)	Same Facility results represent all facilities purchased prior to January 1, 2016.

(2)	Transitioning Facility results represent all facilities purchased from January 1, 2016 to December 31, 2017.

(3)	Recently Acquired Facility (Acquisitions) results represent all facilities purchased on or subsequent to January 1, 2018.

(4)	Facility Closed results represents closed operations during the year ended December 31, 2019, which were excluded from Same Facilities results for the year ended December 31, 2019 and 2018 for comparison purposes.

•	Medicare revenue, including our Part B, increased by $26.2 million: Medicare daily rate grew by 4.6% and patient days grew by 0.3%. We continued to focus on higher acuity Medicare patient, which is demonstrated by sub-acute patient day growth of 9.0%.

•	Managed care revenue grew by $19.5 million: patient days grew by 5.2% and managed care daily rate grew by 3.0%.

•	Other skilled revenue increased by $10.7 million: patient days grew by 4.2% and revenue daily rate grew by 4.5%.

•	Managed care revenue increased by $10.1 million: managed care days grew by 13.1% and managed care daily rate grew by 2.3%.

•	Medicare revenue increased by $7.3 million: Medicare daily rate grew by 4.2%.

•	Medicaid revenue, excluding Medicaid-skilled revenue, increased by $12.7 million: Medicaid days grew by 4.1% and Medicaid daily rate grew by 5.6%,

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(1)	Same Facility results represent all facilities purchased prior to January 1, 2015.

(2)	Transitioning Facility results represent all facilities purchased from January 1, 2015 to December 31, 2016.

(3)	Recently Acquired Facility (Acquisitions) results represent all facilities purchased on or subsequent to January 1, 2017.

(4)	Facility Closed results represent closed operations during year ended December 31, 2017, which were excluded from Same Facilities and Transitioning results for the year ended December 31, 2017, for comparison purposes.

•	Skilled mix revenue increased by $22.0 million, or 4.0%. The increase is driven by the increase in Medicare revenue of 0.6% and managed care revenue of 2.0%, both primarily attributable to growth in revenue per day. Our other skilled revenue also increased by 17.8%.

•	We continue to experience a growth in revenue with our Medicaid plans. Our Medicaid revenue, excluding Medicaid-skilled revenue, increased by $23.7 million, or 5.4%, mainly driven by an increase in Medicaid days of

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•	We tested the effectiveness of controls over the reserve for general and professional liability, including those over the determination of the case reserves for known claims.

•	We obtained an understanding of the factors considered and assumptions made by management and the actuaries in developing the estimate of the general and professional liability reserves, the sources of data relevant to these factors and assumptions and the procedures used to obtain the data, and the methods used to calculate the estimate.

•	We performed a retrospective review in which we compared the current portion of the liability at the end of the prior year with what was actually paid in the current year in order to assess the ability of the Company to forecast the timing of reserve payouts.

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We tested known case reserves by making selections and obtaining the associated notice of claim and settlement support (if applicable), as well as inquiring with the Company as to the nature of each case reserve selection and the judgment rationale for the established reserve amount. Additionally, we confirmed the selected cases with external legal counsel and inquired about open cases handled by each legal firm, and agreed those cases are appropriately included in the claims data.

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•	We tested the effectiveness of controls over management's determination of the incremental borrowing rate, including those over management’s review of its third-party specialist valuation report.

•	We obtained an understanding of the factors considered and assumptions made by management and the valuation specialists in developing the estimate of the incremental borrowing rate, the sources of data relevant to these factors and assumptions and the procedures used to obtain the data, and the methods used to calculate the estimate.

•	With the assistance of our fair value specialists, we performed an independent estimate of the incremental borrowing rate and compared the results to the Company’s estimate.

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The Company - The Ensign Group, Inc. (collectively, Ensign or the Company), is a holding company with no direct operating assets, employees or revenue. The Company, through its operating subsidiaries, is a provider of health care services across the post-acute care continuum. As of December 31, 2019, the Company operated 223 facilities and other ancillary operations located in Arizona, California, Colorado, Idaho, Iowa, Kansas, Massachusetts, Nebraska, Nevada, South Carolina, Texas, Utah, Washington and Wisconsin. The Company's operating subsidiaries, each of which strives to be the operation of choice in the community it serves, provide a broad spectrum of skilled nursing, senior living and other ancillary services. The Company's operating subsidiaries have a collective capacity of approximately 22,600 operational skilled nursing beds and 2,200 senior living units. As of December 31, 2019, the Company operated 161 facilities under long-term lease arrangements, and had options to purchase 11 of those 161 facilities. The Company owned an additional 90 real estate properties, which included 62 operations the Company operated and managed, real estate properties of 29 senior living operations that were leased to The Pennant Group, Inc. as part of the Spin-Off (defined below), and the Service Center location. Of the 29 real estate, two of the senior living operations are located on the same real estate properties as the skilled nursing facilities.

Certain of the Company’s wholly-owned independent subsidiaries, collectively referred to as the Service Center, provide certain accounting, payroll, human resources, information technology, legal, risk management and other centralized services to the other operating subsidiaries through contractual relationships with such subsidiaries. The Company also has a wholly-owned captive insurance subsidiary (the Captive) that provides some claims-made coverage to the Company’s operating subsidiaries for general and professional liability, as well as coverage for certain workers’ compensation insurance liabilities.

Each of the Company's affiliated operations are operated by separate, wholly-owned, independent subsidiaries that have their own management, employees and assets. References herein to the consolidated “Company” and “its” assets and activities in this Report is not meant to imply, nor should it be construed as meaning, that The Ensign Group, Inc. has direct operating assets, employees or revenue, or that any of the subsidiaries, are operated by The Ensign Group, Inc.

Spin-Off Transaction — On October 1, 2019, the Company completed the previously announced separation of its transitional and skilled nursing services, home health and hospice operations and substantially all of its senior living operations into two separate, publicly traded companies (the Spin-Off). Upon completion of the Spin-Off and as of December 31, 2019, the Company restructured its operations. The Company now operates and reports only one reportable operating segment: transitional and skilled services. The Company believes that this structure reflects its current operational and financial management, and provides the best structure for the Company to focus on growth opportunities while maintaining financial discipline.

Basis of Presentation — The accompanying consolidated financial statements (Financial Statements) have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). The Company is the sole member or stockholder of various consolidated limited liability companies and corporations established to operate various acquired skilled nursing and senior living operations and related ancillary services. All intercompany transactions and balances have been eliminated in consolidation. The consolidated financial statements include the accounts of all entities controlled by the Company through its ownership of a majority voting interest. The Company presents noncontrolling interests within the equity section of its consolidated balance sheets and the amount of consolidated net income that is attributable to The Ensign Group, Inc. and the noncontrolling interest in its consolidated statements of income.

The consolidated financial statements include the accounts of all entities controlled by the Company through its ownership of a majority voting interest and the accounts of any variable interest entities (VIEs) where the Company is subject to a majority of the risk of loss from the VIE's activities, entitled to receive a majority of the entity's residual returns, or both. The Company assesses the requirements related to the consolidation of VIEs, including a qualitative assessment of power and economics that considers which entity has the power to direct the activities that "most significantly impact" the VIE's economic performance and has the obligation to absorb losses of, or the right to receive benefits that could be potentially significant to, the VIE. The Company's relationship with variable interest entities was not material during the years ended December 31, 2019, 2018, and 2017.

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During the first quarter of 2019, the Company completed the sale of one of its senior living operations for a sale price of $1,838. The sale transaction did not meet the criteria of discontinued operations as it did not represent a strategic shift that had, or will have, a major effect on the Company's operations and financial results. The Company presented property and equipment assets of the senior living operation sold as held for sale in the consolidated balance sheet as of December 31, 2018.

Estimates and Assumptions — The preparation of Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Financial Statements and the reported amounts of revenue and expenses during the reporting periods. The most significant estimates in the Company’s Financial Statements relate to revenue, intangible assets and goodwill, right-of-use-assets, impairment of long-lived assets, lease liabilities, general and professional liability, workers' compensation and healthcare claims included in accrued self-insurance liabilities, and income taxes. Actual results could differ from those estimates.

Fair Value of Financial Instruments —The Company’s financial instruments consist principally of cash and cash equivalents, debt security investments, accounts receivable, insurance subsidiary deposits, accounts payable and borrowings. The Company believes all of the financial instruments’ recorded values approximate fair values because of their nature or respective short durations.

Revenue Recognition — On January 1, 2018, the Company adopted Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (ASC 606) applying the modified retrospective method. The adoption of ASC 606 did not have a material impact on the measurement nor on the recognition of revenue of contracts, for which all revenue had not been recognized, as of January 1, 2018, therefore no cumulative adjustment has been made to the opening balance of retained earnings at the beginning of 2018. See Note 4, Revenue and Accounts Receivable.

Accounts Receivable and Allowance for Doubtful Accounts — Accounts receivable consist primarily of amounts due from Medicare and Medicaid programs, other government programs, managed care health plans and private payor sources, net of estimates for variable consideration. The allowance for doubtful accounts reflects the Company’s best estimate of probable losses inherent in the accounts receivable balance. The Company determines the allowance based on known troubled accounts and other currently available evidence.

Cash and Cash Equivalents — Cash and cash equivalents consist of bank term deposits, money market funds and treasury bill related investments with original maturities of three months or less at time of purchase and therefore approximate fair value. The fair value of money market funds is determined based on “Level 1” inputs, which consist of unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets. The Company places its cash and short-term investments with high credit quality financial institutions.

Insurance Subsidiary Deposits and Investments — The Company's captive insurance subsidiary cash and cash equivalents, deposits and investments are designated to support long-term insurance subsidiary liabilities and have been classified as short-term and long-term assets based on the timing of expected future payments of the Company's captive insurance liabilities. The majority of these deposits and investments are currently held in AA, A and BBB rated debt security investments and the remainder is held in a bank account with a high credit quality financial institution.

The Company evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.  If securities are in an unrealized loss position, the Company considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. The Company also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For the years ended December 31, 2019, 2018, and 2017, the Company did not recognize any OTTI for its investments.

Property and Equipment — Property and equipment are initially recorded at their historical cost. Repairs and maintenance are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the depreciable assets (ranging from three to 59 years). Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the remaining lease term.

Impairment of Long-Lived Assets — The Company reviews the carrying value of long-lived assets that are held and used in the Company’s operating subsidiaries for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of these assets is determined based upon expected undiscounted future net cash flows from the operating subsidiaries to which the assets relate, utilizing management’s best estimate, appropriate assumptions, and projections at the time. If the carrying value is determined to be unrecoverable from future operating cash flows,

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the asset is deemed impaired and an impairment loss would be recognized to the extent the carrying value exceeded the estimated fair value of the asset. The Company estimates the fair value of assets based on the estimated future discounted cash flows of the asset. Management has evaluated its long-lived assets and recorded an impairment charge of $3,203, $5,492, and $111 during the years ended December 31, 2019, 2018, and 2017, respectively. The Company also recorded an impairment charge of $443 to right-of-use assets during the year ended December 31, 2019.

Leases and Leasehold Improvements - The Company leases skilled nursing facilities, senior living facilities and commercial office space. On January 1, 2019, the Company adopted Accounting Standards Codification Topic 842, Leases (ASC 842), electing the transition method that allows it to apply the standard as of the adoption date and record a cumulative adjustment in retained earnings. The Company determines if an arrangement is a lease at the inception of each lease. At the inception of each lease, the Company performs an evaluation to determine whether the lease should be classified as an operating or finance lease. Operating leases are included in right-of-use assets, current lease liabilities and long-term lease liabilities on the Company's consolidated balance sheet. As the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at lease commencement date in determining the present value of future lease payments. The Company utilized a third-party valuation specialist to assist in estimating the incremental borrowing rate. As of December 31, 2019, the weighted average incremental borrowing rate used to determine the operating lease liability is 8.3%. The Company records rent expense for operating leases on a straight-line basis over the term of the lease. The lease term used for straight-line rent expense is calculated from the date the Company is given control of the leased premises through the end of the lease term. Renewals are not assumed in the determination of the lease term unless they are deemed to be reasonably assured at the inception of the lease. The lease term used for this evaluation also provides the basis for establishing depreciable lives for buildings subject to lease and leasehold improvements.

The Company recognizes lease expense for leases with an initial term of 12 months or less on a straight-line basis over the lease term. These leases are not recorded on the consolidated balance sheet. Certain of the Company's lease agreements include rental payments that are adjusted periodically for inflation. The lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company does not have material subleases.

Intangible Assets and Goodwill — Definite-lived intangible assets consist primarily of patient base, facility trade names and customer relationships. Patient base is amortized over a period of four to 8 months, depending on the classification of the patients and the level of occupancy in a new acquisition on the acquisition date. Trade names at affiliated facilities are amortized over 30 years and customer relationships are amortized over a period of up to 20 years.

The Company's indefinite-lived intangible assets consist of trade names, and Medicare and Medicaid licenses. The Company tests indefinite-lived intangible assets for impairment on an annual basis or more frequently if events or changes in circumstances indicate that the carrying amount of the intangible asset may not be recoverable.

Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations. Goodwill is subject to annual testing for impairment. In addition, goodwill is tested for impairment if events occur or circumstances change that would reduce the fair value of a reporting unit below its carrying amount. The Company performs its annual test for impairment during the fourth quarter of each year. Management evaluated goodwill and intangible assets during fiscal years 2019 and 2018, due to changes in performance. During the years ended December 31, 2019 and 2018, the Company recorded impairment charges of $498 and $3,653, respectively, to goodwill and intangible assets. The Company did not identify any goodwill or intangible asset impairment during the year ended December 31, 2017.

Self-Insurance — The Company is partially self-insured for general and professional liability up to a base amount per claim (the self-insured retention) with an aggregate, one-time deductible above this limit. Losses beyond these amounts are insured through third-party policies with coverage limits per claim, per location and on an aggregate basis for the Company. The combined self-insured retention is $500 per claim, subject to an additional one-time deductible of $750 for California affiliated operations and a separate, one-time, deductible of $1,000 for non-California operations. For all affiliated operations, except those located in Colorado, the third-party coverage above these limits is $1,000 per claim, $3,000 per operation, with a $5,000 blanket aggregate limit and an additional state-specific aggregate where required by state law. In Colorado, the third-party coverage above these limits is $1,000 per claim and $3,000 per operation, which is independent of the aforementioned blanket aggregate limits that apply outside of Colorado.

The self-insured retention and deductible limits for general and professional liability and workers' compensation for all states (except Texas and Washington for workers' compensation) are self-insured through the Captive, the related assets and liabilities of which are included in the accompanying consolidated balance sheets. The Captive is subject to certain statutory requirements as an insurance provider.

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The Company’s policy is to accrue amounts equal to the actuarially estimated costs to settle open claims of insureds, as well as an estimate of the cost of insured claims that have been incurred but not reported. The Company develops information about the size of the ultimate claims based on historical experience, current industry information and actuarial analysis, and evaluates the estimates for claim loss exposure on a quarterly basis.

 The Company’s operating subsidiaries are self-insured for workers’ compensation in California. To protect itself against loss exposure in California with this policy, the Company has purchased individual specific excess insurance coverage that insures individual claims that exceed $500 per occurrence. In Texas, the operating subsidiaries have elected non-subscriber status for workers’ compensation claims and the Company has purchased individual stop-loss coverage that insures individual claims that exceed $750 per occurrence. The Company’s operating subsidiaries in all other states, with the exception of Washington, are under a loss sensitive plan that insures individual claims that exceed $350 per occurrence. In Washington, the operating subsidiaries' coverage is financed through premiums paid by the employers and employees. The claims and benefit payments are managed through a state insurance pool. Outside of California, Texas and Washington, the Company has purchased insurance coverage that insures individual claims that exceed $350 per accident. In all states except Washington, the Company accrues amounts equal to the estimated costs to settle open claims, as well as an estimate of the cost of claims that have been incurred but not reported. The Company uses actuarial valuations to estimate the liability based on historical experience and industry information.

In addition, the Company has recorded an asset and equal liability of $7,999 and $6,969 at December 31, 2019 and 2018, respectively, in order to present the ultimate costs of malpractice and workers' compensation claims and the anticipated insurance recoveries on a gross basis.

The Company self-funds medical (including prescription drugs) and dental healthcare benefits to the majority of its employees. The Company is fully liable for all financial and legal aspects of these benefit plans. To protect itself against loss exposure with this policy, the Company has purchased individual stop-loss insurance coverage that insures individual claims that exceed $300 for each covered person with an additional one-time aggregate individual stop loss deductible of $75.

The Company believes that adequate provision has been made in the Financial Statements for liabilities that may arise out of patient care, workers’ compensation, healthcare benefits and related services provided to date. The amount of the Company’s reserves was determined based on an estimation process that uses information obtained from both company-specific and industry data. This estimation process requires the Company to continuously monitor and evaluate the life cycle of the claims. Using data obtained from this monitoring and the Company’s assumptions about emerging trends, the Company, with the assistance of an independent actuary, develops information about the size of ultimate claims based on the Company’s historical experience and other available industry information. The most significant assumptions used in the estimation process include determining the trend in costs, the expected cost of claims incurred but not reported and the expected costs to settle or pay damage awards with respect to unpaid claims. The self-insured liabilities are based upon estimates, and while management believes that the estimates of loss are reasonable, the ultimate liability may be in excess of or less than the recorded amounts. Due to the inherent volatility of actuarially determined loss estimates, it is reasonably possible that the Company could experience changes in estimated losses that could be material to net income. If the Company’s actual liability exceeds its estimates of loss, its future earnings, cash flows and financial condition would be adversely affected.

Income Taxes — Deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities at tax rates in effect when such temporary differences are expected to reverse. The Company generally expects to fully utilize its deferred tax assets; however, when necessary, the Company records a valuation allowance to reduce its net deferred tax assets to the amount that is more likely than not to be realized.

In determining the need for a valuation allowance or the need for and magnitude of liabilities for uncertain tax positions, the Company makes certain estimates and assumptions. These estimates and assumptions are based on, among other things, knowledge of operations, markets, historical trends and likely future changes and, when appropriate, the opinions of advisors with knowledge and expertise in certain fields. Due to certain risks associated with the Company’s estimates and assumptions, actual results could differ.

Noncontrolling Interest — The noncontrolling interest in a subsidiary is initially recognized at estimated fair value on the acquisition date and is presented within total equity in the Company's consolidated balance sheets. The Company presents the noncontrolling interest and the amount of consolidated net income attributable to The Ensign Group, Inc. in its consolidated statements of income and net income per share is calculated based on net income attributable to The Ensign Group, Inc.'s stockholders. The carrying amount of the noncontrolling interest is adjusted based on an allocation of subsidiary earnings based on ownership interest.

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Share-Based Compensation — The Company measures and recognizes compensation expense for all share-based payment awards made to employees and directors including employee stock options based on estimated fair values, ratably over the requisite service period of the award. Net income has been reduced as a result of the recognition of the fair value of all stock options and restricted stock awards issued, the amount of which is contingent upon the number of future grants and other variables.

Recent Accounting Pronouncements — Except for rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws and a limited number of grandfathered standards, the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) is the sole source of authoritative GAAP literature recognized by the FASB and applicable to the Company. For any new pronouncements announced, the Company considers whether the new pronouncements could alter previous generally accepted accounting principles and determines whether any new or modified principles will have a material impact on the Company's reported financial position or operations in the near term. The applicability of any standard is subject to the formal review of the Company's financial management and certain standards are under consideration.

Recent Accounting Standards Adopted by the Company

In July 2019, the FASB issued ASU No. 2019-07, Codification Updates to SEC Sections - Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization, and Miscellaneous Updates, which aligns the guidance in various SEC sections of the FASB ASC with the requirements of certain already effective SEC final rules. ASU 2019-07 is effective immediately upon issuance and did not have a material impact on the company's consolidated financial statements and related disclosures.

In February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees to recognize leases with terms longer than 12 months on the balance sheet and disclose key information about leasing arrangements. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The classification criteria for distinguishing between operating and finance (previously capital) leases are substantially similar to the previous lease guidance, but with no explicit bright lines.

The Company adopted the standard as of January 1, 2019, electing the transition method that allows it to apply the standard as of the adoption date and record a cumulative adjustment in retained earnings. The Company has elected the package of practical expedients permitted under the transition guidance, which among other things, allows the Company to carry forward the historical lease classification. The new standard also provides practical expedients for an entity’s ongoing accounting. The Company has made an accounting policy election to keep leases with an initial term of 12 months or less off of the balance sheet and recognize those lease payments in the consolidated statements of income on a straight-line basis over the lease term. The Company has also elected the practical expedient to not separate lease and non-lease components for all of its leases as the non-lease components are not significant to the overall lease costs.

The adoption of this standard resulted in recognition of right-of-use assets and lease liabilities of $1,015,937 and $1,006,907, respectively, on its consolidated balance sheets as of January 1, 2019. The Company recorded an adjustment, net of tax, of $9,030 to retained earnings, on the adoption date, related to a deferred gain on a previous sale-leaseback transaction, which resulted in an increase in rent expense of $658 annually, as we are no longer able to recognize the gain in our consolidated statement of income as a result of the new lease standard. In addition, initial direct costs associated with its lease agreements and favorable lease assets of $26,939 were classified into right-of-use assets on the adoption date. The standard does not materially affect the Company's consolidated net earnings or have a notable impact on liquidity or debt-covenant compliance under the current agreements. See further discussion at Note 17, Leases.

Prior to the adoption of ASC 842, the Company recognized revenue related to its senior living residency agreements in accordance with the provisions of ASC 840, Leases (ASC 840).  Subsequent to the adoption of ASU 2016-02, Leases, lessors are required to separately recognize and measure the lease component of a contract with a customer utilizing the provisions of ASC 842 and the non-lease components utilizing the provisions of ASC 606, Revenue from Contracts with Customers (ASC 606). To separately account for the components, the transaction price is allocated among the components based upon the estimated stand alone selling prices of the components. Additionally, certain components of a contract which were previously included within the lease element recognized in accordance with ASC 840 prior to the adoption of ASU 2016-02 (such as common area maintenance services, other basic services, and executory costs) are recognized as non-lease components subject to the provisions of ASC 606 subsequent to the adoption of ASU 2016-02. Entities are required to recognize a cumulative effect adjustment to beginning retained earnings as of the initial application date of ASU 2016-02 for changes to amounts recognized for these certain components for the transition from ASC 840 to ASC 606. However, entities are permitted to elect the practical expedient under ASU 2018-11, Leases, allowing lessors to not separate non-lease components from the associated lease components when certain criteria are met. Entities that elect to utilize the lease/non-lease component combination practical expedient under ASU 2018-11 upon initial application

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of ASC 842 are required to apply the practical expedient to all new and existing transactions within a class of underlying assets that qualify for the expedient as of the initial application date with a cumulative effect adjustment to beginning retained earnings as of the initial application date for any changes recognized related to existing transactions.

Upon adoption of ASU 2016-02 and ASU 2018-11, the Company elected the lessor practical expedient within ASU 2018-11.  The Company recognizes revenue under these resident agreements based upon the predominant component, either the lease or non-lease component, of the contracts rather than allocating the consideration and separately accounting for it under ASC 842 and ASC 606. The Company has concluded that the non-lease components of the agreements with respect to its senior living communities are the predominant component of the contract, therefore, the Company recognizes revenue for these residents agreements under ASC 606. The timing and pattern of revenue recognition is substantially the same as that prior to the adoption of these standards.

In June 2018, the FASB issued ASU 2018-07, which simplifies several aspects of the accounting for nonemployee share-based payment transactions resulting from expanding the scope of ASC 718, Compensation-Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. The amendments specify that ASC 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that ASC 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under ASC 606, Revenue from Contracts with Customers. The Company adopted this guidance effective January 1, 2019. The adoption of this guidance did not have a material impact on its consolidated financial statements and related disclosures.

Accounting Standards Recently Issued but Not Yet Adopted by the Company

In August 2018, the FASB issued amended guidance to simplify fair value measurement disclosure requirements. The new provisions eliminate the requirements to disclose (1) transfers between Level 1 and Level 2 of the fair value hierarchy, (2) policies related to valuation processes and the timing of transfers between levels of the fair value hierarchy, and (3) net asset value disclosure of estimates of timing of future liquidity events. The FASB also modified disclosure requirements of Level 3 fair value measurements. This guidance is effective for annual periods beginning after December 15, 2019, which will be the Company's fiscal year 2020, with early adoption permitted. The Company has adopted this standard on January 1, 2020 and determined there was no material impact on the Company's consolidated financial statements.

In January 2017, the FASB issued amended authoritative guidance to simplify and reduce the cost and complexity of the goodwill impairment test. The new provisions eliminate step 2 from the goodwill impairment test and shifts the concept of impairment from a measure of loss when comparing the implied fair value of goodwill to its carrying amount to comparing the fair value of a reporting unit with its carrying amount. The FASB also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment or step 2 of the goodwill impairment test. The new guidance does not amend the optional qualitative assessment of goodwill impairment. This guidance is effective for annual periods beginning after December 15, 2019, which will be the Company's fiscal year 2020, with early adoption permitted. The Company has adopted this standard on January 1, 2020 and determined there was no material impact on the Company's consolidated financial statements.

In June 2016, the FASB issued Accounting Standards Update (ASU) 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which replaces the existing incurred loss impairment model with an expected credit loss model and requires a financial asset measured at amortized cost to be presented at the net amount expected to be collected. The guidance will be effective for fiscal years beginning after December 15, 2019, which will be the Company's fiscal year 2020, with early adoption is permitted. The Company has adopted this standard on January 1, 2020 and determined there was no material impact on the Company's consolidated financial statements.

On October 1, 2019, the Company completed the previously announced separation of its transitional and skilled nursing services, ancillary businesses, home health and hospice operations and substantially all of its senior living operations into two separate, publicly traded companies:

•	Ensign, which includes skilled nursing and senior living services, physical, occupational and speech therapies and other rehabilitative and healthcare services at 223 healthcare facilities and campuses, post-acute-related ancillary operations and real estate investments; and

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•	The Pennant Group, Inc. (Pennant), which is a holding company of operating subsidiaries that provide home health, hospice and senior living services.

The Company completed the separation through a tax-free distribution of all of the outstanding shares of common stock of Pennant to Ensign stockholders on a pro rata basis. Ensign stockholders received one share of Pennant common stock for every two shares of Ensign common stock held at the close of business on September 20, 2019, the record date for the Spin-Off. The number of shares of Ensign common stock each stockholder owns and the related proportionate interest in Ensign did not change as a result of the Spin-Off. Each Ensign stockholder received only whole shares of Pennant common stock in the distribution, as well as cash in lieu of any fractional shares. The Spin-Off was effective from and after October 1, 2019, with shares of Pennant common stock distributed on October 1, 2019. Pennant is listed on the NASDAQ Global Select Market (NASDAQ) and trades under the ticker symbol “PNTG”.

In connection with the Spin-Off, Pennant's operations consist of 63 home health, hospice and home care agencies and 52 senior living communities. Ensign affiliates retained ownership of all the real estate, which includes the real estate of 29 of the 52 senior living operations that were contributed to Pennant. These assets are leased to Pennant on a triple-net basis. Pennant affiliates are responsible for all costs at the properties, including property taxes, insurance and maintenance and repair costs. The initial terms range between 14 to 16 years. Annual rental income generated from the leases with Pennant is $12,164. The variable rent such as property taxes, insurance and other items is not material for the year ended December 31, 2019. Pennant's remaining 23 senior living operations are leasing the underlying real estate from unrelated third parties.

The Company received $11,600 from Pennant as a dividend payment in connection with the distribution of assets to Pennant. The Company used the funds to repay certain outstanding third-party bank debt. The assets and liabilities were contributed to Pennant based on their historical carrying values, which were as follows:

Cash and cash equivalents	$	47
Accounts receivable, net	30,064
Prepaid expenses and other current assets	4,483
Property and equipment, net	13,728
Right-of-use assets	150,385
Goodwill and intangibles, net	74,747
Accounts payable	(4,725		)
Accrued wages and related liabilities	(14,544		)
Other accrued liabilities - current	(17,531		)
Lease liabilities, net	(152,221		)
Net contribution	$	84,433

In accordance with Accounting Standards Codification (ASC) 505-60, Equity-Spinoffs and Reverse Spinoffs, the accounting for the separation of the Company follows its legal form, with Ensign as the legal and accounting spinnor and Pennant as the legal and accounting spinnee, due to the relative significance of Ensign’s healthcare business, the relative fair values of the respective companies, the retention of all senior management, and other relevant indicators.

As a result of the Spin-Off, the Company recorded a $71,181 reduction in retained earnings which included net assets of $84,433 as of October 1, 2019. The Company transferred cash of $47 to Pennant, with the remainder considered a non-cash activity in the consolidated statements of cash flows. The Spin-Off also resulted in a reduction of noncontrolling interest of $13,252.

Ensign and Pennant entered into several agreements in connection with the Spin-Off, including a transition services agreement (TSA), separation and distribution agreement, tax matters agreement and an employee matters agreement. Pursuant to the TSA, Ensign, Pennant and their respective subsidiaries are providing various services to each other on an interim, transitional basis. Services being provided by Ensign include, among others, certain finance, information technology, human resources, employee benefits and other administrative services. The TSA will terminate on September 30, 2021. Billings by Ensign under the TSA were not material during the year ended December 31, 2019.

Prior to the consummation of the Spin-Off, Pennant granted awards to certain employees and directors of Ensign under the Pennant Long-Term Incentive Plan (LTIP), in recognition of their performance in assisting with the Spin-Off. These awards were exchanged for Pennant common stock prior to the distribution.

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Immediately after the Spin-Off, Ensign no longer consolidated the results of Pennant operations into its financial results. Pennant's assets, liabilities, operating results and cash flows for all periods presented have been classified as discontinued operations within the Consolidated Financial Statements. The following table presents the financial results of Pennant through the date of the Spin-Off for the indicated periods and do not include corporate overhead allocations:

	Year Ended December 31,
	2019				2018				2017
	(In thousands)
Revenue	$	249,039			$	286,058			$	250,991
Expense
Cost of services	187,560				209,423				184,252
Rent—cost of services	17,295				20,836				19,939
General and administrative expense	16,672				9,744				6,497
Depreciation and amortization	2,402				2,480				2,204
Total expenses	223,929				242,483				212,892
Income from discontinued operations	25,110				43,575				38,099
Interest income	26				47				—
Provision for income taxes	5,663				10,156				14,239
Income from discontinued operations, net of tax	19,473				33,466				23,860
Net income attributable to discontinued noncontrolling interests	629				595				160
Net income attributable to The Ensign Group, Inc.	$	18,844			$	32,871			$	23,700

The Company incurred transaction costs of $9,119 related to the Spin-Off since commencing in 2018, of which $7,909 and $746 are reflected in the Company's consolidated statement of operations as discontinued operations for the years ended December 31, 2019 and 2018, respectively. Transaction costs primarily consist of third-party advisory, consulting, legal and professional services, as well as other items that are incremental and one-time in nature that are related to the separation. Transaction costs for 2019 incurred prior to October 1, 2019 are reflected in discontinued operations.

The following table presents the aggregate carrying amounts of the classes of assets and liabilities of the discontinued operations of Pennant:

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	As of December 31, 2018
	(In thousands)
Assets
Current assets:
Cash and cash equivalents	$	41
Accounts receivable—less allowance for doubtful accounts of $616	24,184
Prepaid expenses and other current assets	4,554
Total current assets as classified as discontinued operations on the consolidated balance sheet	28,779
Property and equipment, net	10,458
Restricted and other assets(1)	2,286
Intangible assets, net	78
Goodwill	30,892
Other indefinite-lived intangibles	25,136
Long-term assets as discontinued operations on the consolidated balance sheet	68,850
Total assets as discontinued operations on the consolidated balance sheet	$	97,629
Liabilities
Current liabilities:
Accounts payable	4,390
Accrued wages and related liabilities	12,786
Other accrued liabilities	13,073
Total current liabilities as discontinued operations on the consolidated balance sheet	30,249
Other long-term liabilities	3,316
Long-term liabilities as discontinued operations on the consolidated balance sheet	3,316
Total liabilities as discontinued operations on the consolidated balance sheet	$	33,565

(1) Restricted and other assets is net of deferred tax liabilities .

The Company's revenue is derived primarily from providing healthcare services to its patients. Revenues are recognized when services are provided to the patients at the amount that reflects the consideration to which the Company expects to be entitled from patients and third-party payors, including Medicaid, Medicare and insurers (private and Medicare replacement plans), in exchange for providing patient care. The healthcare services in transitional and skilled patient contracts include routine services in exchange for a contractual agreed-upon amount or rate. Routine services are treated as a single performance obligation satisfied over time as services are rendered. As such, patient care services represent a bundle of services that are not capable of being distinct. Additionally, there may be ancillary services which are not included in the daily rates for routine services, but instead are treated as separate performance obligations satisfied at a point in time, if and when those services are rendered.

Revenue recognized from healthcare services are adjusted for estimates of variable consideration to arrive at the transaction price. The Company determines the transaction price based on contractually agreed-upon amounts or rate on a per day basis, adjusted for estimates of variable consideration. The Company uses the expected value method in determining the variable component that should be used to arrive at the transaction price, using contractual agreements and historical reimbursement experience within each payor type. The amount of variable consideration which is included in the transaction price may be constrained, and is included in net revenue only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. If actual amounts of consideration ultimately received differ from the Company’s estimates, the Company adjusts these estimates, which would affect net revenue in the period such variances become known.

Revenue from the Medicare and Medicaid programs accounted for 70.4%, 71.0%, and 70.9% the Company's revenue for the years ended December 31, 2019, 2018, and 2017, respectively. Settlement with Medicare and Medicaid payors for retroactive adjustments due to audits and reviews are considered variable consideration and are included in the determination of the estimated transaction price. These settlements are estimated based on the terms of the payment agreement with the payor, correspondence from the payor and the Company’s historical settlement activity. Consistent with healthcare industry practices, any changes to these revenue estimates are recorded in the period the change or adjustment becomes known based on final settlement. The Company recorded adjustments to revenue which were not material to the Company's consolidated revenue or Financial Statements for the years ended December 31, 2019, 2018, and 2017.

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Disaggregation of Revenue

The Company disaggregates revenue from contracts with its patients by payors. The Company determines that disaggregating revenue into these categories achieves the disclosure objectives to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

Revenue by Payor

The Company’s revenue is derived primarily from providing long-term healthcare services to patients and is recognized on the date services are provided at amounts billable to individual patients, adjusted for estimates for variable consideration. For patients under reimbursement arrangements with third-party payors, including Medicaid, Medicare and private insurers, revenue is recorded based on contractually agreed-upon amounts or rate, adjusted for estimates for variable consideration, on a per patient, daily basis or as services are performed.

Revenue for the years ended December 31, 2019, 2018, and 2017 is summarized in the following tables:

	Year Ended December 31,
	2019							2018							2017
	Revenue				% of Revenue			Revenue				% of Revenue			Revenue				% of Revenue
Medicaid	$	802,952			39.4	%		$	691,276			39.4	%		$	613,760			38.4	%
Medicare	499,353				24.5			436,580				24.9			417,870				26.1
Medicaid — skilled	132,889				6.5			117,686				6.7			102,875				6.4
Total Medicaid and Medicare	1,435,194				70.4			1,245,542				71.0			1,134,505				70.9
Managed care	351,054				17.2			301,866				17.2			281,563				17.6
Private and other(1)	250,276				12.4			207,193				11.8			182,258				11.5
Revenue	$	2,036,524			100.0	%		$	1,754,601			100.0	%		$	1,598,326			100.0	%

(1) Private and other payors also includes revenue from all payors generated in other ancillary services for the years ended December 31, 2019, 2018, and 2017. During the fiscal year 2019, private and other payors includes $5,812 of rental income.

Balance Sheet Impact

Included in the Company’s consolidated balance sheet are contract assets, comprised of billed accounts receivable and unbilled receivables, which are the result of the timing of revenue recognition, billings and cash collections, as well as, contract liabilities, which primarily represent payments the Company receives in advance of services provided. The Company had no material contract liabilities as of December 31, 2019 and 2018, or activity during the year ended December 31, 2019 and 2018.

Accounts receivable as of December 31, 2019 and 2018 is summarized in the following table:

	Year Ended December 31,
	2019				2018
Medicaid	$	125,443			$	111,292
Managed care	70,015				51,603
Medicare	53,163				39,537
Private and other payors	62,836				51,753
	311,457				254,185
Less: allowance for doubtful accounts	(2,472		)		(2,270		)
Accounts receivable, net	$	308,985			$	251,915

The Company adopted ASC 606 on January 1, 2018. As a result of the adoption, the majority of what was previously presented as bad debt expense under operating expenses has been incorporated as an implicit price concession factored into the calculation of net revenues. Subsequent material events that alter the payor's ability to pay are recorded as bad debt expense. The Company's bad debt expense and bad debt as a percent of total revenue was $2,444 and 0.1%, $2,477 and 0.1% and $27,649 and 1.7%, for the years ended December 31, 2019, 2018 and 2017, respectively.

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Practical Expedients and Exemptions

Basic net income per share is computed by dividing income from continuing operations attributable to stockholders of The Ensign Group, Inc. by the weighted average number of outstanding common shares for the period. The computation of diluted net income per share is similar to the computation of basic net income per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued.

A reconciliation of the numerator and denominator used in the calculation of basic net income per common share follows:

	Year Ended December 31,
	2019				2018				2017
Numerator:
Net income from continuing operations	$	92,213			$	59,062			$	16,973
Less: net income/(loss) attributable to noncontrolling interests in continuing operations	523				(431		)		198
Net income from continuing operations attributable to The Ensign Group, Inc.	91,690				59,493				16,775
Net income from discontinued operations, net of tax	19,473				33,466				23,860
Less: net income attributable to noncontrolling interests in discontinued operations	629				595				160
Net income from discontinued operations, net of tax	18,844				32,871				23,700
Net income attributable to The Ensign Group, Inc.	$	110,534			$	92,364			$	40,475
Denominator:
Weighted average shares outstanding for basic net income per share	53,452				52,016				50,932
Basic net income per common share:
Income from continuing operations	$	1.72			$	1.14			$	0.33
Income from discontinued operations	$	0.35			$	0.64			$	0.46
Net income attributable to The Ensign Group, Inc.	$	2.07			$	1.78			$	0.79

A reconciliation of the numerator and denominator used in the calculation of diluted net income per common share follows:

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	Year Ended December 31,
	2019				2018				2017
Numerator:
Net income from continuing operations	$	92,213			$	59,062			$	16,973
Less: net income/(loss) attributable to noncontrolling interests in continuing operations	523				(431		)		198
Net income from continuing operations attributable to The Ensign Group, Inc.	91,690				59,493				16,775
Net income from discontinued operations, net of tax	19,473				33,466				23,860
Less: net income attributable to noncontrolling interests in discontinued operations	629				595				160
Net income from discontinued operations, net of tax	18,844				32,871				23,700
Net income attributable to The Ensign Group, Inc.	$	110,534			$	92,364			$	40,475
Denominator:
Weighted average common shares outstanding	53,452				52,016				50,932
Plus: incremental shares from assumed conversion (1)	2,529				2,381				1,897
Adjusted weighted average common shares outstanding	55,981				54,397				52,829
Diluted net income per common share:
Income from continuing operations attributable to The Ensign Group, Inc.	$	1.64			$	1.09			$	0.32
Income from discontinued operations	$	0.33			$	0.61			$	0.45
Net income attributable to The Ensign Group, Inc.	$	1.97			$	1.70			$	0.77

Fair value measurements are based on a three-tier hierarchy that prioritizes the inputs used to measure fair value. These tiers include: Level 1, defined as observable inputs such as quoted market prices in active markets; Level 2, defined as inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2019 and 2018:

		December 31,
		2019												2018
		Level 1				Level 2				Level 3				Level 1				Level 2				Level 3
Cash and cash equivalents		$	59,175			$	—			$	—			$	31,042			$	—			$	—

The Company's non-financial assets, which includes goodwill, intangible assets, property and equipment and right-of-use assets, are not required to be measured at fair value on a recurring basis. However, on a periodic basis, or whenever events or changes in circumstances indicate that their carrying value may not be recoverable, the Company assesses its long-lived assets for impairment. When impairment has occurred, such long-lived assets are written down to fair value.

The Company classified $1,859 of land, building and equipment related to the sale of one senior living operations as held for sale in the consolidated balance sheets as of December 31, 2018. The carrying value of these assets approximates fair value based on Level 2 inputs based on the determined transaction price in the sale agreement.

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Debt Security Investments - Held to Maturity

At December 31, 2019 and 2018, the Company had approximately $48,325 and $44,850, respectively, in debt security investments which were classified as held to maturity and carried at amortized cost. The carrying value of the debt securities approximates fair value based on Level 1 inputs. The Company has the intent and ability to hold these debt securities to maturity. Further, as of December 31, 2019, the debt security investments were held in AA, A and BBB rated debt securities.

Prior to the Spin-Off, the Company had three reportable segments: 1) transitional and skilled services, 2) home health and hospice services and 3) senior living services. As of December 31, 2019, upon completion of the Spin-Off, the Company has one reportable operating segment: transitional and skilled services, which includes the operation of skilled nursing facilities. There was no change made to the historically presented segment of transitional and skilled services, which remains as the single segment subsequent to the Spin-Off. The Company's Chief Executive Officer, who is its chief operating decision maker, or CODM, reviews financial information at the operating segment level. The Company also reports an “all other” category that includes results from its senior living operations, real estate properties, mobile diagnostics and other ancillary operations. These operations are neither significant individually nor in aggregate, and therefore do not constitute a reportable segment. The Company believes that this structure reflects its current operational and financial management, and provides the best structure for the Company to maximize the quality of care provided while maintaining financial discipline.

As of December 31, 2019, transitional and skilled services included 190 wholly-owned affiliated skilled nursing operations and 23 campuses that provide skilled nursing and rehabilitative care services and senior living services. Included in the "all other" category are ancillary services the Company provided through ancillary operations and room and board and social services through ten wholly-owned affiliated senior living operations and 23 campuses as mentioned above. The Company evaluates performance and allocates capital resources to its operations based on an operating model that is designed to maximize the quality of care provided and profitability. General and administrative expenses are not allocated to the Company's reportable segment for purposes of determining segment profit or loss, and are included in the "all other" category in the selected segment financial data that follows. The accounting policies of the reporting segment is the same as those described in Note 2, Summary of Significant Accounting Policies. The Company's CODM does not review assets by segment in his resource allocation and therefore assets by segment are not disclosed below.

Segment revenues by major payor source were as follows:

		Year Ended December 31, 2019
		Transitional and Skilled Services				All Other				Total Revenue				Revenue %
Medicaid		$	789,873			$	13,079		(1)	$	802,952			39.4	%
Medicare		499,353				—				499,353				24.5
Medicaid-skilled		132,889				—				132,889				6.5
Subtotal		1,422,115				13,079				1,435,194				70.4
Managed care		351,054				—				351,054				17.2
Private and other		161,471				88,805			(2)	250,276				12.4
Total revenue		$	1,934,640			$	101,884			$	2,036,524			100.0	%

(1) Medicaid payor includes revenue generated from senior living operations for the year ended December 31, 2019.

(2) Private and other payors also includes revenue from senior living operations and all payors generated in other ancillary services for the year ended December 31, 2019.

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		Year Ended December 31, 2018
		Transitional and Skilled Services				All Other				Total Revenue				Revenue %
Medicaid		$	678,749			$	12,527		(1)	$	691,276			39.4	%
Medicare		436,580				—				436,580				24.9
Medicaid-skilled		117,686				—				117,686				6.7
Subtotal		1,233,015				12,527				1,245,542				71.0
Managed care		301,866				—				301,866				17.2
Private and other		144,131				63,062			(2)	207,193				11.8
Total revenue		$	1,679,012			$	75,589			$	1,754,601			100.0	%

(1) Medicaid payor includes revenue generated from senior living operations for the year ended December 31, 2018.

(2) Private and other payors also includes revenue from senior living operations and all payors generated in other ancillary services for the year ended December 31, 2018.

		Year Ended December 31, 2017
		Transitional and Skilled Services				All Other				Total Revenue				Revenue %
Medicaid		$	603,104			$	10,656		(1)	$	613,760			38.4	%
Medicare		417,870				—				417,870				26.1
Medicaid-skilled		102,875				—				102,875				6.4
Subtotal		1,123,849				10,656				1,134,505				70.9
Managed care		281,563				—				281,563				17.6
Private and other		139,798				42,460			(2)	182,258				11.5
Total revenue		$	1,545,210			$	53,116			$	1,598,326			100.0	%

(1) Medicaid payor includes revenue generated from senior living operations for the year ended December 31, 2017.

(2) Private and other payors also includes revenue from senior living operations and all payors generated in other ancillary services for the year ended December 31, 2017.

The following table sets forth selected financial data consolidated by business segment:

		Year Ended December 31, 2019
		Transitional and Skilled Services				All Other(1)				Total
Revenue from external customers		$	1,934,640			$	101,884			$	2,036,524
Segment income (loss)		$	243,536			$	(114,356	)		$	129,180
Interest expense, net of interest income										$	(13,013	)
Income before provision for income taxes										$	116,167
Depreciation and amortization		$	37,004			$	14,050			$	51,054

(1) General and administrative expense are included in the "All Other" category.

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		Year Ended December 31, 2018
		Transitional and Skilled Services				All Other(2)				Total
Revenue from external customers		$	1,679,012			$	75,589			$	1,754,601
Segment income (loss)		$	190,924			$	(106,011	)		$	84,913
Interest expense, net of interest income										$	(13,166	)
Income before provision for income taxes										$	71,747
Depreciation and amortization		$	31,931			$	12,933			$	44,864

(1) General and administrative expense is included in the "All Other" category.

		Year Ended December 31, 2017
		Transitional and Skilled Services				All Other(2)				Total
Revenue from external customers		$	1,545,210			$	53,116			$	1,598,326
Segment income (loss)		$	140,272			$	(97,086	)		$	43,186
Interest expense, net of interest income										$	(12,007	)
Income before provision for income taxes										$	31,179
Depreciation and amortization		$	29,928			$	12,340			$	42,268

(1) General and administrative expense is included in the "All Other" category.

The Company's subsidiaries acquisition focus is to purchase or lease operations that are complementary to the current affiliated operations, accretive to the business or otherwise advance the Company's strategy. The results of all operating subsidiaries are included in the accompanying Financial Statements subsequent to the date of acquisition. Acquisitions are accounted for using the acquisition method of accounting. The Company's affiliated operations also enter into long-term leases that may include options to purchase the facilities. As a result, from time to time, the affiliated operations will acquire the real estate of facilities that have been operating under third-party leases.

On January 1, 2018, the Company adopted Accounting Standards Codification Topic 805, Clarifying the Definition of a Business (ASC 805) prospectively, which changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is deemed to be a business. Determining whether a transferred set constitutes a business is important because the accounting for a business combination differs from that of an asset acquisition. The definition of a business also affects the accounting for dispositions. Under the new standard, when substantially all of the fair value of assets acquired is concentrated in a single asset, or a group of similar assets, the assets acquired would not represent a business and business combination accounting would not be required. The new standard may result in more transactions being accounted for as asset acquisitions rather than business combinations. The Company anticipates that future acquisitions will be classified as a mixture of business and asset acquisitions under the new guidance.

2019 Acquisitions

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During the year ended December 31, 2019, the Company expanded its operations through a combination of long-term leases and real estate purchases, with the addition of 22 stand-alone skilled nursing operations, one stand-alone senior living operation, and four campus operations. The addition of these operations added a total of 3,142 operational skilled nursing beds and 407 operational senior living units to be operated by the Company's affiliated operating subsidiaries. The Company also invested in new ancillary services that are complementary to its existing businesses. In addition, the Company invested in real estate and Medicare and Medicaid licenses during the year. The aggregate purchase price for these acquisitions during the year ended December 31, 2019 was $148,974.

For the acquisitions through long-term leases, the Company did not acquire any material assets or assume any liabilities other than the tenant's post-assumption rights and obligations under the long-term lease. The Company entered into a separate operations transfer agreement with the prior operator as part of each transaction.

The fair value of assets for 30 of the acquisitions was concentrated in property and equipment and as such, these transactions were classified as asset acquisitions. The purchase price for the asset acquisitions was $141,595. The fair value of assets for the remaining one acquisition was concentrated in goodwill and as such, this transaction was classified as a business combination. The purchase price for the business combination was $7,379. The Company also entered into a note payable with the seller of $924, which was subsequently paid off in the second quarter of 2019 and is included as payments of debt in the consolidated statement of cash flow.

In connection with the Spin-Off, the Company transferred the assets of two stand-alone senior living operations, two home health agencies, five hospice agencies and two home care agencies that were purchased for an aggregate price of $18,780. The Company retained the real estate for one stand-alone senior living operation.

Subsequent Event

Subsequent to December 31, 2019, the Company expanded its operations through real estate purchases with the addition of one stand-alone skilled nursing operation and one stand-alone independent living operation for a purchase price of $14,000. The addition of this operation added 59 operational skilled nursing beds and 158 operational senior living units to be operated by the Company's operating subsidiary. As of the date of this report, the preliminary purchase price allocations for each of the acquisitions acquired subsequent to December 31, 2019 were not complete as necessary valuation information was not yet available. As such, the determination of whether these acquisitions should be classified as business combinations or asset acquisitions under ASC 805 will be determined upon completion of the purchase price allocations.

2018 Acquisitions

During the year ended December 31, 2018, the Company expanded its operations through a combination of a long-term lease and real estate purchases, with the addition of four stand-alone skilled nursing operations and three campus operations. The addition of these operations added 744 operational skilled nursing beds and 264 senior living units to be operated by the Company's affiliated operating subsidiaries. In addition, with the stand-alone skilled nursing operation acquisition, the Company acquired real estate that included an adjacent long-term acute care hospital that is currently operated by a third party under a lease arrangement. In addition, in June 2018, the Company acquired an office building for a purchase price of $30,959 to accommodate its growing Service Center team. The aggregate purchase price for these acquisitions during the year ended December 31, 2018 was $84,721, which the fair value of assets for all these acquisitions was concentrated in property and equipment and as such, these transactions were classified as asset acquisitions.

The Company did not acquire any material assets or assume any liabilities other than tenant's post-assumption rights and obligations under the long-term lease. The Company entered into a separate operations transfer agreement with the prior operator as part of each transaction.

In connection with the Spin-Off, the Company transferred the assets of the seven stand-alone senior living operations, four home health agencies, three hospice agencies and two home care agencies which were purchased for an aggregate price of $5,318. The Company retained the real estate for three stand-alone senior living operations.

2017 Acquisitions

The information for the year ended December 31, 2017 presented below reflects the previous accounting policy prior to the adoption of ASC 805. As such, the majority of the acquisitions acquired during the year ended December 31, 2017 were classified as business combinations.

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During the year ended December 31, 2017, the Company expanded its operations through a combination of long-term leases and purchases, with the addition of eight stand-alone skilled nursing operations, two stand-alone senior operations and one campus operation. The addition of these operations added 905 operational skilled nursing beds and 344 senior living units operated by the Company's operating subsidiaries. The Company also invested in new ancillary services that are complementary to its existing businesses. The aggregate purchase price for these acquisitions for the year ended December 31, 2017 was $77,624. Additionally, the Company's operating subsidiaries also opened four newly constructed stand-alone skilled nursing operations under long-term lease agreements, which added 455 operational skilled nursing beds.

In addition to the business combinations above, during the year ended December 31, 2017, the Company acquired Medicare and Medicaid licenses to add to its existing operations for an aggregate purchase price of $195.

The Company did not acquire any material assets or assume any liabilities other than the tenant's post-assumption rights and obligations under the long-term leases. The Company entered into a separate operations transfer agreement with the prior operator as part of each transaction.

In connection with the Spin-Off, the Company transferred the assets of seven stand-alone senior living operations, three home health agencies, three hospice agencies and one home care agency which were purchased for an aggregate price of $12,059. The Company retained the real estate for six stand-alone senior living operations.

The table below presents the allocation of the purchase price for the operations acquired, excluding assets that were contributed to Pennant, during the year ended December 31, 2019, 2018 and 2017:

	December 31,
	2019				2018				2017
Land	$	34,377			$	16,851			$	9,732
Building and improvements	101,217				65,136				53,735
Equipment, furniture, and fixtures	6,024				1,638				4,196
Assembled occupancy	638				202				648
Definite-lived intangible assets	440				—				—
Goodwill	5,382				—				7,121
Favorable leases	294				534				—
Lease acquisition	—				360				—
Other indefinite-lived intangible assets	602				—				2,277
Other assets acquired, net of liabilities assumed	—				—				110
Total acquisitions	$	148,974			$	84,721			$	77,819

The Company’s acquisition strategy has been focused on identifying both opportunistic and strategic acquisitions within its target markets that offer strong opportunities for return. The operating subsidiaries acquired by the Company are frequently underperforming financially and can have regulatory and clinical challenges to overcome. Financial information, especially with underperforming operating subsidiaries, is often inadequate, inaccurate or unavailable. Consequently, the Company believes that prior operating results are not a meaningful representation of the Company’s current operating results or indicative of the integration potential of its newly acquired operating subsidiaries. The businesses acquired during the year ended December 31, 2019 were not material acquisitions to the Company individually or in the aggregate. Accordingly, pro forma financial information is not presented. These acquisitions have been included in the December 31, 2019 consolidated balance sheets of the Company, and the operating results have been included in the consolidated statements of operations of the Company since the dates the Company gained effective control.

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Property and equipment, net consist of the following:

	December 31,
	2019				2018
Land	$	91,740			$	60,420
Buildings and improvements	531,538				410,728
Equipment	212,808				187,909
Furniture and fixtures	4,453				4,496
Leasehold improvements	127,983				109,005
Construction in progress	3,409				9,729
	971,931				782,287
Less: accumulated depreciation	(204,366		)		(173,871		)
Property and equipment, net	$	767,565			$	608,416

The Company completed the sale of real estate for $7,138 during the year ended December 31, 2019, of which $1,859 was classified as held for sale on the consolidated balance sheet as of December 31, 2018. The Company recognized a gain of $2,861 during the year ended December 31, 2019 related to the transaction. In addition, the Company evaluated its long-lived assets and recorded an impairment charge of $3,203, $5,492 and $111 for the fiscal year 2019, 2018 and 2017, respectively.

See also Note 8, Acquisitions for information on acquisitions during the years ended December 31, 2019 and 2018.

				December 31,
				2019												2018
				Gross Carrying Amount				Accumulated Amortization								Gross Carrying Amount				Accumulated Amortization
Intangible Assets												Net												Net
Lease acquisition costs		1.7		$	360			$	(349	)		$	11			$	843			$	(251	)		$	592
Favorable leases		2.1		534				(448		)		86				35,650				(8,724		)		26,926
Assembled occupancy		0.4		2,982				(2,818		)		164				2,344				(2,297		)		47
Facility trade name		30.0		733				(342		)		391				733				(317		)		416
Customer relationships		18.2		4,640				(1,910		)		2,730				4,200				(1,259		)		2,941
Total				$	9,249			$	(5,867	)		$	3,382			$	43,770			$	(12,848	)		$	30,922

During the year ended December 31, 2019, amortization expense was $3,660, of which $1,981 was related to the amortization of right-of-use assets. During the years ended December 31, 2018 and 2017, amortization expense was $2,736 and $2,935, respectively. Favorable leases and lease acquisition costs of $26,939 were reclassed to right-of-use assets as of January 1, 2019, as a part of the adoption of ASC 842. See Note 17, Leases.

Estimated amortization expense for each of the years ending December 31 is as follows:

Year	Amount
2020	$	496
2021	234
2022	234
2023	234
2024	234
Thereafter	1,950
	$	3,382

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The Company tests goodwill during the fourth quarter of each year or more often if events or circumstances indicate there may be impairment. The Company performs its analysis for each reporting unit that constitutes a business for which discrete financial information is produced and reviewed by operating segment management and provides services that are distinct from the other components of the operating segment, in accordance with the provisions of Accounting Standards Codification topic 350, Intangibles—Goodwill and Other (ASC 350). This guidance provides the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value, a "Step 0" analysis. If, based on a review of qualitative factors, it is more likely than not that the fair value of a reporting unit is less than its carrying value, the Company performs "Step 1" of the traditional two-step goodwill impairment test by comparing the net assets of each reporting unit to their respective fair values. The Company determines the estimated fair value of each reporting unit using a discounted cash flow analysis. In the event a unit's net assets exceed its fair value, an implied fair value of goodwill must be determined by assigning the unit's fair value to each asset and liability of the unit. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. An impairment loss is measured by the difference between the goodwill carrying value and the implied fair value.

The Company performs its goodwill impairment test annually and evaluates goodwill when events or changes in circumstances indicate that its carrying value may not be recoverable. The Company performs the annual impairment testing of goodwill using October 1 as the measurement date. The Company completed its goodwill impairment test as of October 1, 2019 and recorded a goodwill impairment charge of $498 for the year ended December 31, 2019 compared to $3,513 of goodwill and $140 of intangible assets impairment charges for the year ended December 31, 2018 for other ancillary services. The Company did not record any impairment charge to goodwill and other intangible assets during the year ended December 31, 2017. Management determined that the improvements in operations and related forecasted cash flows were slower than anticipated at the time of acquisition, resulting in the impairment to goodwill for fiscal years 2019 and 2018.

The Company anticipates that the majority of total goodwill recognized will be fully deductible for tax purposes as of December 31, 2019. See further discussion of goodwill acquired at Note 8, Acquisitions.

The following table represents activity in goodwill by transitional and skilled service segment and "all other" category as of and for the year ended December 31, 2019:

	Transitional and Skilled Services				All Other				Total
January 1, 2017	$	40,636			$	5,341			$	45,977
Additions	4,850				2,271				7,121
December 31, 2017	$	45,486			$	7,612			$	53,098
Impairments	—				(3,513		)		(3,513		)
December 31, 2018	$	45,486			$	4,099			$	49,585
Additions	—				5,382				5,382
Impairments	—				(498		)		(498		)
December 31, 2019	$	45,486			$	8,983			$	54,469

During the year ended December 31, 2019, the Company acquired $602 in Medicare and Medicaid licenses as part of its acquisitions, compared to $2,277 in the fiscal year 2017. The Company did not acquire Medicare and Medicaid licenses during the fiscal year 2018.

Other indefinite-lived intangible assets consists of the following:

	December 31,
	2019				2018
Trade name	$	889			$	889
Medicare and Medicaid licenses	2,179				1,577
	$	3,068			$	2,466

Restricted and other assets consist of the following:

	December 31,
	2019				2018
Debt issuance costs, net	$	3,374			$	1,891
Long-term insurance losses recoverable asset	7,999				6,969
Deposits with landlords	11,765				8,397
Capital improvement reserves with landlords and lenders	3,024				1,109
Other	45				93
Restricted and other assets	$	26,207			$	18,459

Included in restricted and other assets as of December 31, 2019 and 2018 are anticipated insurance recoveries related to the Company's workers' compensation, general and professional liability claims that are recorded on a gross rather than net basis in accordance with an Accounting Standards Update issued by the FASB. Prepaid rent of $5,220, previously included in deposits with landlords above, were reclassified to right-of-use assets as of January 1, 2019, as part of the adoption of ASC 842. See Note 17, Leases.

Other accrued liabilities consist of the following:

	December 31,
	2019				2018
Quality assurance fee	$	6,461			$	5,375
Refunds payable	29,412				23,213
Resident advances	8,870				6,953
Cash held in trust for patients	3,038				2,765
Resident deposits	1,818				355
Dividends payable	2,705				2,525
Property taxes	8,055				8,461
Other	9,914				7,064
Other accrued liabilities	$	70,273			$	56,711

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The provision for income taxes on continuing operations for the years ended December 31, 2019, 2018, and 2017 is summarized as follows:

	Year Ended December 31,
	2019				2018				2017
Current:
Federal	$	14,363			$	7,970			$	4,006
State	5,425				3,362				1,235
	19,788				11,332				5,241
Deferred:
Federal	4,451				1,995				4,173
State	(285		)		(642		)		748
	4,166				1,353				4,921
Adjustment to deferred taxes for tax rate change	—				—				4,044
Total	$	23,954			$	12,685			$	14,206

A reconciliation of the federal statutory rate to the effective tax rate for income from continuing operations for the years ended December 31, 2019, 2018, and 2017, respectively, is comprised as follows:

 

	December 31,
	2019			2018			2017
Income tax expense at statutory rate	21.0	%		21.0	%		35.0	%
State income taxes - net of federal benefit	3.5			2.6			2.8
Non-deductible expenses	0.7			1.1			3.6
Non-deductible compensation	2.4			2.9			—
Equity compensation	(5.2	)		(6.9	)		(9.3	)
Revaluation of deferred	—			(2.8	)		13.0
Other adjustments	(1.8	)		(0.2	)		0.5
Total income tax provision	20.6	%		17.7	%		45.6	%

The Company's effective tax rate was 20.6% for the year ended December 31, 2019, compared to 17.7% for the same period in 2018. The higher effective tax rate reflects a decrease in tax benefit from share-based payment awards and a one-time benefit from IRS approval of non-automatic change for 2018 that did not reoccur in 2019.

The decrease in the effective tax rate from fiscal year 2017 to fiscal year 2018 primarily resulted from the enactment of the Tax Act which reduced the corporate tax rate from 35% to 21%, along with the revaluation benefit in 2018 as compared to 2017. Further, the 2018 rate was lowered by a favorable impact of tax benefits related to stock-based compensation, offset by non-deductible compensation.

The Company's deferred tax assets and liabilities as of December 31, 2019 and 2018 are summarized below.

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	December 31,
	2019				2018
Deferred tax assets (liabilities):
Accrued expenses	$	22,106			$	19,758
Allowance for doubtful accounts	11,842				11,442
Tax credits	2,959				3,504
Insurance	5,952				5,681
Lease liability	264,460				—
	307,319				40,385
Valuation allowance	(791		)		(791		)
Total deferred tax assets	306,528				39,594
State taxes	(220		)		(972		)
Depreciation and amortization	(36,220		)		(24,543		)
Prepaid expenses	(2,822		)		(2,330		)
Right of use asset	(262,651		)		—
Total deferred tax liabilities	(301,913		)		(27,845		)
Net deferred tax assets	$	4,615			$	11,749

The Company implemented ASC 842 as described in the Summary of Significant Accounting Policies. The new lease standard reduced net deferred assets by $3,044, which is reflected in retained earnings as a day one accounting change adjustment.

The Company had state credit carryforwards as of December 31, 2019 and 2018 of $2,959 and $3,504, respectively. These carryforwards almost entirely relate to state limitations on the application of Enterprise Zone employment-related tax credits. Unless the Company uses the Enterprise Zone credits beforehand, the carryforward will begin to expire in 2023. The remainder of these carryforwards relates to credits against the Texas margin tax and is expected to carry forward until 2027. As of December 31, 2019, a valuation allowance of $1,000 was recorded against the Enterprise Zone credits as the Company believes it is more likely than not that some of the benefit of the credits will not be realized.

The Company's operating loss carry forwards for both federal and states were not material during the years ended December 31, 2019 and 2018.

The Federal statutes of limitations on the Company's 2013, 2014, and 2015 income tax years lapsed during the third quarter of 2017, 2018, and 2019, respectively. During the fourth quarter of each year, various state statutes of limitations also lapsed. The lapses for the years ended December 31, 2019, 2018, and 2017 had no impact on the Company's unrecognized tax benefits.

As of December 31, 2019, 2018, and 2017, the Company did not have any unrecognized tax benefits, net of their state benefits, that would affect the Company's effective tax rate. The Company classifies interest and/or penalties on income tax liabilities or refunds as additional income tax expense or income. Such amounts are not material.

Subsequent to the year ended December 31, 2019, the IRS sent notification to the Company that the 2017 tax return will be examined. The Company is not currently under examination by any other major income tax jurisdiction.

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Long-term debt consists of the following:

	December 31,
	2019				2018
Term loan with Truist	$	—			$	113,125
Revolving credit facility with Truist	210,000				10,000
Mortgage loans and promissory note	120,350				122,955
	330,350				246,080
Less: current maturities	(2,702		)		(10,105		)
Less: debt issuance costs	(2,431		)		(2,840		)
	$	325,217			$	233,135

Credit Facility with a Lending Consortium Arranged by Truist

The Company maintains a credit facility with a lending consortium arranged by Truist Financial Corporation ("Truist"), formerly known as SunTrust Bank, Inc. ("SunTrust"). The Company originally entered into the Credit Facility in an aggregate principal amount of $150,000 in May 2014. In 2016, the Company amended the revolving credit facility and increased its aggregate principal amount by $150,000 (the Amended Credit Facility) and again to $450,000, which comprised of a $300,000 revolving credit facility and a $150,000 term loan (the Second Amended Credit Facility). Borrowings under the term loan portion of the Second Amended Credit Facility mature on February 5, 2021 and amortize in equal quarterly installments, in an aggregate annual amount equal to 5.00% per annum of the original principal amount.

On October 1, 2019, in connection with the Spin-Off, the Company entered into the third amendment to the current amended credit facility (Third Amended Credit Facility), with a revolving line of credit of up to $350,000 in aggregate principal. The maturity date of the Third Amended Credit Facility is October 1, 2024. Borrowings are supported by a lending consortium arranged by Truist. In connection with the amendment, the Company also terminated the term loan under the Second Amended Credit Facility, which had an aggregate outstanding principal amount of $107,500, plus accrued and unpaid interest as of September 30, 2019. The interest rates applicable to loans under the Third Amended and Restated Credit Facility are, at the Company's option, equal to either a base rate plus a margin ranging from 0.50% to 1.50% per annum or LIBOR plus a margin range from 1.50% to 2.50% per annum, based on the Consolidated Total Net Debt to Consolidated EBITDA ratio (as defined in the agreement). In addition, the Company will pay a commitment fee on the unused portion of the commitments that will range from 0.25% to 0.45% per annum, depending on the Consolidated Total Net Debt to Consolidated EBITDA ratio. Except as set forth in the Third Amended and Restated Credit Facility, all other terms and conditions of the Amended Credit Facility remained in full force and effect as described below.

The Credit Facility is guaranteed, jointly and severally, by certain of the Company’s wholly owned subsidiaries, and is secured by a pledge of stock of the Company's material operating subsidiaries as well as a first lien on substantially all of its personal property. The credit facility contains customary covenants that, among other things, restrict, subject to certain exceptions, the ability of the Company and its operating subsidiaries to grant liens on their assets, incur indebtedness, sell assets, make investments, engage in acquisitions, mergers or consolidations, amend certain material agreements and pay certain dividends and other restricted payments. Under the Credit Facility, the Company must comply with financial maintenance covenants to be tested quarterly, consisting of (i) a maximum consolidated total net debt to consolidated EBITDA ratio (which shall not be greater than 3.00:1.00; provided that if the aggregate consideration for approved acquisitions in a six month period is greater than $50,000, then the ratio can be increased at the election of the Company with notice to the administrative agent to 3.50:1.00 for the first fiscal quarter and the immediately following three fiscal quarters), and (ii) a minimum interest/rent coverage ratio (which cannot be less than1.50:1.00). As of December 31, 2019, the Company's operating subsidiaries had $210,000 outstanding under the Credit Facility. The Company was in compliance with all loan covenants as of December 31, 2019. In addition, the Company incurred $2,494 of debt issuance costs associated with the Third Amended and Restated Credit Facility.

As of January 31, 2020, there was approximately $200,000 of outstanding borrowings under the Credit Facility.

Mortgage Loans and Promissory Note

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As of December 31, 2019, 19 of the Company's subsidiaries are under mortgage loans insured with the Department of Housing and Urban Development (HUD)in the aggregate amount of $116,080, which subjects these subsidiaries to HUD oversight and periodic inspections. The mortgage loans bear fixed interest rates ranging from 2.6% to 3.5% per annum. Amounts borrowed under the mortgage loans may be prepaid, subject to prepayment fees of the principal balance on the date of prepayment. For the majority of the loans, during the first three years, the prepayment fee is 10% and is reduced by 3% in the fourth year of the loan, and reduced by 1.0% per year for years five through ten of the loan. There is no prepayment penalty after year ten. The terms for all the mortgage loans are 25 to 35 years. The borrowings were arranged by Lancaster Pollard Mortgage Company, LLC, and insured by HUD. Loan proceeds were used to pay down previously drawn amounts on Ensign's revolving line of credit. In addition to refinancing existing borrowings, the proceeds of the HUD-insured debt helped fund acquisitions, to renovate and upgrade existing and future facilities, to cover working capital needs and for other business purposes.

In addition to the HUD mortgage loans above, the Company has a promissory note issued in connection with various acquisitions. The note bears a fixed interest rate of 5.3% per annum. The term of the note is 12 years. The note is secured by the real property comprising the facilities and the rents, issues and profits thereof, as well as all personal property used in the operation of the facilities.

As of December 31, 2019, the Company's operating subsidiaries had $120,350 outstanding under the mortgage loans and note, of which $2,702 is classified as short-term and the remaining $117,648 is classified as long-term. The Company was in compliance with all loan covenants as of December 31, 2019.

Based on Level 2, the carrying value of the Company's long-term debt is considered to approximate the fair value of such debt for all periods presented based upon the interest rates that the Company believes it can currently obtain for similar debt.

Future principal payments due under the long-term debt arrangements discussed above are as follows:

Years Ending
December 31,		Amount
2020		$	2,702
2021		2,802
2022		2,906
2023		3,016
2024		213,128
Thereafter		105,796
		$	330,350

Off-Balance Sheet Arrangements

Stock-based compensation expense consists of share-based payment awards made to employees and directors, including employee stock options and restricted stock awards, based on estimated fair values. As stock-based compensation expense recognized in the Company’s consolidated statements of income for the years ended December 31, 2019, 2018, and 2017 was based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. The Company estimates forfeitures at the time of grant and, if necessary, revises the estimate in subsequent periods if actual forfeitures differ.

During the second quarter of 2017, the Company's stockholders approved the 2017 Omnibus Incentive Plan (the 2017 Plan). The Company retired the 2001 Stock Option, Deferred Stock and Restricted Stock Plan (2001 Plan), the 2005 Stock Incentive Plan (2005 Plan), and the 2007 Omnibus Incentive Plan (2007 Plan) as a result of the approval of the 2017 Plan.

2017 Omnibus Incentive Plan - The Company has one active stock incentive plan, the 2017 Omnibus Incentive Plan (the 2017 Plan). The 2017 Plan provided for the issuance of 6,881 shares of common stock which are to be proportionally adjusted in the event of any Equity Restructuring. In connection with the Spin-Off, the number of shares available to be issued under the 2017 Plan were adjusted in the current year in order to reflect the proportional adjustments. The adjustment provides for a total issuance

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of 8,118 shares of common stock (Spin-Off Conversion). The number of shares available to be issued under the 2017 Plan will be reduced by (i) one share for each share that relates to an option or stock appreciation right award and (ii) 2.5 shares for each share which relates to an award other than a stock option or stock appreciation right award (a full-value award). Granted non-employee director options vest and become exercisable in three equal annual installments, or the length of the term if less than three years, on the completion of each year of service measured from the grant date. All other options generally vest over 5 years at 20% per year on the anniversary of the grant date. Options expire 10 years from the date of grant. At December 31, 2019, reflective of the Spin-Off, there were approximately 4,409 unissued shares of common stock available for issuance under this plan.

The Company uses the Black-Scholes option-pricing model to recognize the value of stock-based compensation expense for all share-based payment awards. Determining the appropriate fair-value model and calculating the fair value of stock-based awards at the grant date requires considerable judgment, including estimating stock price volatility, expected option life and forfeiture rates. The Company develops estimates based on historical data and market information, which can change significantly over time. The Black-Scholes model required the Company to make several key judgments including:

•	The expected option term is calculated by the average of the contractual term of the options and the weighted average vesting period for all options. The calculation of the expected option term is based on the Company's experience due to sufficient history.

•	Estimated volatility also reflects the application of ASC 718 interpretive guidance and, accordingly, incorporates historical volatility of similar public entities until sufficient information regarding the volatility of the Company's share price becomes available. The Company has utilized its own experience to calculate estimated volatility for options granted.

•	The dividend yield is based on the Company's historical pattern of dividends as well as expected dividend patterns.

•	The risk-free rate is based on the implied yield of U.S. Treasury notes as of the grant date with a remaining term approximately equal to the expected term.

•	Estimated forfeiture rate of approximately 9.10% per year is based on the Company's historical forfeiture activity of unvested stock options.

Modifications of Equity Awards

Effective at the time of the consummation of the Spin-Off, all holders of the Company's restricted stock awards on the date of record for the Spin-Off, received Pennant restricted stock awards consistent with the distribution ratio, with terms and conditions substantially similar to the terms and conditions applicable to the Company's restricted stock awards. For purposes of the vesting of these equity awards, continued employment or service with Ensign or with Pennant is treated as continued employment for purposes of both Ensign's and Pennant's equity awards and the vesting terms of each converted grant remained unchanged. Also, effective with the Spin-Off, the holders of the Company's stock options on the date of record received stock options consistent with a conversion ratio that was necessary to maintain the pre Spin-Off intrinsic value of the options. The stock options terms and conditions are based on the preexisting terms in the 2017 Plan, including nondiscretionary antidilution provisions. In order to preserve the aggregate intrinsic value of the Company's stock options held by such persons, the exercise prices of such awards were adjusted by using the proportion of the Pennant closing stock price to the total Company closing stock prices on the distribution date. All of these adjustments were designed to equalize the fair value of each award before and after Spin-Off. These adjustments were accounted for as modifications to the original awards. Due to the modification of the equity options as a result of the Spin-Off, the Company compared the fair value of the original equity awards immediately before and after the Spin-Off and no incremental fair value was recognized as a result of the above adjustments due to immateriality. Accordingly, the Company did not record any incremental compensation expense as a result of the modifications to the awards on the date of the Spin-Off.

The Company's future share-based compensation expense will not be significantly impacted by the equity award adjustments that occurred as a result of the Spin-Off. Deferred compensation costs as of the date of the Spin-Off reflected the unamortized balance of the original grant date fair value of the equity awards held by the employees of the Company's operating subsidiaries (regardless of whether those awards are linked to the Company's stock or Pennant's stock).

Stock Options

The Company granted 776 options and 290 restricted stock awards from the 2017 Plan during the year ended December 31, 2019. The Company used the following assumptions for stock options granted during the years ended December 31, 2019, 2018, and 2017:

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Grant Year		Options Granted(1)		Weighted Average Risk-Free Rate		Expected Life		Weighted Average Volatility		Weighted Average Dividend Yield
2019		776		2.0%		6.2 years		34.0%		0.4%
2018		640		2.8%		6.2 years		32.0%		0.5%
2017		481		2.0%		6.2 years		35.2%		0.8%

(1) Options granted represents historical grant values prior to the Spin-Off discussed above for fiscal years 2017 and 2018.

For the years ended December 31, 2019, 2018, and 2017, the following represents the exercise price and fair value displayed at grant date for stock option grants:

Grant Year		Granted(1)			Weighted Average Exercise Price(2)				Weighted Average Fair Value of Options(3)
2019		776			$	44.31			$	15.71
2018		640			$	29.27			$	10.21
2017		481			$	17.21			$	5.93

(1) Options granted from January 1, 2017 through September 30, 2019 represents historical grant values prior to the impact of the Spin-Off as discussed above. Options granted from October 1, 2019 - December 31, 2019 reflect the impact of the Spin-Off Conversion.

(2) Weighted average exercise price was calculated using exercise prices reflective of the Spin-Off Conversion.

(3) Weighted average fair value of options was calculated using the fair values reflective of the Spin-Off Conversion.

The weighted average exercise price equaled the weighted average fair value of common stock on the grant date for all options granted during the periods ended December 31, 2019, 2018, and 2017 and therefore, the intrinsic value was $0 at the date of grant.

The following table represents the employee stock option activity during the years ended December 31, 2019, 2018, and 2017:

	Number of Options Outstanding(1)			Weighted Average Exercise Price(3)				Number of Options Vested(1)			Weighted Average Exercise Price of Options Vested(3)
January 1, 2017	5,176			$	9.85			2,704			$	6.93
Granted	481			17.21
Forfeited	(178	)		4.93
Exercised	(740	)		5.87
December 31, 2017	4,739			$	11.09			2,776			$	8.53
Granted	640			29.27
Forfeited	(120	)		15.86
Exercised	(1,071	)		7.26
December 31, 2018	4,188			$	14.71			2,431			$	10.48
Granted	776			44.31
Forfeited	(63	)		26.84
Exercised	(809	)		8.83
Equitable adjustment - due to Spin-Off(2)	336			N/A
December 31, 2019	4,428			$	20.85			2,557			$	12.82

(1) Options activity from January 1, 2017 through September 30, 2019 represents historical grant values prior to the impact of the Spin-Off as discussed above. Options activity from October 1, 2019 - December 31, 2019 reflect the impact of the Spin-Off Conversion.

(2) The equitable adjustment represents equity awards modifications upon the Spin-Off Conversion related to fiscal years prior to October 1, 2019.

(3) Weighted average exercise prices were calculated using exercise prices reflective of the Spin-Off Conversion for all periods presented.

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The following summary information reflects stock options outstanding, vested and related details as of December 31, 2019:

		Stock Options Outstanding													Stock Options Vested
						Number Outstanding			Black-Scholes Fair Value				Remaining Contractual Life (Years)		Vested and Exercisable
Year of Grant		Exercise Price
2010		$4.04	-	$4.20		40			82				1		40
2011		5.00	-	6.77		77			148				2		77
2012		5.56	-	6.75		210			654				3		210
2013		6.76	-	9.74		360			1,480				4		360
2014		8.94	-	16.05		1,024			4,906				5		1,024
2015		18.20	-	21.39		452			3,490				6		344
2016		18.79	-	19.89		381			2,254				7		212
2017		15.80	-	22.90		448			2,649				8		161
2018		22.49	-	32.71		675			6,907				9		129
2019		43.59	-	45.76		761			11,947				10		—
Total						4,428			$	34,517					2,557

Restricted Stock Awards

The Company granted 290, 367 and 173 restricted stock awards during the years ended December 31, 2019, 2018, and 2017, respectively. All awards were granted at an issued price of $0 and generally vest over five years. The fair value per share of restricted awards granted during the years ended December 31, 2019, 2018, and 2017 ranged from $35.33 to $48.64, $20.01 to $32.71 and $15.65 to $19.41, respectively. The fair value per share includes quarterly stock awards to non-employee directors.

A summary of the status of the Company's non-vested restricted stock awards as of December 31, 2019 and changes during the year ended December 31, 2019 is presented below:

	Non-Vested Restricted Awards			Weighted Average Grant Date Fair Value(1)
Nonvested at January 1, 2017	429			$	17.31
Granted	173			17.13
Vested	(195	)		16.77
Forfeited	(24	)		17.24
Nonvested at December 31, 2017	383			$	17.50
Granted	367			29.83
Vested	(153	)		19.22
Forfeited	(24	)		19.76
Nonvested at December 31, 2018	573			$	24.84
Granted	290			43.51
Vested	(241	)		30.24
Forfeited	(12	)		28.49
Nonvested at December 31, 2019	610			$	31.35

(1) Weighted average grant date fair value was calculated using the fair values reflective of the Spin-Off Conversion.

During the year ended December 31, 2019, the Company granted 25 automatic quarterly stock awards to non-employee directors for their service on the Company's board of directors. The fair value per share of these stock awards ranged from $35.33 to $48.64 based on the market price on the grant date.

Share-based compensation expense recognized for the Company's equity incentive plans for the years ended December 31, 2019, 2018, and 2017 was as follows:

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	Year Ended December 31,
	2019(1)				2018(1)				2017(1)
Share-based compensation expense related to stock options	$	5,148			$	4,545			$	4,386
Share-based compensation expense related to restricted stock awards	4,955				2,927				2,133
Share-based compensation expense related to stock options and restricted stock awards to non-employee directors	1,219				895				1,236
Total	$	11,322			$	8,367			$	7,755

(1) The amount of share-based compensation expense that was classified as discontinued operations was $424, $592 and $576 for the periods ended December 31, 2019, 2018 and 2017, respectively.

In future periods, the Company expects to recognize approximately $18,726 and $16,916 in share-based compensation expense for unvested options and unvested restricted stock awards, respectively, that were outstanding as of December 31, 2019. Future share-based compensation expense will be recognized over 3.9 weighted average years for both unvested options and restricted stock awards. There were 1,871 unvested and outstanding options at December 31, 2019, of which 1,754 are expected to vest. The weighted average contractual life for options outstanding, vested and expected to vest at December 31, 2019 was 6.1 years.

The aggregate intrinsic value of options outstanding, vested, expected to vest and exercised as of years ended December 31, 2019, 2018, and 2017 is as follows:

		December 31,
Options		2019				2018				2017
Outstanding		$	108,623			$	89,806			$	44,060
Vested		83,243				64,222				33,976
Expected to vest		22,399				22,963				9,311
Exercisable		29,032				27,646				10,481

The intrinsic value is calculated as the difference between the market value of the underlying common stock and the exercise price of the options. The options outstanding, vested, expected to vest and exercisable as of December 31, 2018 and 2017 were calculated using amounts prior to the Spin-Off. The options outstanding, vested, expected to vest and exercisable as of December 31, 2019 were calculated using amounts reflective of the Spin-Off.

Equity Instrument Denominated in the Shares of a Subsidiary

On May 26, 2016, the Company granted stock options and restricted stock awards in the Subsidiary Equity Plan to employees and management of the subsidiary that the Company contributed net assets to Pennant prior to the consummation of the Spin-off. Effective upon the Spin-Off, on October 1, 2019, all shares under the Plan were converted to Pennant shares.

The Company did not grant any new restricted shares during the years ended December 31, 2019, 2018, and 2017. These awards generally vested over a period of three to five years, or upon the occurrence of certain prescribed events. During each of the years ended December 31, 2019, 2018, and 2017, 976 restricted stock awards vested.

The Company granted 221 and 174 of stock options during the years ended December 31, 2018, and 2017, respectively. The Company did not grant any new stock options during the year ended December 31, 2019. The value of the stock options and restricted stock awards had been tied to the value of the common stock of the subsidiary. Prior to the Spin-Off, the awards could be put to the Company at various prescribed dates, which in no event was earlier than six months after vesting of the restricted awards or exercise of the stock options. The Company had the ability to call the awards, generally upon employee termination.

Prior to the Spin-Off, the grant-date fair value of the awards was recognized as compensation expense over the relevant vesting periods, with a corresponding adjustment to noncontrolling interests. As a result of the conversion of the Subsidiary Equity Plan, the Company's noncontrolling interest in the subsidiary was eliminated. The grant values were determined based on an independent valuation of the subsidiary shares. For the years ended December 31, 2019, 2018, and 2017, the Company expensed $594, $1,378 and $1,364, respectively, in share-based compensation related to the Subsidiary Equity Plan. The reduction in expense for the year ended December 31, 2019 is related to the vesting completion for certain restricted shares, which vested over a period of three years. Stock-based compensation expense related to the Subsidiary Equity Plan is included within the Company's consolidated financial statements as discontinued operations.

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During the years ended December 31, 2019 and 2018, the Company repurchased 534 and 865 shares of common stock, respectively, under the Subsidiary Equity Plan for $2,687 and $1,972, respectively. The Company subsequently sold the shares and received net proceeds of $2,293 and $1,972, respectively during the years ended December 31, 2019 and 2018. These proceeds have been included as net investing activities from discontinued operation on the consolidated statements of cash flow.

Long-Term Incentive Plan

On August 27, 2019, the Board approved the Long-Term Incentive Plan (The 2019 LTI Plan). The 2019 LTI Plan provides that certain employees of the Company and Pennant who assisted in the consummation of the Spin-Off are granted shares of restricted stock upon the successful completion of the Spin-Off. The 2019 LTI Plan provides for the issuance of 500 shares of Pennant restricted stock. The shares are vested over five years at 20% per year on the anniversary of the grant date. If a recipient is terminated or voluntarily leaves the Company, all shares subject to restriction or not yet vested shall be entirely forfeited. The total stock-based compensation related to the 2019 LTI Plan was approximately $271 as of the year ended December 31, 2019.

The Company leases from CareTrust REIT, Inc. (CareTrust) real property associated with 83 affiliated skilled nursing, senior living facilities used in the Company’s operations under eight “triple-net” master lease agreements (collectively, the Master Leases), which range in terms from 12 to 20 years. In connection with the Spin-Off, 11 of the original 94 properties under the CareTrust lease were transferred to Pennant. At the Company’s option, the Master Leases may be extended for two or three five-year renewal terms beyond the initial term, on the same terms and conditions. The extension of the term of any of the Master Leases is subject to the following conditions: (1) no event of default under any of the Master Leases having occurred and being continuing; and (2) the tenants providing timely notice of their intent to renew. The term of the Master Leases is subject to termination prior to the expiration of the then current term upon default by the tenants in their obligations, if not cured within any applicable cure periods set forth in the Master Leases. If the Company elects to renew the term of a Master Lease, the renewal will be effective to all, but not less than all, of the leased property then subject to the Master Lease.

The Company does not have the ability to terminate the obligations under a Master Lease prior to its expiration without CareTrust’s consent. If a Master Lease is terminated prior to its expiration other than with CareTrust’s consent, the Company may be liable for damages and incur charges such as continued payment of rent through the end of the lease term as well as maintenance and repair costs for the leased property.

Commencing the third year, the rent structure under the Master Leases includes a fixed component, subject to annual escalation equal to the lesser of (1) the percentage change in the Consumer Price Index (but not less than zero) or (2) 2.5%. In addition to rent, the Company is required to pay the following: (1) all impositions and taxes levied on or with respect to the leased properties (other than taxes on the income of the lessor); (2) all utilities and other services necessary or appropriate for the leased properties and the business conducted on the leased properties; (3) all insurance required in connection with the leased properties and the business conducted on the leased properties; (4) all facility maintenance and repair costs; and (5) all fees in connection with any licenses or authorizations necessary or appropriate for the leased properties and the business conducted on the leased properties. Total rent expense for continuing operations under the Master Leases was approximately $55,644, $53,501 and $52,284 for the years ended December 31, 2019, 2018, and 2017, respectively.

Among other things, under the Master Leases, the Company must maintain compliance with specified financial covenants measured on a quarterly basis, including a portfolio coverage ratio and a minimum rent coverage ratio. The Master Leases also include certain reporting, legal and authorization requirements. The Company is not aware of any defaults as of December 31, 2019.

In connection with the Spin-Off, the Company amended the Master Leases with CareTrust and other third party lease agreements. These amendments terminated the leases related to Pennant and modified the rental payments and lease terms of the operations that remained with Ensign. In accordance with ASC 842, the amended lease agreements are considered to be modified and subject to lease modification guidance. The amended lease agreements are considered to be modified and subject to lease modification guidance. The right-of-use (ROU) asset and lease liabilities related to these agreements were remeasured based on the change in the lease conditions such as rent payment and lease terms. The incremental borrowing rate was adjusted to reflect the revised lease terms which became effective at the date of the modification, which is the date of the Spin-Off. The net impact of the lease termination, for the 23 leases that transferred to Pennant and modification of lease agreements, is a reduction in ROU asset and lease liabilities of approximately $35,000. The annual rent expense transferred to Pennant was approximately $23,000.

In connection with the Spin-Off, the Company also guaranteed certain leases of Pennant based on the underlying terms of the leases. The Company does not consider these guarantees to be probable, and cannot estimate the maximum exposure.

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The Company also leases certain affiliated operations and its administrative offices under non-cancelable operating leases, most of which have initial lease terms ranging from five to 20 years. The Company has entered into multiple lease agreements with various landlords to operate newly constructed state-of-the-art, full-service healthcare resorts. The term of each lease is 15 years with two five-year renewal options and is subject to annual escalation equal to the percentage change in the Consumer Price Index with a stated cap percentage. In addition, the Company leases certain of its equipment under non-cancelable operating leases with initial terms ranging from three to five years. Most of these leases contain renewal options, certain of which involve rent increases. Total rent expense for continuing operations inclusive of straight-line rent adjustments and rent associated with the Master Leases noted above, was $125,167, $118,192 and $112,512 for the years ended December 31, 2019, 2018, and 2017, respectively.

Forty-two of the Company’s affiliated facilities, excluding the facilities that are operated under the Master Leases with CareTrust, are operated under eight separate master lease arrangements. Under these master leases, a breach at a single facility could subject one or more of the other facilities covered by the same master lease to the same default risk. Failure to comply with Medicare and Medicaid provider requirements is a default under several of the Company’s leases, master lease agreements and debt financing instruments. In addition, other potential defaults related to an individual facility may cause a default of an entire master lease portfolio and could trigger cross-default provisions in the Company’s outstanding debt arrangements and other leases. With an indivisible lease, it is difficult to restructure the composition of the portfolio or economic terms of the lease without the consent of the landlord.

In first quarter of 2017, the Company voluntarily discontinued operations at one of its skilled nursing facilities after determining that the facility could not competitively operate in the marketplace without substantial investment renovating the building. After careful consideration, the Company determined that the costs to renovate the facility could outweigh the future returns from the operation. As part of this closure, the Company entered into an agreement with its landlord allowing for the closure of the property, as well as other provisions, to allow its landlord to transfer the property and the licenses free and clear of the applicable master lease. This arrangement does not impact the rent expense paid in 2017, or expected to be paid in future periods, and has no material impact on the Company's lease coverage ratios under the Master Leases. The Company recorded a continued obligation liability under the lease and related closing expenses of $2,830, including the present value of rental payments of approximately $2,715 during the first quarter of 2017. Residents of the affected facility were transferred to local skilled nursing facilities.

In March 2017, the Company entered into definitive agreements to sell the properties of two skilled nursing facilities and one senior living community. The transaction closed in the second quarter of 2017. Upon closing the transaction, the Company leased the properties under a triple-net master lease with an initial 20-year term, with three 5-year optional extensions, at CPI-based annual escalators. The Company received $38,000 in proceeds. The carrying value for the sale was $24,847. Under applicable accounting guidance, the master lease was classified as an operating lease. The Company recognized a deferred gain on the transaction of $13,153 during the second quarter of 2017 that is amortized over the life of the lease. The gain was subsequently written off in the 2019 when the Company adopted ASC 842.

During the first quarter of 2017, the Company terminated its lease obligations on four transitional care facilities that were under development at that time and one newly constructed stand-alone skilled nursing operation. The Company recorded $1,187 in lease termination costs and long-lived asset impairment.

Impact of New Leases Guidance

As described further in Note 2, Summary of Significant Accounting Policies, the Company adopted Topic 842, as of January 1, 2019. Prior period amounts have not been adjusted and continue to be reported in accordance with our historic accounting under ASC 840.

All of the Company's leases are classified as operating leases. The components of lease assets and liabilities are included in the consolidated balance sheets.

The following table summarizes the impact of the adoption of the new lease accounting guidance on the Company’s consolidated balance sheet as of January 1, 2019.

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		Balance at December 31, 2018				Adjustments due to new lease guidance				January 1, 2019				Balance at December 31, 2019
Total assets(1)		$	1,181,958			$	1,015,937			$	2,197,895			$	2,361,909
Total liabilities(2)		579,618				1,006,907				1,586,525				1,705,765
Total equity		602,340				9,030				611,370				656,144

(1) Adjustment in assets includes the reclassification of intangible assets, prepaid rent and deferred rent into right-of-use assets and the decrease in deferred tax assets due to the removal of deferred gain related to sale-leaseback as of January 1, 2019.

(2) Adjustment in liabilities includes the reclassification of other liabilities into lease liabilities and the removal of deferred gain related to sale-lease back as of January 1, 2019.

The components of operating lease expense⁽¹⁾, are as follows:

		Year Ended December 31,
		2019				2018				2017
Rent - cost of services(2)		$	124,789			$	117,676			$	111,980
General and administrative expense		378				516				532
Depreciation and amortization(3)		1,981				1,993				2,000
		$	127,148			$	120,185			$	114,512

(1) Operating lease expenses include variable lease costs for continuing operations of $13,680 during the year ended December 31, 2019. In addition, short-term leases are included in operating leases, which are immaterial.

(2) Rent- cost of services includes the amortization of deferred rent of $318 for the year ended December 31, 2019.

(3) Depreciation and amortization is related to the amortization of favorable and direct lease costs.

Future minimum lease payments for all leases as of December 31, 2019 are as follows:

Year		Amount
2020		$	126,901
2021		126,524
2022		125,303
2023		123,567
2024		122,586
Thereafter		1,130,599
Total lease payments		1,755,480
Less: present value adjustment		(736,533		)
Present value of total lease liabilities		1,018,947
Less: current lease liabilities		(44,964		)
Long-term operating lease liabilities		$	973,983

Future minimum lease payments for all leases as of December 31, 2018 were as follows:

Year		Amount
2019		$	142,497
2020		141,536
2021		140,524
2022		139,018
2023		137,349
Thereafter		967,027
Total lease payments		$	1,667,951

As of January 31, 2020, the Company had additional operating lease agreements that had been signed, but not yet commenced, of approximately $18,620. The operating leases will commence between the fiscal year 2020 and fiscal year 2021 with lease terms of 20 to 36 years.

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Operating lease liabilities are based on the net present value of the remaining lease payments over the remaining lease term. In determining the present value of lease payments, the Company used its incremental borrowing rate based on the information available at the lease commencement date. As of December 31, 2019, the weighted average remaining lease term is 14.6 and the weighted average discount rate used to determine the operating lease liability is 8.3%.

Lessor Activities

In connection with the Spin-Off, Ensign affiliates retained ownership of the real estate at 29 senior living operations that were contributed to Pennant. All of these properties are leased to Pennant on a triple-net basis, where as the respective Pennant affiliates are responsible for all costs at the properties including (1) all impositions and taxes levied on or with respect to the leased properties (other than taxes on the income of the lessor); (2) all utilities and other services necessary or appropriate for the leased properties and the business conducted on the leased properties; (3) all insurance required in connection with the leased properties and the business conducted on the leased properties; (4) all facility maintenance and repair costs; and (5) all fees in connection with any licenses or authorizations necessary or appropriate for the leased properties and the business conducted on the leased properties. The initial terms range between 14 to 16 years. Annual rental income generated from the leases with Pennant is $12,164. The variable rent such as property taxes, insurance and other items is not material for the year ended December 31, 2019.

In addition, the Company also leased to other third-party tenants which includes office spaces at the Service Center location. For the years ended December 31, 2019 and 2018, other third-party rental income was $2,771 and $2,154, respectively. Total rental income from all sources for the years ended December 31, 2019 and 2018 was $5,812 and $2,154, respectively.

Future minimum lease payments receivable for all leases as of December 31, 2019 were as follows:

Year		Amount
2020		$	16,263
2021		14,988
2022		14,537
2023		14,375
2024		14,286
Thereafter		116,235
Total lease payments receivable		$	190,684

The following table represents activity in our insurance reserves as of and for the years ended December 31, 2019 and 2018:

 

	General and Professional Liability
					Workers' Compensation
									Health				Total
Balance January 1, 2018	$	40,934			$	27,079			$	4,723			$	72,736
Current year provisions	22,028				12,990				43,441				78,459
Claims paid and direct expenses	(18,391		)		(11,987		)		(42,341		)		(72,719		)
Change in long-term insurance losses recoverable	795				780				—				1,575
Balance December 31, 2018	$	45,366			$	28,862			$	5,823			$	80,051
Current year provisions	25,718				13,479				45,498				84,695
Claims paid and direct expenses	(21,369		)		(12,684		)		(44,357		)		(78,410		)
Change in long-term insurance losses recoverable	353				677				—				1,030
Balance December 31, 2019	$	50,068			$	30,334			$	6,964			$	87,366

 

 

Regulatory Matters — Laws and regulations governing Medicare and Medicaid programs are complex and subject to interpretation. Compliance with such laws and regulations can be subject to future governmental review and interpretation, as well as significant regulatory action including fines, penalties, and exclusion from certain governmental programs. Included in these laws and regulations is the Health Insurance Portability and Accountability Act of 1996 (HIPAA), which requires healthcare providers (among other things) to safeguard the privacy and security of certain health information. In late December of 2016, the Company learned of a potential issue at one of its independent operating entities in Arizona which involved the limited and inadvertent disclosure of certain confidential information. The issue has been internally investigated, addressed and disclosed as required by law. This matter was resolved in the second quarter of 2019. The Company believes that it is presently in compliance in all material respects with applicable HIPAA laws and regulations.

Cost-Containment Measures — Both government and private pay sources have instituted cost-containment measures designed to limit payments made to providers of healthcare services, and there can be no assurance that future measures designed to limit payments made to providers will not adversely affect the Company.

Indemnities — From time to time, the Company enters into certain types of contracts that contingently require the Company to indemnify parties against third-party claims. These contracts primarily include (i) certain real estate leases, under which the Company may be required to indemnify property owners or prior facility operators for post-transfer environmental or other liabilities and other claims arising from the Company’s use of the applicable premises, (ii) operations transfer agreements, in which the Company agrees to indemnify past operators of facilities the Company acquires against certain liabilities arising from the transfer of the operation and/or the operation thereof after the transfer to the Company's independent operating subsidiary, (iii) certain lending agreements, under which the Company may be required to indemnify the lender against various claims and liabilities, and (iv) certain agreements with the Company’s officers, directors and employees, under which the Company may be required to indemnify such persons for liabilities arising out of their employment relationships or relationship to the Company. The terms of such obligations vary by contract and, in most instances, do not expressly state or include a specific or maximum dollar amount. Generally, amounts under these contracts cannot be reasonably estimated until a specific claim is asserted. Consequently, because no claims have been asserted, no liabilities have been recorded for these obligations on the Company’s consolidated balance sheets for any of the periods presented.

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U.S. Department of Justice Civil Investigative Demand - On May 31, 2018, the Company received a Civil Investigative Demand (CID) from the U.S. Department of Justice stating that it is investigating whether there has been a violation of the False Claims Act and/or the Anti-Kickback Statute with respect to the relationships between certain of the Company’s independently operated skilled nursing facilities and persons who served as medical directors, advisory board participants or other potential referral sources. The CID covered the period from October 3, 2013 to the present, and was limited in scope to ten of the Company’s Southern California independent operating entities. In October 2018, the Department of Justice made an additional request for information covering the period of January 1, 2011 to the present, relating to the same topic. As a general matter, the Company’s independent operating entities maintain policies and procedures to promote compliance with the False Claims Act, the Anti-Kickback Statute, and other applicable regulatory requirements. The Company is fully cooperating with the U.S. Department of Justice to promptly respond to the requests for information. However, the Company cannot predict when the investigation will be resolved, the outcome of the investigation, or its potential impact on the Company.

Litigation — The skilled nursing business involves a significant risk of liability given the age and health of the patients and residents served by the Company's independent operating subsidiaries. The Company, its independent operating subsidiaries, and others in the industry are subject to an increasing number of claims and lawsuits, including professional liability claims, alleging that services provided have resulted in personal injury, elder abuse, wrongful death or other related claims. The defense of these lawsuits may result in significant legal costs, regardless of the outcome, and can result in large settlement amounts or damage awards.

In addition to the potential lawsuits and claims described above, the Company is also subject to potential lawsuits under the Federal False Claims Act and comparable state laws alleging submission of fraudulent claims for services to any healthcare program (such as Medicare) or payor. A violation may provide the basis for exclusion from Federally-funded healthcare programs. Such exclusions could have a correlative negative impact on the Company’s financial performance. Some states, including California, Arizona and Texas, have enacted similar whistleblower and false claims laws and regulations. In addition, the Deficit Reduction Act of 2005 created incentives for states to enact anti-fraud legislation modeled on the Federal False Claims Act. As such, the Company could face increased scrutiny, potential liability and legal expenses and costs based on claims under state false claims acts in markets in which its independent operating subsidiaries do business.

In May 2009, Congress passed the Fraud Enforcement and Recovery Act (FERA) which made significant changes to the Federal False Claims Act (FCA) and expanded the types of activities subject to prosecution and whistleblower liability. Following changes by FERA, health care providers face significant penalties for the knowing retention of government overpayments, even if no false claim was involved. Health care providers can now be liable for knowingly and improperly avoiding or decreasing an obligation to pay money or property to the government. This includes the retention of any government overpayment. The government can argue, therefore, that a FCA violation can occur without any affirmative fraudulent action or statement, as long as it is knowingly improper. In addition, FERA extended protections against retaliation for whistleblowers, including protections not only for employees, but also contractors and agents. Thus, an employment relationship is generally not required in order to qualify for protection against retaliation for whistleblowing.

Healthcare litigation (including class action litigation) is common and is filed based upon a wide variety of claims and theories, and the Company's independent operating subsidiaries are routinely subjected to varying types of claims. One particular type of suit arises from alleged violations of minimum staffing requirements for skilled nursing facilities in those states which have enacted such requirements. The alleged failure to meet these requirements can, among other things, jeopardize a facility's compliance with the requirements of participation under certain state and federal healthcare programs; it may also subject the facility to a deficiency, a citation, a civil money penalty, or litigation. These class-action “staffing” suits have the potential to result in large jury verdicts and settlements. The Company expects the plaintiffs' bar to continue to be aggressive in their pursuit of these staffing and similar claims.

The Company and its independent operating subsidiaries have in the past been subject to class action litigation involving claims of alleged violations of regulatory requirements related to staffing. While the Company has been able to settle these claims without a material ongoing adverse effect on its business, future claims could be brought that may materially affect its business, financial condition and results of operations. Other claims and suits, including class actions, continue to be filed against the Company and other companies in its industry. The Company has been subjected to, and is currently involved in, class action litigation alleging violations (alone or in combination) of state and federal wage and hour law as related to the alleged failure to pay wages, to timely provide and authorize meal and rest breaks, and related causes action. The Company does not believe that the ultimate resolution of these actions will have a material adverse effect on the Company’s business, cash flows, financial condition or results of operations.

The Company and its independent operating subsidiaries have been, and continue to be, subject to claims and legal actions that arise in the ordinary course of business, including potential claims related to patient care and treatment, as well as employment

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related claims. A significant increase in the number of these claims, or an increase in the amounts owing should plaintiffs be successful in their prosecution of these claims, could materially adversely affect the Company’s business, financial condition, results of operations and cash flows.

In August of 2011, the Company was named as a Defendant in a class action litigation alleging violations of state and federal wage and hour law. In January of 2017, the Company participated in an initial mediation session with plaintiffs' counsel. As a result of this discussion and due to (i) the fact no class had been certified (ii) the lack of specificity as to legal theories articulated by the plaintiffs (iii) the nature of the remedies sought and (iv) the lack of any basis upon which to compute estimated compensatory and/or exemplary damages, the Company could not predict what the outcome of the pending class action lawsuit would be, what the timing of the ultimate resolution of this lawsuit would be, or an estimate and/or range of possible loss related to it.

In March of 2017, the Company was invited to engage in further settlement discussions to determine whether a resolution of the case was possible in advance of a decision on class certification. In April of 2017, the Company reached an agreement in principle to settle the subject class action litigation, without any admission of liability and subject to approval by the California Superior Court.  Based upon the change in case status, the Company recorded an accrual for estimated probable losses of $11,000, exclusive of legal fees, in the first quarter of 2017. The Company funded the settlement amount of $11,000 in December of 2017, and the funds were distributed to participating class members in the first quarter of 2018. The Company received back $1,664 related to unclaimed class settlement funds remaining after completion of the settlement process, and the recoveries were recorded in the first quarter of 2018.

Other claims and suits continue to be filed against the Company, its independent operating entities, and other post-acute care providers. In addition, professional negligence claims have been filed and will likely continue to be filed against the Company's independent operating entities by residents or responsible parties.

The Company cannot predict or provide any assurance as to the possible outcome of any inquiry, investigation or litigation. If any litigation were to proceed through trial, and the Company and its independent operating subsidiaries are subjected to, alleged to be liable for, or agree to a settlement of, claims or obligations under Federal Medicare statutes, the Federal False Claims Act, or similar State and Federal statutes and related regulations, or if the Company or its independent operating subsidiaries are alleged or found to be liable on theories of general or professional negligence, the Company's business, financial condition and results of operations and cash flows could be materially and adversely affected and its stock price could be adversely impacted. Among other things, any settlement or litigation could involve the payment of substantial sums to settle any alleged civil violations, and may also include the assumption of specific procedural and financial obligations by the Company or its subsidiaries going forward under a corporate integrity agreement and/or other such arrangements.

Medicare Revenue Recoupments — The Company's independent operating entities are subject to regulatory reviews relating to the provision of Medicare services, billings and potential overpayments as a result of Recovery Audit Contractors (RAC), Program Safeguard Contractors (PSC), and Medicaid Integrity Contractors (MIC) programs (collectively referred to as Reviews). As of December 31, 2019, eight of the Company's independent operating subsidiaries had Reviews scheduled, on appeal, or in a dispute resolution process, both pre- and post-payment. The Company anticipates that these Reviews will increase in frequency in the future. If an operation fails a Review and/or subsequent Reviews, the operation could then be subject to extended review or an extrapolation of the identified error rate to billings in the same time period. As of December 31, 2019, the Company's independent operating subsidiaries have responded to the requests and the related claims are currently under review, on appeal or in a dispute resolution process.

U.S. Government Inquiry and Corporate Integrity Agreement — In October 2013, the Company and its independent operating entities completed and executed a settlement agreement (the Settlement Agreement) with the DOJ, which received the final approval of the Office of Inspector General-HHS and the United States District Court for the Central District of California. Pursuant to the Settlement Agreement, the Company made a single lump-sum remittance to the government in the amount of $48,000 in October 2013. The Company and its independent operating entities have denied engaging in any illegal conduct and agreed to the settlement amount without any admission of wrongdoing in order to resolve the allegations and to avoid the uncertainty and expense of protracted litigation.

In connection with the settlement and effective as of October 1, 2013, the Company and its independent operating entities entered into a five-year corporate integrity agreement (the CIA) with the Office of Inspector General-HHS. CMS acknowledged the existence of the Company’s current compliance program, which is in accord with the Office of the Inspector General (OIG)’s guidance related to an effective compliance program, and required that the Company and its independent operating entities continue during the term of the CIA to maintain a program designed to promote compliance with the statutes, regulations, and written directives of Medicare, Medicaid, and all other Federal health care programs.

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In the first quarter of 2019, the Company received notice from the OIG that the Company’s five-year CIA with the OIG had been completed. Upon receipt of the Company’s fifth and final annual report, the OIG confirmed that the term of the CIA is concluded.

Concentrations

Credit Risk — The Company has significant accounts receivable balances, the collectability of which is dependent on the availability of funds from certain governmental programs, primarily Medicare and Medicaid. These receivables represent the only significant concentration of credit risk for the Company. The Company does not believe there are significant credit risks associated with these governmental programs. The Company believes that an appropriate allowance has been recorded for the possibility of these receivables proving uncollectible, and continually monitors and adjusts these allowances as necessary. The Company’s receivables from Medicare and Medicaid payor programs accounted for approximately 57.3% and 59.3% of its total accounts receivable as of December 31, 2019 and 2018, respectively. Revenue from reimbursement under the Medicare and Medicaid programs accounted for 70.4%, 71.0%and 70.9% of the Company's revenue for the years ended December 31, 2019, 2018, and 2017, respectively.

Cash in Excess of FDIC Limits — The Company currently has bank deposits with financial institutions in the U.S. that exceed FDIC insurance limits. FDIC insurance provides protection for bank deposits up to $250. In addition, the Company has uninsured bank deposits with a financial institution outside the U.S. As of January 31, 2020, the Company had approximately $968 in uninsured cash deposits. All uninsured bank deposits are held at high quality credit institutions.

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As approved by the Board of Directors on August 26, 2019, the Company entered into a stock repurchase program pursuant to which the Company may repurchase up to $20,000 of its common stock under the program for a period of approximately 12 months. Under this program, the Company is authorized to repurchase its issued and outstanding common shares from time to time in open-market and privately negotiated transactions and block trades in accordance with federal securities laws. The stock repurchase program will expire on August 31, 2020. During the year ended December 31, 2019, the Company repurchased 138 shares of its common stock for a total of $6,406. The Company did not repurchase shares subsequent to December 31, 2019.

As approved by the Board of Directors on April 3, 2018, the Company entered into a stock repurchase program pursuant to which the Company was authorized to repurchase up to $30,000 of its common stock under the program for a period of approximately 11 months. Under this program, the Company was authorized to repurchase its issued and outstanding common shares from time to time in open-market and privately negotiated transactions and block trades in accordance with federal securities laws. The stock repurchase program expired on February 20, 2019. The Company did not purchase any shares pursuant to this stock repurchase program.

21.	DEFINED CONTRIBUTION PLANS

The Company has a 401(k) defined contribution plan (the 401(k) Plan), whereby eligible employees may contribute up to 15% of their annual basic earnings. Additionally, the 401(k) Plan provides for discretionary matching contributions (as defined in the 401(k) Plan) by the Company. The Company expensed matching contributions to the 401(k) Plan of $1,328, $1,283 and $1,028 during the years ended December 31, 2019, 2018, and 2017, respectively. The 401(k) Plan allowed eligible employees to contribute up to 90% of their eligible compensation, subject to applicable annual Internal Revenue Code limits.

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15a(2)	Financial Statement Schedule