Leased            Leased
                                                        (with a         (without a
                                                       Purchase          Purchase
                                         Owned          Option)          Option)           Total
Number of facilities                          38                9                23             70
Percent of total                            54.2 %           12.9 %            32.9 %          100 %
Operational skilled nursing,
assisted living and independent
living beds                                4,174            1,056             2,743          7,973
Percent of total                            52.4 %           13.2 %            34.4 %          100 %

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 are operated by the same entity. Recent Developments
During the first quarter of 2009, we acquired five skilled nursing facilities, one skilled nursing facility which also has the capacity to provide assisted living and independent living services and one assisted living facility. The aggregate purchase price of six of the seven facilities was $20.5 million. We acquired the remaining facility pursuant to a long-term lease arrangement with the real property owner of the facility. In this transaction, we assumed ownership of the skilled nursing operating business at this facility for approximately $1.6 million. These acquisitions added an aggregate of 554 operational skilled nursing, 92 operational assisted living and 24 independent living beds to our operations.
On September 30, 2009, the lease on one of our assisted living facilities in Arizona expired and we decided not to exercise our renewal option on this facility. As the operations of this facility were not material to us as a whole, the disposal of this facility was not shown as discontinued operations in our condensed consolidated statement of income for the three and nine months ended September 30, 2009. Total revenues for the three and nine months ended September 30, 2009 for this facility were $496 and $1,412, respectively and net loss for the three and nine months ended September 30, 2009 for this facility was $156 and $206, respectively.
On October 1, 2009, we purchased a skilled nursing facility which also has the capacity to provide independent living and hospice services in Dallas, Texas for approximately $17.0 million, which was paid in cash. This acquisition added 264 operational skilled nursing beds, 39 independent living units and hospice care services to our operations. We also entered into a separate operations transfer agreement with the prior tenant as part of this transaction.
On October 1, 2009, we purchased three skilled nursing facilities in Utah for approximately $23.0 million, of which $13.0 million was paid in cash and the remaining $10.0 million was financed through a short term loan with the seller. This acquisition added an aggregate of 396 operational skilled nursing beds to our operations. We also entered into a separate operations transfer agreement with the prior tenant as part of this transaction.
See further discussion of facility acquisitions in Note 6 above. Facility Acquisition History

                                                                                                                                                   As of
                                                                       As of December 31,                                                      September 30,
                        1999       2000        2001        2002        2003        2004        2005        2006        2007        2008            2009
Cumulative number of
facilities                  5          13          19          24          41          43          46          57          61          63                  70
Cumulative number of
operational skilled
nursing, assisted
living and
independent living

The following table sets forth the location of our facilities and the number of operational beds located at our facilities as of September 30, 2009:

                         CA          AZ          TX          UT         CO         WA         ID        Total
Number of facilities        33          12          11          6          4          3          1          70
Operational skilled
nursing, assisted
living and
independent living

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 higher levels of care under Medicare, managed care, Medicaid, or other skilled reimbursement programs. The other skilled residents that are included in this population represent very high acuity residents who are receiving high levels of nursing and ancillary services which are reimbursed by payors other than Medicare or managed care 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, managed care, or other skilled patients are receiving services at our skilled nursing facilities divided by the total number of days patients (less days from assisted living services) from all payor sources are receiving services at our skilled nursing facilities for any given period (less days from assisted living services).

• 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 (less days from assisted living services).

• 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 (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 operational beds: The total number of skilled nursing, assisted living and independent living facilities that we own or operate and the total number of operational beds associated with these facilities.

Skilled and Quality Mix. Like most skilled nursing providers, we measure both patient days and revenue by payor. Medicare, managed care and other skilled 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 overall 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 (less days from assisted living services):

                               Three Months Ended          Nine Months Ended
                                  September 30,              September 30,
                               2009           2008         2009           2008
              Skilled Mix:
              Days                24.5 %        24.7 %        24.7 %       25.2 %
              Revenue             48.1 %        48.5 %        48.2 %       49.0 %
              Quality Mix:
              Days                37.4 %        37.6 %        37.4 %       38.0 %
              Revenue             57.7 %        58.3 %        57.8 %       58.6 %

Occupancy. We define occupancy as the ratio of actual patient days (one patient day equals one resident occupying one bed for one day) during any measurement period to the number of beds in facilities which are available for occupancy during the measurement period. 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. 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. 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.

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

                                          Three Months Ended              Nine Months Ended
                                            September 30,                   September 30,
                                         2009           2008            2009             2008
Occupancy:
Operational beds at end of period          7,973          7,588            7,973            7,588
Available patient days                   730,920        666,048        2,167,556        1,966,112
Actual patient days                      581,041        535,237        1,724,398        1,594,616
Occupancy percentage (based on
operational beds)                           79.5 %         80.4 %           79.6 %           81.1 %

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,
                                 2009                        2008                        2009                        2008
                            $             %             $             %             $             %             $             %
                                                                       (in thousands)
Revenue:
Medicaid-custodial      $  53,589         40.3 %    $  46,426         39.9 %    $ 159,428         40.3 %    $ 136,748         39.6 %
Medicare                   42,027         31.6         37,610         32.3        128,389         32.5        114,405         33.1
Medicaid-skilled            3,640          2.7          2,364          2.0          8,627          2.2          6,446          1.9

Total                      99,256         74.6         86,400         74.2        296,444         75.0        257,599         74.6
Managed Care               17,996         13.6         16,142         13.9         52,675         13.3         47,320         13.7
Private and Other(1)       15,672         11.8         13,786         11.9         46,268         11.7         40,506         11.7

Total revenue           $ 132,924        100.0 %    $ 116,328        100.0 %    $ 395,387        100.0 %    $ 345,425        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, 2009 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.

• 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.

• Increased Demand Driven by Aging Populations and Increased Life Expectancy. As life expectancy continues to increase in the United States and seniors account for a higher percentage of the total U.S. population, we believe the overall demand for skilled nursing services will increase. At present, the primary market demographic for skilled nursing services is primarily individuals age 75 and older. According to U.S. Census Bureau Interim Projections, there were 38 million people in the United States in 2008 that were over 65 years old. The U.S. Census Bureau estimates this group is one of the fastest growing segments of the United States population and is expected to more than double between 2000 and 2030.

We believe the skilled nursing industry has been and will continue to be impacted by several other trends. The use of long-term care insurance is increasing among seniors as a means of planning for the costs of skilled nursing services. In addition, as a result of increased mobility in society, reduction of average family size, and the increased number of two-wage earner couples, more seniors are looking for alternatives outside the family for their care. Effects of Changing Prices. Medicare reimbursement rates and procedures are subject to change from time to time, which could materially impact our revenue. Medicare reimburses our skilled nursing facilities under a prospective payment system (PPS) for certain inpatient covered services. Under the PPS, facilities are paid a predetermined amount per patient, per day, based on the anticipated costs of treating patients. The amount to be paid is determined by classifying each patient into a resource utilization group (RUG) category that is based upon each patient's acuity level. As of January 1, 2006, the RUG categories were expanded from 44 to 53, with increased reimbursement rates for treating higher acuity patients. Should future changes in skilled nursing facility payments reduce rates or increase the standards for reaching certain reimbursement levels, our Medicare revenues could be reduced, with a corresponding adverse impact on our financial condition or results of operation.
The Deficit Reduction Act of 2005 (DRA) was expected to significantly reduce net Medicare and Medicaid spending. Prior to the DRA, caps on annual reimbursements for rehabilitation therapy became effective on January 1, 2006. The DRA provides for exceptions to those caps for patients with certain conditions or multiple complexities whose therapy is reimbursed under Medicare Part B and provided in 2006. On July 15, 2008, the Medicare Improvements for Patients and Providers Act of 2008 extended the exceptions to these therapy caps until December 31, 2009. On July 31, 2009, Centers for Medicare and Medicaid Services (CMS) released its final rule on the fiscal year 2010 PPS reimbursement rates for skilled nursing facilities, which resulted in a 2.2% market basket increase. The fiscal year 2010 recalibration of the case mix index (CMI) is expected to correct a forecast error resulting in a 3.3% rate reduction.
Historically, adjustments to reimbursement under Medicare have had a significant effect on our revenue. For a discussion of historic adjustments and recent changes to the Medicare program and related reimbursement rates see Risk Factors
- Risks Related to Our Business and Industry - "Our revenue could be impacted by federal and state changes to reimbursement and other aspects of Medicaid and Medicare," "Our future revenue, financial condition and results of operations could be impacted by continued cost containment pressures on Medicaid spending," and "If Medicare reimbursement rates decline, our revenue, financial condition and results of operations could be adversely affected." The federal government and state governments continue to focus on efforts to curb spending on healthcare programs such as Medicare and Medicaid. We are not able to predict the outcome of the legislative process. We also cannot predict the extent to which proposals will be adopted or, if adopted and implemented, what effect, if any, such proposals and existing new legislation will have on us. Efforts to impose reduced allowances, greater discounts and more stringent cost controls by government and other payors are expected to continue and could adversely affect our business, financial condition and results of operations.

Results of Operations
The following table sets forth details of our revenue, expenses and earnings as
a percentage of total revenue for the periods indicated:

                                           Three Months Ended              Nine Months Ended
                                             September 30,                   September 30,
                                          2009            2008            2009           2008
Revenue                                     100.0 %         100.0 %         100.0 %        100.0 %
Expenses:
Cost of services (exclusive of
facility rent and depreciation and
amortization shown separately
below)                                       80.7            81.1            80.1           80.6
Facility rent-cost of services                2.8             2.8             2.8            3.3
General and administrative expense            3.7             3.9             3.9            4.2
Depreciation and amortization                 2.4             2.0             2.4            1.9

Total expenses                               89.6            89.8            89.2           90.0
. . .