Ensign Group Inc
NASDAQ:ENSG
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Ensign Group Inc
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Thank you for standing by, and welcome to the Ensign Group First Quarter Fiscal Year 2021 Earnings Conference Call. [Operator Instructions] As a reminder, today's program may be recorded. And now I'd like to introduce your host for today's program, Chad Keetch, Chief Investment Officer. Please go ahead, sir.
Welcome, everyone, and thank you for joining us today. We filed our earnings press release yesterday, and it is available on the Investor section of our website at ensigngroup.net. A replay of this call will also be available on our website until 5:00 P.M. Pacific on Friday, June 4, 2021. We want to remind any listeners that may be listening to a replay of this call that all statements are made as of today, April 30, 2021, and these statements have not been nor will be updated subsequent to today's call.
Also, any forward-looking statements made today are based on management's current expectations, assumptions and beliefs about our business and the environment in which we operate. These statements are subject to risks and uncertainties that could cause our actual results to materially differ from those expressed or implied on today's call. Listeners should not place undue reliance on forward-looking statements and are encouraged to review our SEC filings for a more complete discussion of factors that could impact our results. Except as required by federal securities laws, Ensign and its affiliates do not undertake to publicly update or revise any forward-looking statements where changes arise as a result of new information, future events, changing circumstances or for any other reason.
In addition, The Ensign group, Inc. is a holding company with no direct operating assets, employees or revenues. Certain of our wholly owned independent subsidiaries, collectively referred to as a service center, provide accounting, payroll, human resources, information technology, legal, risk management and other services to the other operating subsidiaries through contractual relationships with such subsidiaries. In addition, our wholly owned captive insurance subsidiary, which we refer to as a captive, provides certain claims made coverage for our operating subsidiaries for general and professional liability as well as for workers' compensation insurance liabilities.
The words Ensign, company, we, our and us refer to the Ensign Group Inc. and its consolidated subsidiaries. All of our operating subsidiaries, the service center and the captive are operated by separate, wholly owned independent companies that have their own management, employees and assets. References herein to the consolidated company and its assets and activities as well as use of the terms we, us, our and similar words used today are 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.
Also, we supplement our GAAP reporting with non-GAAP metrics. When viewed together with our GAAP results, we believe that these measures can provide a more complete understanding of our business, but they should not be relied upon to the exclusion of GAAP reports. A GAAP to non-GAAP reconciliation is available in yesterday's press release and is available in our Form 10-Q. And with that, I'll turn the call over to Barry Port, our CEO. Barry?
We're very happy to report record results again this quarter. Thanks to early access to the vaccine, we have seen a significant reduction in the number of COVID positive patients and staff in our operations throughout the first quarter with weekly resident cases in the single digits across our entire portfolio. As a result, our patients and caregivers have begun to enjoy an environment that although certainly different in many ways, is starting to look and feel a lot more like pre-COVID times. We again remind you that the results for the quarter do not include any benefit related to CARES Act provider relief funds. To date, all of the provider relief funds totaling over approximately $153 million have been returned to the government.
As they've shown so many times before, our locally empowered leadership teams have yet again demonstrated the agility of our model as they have been customizing their strategies to meet the specific needs of the markets they serve. These sustained results during one of the largest global health care challenges in recent history are what separate Ensign affiliates from the rest of the industry. Our operations have remained integral to the preservation of the healthcare continuum despite great difficulties because they adjusted and adapted to meet the acute needs of their markets. And now as these operations emerge from the height of this crisis, they are poised to fill an even greater role than before as they stand out from traditional nursing homes as the new standards of excellence for post-acute care.
As we expected, as the community spread of COVID has slowed, we have seen occupancies increase as the pent-up demand for healthcare services in our markets has continued to increase while Medicare census has begun to trend towards pre-COVID levels. As our affiliates saw improvements in overall census, we were particularly pleased by the continued improvement in our managed care growth across the portfolio. Specifically, we saw same-store and transitioning managed care average daily census increase from the fourth quarter by approximately 18% and 26%, respectively, which is our third sequential quarter of managed care census growth.
Additionally, the strong results in the quarter were also a result of a multifaceted effort, which included making continued progress in our company-wide cost-saving initiatives, improving our cash collections, and making significant strides in our operational expense management as some of the extra COVID-related expenses have started to decline. We also continue to benefit from the continuation of sequestration suspension and improved Medicaid funding in certain states. Moreover, with full access to vaccines throughout the quarter, we saw new resident and staff infection rates plummet, and we began and quickly became one of the safest environments available for our critically ill population.
Although we will see some seasonality, we expect the positive trend in occupancy to continue throughout the year as volumes in higher acute settings and managed care utilization continue to increase. We look forward to continuing to work closely with our hospital and managed care partners in this new environment and to continue to demonstrate our ability to care for patients with the most complex medical needs with the highest standards and outcomes.
Our leaders are very excited to redirect the enormous energy spent in dealing with the pandemic towards continued improvement on the fundamentals that have made our operation so successful for so many years, including achieving high-quality outcomes, increasing occupancy, enhancing our clinical capabilities, and driving consistent organic and inorganic growth. As we look out towards the near long-term horizon as occupancies begin to climb toward pre-COVID levels and beyond, our existing portfolio truly has never had so much growth potential. As we said last year, this dynamic arrived at our doorsteps at a time when our organization has never been stronger clinically and financially. As a result of being stretched to our limits in the face of this pandemic, we have learned many lessons and have become even stronger as our leaders and caregivers have made life-changing sacrifices on behalf of patients and their families.
As we announced yesterday, we increased our 2021 annual earnings guidance to $3.54 to $3.66 per diluted share, up from the previous guidance of $3.44 to $3.56 per diluted share, and affirmed our previous annual revenue guidance of $2.62 billion to $2.69 billion. This increase comes from the strong results during the first quarter, positive trends in occupancy, and the continuation of sequestration suspension, which provided some additional reimbursement that was not included in the original guidance. Our current health combined with our culture, proven local leadership strategy, healthy balance sheet, the enormous potential in our existing portfolio and the tremendous acquisition opportunities on the horizon, gives us the confidence that we are well positioned to not only rebound to our pre-COVID path but to accelerate our growth.
While we transition from operating in a pandemic to a post-pandemic environment, we are confident that our local leaders, caregivers and other frontline staff will continue to provide amazing service to their patients, family and our society as a whole. We can't even begin to express our love and appreciation for all of our amazing team members, especially those on the front lines for all that they're doing to help us to get through this unprecedented time. They are the absolute driving force to the outcomes that have been achieved. They have sacrificed and continue to sacrifice, putting themselves in harm's way to keep their patients safe and secure. We honor them and are so grateful for them. While we certainly expect some challenges, we are excited about the year ahead of us and look forward to showing our dedication to all of those who have entrusted us with the care of their loved ones. And with that, I'll ask Chad to give us an update on our recent investment activity. Chad?
Thank you, Barry. We are pleased to announce that we are continuing to make progress in our efforts to demonstrate the value of our owned real estate. As you are aware, we took the first step in the fourth quarter of 2020 when we began reporting the results of our real estate portfolio as a new and independent reporting segment, which is comprised of properties owned by us and leased to affiliated skilled nursing and senior living operations and 31 senior living operations that are leased to the Pennant group. Each of these properties are subject to triple net long-term leases and generated rental revenue of $16 million, of which $12 million was derived from Ensign affiliated operations. Also, for the first quarter of 2021, we reported $14 million in FFO, which represents a 25% increase over the prior year quarter of $11 million.
As I shared with you on our last call, our goal in separating this real estate business from our legacy operations is to demonstrate the enormous inherent value that these real estate assets have and will have over time. We hope that this extra disclosure will be helpful to our current and prospective investors who are familiar with our history of successfully incubating businesses as they evaluate this growing part of our business, which we believe is a key differentiator in the market. Our growing real estate portfolio consists of 94 properties, 64 of which we operate and 31 of which are leased to the Pennant group. While we are often approached by potential buyers that would love the chance to purchase and lease back our real estate, we do not believe that, that approach is the best way to advance our mission and to maximize our long-term shareholder value. There are several guiding principles and lessons we learned from our past spin-offs that are leading our decision-making with the health of the operator taking top priority to ensure the long-term value of these real estate assets.
Since our last call, we have engaged advisers to help us determine the best path towards a structure inside of Ensign that demonstrates the growing value of our owned real estate, while not losing sight of our purpose-driven mission. We envision a structure that not only creates better visibility into the demonstrable value of our real estate, but will also provide us with an efficient vehicle for future acquisitions of properties which could be operated by Ensign affiliates or other third-party operators, just as we have done with the Pennant group. We also seek a structure that will preserve the optionality that enables us to take advantage of private and public market conditions in order to maximize long-term shareholder value. We are very excited about the new opportunities embedded in this chapter of our growth story and look forward over the coming quarters to updating you on our progress.
We were also very happy to continue our efforts to grow. After a brief pause in our acquisition efforts during the early months of the pandemic, our teams have shown their commitment to one of the things that drives our organization, which is to consistently and methodically acquire, not only in good times, but even when it would be easier to shut down growth while waiting out the storm. The following skilled nursing operations were acquired during the quarter and since. Golden Hill post-acute, a 99-bed skilled nursing facility located in San Diego, California; St. Catherine Healthcare, a 99-bed skilled nursing facility located in Fullerton, California; Camino Healthcare, a 99-bed skilled nursing facility located in Hawthorne, California; San Pedro Manner, a 150-bed skilled nursing facility located in San Antonio, Texas; Boulder Canyon Health and Rehabilitation, a 140-bed skilled nursing facility located in Boulder, Colorado; Virtu Care and Rehabilitation, a 76-bed nursing facility located in Virtu, Colorado; and South Valley Post-Acute Rehabilitation, a 106-bed skilled nursing facility located in Denver, Colorado.
We are very excited about each of these handpicked opportunities in some of our strongest markets. And because of the extra time we had to prepare, given COVID protocols, each operation is poised to be a contributor to our results very soon. Each of these additions is a true testament to our local team of clinical and operational leadership, their experience, planning and preparation.
As we look ahead to 2021, the pipeline for our typical turnaround opportunities and exciting strategic opportunities remains strong, currently with more deals available than we have the capacity to transition. In some cases, the deals we expected to see last year have been delayed as the CARES Act funding has provided additional capital that provided temporary assistance to undercapitalized or struggling operations. We are still being very selective and keeping plenty of dry powder on hand for what we believe will be an attractive buyer's market once the pandemic-related dust settles and government relief funds run out. We look forward to growing within our existing geographical footprint, and we see significant advantages to adding strength in markets we know well, including some of our newer emerging markets as they continue to mature and prepare for growth.
As we mentioned in our release yesterday, we have well over $340 million in available capital. In addition, we have 74 completely unlevered real estate assets. We continue to work on unlocking some equity value in 7 or 8 of those owned and unlevered real estate assets through long-term fixed rate HUD debt. This process takes several months and will not be completed until later in the year, but we are preparing now for a wave of new acquisitions we see on the horizon and are excited about the deals we are working on now and the new opportunities that are on their way. And with that, I'll turn the call back over to Barry. Barry?
Thanks, Chad. Before Suzanne runs through the numbers, we'd like to share a couple of brief examples that represent the tremendous difference that Ensign leaders make, especially during challenging and unusual times. Over the last several quarters, while much of the skilled nursing sector has experienced a trend of sharp declines in occupancy during the pandemic, many of our facilities have continued to grow census by focusing relentlessly on clinical quality and strengthening partnerships with managed care and acute hospital systems in the communities they serve. This formula has been consistently demonstrated by the team at Healthcare Resort of Plano located in Plano, Texas.
Despite pandemic pressures that have reduced discharges from their local acute hospitals, the resort has grown overall occupancy by approximately 6% and Medicare skilled mix by 29% compared to the same quarter last year. This 5-star facility, led by Executive Director, Max Edginton and DNS [ Steven Aite ], has partnered with attending physicians from Baylor, Presbyterian and Methodist Health Systems and enable these providers to seamlessly manage their patients through the care continuum. This provider support has enabled the facility to develop numerous clinical programs, including specialized cardiac program, and the resort has gained a reputation in the community for being able to effectively rehabilitate a wide variety of medically complex patients.
Not only has this careful coordination with continuum partners resulted in improved outcomes and reduced rehospitalization rates, it has also led to increased revenues as many patients continue to receive outpatient rehabilitative services post discharge. The team at Plano has created full transparency with their partners, giving them access to key metrics that impact outcomes and costs.
Likewise, Max and Stephen are attuned to the needs of their market and are constantly sharing and shifting and adapting to meet those needs. They have become the standard of coordinated care in a very competitive North Dallas market and are the absolute facility of choice. In this last year, they have seen their efforts result in a 58% EBITDAR increase this quarter compared to the prior year quarter. We look forward to what they will continue to achieve.
Another similar example of this standard of excellence is found at Chandler Post Acute located in the Phoenix suburb of Chandler, Arizona. Over the past 5 years, leaders Chandler Monks, CEO, and [ Jamie Journey ], COO, and their team have developed deep relationships with their local health care continuum. They have strengthened these relationships by consistently evaluating and adapting their clinical programs to meet their partners' needs. For example, in 2018, they learned that health plans and hospitals were struggling to place behaviorally complex dementia patients. They spent the next year receiving specialized training, modifying part of their physical plant, and partnering with the community's top behavioral health care providers.
Finally, in the fourth quarter of 2019, they opened their specialty unit for these complex patients, one of only 4 such units in the entire state of Arizona. The unit quickly grew to 100% occupancy with a waiting list. And as it grew, so did the facility's reputation for achieving great outcomes with other high acuity patients. As a result, throughout the past 4 quarters, despite the pandemic, Chandler Post-Acute has grown managed care census by nearly 50%. And during the first quarter of 2021, occupancy averaged over 97%. They're clinically driven model and market-focused initiatives have also boosted the financial results with revenues increasing by 28% and EBIT improving by 106% when compared to the first quarter of last year.
But the impact of Chandler Post-Acute goes far beyond these financial results and even beyond improving the lives of patients. Equally important, these leaders have pioneered ways to recruit and retain high-quality nursing staff. In fact, over the past 2 years, Jamie spearheaded a leadership development curriculum for clinicians which has provided hundreds of nurses with management skills and produced 8 new directors of nursing who are now leading Ensign affiliated facilities throughout Arizona. These operations and these leaders represent this new standard of post-acute excellence we referenced earlier. It represents a stark difference from the traditional model of nursing home care and demonstrates transformative integrated health care execution and partnership for our growing senior population.
Our leaders are driven to transform and dignify post-acute care in the eyes of the world, and we are grateful for their continued progress toward that goal. With that, I'll turn the time over to Suzanne to provide more detail on the company's financial performance and our guidance, and then we'll open it up for questions. Suzanne?
Thank you, Barry, and good morning, everyone. Detailed financials for the quarter are contained in our 10-Q and press release filed yesterday. Some additional highlights for the quarter include GAAP diluted earnings per share was $0.86, representing an increase of 17.8% over the prior year quarter. Adjusted diluted earnings per share was $0.87, an increase of 13% over the prior year quarter. Consolidated GAAP revenues were $627.3 million, and adjusted revenues were $626.8 million, both increased 6.4% over the prior year quarter. GAAP net income was $49.2 million, an increase of 20.5% over the prior year quarter, and adjusted net income was $49.6 million, an increase of 15.5% over the prior year quarter.
Other key metrics as of March 31 include cash and cash equivalents of $155.5 million. Cash flow from operations for the quarter was $34.3 million. And $342 million of availability on our revolving line of credit. We continue to de-lever our portfolio, achieving a lease-adjusted net debt to EBITDAR, adjusted EBITDAR ratio of 2.3x. These improvements are attributable to growth in our EBITDA from same store, transitioning and newly acquired operations and enhanced cash collections. We also own 94 assets, 74 of which are unlevered with significant equity values that provide us with even more liquidity.
As Barry mentioned, in March, we repaid all the remaining funds from the Medicare Advance Payment Program of $102 million. In addition, we returned all provider relief funds that we have received to date, which as of April 2021, totaled over $152 million. The suspension of the 2% sequestration was recently extended through December 31, 2021. This suspension has and will continue to have a positive impact on our revenue, depending on how the pandemic affects our Medicare census. Last week, the public health emergency was extended for another 90 days to July 20, 2021. With this extension, the federal government will continue to provide increased SMET funds to the states. However, Medicaid reimbursement and the timing of payments vary substantially by state. Currently, we anticipate 2 of the states in which we operate will continue to have approved funding through July 2021.
We are increasing our 2021 annual earnings guidance of $3.44 to $3.56 per diluted share to $3.54 to $3.66 per diluted share and are reaffirming our annual revenue guidance of $2.62 billion to $2.69 billion. The midpoint of the 2021 earnings guidance represents an increase of approximately 15% over 2020 results. Our increased 2021 guidance is based on diluted weighted average common shares outstanding of approximately 57.8 million, a tax rate of 25%, the inclusion of acquisitions closed in the first half of 2021, the exclusion of losses associated with start-up operations which are not yet stabilized, the inclusion of anticipated Medicare and Medicaid reimbursement rate increases, net of provider tax, and the recovery of the COVID-19 pandemic, with the primary exclusion coming from stock-based compensation. Additionally, other factors that could impact quarterly performance include variation in reimbursement systems, delays and changes in state budgets, seasonality and occupancy in skilled mix, the influence of the general economy on our census and staffing, the short-term impact of acquisition activities, variation in insurance accruals, surge in COVID and other factors. And with that, I'll turn the call back over to Barry. Barry?
Thanks, Suzanne. We want to again thank you for joining us today and express our appreciation to our shareholders for their confidence and support. We recognize the heroic efforts of our nurses, therapists and other frontline care providers who have courageously faced this pandemic and provided life-enriching care to our residents and their families. We're also appreciative to our colleagues in the service center who are working tirelessly to support our operations and enabling us to succeed in spite of the challenges we faced. Thank you for making us better every day. We'll now turn to the Q&A portion of the call. Joining us also today is our Chief Operating Officer, Spencer Burton. Jonathan, can you please instruct the audience on the Q&A procedure?
[Operator Instructions] Our first question comes from the line of Frank Morgan from RBC Capital.
I guess maybe starting at the macro level, just with the proposed rule coming out for SNF reimbursement, thoughts around the market basket update? And then also on the -- your initial thoughts on this commentary about recalibrating for PDPM would be my first question.
Yes. Frank, thanks for asking that question. I think where we've typically seen that market basket has been a little bit higher. I think that forecasting error, if you took out the forecasting error of the 0.8%, that's kind of more in our typical range that we have seen the market basket come in around, about 2.5%, 2.3%. So that was a little bit lower than what we had in our initial guidance. And so that was a little bit of a decrease for us. I think on the additional amount that you had and mentioned there in the PDPM, potential recalibration, we actually have a couple of different thoughts on that, right? The 5% that they've identified as a potential recalibration, there are a couple of different ways that we would get it. If it's spread over a period of time, we have the opportunity to operationally adjust over that. If it's done right away, we think that that's going to be harmful for people who are in really tough situation right now. But for us, it actually gives us some opportunity maybe on the acquisition front to really take and get some of those acquisitions where people can't make it anymore.
What would be your response like when you give your comments back to them about this recalibration assumption? The first question, is it simply just suggesting you phase it in over time? Or do you see anything structurally wrong with how it's being implemented? Or do you think it's being adversely affected by COVID? That would be a follow-up.
Yes. It's a great question, Frank. We've submitted our response back. We just did that yesterday. And in it were similar themes to what you just identified. Yes on both. First and foremost, we feel that there's some deficiencies on the analysis that was done as it relates to budget neutrality, just given the nature of the pandemic, the complexity of the patients. And we lined out those details in our response. Second to that, the question of timing, look, we're not as concerned about that ultimately as we are making sure that the analysis is done right. And like Suzanne said, certainly I think most would prefer that it's spread out over time, that there's a long enough runway to have before that would go into effect. But there is a small part of us that if it all happened at once, it would be bad for everyone in the very short term, but most importantly, for the poorly capitalized companies that just are hanging on by a thread right now. For us, it would most undoubtedly create a pretty large buying opportunity, which wouldn't be a horrible thing for us to see.
Right. And obviously, you've had lots of cost reduction programs in place and cost management programs in place. But where do you think about sort of the opportunities to offset this? Is it really more on the cost side? Is it something you can do on the revenue side that you see as an offset if this were to go through?
Yes, sure. I mean we -- as we look at our kind of return to fundamentals, and as we enter kind of a post-COVID environment, hopefully that's here to stay, we're already seeing operational adjustments that are really encouraging. But even more fundamentally, PDPM is still -- remember, we only had a few months of the new program right before the pandemic hit. So we weren't fully operationally up to snuff as much as we would have liked to have been yet. And there are many things that have kind of gone by the wayside over the last year and change that we've got to either relearn, retrain and then get better at. We just feel like there's a lot of opportunity for us to capture the complexity of the patients that we take under this new program. And that's what Suzanne was referencing before. As we really retrench and relearning that system, we feel like there's just operational opportunity or reimbursement opportunity that has yet to be tapped into as we get better at learning that system.
Got you. And obviously, your expectations around occupancy continuing to improve over the -- as the COVID subsides, do you really feel -- how comfortable are you with your ability to really sustain the momentum you've got from this growth in this high acuity Medicare commercial or Medicare Advantage population going forward? Do you think this is something that you should be able to sustain going forward? Or you would expect this to kind of lean back somewhat as COVID subsides?
So this is Spencer. It's a good question and the answer is, we never know for certain, but there's a lot of evidence that we fundamentally can continue to have a changed and higher percentage of our population B of the skilled nature. But we're not going to focus exclusively on that. With the occupancy that we currently have, there's opportunity to add incremental census in any area, and it's going to be positive to our operations. And there's also some fluidity between the 2 buckets. If you're admitting a lot of skilled patients and some of them are turning over to a long-term care patient, that's a positive thing, too. So we're -- I think our focus is mostly on growing occupancy with quality payers, not so much differentiating between if it's Medicare or if it's a managed care. And then also recognizing that when properly managed and properly cared for, our long-term care payers can be a benefit to our business as well as to the communities we serve as well.
Got you. Last one for me, labor. A lot of discussions across all provider groups about labor and use of contract labor. Maybe a little commentary there would be appreciated. And has that started to change in any way? And what are your thoughts over the balance of the year? Thanks.
Yes. We're super fortunate in that our use of contract labor, although higher than where we like it to be, we know is nowhere near what others are experiencing. And I think that speaks to our leadership model and our culture. We've seen ebbs and flows during kind of the different phases of the pandemic. And certainly, with fatigue of some of the staff settling in a little bit, there's been more than we'd like to see in the early part of this year. But again, certainly much less than most of our competitors.
Thankfully, we've seen spikes in wages that have coincided with us doing additional compensation during challenging phases. But we're seeing our wages come more under control and not structurally or fundamentally any higher than we would expect them to see year-over-year, which is assuring to us that we can actually recover and kind of return to somewhat kind of normal wage, kind of a wage pathway as we return to our fundamentals. But it's going to be kind of a macro challenge that everyone will deal with in healthcare, just given what we've gone through.
But we feel, again, like our model is poised to make sure that we can recover appropriately. Remember, we don't thankfully have to deal with unionized labor, and that allows our leaders a lot of flexibility to reward and help compensate staff for the good work that they're doing. So that certainly helps us to be able to manage this closely and effectively at an operational level.
And I think there's never been a time operationally where we've been more focused on our facility-by-facility culture of making sure that our employees are cared for and that they're able to provide care for the residents because they feel valued and they feel like they're the number one priority. So it's actually -- it's a positive thing for us right now because it's a return to that fundamental of taking care of our employees, and that always works over time.
Our next question comes from the line of Scott Fidel from Stephens.
First question, just wanted to ask about EBITDA margin trends and your thinking around normalized margins. Obviously, there's been a number of different moving pieces during the pandemic, but you've been able to deliver very strong overall margins. And just interested if as things sort of go somewhat back to normal and the Medicare patient mix moves back to pre-COVID levels, how that influences your thinking on margins and whether you see the recent trends as sustainable?
Yes, Scott, it's a great question. I think if you kind of look over the last 5 quarters, 4 of those quarters we were very in the COVID phase. But if you kind of go back to Q1 2020, really COVID didn't hit us kind of until maybe that last week of March. So when you look at margins and how we were performing on a margins basis, we were doing really well in that quarter, pretty comparable on an EBITDA margin basis to what we were doing now, a little bit lower than that. And so I think that as we continue, as Spencer mentioned as well, that occupancy base and having that occupancy base grow up, continuing to maintain that skilled mix and having that continue to grow overall as the overall occupancy grows. And so maybe the percentage of it goes down a little bit, but the overall number and the count of individuals continues to increase, the margins are -- kind of go back to maybe that Q1 2020 and maybe a little bit before that margin basis.
Okay, I got it. And a follow-up question, just wanted to touch a little bit more on the outlook for occupancy. And you referenced the seasonality that typically plays out in the business. And just want to make sure, so we're modeling this as, I guess, as accurately as we can. Obviously, there's still unknowns about COVID and things like that. I think traditionally, your seasonality has been more around the summer months when that's -- there is some dampening effect on occupancy. So would you think it's reasonable to think about -- you've had some recent momentum on occupancy, that sort of continues into the second quarter, the third quarter is where we'd see some more of that seasonality impact that you've traditionally seen and that you would expect to re-ramp in the occupancy in the fourth quarter again in the winter months? Is that a reasonable way to think about it? Or any thoughts on that would be helpful.
Yes, that's exactly right. You're thinking about it exactly the right way. The only caveat I would offer there is that we're recovering from a pandemic. And so it adds some uncertainty. But given the gap of where we are today from an occupancy standpoint and where we think we will be, especially as hospital utilization and managed care utilization starts to increase, which it has been pretty consistently over the last several months, our hope is that some of that pent-up demand will buffer some of that typical summer seasonality. So that might play to our favor, whereas normally, we would expect occupancy to go down.
Okay. And then just last one for me. I know you already gave some thoughts on the proposed 2022 rate and the PDPM proposed re-basement. Just interested, it sounds like you've now updated your thinking to already sort of layer in that 1.3% proposed. Just want to confirm that's the case. And then also, sort of lobbying efforts. Obviously, this is a proposed rule and the skilled nursing industry has faced a lot of pressure during the pandemic, so how you think about the industry's prospects for potentially lobbying for maybe some improvement as we get to the final rate? And that's it for me, thanks.
Yes. It's a good question. I mean I think there's 2 components, right? One piece is the market basket. The second part is the value-based component. On the value-based component, they are holding everyone equal, which hurts us. We talk a lot about the quality that we provide and how successful we are with the overall quality that we provide. And so when we have a flat rate where everyone in the industry is treated equally, we actually get penalized from that. So that's a component of it.
I think with all the COVID adjustments out there, I think that's probably something that they're going to have to leave in. It's probably a harder point for them to move off of just because it's harder for people to measure on that readmissions value-based component. And then on the second part, I think right now, yes, we did build that into what we put out there. Obviously, we're not -- it's not said and done, and we're still continuing to participate, as Barry mentioned earlier, in the lobbying efforts to try to get people to understand the impact and the timing of this maybe isn't the greatest thing for the industry as a whole right now.
Yes. We believe, fundamentally, that reimbursement through PDPM has been absolutely appropriate through the pandemic. I know it's easy for us to say, but if you take bias out of it, it just -- it's aligned with the level of complexity of the patients that we've seen over the past 12 months is amongst the highest we've ever seen. I mean these are atypically very, very sick patients. And the level of care and the amount of interventions required to care for those patients is obviously much higher. So we've made those points. Our industry association is very strong, has very good ties with CMS. They have really good ongoing dialogue with them. I think they're generally open. They've kind of been firm and they're coming out in their stance on the budget neutrality issue. We'll see how it plays out. I mean we're not overly worried about it one way or another. In the end, we know we'll be fine, and it will create opportunity one way or the other for us. So -- but we'll see what happens. There's really no way to completely tell.
Yes. And I think just remembering that we're never just focused on what the market basket increase is. One of the things that we have done so well over the years is really look at the overall acuity that we're bringing in, right? So if you look back at what our rate increases are year-over-year, it never equals the market basket rate increase. And that's because we're continuing to shift the acuity within each one of our skilled nursing facilities. And that's not us here, but the operators who are doing that. And so I think one of the things that when we're trying to communicate this to you is just to help you understand the story. It isn't just about a market basket increase, but it is about the overall continuing shift of it. And I think we're just being a little bit safer right now because there's a lot of moving pieces out there with the guidance.
Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Barry Port for any further remarks.
Thank you, Jonathan, and thank you, everyone, for joining us today. As always, we appreciate everyone's support and questions. Have a good day.
Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.