Pennant Group (PNTG) Risk Factors

Two of our directors continue to serve on the Ensign board of directors and a portion of our executive officers and non-employee directors own shares of Ensign common stock. This could create, or appear to create, potential conflicts of interest when our or Ensign's management or directors face decisions that could have different implications for us and Ensign, including our existing long term leases, any commercial agreements entered into in the future between us and Ensign and the allocation of such directors' time between us and Ensign.

If we experience problems with our billing information systems or if payment issues arise with Medicare, Medicaid or other payors, we may encounter delays in our payment cycle or delays in submitting required cost reports. From time to time, we have experienced such delays as a result of government payors instituting planned reimbursement delays for budget balancing purposes or as a result of prepayment reviews. Some states in which we operate experience or have experienced budget deficits or could have a budget deficit in the future, which may delay reimbursement in a manner that would adversely affect our liquidity. In addition, from time to time, procedural issues require us to resubmit claims before payment is remitted, which contributes to aged receivables. Unanticipated delays in receiving reimbursement from state programs due to changes in their policies or billing or audit procedures may adversely impact our liquidity and working capital. Failure to timely submit required cost reports may result in financial penalties.

To date, our revenue growth has been significantly accelerated by our acquisition of new operations. Subject to general market conditions and the availability of essential resources and leadership within our company, we continue to seek home health, hospice and senior living acquisition opportunities that are consistent with our geographic, financial and operating objectives. We face competition for the acquisition of operations and businesses and expect this competition to increase. Based upon factors such as our ability to identify suitable acquisition candidates, the purchase price of the operations, prevailing market conditions, the availability of leadership to manage new operations and our own willingness to take on new operations, the rate at which we have historically acquired home health, hospice and senior living operations has fluctuated and we anticipate similar fluctuation in the future. Further, acquisitions may require financing, which may not be available to us or may be available to us only on terms that are not favorable. If funds are raised through the issuance of additional equity securities, the percentage ownership of our stockholders would be diluted, and any newly issued equity securities may have rights,preferences or privileges senior to those of our common stock. We may acquire operations that prove to be non-strategic or less desirable, and we may consider disposing of such operations or exchanging them for operations which are more desirable.

Our success depends upon our ability to retain and attract nurses, certified nurse assistants, social workers and speech, physical and occupational therapists, as well as skilled personnel who are responsible for the day-to-day operations of each of our affiliated operations. If we fail to attract and retain qualified and skilled personnel, or if the associated costs to do so increase, our independent operating subsidiaries' ability to conduct their business operations effectively could be harmed. Staffing challenges increased during the pandemic and have persisted due to health care worker burnout, COVID-19 exposures, vaccine mandates, and wage inflation, increasing the competition for qualified staff and cost of retaining personnel, and continue to affect our operations. There can be no assurance that we will be able to attract and retain key personnel going forward.

Our managed care revenue and profitability may be affected by continuing efforts of third-party payors to maintain or reduce costs of healthcare by lowering payment rates, narrowing the scope of covered services and network providers, increasing case management review of services and negotiating pricing. In addition, sustained unfavorable economic conditions may affect the number of patients enrolled in managed care programs and the profitability of managed care companies, which could result in reduced revenue due to reduced reimbursement for our services. There can be no assurance that third-party payors will make timely payments for our services, not seek recoupment of payments on grounds that may or may not be valid, or that we will continue to maintain our current payor or revenue mix. We are continuing our efforts to develop our private pay sources of revenue. Any changes in payment levels from current or future third-party payors could have a material adverse effect on our business financial condition, results of operations and cash flows. In addition, enrollment in Medicare Advantage programs continues to grow nationwide, and an increasing proportion of Medicare and Medicaid funds are managed by companies that are also third-party payors who may seek to reduce reimbursement as described above.

The annual inflation rate in 2023 has impacted our operations, placing upward pricing pressure on all things from wages to supplies to energy costs. Inflation is expected to remain relatively consistent in 2024, but may continue to affect the Company's profit in providing services. We have historically derived a substantial portion of our revenue from the Medicare program. We also derive revenue from state Medicaid and similar reimbursement programs. Payments under these programs generally provide for reimbursement levels that are adjusted for inflation annually. These adjustments may not continue in the future, and even if continued, such adjustments may not reflect the actual increase in our costs for providing healthcare services. Labor and supply expenses make up a substantial portion of our cost of services. Those expenses are subject to increase in periods of rising inflation and when labor shortages occur in the marketplace. Inflation has led, and may continue to lead, to increased interest rates, which have and could continue to increase our cost of capital, impair consumers' ability to purchase our services, or otherwise harm us financially.

The global spread of COVID-19 and the various attempts to contain it created significant volatility, uncertainty and economic disruption, and we continue to see the after-effects of these changes today. Many of the direct and indirect consequences of COVID-19 on our business are now known; however, new developments in the wake of the PHE's termination, as well as legacy consequences from the COVID-19 pandemic including COVID-19 variants, second-order effects such as inflation, consumer demand, and labor supply issues are ongoing. Similarly, not all the risks and consequences of the COVID-19 PHE's termination and conclusion of emergency responses to COVID-19 in states and localities where we operate are not yet fully known, and may yet adversely affect our business in ways that are evolving or may only be evident with the passage of time. Risks presented by the effects of COVID-19 include the following: - Disruption caused by repeated waves of COVID-19 variants, including breakthrough infections of fully vaccinated individuals, poses a risk to the Company for the foreseeable future due to the potential consequences of such variants on Company personnel, labor pool participants, availability of necessary supplies, continued adverse impact on move-in rates within senior living, and consequences for the broader economy. - Decreased home health and hospice volumes and senior living occupancy, which may lead to decreased revenue. - Increased costs and staffing requirements related to implementation of COVID-19 infection prevention protocols, including increased utilization of personal protective equipment ("PPE"), COVID-19 diagnostic testing and vaccination for staff and residents, and additional labor and cleaning supplies to frequently sterilize equipment and surfaces. - Increased labor costs due to increased overtime or premium pay, paid leave, reduced labor force participation, wage pressure from competitors, workers becoming ineligible for employment due to COVID-19 vaccination requirements, mandatory testing costs, reduction of the qualified workforce due to burnout and qualified personnel leaving the caregiving field, and the increased need for temporary labor to supplement our existing staffing as our front-line employees may become unable to work while awaiting the results of COVID-19 tests or as they recover from a COVID-19 infection. - Increased scrutiny by regulators of visitation requirements, infection control and prevention measures, including imposition of new COVID-19 disease and mortality reporting requirements, and increased enforcement of resident rights' violations related to visitation. - Disruptions to supply chains which could negatively impact consistent and reliable delivery of PPE, sanitizing supplies, food, pharmaceuticals, and other goods. - COVID-19 related illnesses in staff may impact the quality of care, which could lead to temporary staffing shortages or reliance on less experienced personnel. - Employee concerns related to workplace safety, including potential for increase in workers' compensation claims. - Potential increase in insurance premiums and COVID-19 related claims. - Inconsistent application or interpretation of modifications to regulatory requirements by surveyors, including both COVID-19 survey standards and the resumption of pre-COVID-19 survey standards and practices. - Potential for continued inflation and price increases of certain goods or services resulting from changes in economic conditions and steps taken by the federal government and the Federal Reserve, which could lead to higher inflation rates or longer-lasting inflation than anticipated, which could in turn lead to an increase in expenses, including payroll, insurance, and rent expense under our triple net leases. All of the triple net leases in our senior living business contain annual rent escalators tied to year-over-year increases in various consumer price indices. While these leases contain provisions capping the increased rent expense each year, increased inflation could cause our rent expense in our senior living business to increase at a greater rate than in prior years. - Potential for future investigations, sanctions, fines, or other penalties arising from the conclusion of the COVID-19 PHE and the expiration of waivers and flexibilities enacted at the federal and state levels as a result of the PHE, and the need to update and amend policies and procedures to timely acknowledge the expiration of these waivers and flexibilities and meet new standards concerning visitation and infection control that arose from the COVID-19 PHE.