REVENUE RECOGNITION

On January 1, 2018, the Company adopted Accounting Standards Codification ("ASC") 606 using the modified retrospective method for all contracts as of the date of adoption. The reported results for 2018 reflect the application of ASC 606 guidance while the reported results for 2017 were prepared under the guidance of ASC 605, Revenue Recognition (ASC 605), which is also referred to herein as "legacy GAAP". The adoption of ASC 606 represents a change in accounting principle that will more closely align revenue recognition with the delivery of the Company's services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these services. ASC 606 requires companies to exercise more judgment and recognize revenue in accordance with the standard's core principle by applying the following five steps:

Step 1: Identify the contract with a customer.

Step 2: Identify the performance obligations in the contract.

Step 3: Determine the transaction price.

Step 4: Allocate the transaction price to the performance obligations in the contract.

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

Performance obligations are promises made in a contract to transfer a distinct good or service to the customer. A contract's transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The Company has concluded that the contracts with patients and residents represent a bundle of distinct services that are substantially the same, with the same pattern of transfer to the customer. Accordingly, the promise to provide quality care is accounted for as a single performance obligation.

The Company performed analyses using the application of the portfolio approach as a practical expedient to group patient contracts with similar characteristics, such that revenue for a given portfolio would not be materially different than if it were evaluated on a contract-by-contract basis. These analyses incorporated consideration of reimbursements at varying rates from Medicaid, Medicare, Managed Care, Private Pay, Assisted Living, Hospice, and Veterans for services provided in each corresponding state. It was determined that the contracts are not materially different for the following groups: Medicaid, Medicare, Managed Care and Private Pay and other (Assisted Living, Hospice and Veterans).

In order to determine the transaction price, the Company estimates the amount of variable consideration at the beginning of the contract using the expected value method. The estimates consider (i) payor type, (ii) historical payment trends, (iii) the maturity of the portfolio, and (iv) geographic payment trends throughout a class of similar payors. The Company typically enters into agreements with third-party payors that provide for payments at amounts different from the established charges. These arrangement terms provide for subsequent settlement and cash flows that may occur well after the service is provided. The Company constrains (reduces) the estimates of variable consideration such that it is probable that a significant reversal of previously recognized revenue will not occur throughout the life of the contract. Changes in the Company's expectation of the amount it will receive from the patient or third-party payors will be recorded in revenue unless there is a specific event that suggests the patient or third-party payor no longer has the ability and intent to pay the amount due and, therefore, the changes in its estimate of variable consideration better represent an impairment, or bad debt. These estimates are re-assessed each reporting period, and any amounts allocated to a satisfied performance obligation are recognized as revenue or a reduction of revenue in the period in which the transaction price changes.

The Company satisfies its performance obligation by providing quality of care services to its patients and residents on a daily basis until termination of the contract. The performance obligation is recognized on a time elapsed basis, by day, for which the services are provided. For these contracts, the Company has the right to consideration from the customer in an amount that directly corresponds with the value to the customer of the Company's performance to date. Therefore, the Company recognizes revenue based on the amount billable to the customer in accordance with the practical expedient in ASC 606-10-55-18. Additionally, because the Company applied ASC 606 using certain practical expedients, the Company elected not to disclose the aggregate amount of the transaction price for unsatisfied, or partially unsatisfied, performance obligations for all contracts with an original expected length of one year or less.

The Company incurs costs related to patient/resident contracts, such as legal and advertising expenses. The contract costs are expensed as incurred. They are not expected to be recovered and are not chargeable to the patient/resident regardless of whether the contract is executed.

Financial Statement Impact of Adopting ASC 606

The Company adopted ASC 606 using the modified retrospective method. The cumulative effect of applying the new guidance to all contracts with customers as of January 1, 2018 was not material to the interim consolidated financial statements. As a result of applying the modified retrospective method to adopt ASC 606, the following adjustments were made to our operating results:



	Three Months Ended September 30, 2018
	As Reported	Increase (Decrease)		Balances as if the previous accounting guidance was in effect
Patient Revenues, net	$141,431	3,903	(a)	$145,065
		(269)	(b)
		3,634
Operating Expenses	$113,799	3,903	(a)	$117,702
Total Expenses	$147,397	3,903	(a)	$151,300

(a) Adjusts for the implicit price concession of bad debt expense.

(b) Adjusts for the implementation of ASC 606.



	Nine Months Ended September 30, 2018
	As Reported	Increase (Decrease)		Balances as if the previous accounting guidance was in effect
Patient Revenues, net	$423,798	11,155	(a)	$434,066
		(887)	(b)
		10,268
Operating Expenses	$337,517	11,155	(a)	$348,672
Total Expenses	$427,672	11,155	(a)	$438,827

(a) Adjusts for the implicit price concession of bad debt expense.

(b) Adjusts for the implementation of ASC 606.



	As of September 30, 2018
	As Reported	Increase (Decrease)		Balances as if the previous accounting guidance was in effect
Accounts Receivable	$65,927	(887)	(a)	$81,275
		16,235	(b)
		15,348
Accumulated Deficit	$(23,432)	887	(a)	$(22,829)
		(284)	(c)
		603

(a) Adjusts for the implementation of ASC 606.

(b) Adjusts for a direct reduction of accounts receivable that would have been reflected as allowance for doubtful accounts in the consolidated balance sheet prior to the adoption of ASC 606.

Disaggregation of Revenue

The following table summarizes revenue from contracts with customers by payor source for the periods presented (dollar amounts in thousands):



	Three Months Ended September 30,
	2018				2018				2017(1)
	As reported				As Adjusted to Legacy GAAP				As reported
Medicaid	$	68,929	48.7	%	$	78,200	53.9	%	$	77,027	52.6	%
Medicare	26,997		19.1	%	34,933		24.1	%	36,449		24.9	%
Managed Care	12,404		8.8	%	10,874		7.5	%	10,992		7.5	%
Private Pay and other	33,101		23.4	%	21,058		14.5	%	21,909		15.0	%
Total	$	141,431	100.0	%	$	145,065	100.0	%	$	146,377	100.0	%



	Nine Months Ended September 30,
	2018				2018				2017(1)
	As reported				As Adjusted to Legacy GAAP				As reported
Medicaid	$	198,418	46.8	%	$	226,631	52.2	%	$	223,410	51.9	%
Medicare	84,611		20.0	%	109,150		25.1	%	113,360		26.3	%
Managed Care	39,919		9.4	%	34,854		8.0	%	31,756		7.4	%
Private Pay and other	100,850		23.8	%	63,431		14.7	%	61,901		14.4	%
Total	$	423,798	100.0	%	$	434,066	100.0	%	$	430,427	100.0	%

(1) As noted above, prior period amounts have not been adjusted under the application of the modified retrospective method.