The Ensign Group Inc., among the largest senior living operators in the nation with 396 facilities across 17 states, is under scrutiny after activist short sellers accused the company of misconduct at its facilities.
The reports published by Hunterbrook Media and Muddy Waters Research allege that Ensign has built its growth on understaffing, tunneling funds to executives and affiliates, as well as licensing violations.
Ensign is part of an industry expected to grow tremendously in the coming years as Baby Boomers enter retirement age. The industry is also fraught with allegations of misconduct and fraud.
Ensign has gained a reputation for acquiring underperforming facilities and turning them around through its “cluster” model, which groups independent facilities in close proximity to share resources and expertise. In the past decade, the company has achieved a 15% compound annual revenue growth rate.
The company’s model has convinced investors, as shares have more than doubled in the past five years to a market cap that topped $10 billion, making it Orange County’s fifth most valuable firm.
After four days of back-to-back reports from June 8 to June 11, Ensign’s shares fell 11% and lost more than $500 million in market cap. At press time, shares traded around $155.84 and a $9.1 billion market cap (Nasdaq: ENSG).
While Ensign declined to comment for this story and has remained quiet on the matter, company officials met with the analyst firm UBS to address questions about its quality of care.
“ENSG expressed confidence in its business practices and pointed to its ~20 year operating history,” UBS analysts AJ Rice, James Kurek, Joseph Overman, Jonathan Young and Michael Wei wrote in a June 8 note to investors.
“The company’s strong occupancy levels, rising patient skilled mix, and increasing referral volumes were noted as only being achievable because the company is delivering high-quality outcomes. Further, the company noted that MCOs and government payers would not continue to refer patients to ENSG facilities if ENSG were continually delivering low quality patient outcomes.”
Report Claims Care Hours Cut to Boost Profits
Short traders often buy put options before releasing their reports, aiming to cash in on falling share prices.
Hunterbrook, which began in 2023, says it’s a legitimate journalism outlet that monetizes its reporting through trading profits and sometimes litigation support, according to a New Yorker magazine profile on the firm with the headline, “Is Hunterbrook Media a News Outlet or a Hedge Fund?”
Hunterbrook’s five-month investigation claims that Ensign boosted profits by providing less care than patients needed, particularly to ones needing higher levels of care referred to as high-acuity patients.
According to the report, Ensign provided 26.8% fewer nursing hours to its patients than what was recommended by the Centers for Medicare & Medicaid Services (CMS), translating to savings of $161 million during five months in 2024.
“Ensign says it’s focusing on high-acuity people in order to increase its revenue, the bulk of which comes from government programs, but then it staffs many facilities below the levels needed to provide the care those payment rates are calibrated to support,” the report read.
Ensign told UBS that the data regarding inadequate staffing comes from Payroll Based Journal, which the company noted “CMS has said is incomplete and does not fully reflect staffing levels.” CMS created and implemented the standardized electronic reporting system in 2015 for nursing homes to submit staffing information.
The Hunterbrook report alleged that Ensign facilities directed about $339 million to affiliated entities in 2024. The report described the transactions as “tunneling,” a term used in corporate governance to describe the movement of assets or profits from a company to related parties controlled by insiders.
“Our cost-report analysis shows Ensign facilities pay hundreds of millions of dollars a year to entities also owned or controlled by Ensign,” the firm said.
In response to accusations about intra-company payments, Ensign said that it is management fees facilities pay for the centralized service center operations that Ensign runs.
Additional claims in the report include manipulating quality ratings and accounts of patient deaths and injuries due to negligence.
Muddy Waters Report
Muddy Waters, which was founded in 2010 by Carson Block, became famous for shorting Chinese companies trading on U.S. stock exchanges.
Three days after the Hunterbrook report, Muddy Waters released its own independent research report.
The firm said it sent investigators to 57 of Ensign’s facilities across eight states and found what it described as a “license rental scheme” at 12 locations, or about 20% of those surveyed.
Muddy Waters breaks down the alleged scheme as Ensign paying a licensed administrator $2,000 per month plus $60 per site visit to lend their license to the facility while allowing an unlicensed operator to run the building’s day-to-day operations.
“Ensign enters into consulting agreements with these nominal administrators that appear to cause Ensign to state the facilities have licensed Administrators when in fact these administrators are seldom on premise and do not substantively manage facilities,” Muddy Waters said in its report.
“We believe this scheme, which could amount to fraud against states, Medicare, and Medicaid, is the pillar upon which Ensign’s acquisition strategy and margins is built.”
Federal law requires skilled nursing facilities billing Medicare and Medicaid to have a state-licensed administrator who manages the facility. Those programs account for 69% of Ensign’s revenue, according to Muddy Waters.
The Counter Argument
Ensign management countered that it currently has just six facilities, out of 396 total, with an administrator in transition.
“The company pointed to the fact that it operates within statutory guidelines that allow for the transfer of administrators, which sometimes involves third-party administrators stepping into lead buildings on an interim basis,” UBS said.
Following the publication of the two reports, Hagens Berman, a law firm known for shareholder lawsuits, opened an investigation into whether Ensign violated federal securities laws.
“Our investigation is focused on whether the analysts’ allegations are accurate and, if so, whether Ensign may have misled investors about its business practices and accounting,” said Reed Kathrein, who is leading the investigation.
Meanwhile, on June 15, Ensign’s board of directors announced it had approved a $60 million increase to the company’s previously approved $40 million stock repurchase program. Repurchases are expected to begin in the near term, according to the company.
“The increased stock repurchase authorization underscores our confidence in the strength, integrity and upside potential of our company, as well as our ongoing commitment to disciplined capital allocation,” Chief Executive Barry Port said in a statement.
