Leased            Leased
                                                        (with a          (without a
                                                        Purchase          Purchase
                                         Owned          Option)           Option)           Total
Number of facilities                          28                 8                26             62
Percent of total                            45.2 %            12.9 %            41.9 %          100 %
Licensed skilled nursing, assisted
living and independent living
beds(1)                                    3,517               991             3,080          7,588
Percent of total                            46.3 %            13.1 %            40.6 %          100 %
Operational skilled nursing,
assisted living and independent
living beds(1)                             3,269               974             2,996          7,239
Percent of total                            45.2 %            13.4 %            41.4 %          100 %

(1) Includes 671 beds in our 460 assisted living units and 84 independent living units as of September 30, 2008. All of the independent living units are located at one of our assisted living facilities. The cumulative number of skilled nursing, assisted living and independent living beds is calculated using the current number of licensed beds at each facility and may differ from the number of beds at the time of acquisition. We may also permanently expand the number of licensed beds in connection with renovations or expansions of specific facilities.

The Ensign Group, Inc. is a holding company with no direct operating assets, employees or revenues. All of our facilities are operated by separate, wholly-owned, independent subsidiaries, which have their own management, employees and assets. In addition, one of our wholly-owned independent subsidiaries, which we call our Service Center, provides centralized accounting, payroll, human resources, information technology, legal, risk management and other services to each operating subsidiary through contractual relationships between such subsidiaries. In addition, we have the Captive that provides some claims-made coverage to our operating subsidiaries for general and professional liability, as well as for certain workers' compensation insurance liabilities. References herein to the consolidated "Company" and "its" assets and activities, as well as the use of the terms "we," "us," "our" and similar verbiage in this quarterly report is not meant to imply that The Ensign Group, Inc. has direct operating assets, employees or revenue, or that any of the facilities, the Service Center or the captive insurance subsidiary are operated by the same entity.
2008 Developments
On February 21, 2008, we amended our Revolver by extending the term to 2013, increasing the available credit thereunder up to the lesser of $50.0 million or 85% of the eligible accounts receivable, and changing the interest rate for all or any portion of the outstanding indebtedness thereunder to any of three options, as we may elect from time to time, (i) the 1, 2, 3 or 6 month LIBOR (at our option) plus 2.5%, or (ii) the greater of (a) prime plus 1.0% or (b) the federal funds rate plus 1.5% or (iii) a floating LIBOR rate plus 2.5%. The Revolver contains typical representations and financial and non-financial covenants for a loan of this type, a violation of which could result in a default under the Revolver and could possibly cause all amounts owed by us, including amounts due under the Term Loan, to be declared immediately due and payable.
On May 1, 2008, we assumed an existing lease for a 120-bed skilled nursing facility in Orem, Utah. We purchased the tenant's rights under the lease agreement from the prior tenant and operator for approximately $2.0 million. We did not acquire any material assets or assume any liabilities other than the prior tenant's post-assumption rights and obligations under the lease. We also entered into a separate operations transfer agreement with the prior tenant as a part of this transaction, which is common. We paid for the prior tenant's lease rights in cash from our IPO proceeds. Also on May 1, 2008, under the terms of a purchase option contained in the original lease agreement, we purchased the underlying assets of one of our leased long-term care facilities in Scottsdale, Arizona. This facility was purchased for approximately $5.2 million, which was paid in cash from our IPO proceeds. Lastly, on May 14, 2008, we purchased the underlying assets of one of our leased long-term care facilities in Draper, Utah. This facility was purchased for approximately $3.0 million, which was paid in cash from our IPO proceeds.
In July 2008, our Utah and Idaho facilities, which had been supported by our Keystone Care portfolio subsidiary since we first moved into those markets beginning in July 2006, were reorganized in anticipation of becoming their own standalone portfolio company known as Milestone Healthcare, Inc. Milestone's eventual emergence as a self-contained portfolio company will not only allow us to focus more closely on the growth and development of our Utah/Idaho markets, it will also allow our key leadership in Keystone, which is based in and covers the state of Texas, to focus more rigorously on operational excellence and growth in that important market as well. During a transitional period our Chief Executive Officer, Christopher Christensen, will serve as interim President of Milestone, as he did for the latter part of 2007 and early 2008 in our Flagstone portfolio subsidiary, until a permanent leader for Milestone is identified and installed. Resources will be deployed from other areas of the organization to provide needed support. We expect the transition to be completed in the near term.
On October 28, 2008, four of our subsidiaries purchased the underlying assets of one of our leased long-term care facilities in California and three of our long-term care facilities in Texas. These facilities were purchased for an aggregate price of approximately $10.4 million, which was paid in cash from our IPO proceeds. The lease agreements associated with these properties did not contain purchase options. We anticipate the purchase of these assets will lower operating expenses and be immediately accretive to earnings. Taking into account these purchases, we own 32 facilities and operate an additional 30 facilities under long-term lease arrangements, and have options to purchase 8 of those 30 facilities.

Facility Acquisition History


                                                                                                                                               As of
                                                                    As of December 31,                                                     September 30,
                       1999        2000         2001         2002         2003         2004         2005         2006         2007             2008
Cumulative number
of facilities              5           13           19           24           41           43           46           57           61                   62
Cumulative number
of licensed skilled
nursing, assisted
living and
independent living
beds(1)                  710        1,645        2,244        2,919        5,147        5,401        5,780        6,940        7,448                7,588
Cumulative number
of operational
skilled nursing,
assisted living and
independent living
beds(1)                  665        1,571        2,155        2,751        4,959        5,213        5,585        6,667        7,105                7,239

(1) Includes 671 beds in our 460 assisted living units and 84 independent living units as of September 30, 2008. All of the independent living units are located at one of our assisted living facilities. The cumulative number of skilled nursing, assisted living and independent living beds is calculated using the current number of licensed beds at each facility and may differ from the number of beds at the time of acquisition. We may also permanently expand the number of licensed beds in connection with renovations or expansions of specific facilities.

The following table sets forth the location of our facilities and the number of skilled nursing, assisted living and independent living beds located at our facilities as of September 30, 2008:

                         CA           AZ           TX           UT          WA          ID         Total
 Number of
 facilities                 31           12           10           5           3           1           62
 Licensed skilled
 nursing, assisted
 living and
 independent living
 beds(1)                 3,519        1,952        1,154         562         313          88        7,588
 Operational
 skilled nursing,
 assisted living
 and independent
 living beds(1)          3,464        1,836        1,076         492         283          88        7,239

(1) Includes 671 beds in our 460 assisted living units and 84 independent living units as of September 30, 2008. All of the independent living units are located at one of our assisted living facilities. The cumulative number of skilled nursing, assisted living and independent living beds is calculated using the current number of licensed beds at each facility and may differ from the number of beds at the time of acquisition. We may also permanently expand the number of licensed beds in connection with renovations or expansions of specific facilities.

Key Performance Indicators
We manage our skilled nursing business by monitoring key performance indicators that affect our financial performance. These indicators and their definitions include the following:
• Routine revenue: Routine revenue is generated by the contracted daily rate charged for all contractually inclusive 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 our skilled nursing facilities who are receiving care under Medicare or managed care reimbursement, referred to as "Medicare and managed care patients." Skilled revenue excludes any revenue generated from our assisted living services.

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

• Quality mix: The amount of routine non-Medicaid revenue as a percentage of our total routine revenue. Quality mix (in days) represents the number of days our non-Medicaid patients are receiving services at our skilled nursing facilities divided by the total number of days patients from all payor sources are receiving services at our skilled nursing facilities for any given period.

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

• Occupancy percentage (Licensed beds): The total number of residents occupying a bed in a skilled nursing, assisted living or independent living facility as a percentage of the number of total licensed and independent living beds in a facility.

• Occupancy percentage (Operational beds): The total number of residents occupying a bed in a skilled nursing, assisted living or independent living facility as a percentage of the beds in a facility which are available for occupancy during the measurement period.

• Number of facilities and licensed beds: The total number of skilled nursing, assisted living and independent living facilities that we own or operate and the total number of licensed and independent living beds associated with these facilities. Independent living beds do not have a licensing requirement.

Skilled and Quality Mix. Like most skilled nursing providers, we measure both patient days and revenue by payor. Medicare and managed care patients, whom we refer to as high acuity patients, typically require a higher level of skilled nursing and rehabilitative care. Accordingly, Medicare and managed care reimbursement rates are typically higher than from other payors. In most states, Medicaid reimbursement rates are generally the lowest of all payor types. Changes in the payor mix can significantly affect our revenue and profitability. The following table summarizes our skilled mix and quality mix for the periods indicated as a percentage of our total routine revenue (less revenue from assisted living services) and as a percentage of total patient days:

                               Three Months Ended          Nine Months Ended
                                  September 30,              September 30,
                               2008           2007         2008           2007
              Skilled Mix:
              Days                23.8 %        21.9 %        24.4 %       22.7 %
              Revenue             46.3 %        41.7 %        47.0 %       42.9 %
              Quality Mix:
              Days                36.8 %        35.1 %        37.3 %       35.8 %
              Revenue             56.2 %        52.4 %        56.7 %       53.3 %

Occupancy. We have historically defined occupancy as the ratio of actual patient days (one patient day equals one patient or resident occupying one bed for one day) during any measurement period to the number of licensed patient days for that period. Licensed patient days are determined by multiplying the total of officially licensed beds by the number of calendar days in the measurement period.
However, the number of licensed and independent living beds in a skilled nursing, assisted living or independent living facility that are actually operational and available for occupancy may be less than the total official licensed bed capacity. This sometimes occurs due to the permanent dedication of bed space to alternative purposes, such as enhanced therapy treatment space or other desirable uses calculated to improve service offerings and/or operational efficiencies in a facility. In some cases, three- and four-bed wards have been reduced to two-bed rooms for resident comfort, and larger wards have been reduced to conform to changes in Medicare requirements. These beds are seldom expected to be placed back into service. In addition, we occasionally acquire facilities with "banked" beds, for which valuable licensing rights have been retained, but have been voluntarily suspended under state regulations until the beds can be economically placed into service again. We define occupancy in operational beds as the ratio of actual patient days during any measurement period to the number of available patient days for that period. Available patient days are determined by subtracting non-operational licensed beds from total licensed beds, and multiplying the difference by the number of calendar days in the measurement period. Although we believe that reporting occupancy based on operational beds is consistent with industry practices and provides a more useful measure of actual occupancy performance from period to period, we intend to also continue reporting occupancy based on all licensed beds, whether they are in service or not, through at least fiscal year 2008.

The following table summarizes our occupancy statistics for the periods indicated:

                                           Three Months Ended              Nine months Ended
                                             September 30,                   September 30,
                                          2008           2007            2008             2007
Occupancy:
Licensed and independent living beds
at end of period(1)                         7,588          7,448            7,588            7,448
Operational beds at end of period(2)        7,239          7,105            7,239            7,105
Available patient days(2)                 666,048        652,385        1,966,112        1,905,118
Licensed patient days                     698,156        682,522        2,061,012        1,988,894
Actual patient days                       535,237        532,459        1,594,616        1,546,083
Occupancy percentage (based on
operational beds)                            80.4 %         81.6 %           81.1 %           81.2 %
Occupancy percentage (based on
licensed beds)                               76.7 %         78.0 %           77.4 %           77.7 %

(1) The number of licensed beds is calculated using the historical number of beds licensed at each facility. All bed counts are licensed beds except for independent living beds, and may not reflect the number of beds actually available for patient use.

(2) The number of licensed and independent living beds in a skilled nursing, assisted living or independent living facility that are actually operational and available for occupancy may be less than the total official licensed bed capacity. This sometimes occurs due to the permanent dedication of bed space to alternative purposes, such as enhanced therapy treatment space or other desirable uses calculated to improve service offerings and/or operational efficiencies in a facility. In some cases, three- and four-bed wards have been reduced to two-bed rooms for resident comfort. These beds are seldom expected to be placed back into service. In addition, we occasionally acquire facilities with "banked" beds, for which valuable licensing rights have been retained, but have been voluntarily suspended under state regulations until the beds can be economically placed into service again.

Revenue Sources
Our total revenue represents revenue derived primarily from providing services to patients and residents of skilled nursing facilities, and to a lesser extent from assisted living facilities and ancillary services. We receive service revenue from Medicaid, Medicare, private payors and other third-party payors, and managed care sources. The sources and amounts of our revenue are determined by a number of factors, including bed capacity and occupancy rates of our healthcare facilities, the mix of patients at our facilities and the rates of reimbursement among payors. Payment for ancillary services varies based upon the service provided and the type of payor. The following table sets forth our total revenue by payor source and as a percentage of total revenue for the periods indicated:

                              Three Months Ended September 30,                        Nine Months Ended September 30,
                              2008                        2007                        2008                        2007
                         $             %             $             %             $             %             $             %
                                                                   (in thousands)
Revenue:
Medicare             $  37,610         32.3 %    $  30,010         28.8 %    $ 114,405         33.1 %    $  89,706         29.7 %
Managed care            16,142         13.9         13,100         12.6         47,320         13.7         38,807         12.8
Private and other
payors(1)               13,786         11.9         13,769         13.2         40,506         11.7         39,266         13.0
Medicaid                48,790         41.9         47,213         45.4        143,194         41.5        134,560         44.5

Total revenue        $ 116,328        100.0 %    $ 104,092        100.0 %    $ 345,425        100.0 %    $ 302,339        100.0 %

(1) Includes revenue from assisted living facilities.

Critical Accounting Policies Update
There have been no significant changes during the nine month period ended September 30, 2008 to the items that we disclosed as our critical accounting policies and estimates in our discussion and analysis of financial condition and results of operations in our Annual Report on Form 10-K filed with the SEC. Industry Trends
The skilled nursing industry has evolved to meet the growing demand for post-acute and custodial healthcare services generated by an aging population, increasing life expectancies and the trend toward shifting of patient care to lower cost settings. The skilled nursing industry has evolved in recent years, which we believe has led to a number of favorable improvements in the industry, as described below:
• 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, inpatient rehabilitation facilities 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.

• Significant Acquisition and Consolidation Opportunities. The skilled nursing industry is large and highly fragmented, characterized predominantly by numerous local and regional providers. We believe this fragmentation provides significant acquisition and consolidation opportunities for us.

. . .