Shrinking profits place nursing homes at crossroads

August 01, 1993|By Patricia Meisol | Patricia Meisol,Staff Writer

When Michael J. Francus applied to build a nursing home in Baltimore in 1988, banks were only too happy to finance a project whose patients were certain to bring government dollars. But by the time he got the necessary approvals from regulators two years later, the government had slashed reimbursement levels, and bankers shut their doors.

He was left with the rights to build a 136-bed unit -- and the prospect of a "razor-thin" profit margin. "You don't go in the hole $5 million or $6 million to make $50,000," he decided. "That's ridiculous."

Mr. Francus was able to recoup his investment by transferring those rights. But the buyer, Mariner Health Care Inc., used the beds for subacute care, a level of skilled medical care that can command seven times as much money as traditional nursing home care.

That deal is part of a broad industry trend -- the move away from "white bread" nursing homes, as Mr. Francus calls them. In Maryland and across the nation, as owners react to shrinking profit margins and patients who demand more care, nursing homes as we've known them for 30 years are disappearing.

Maryland's 250 nursing homes remain popular -- there are few vacancies in their 27,000 beds. But as the industry slumped over the past 18 months, the number of state-approved beds that remain unbuilt has grown to an extraordinary level. The rights to build 1,500 new beds, represented by certificates granted as long ago as 1983, are sitting unused while their owners bet on the industry's future.

"There's a lot of angst because there are more and more requirements [to care for sicker patients] on us but not the funds to do it," Mr. Francus said.

Nursing home owners don't know whether to close, sue the state for higher reimbursements or move into more lucrative subacute care. In recent months, regulators have favored hospitals and for-profit companies in converting traditional nursing home beds subacute care. As a result, nursing homes are scrambling for new partners.

"Everyone is talking to hospitals," said Mr. Francus, part owner with his family of six nursing homes. "In fact, we are talking to Mariner about running subacute units in some other homes my family owns."

Meanwhile, certificates for traditional beds are piling up. The problem arose "because nursing home owners could not get financing to develop them," said Ann MacKay, president of the Maryland Association of Non-Profit Homes for the Aging. "And now it is because the reimbursement level is so squeezed that operators are not willing to build."

For example, the rights Mr. Francus sold to Mariner brought $2,000 a bed, a far cry from the $10,000 per bed that certificates commanded in the late 1980s, when large government reimbursements kept the value of the limited supply high. (Certificates of need, which give an owner the right to build a specific number of beds, technically can't be sold. But state regulators have been approving ownership transfer for the price of the investment, usually the legal and development costs to obtain the certificates.)

Today, state nursing home operators largely depend on Medicaid reimbursements to pay for patients.

"What has happened in the marketplace is that the typical private-pay patient has been evaporating," said James L. Buxbaum, a senior partner with the Baltimore accounting firm Wolpoff & Co., whose clients include 100 nursing homes.

One reason: A mini-industry of lawyers has developed to help the elderly legally dispose of assets through trusts and other devices. That allows them to qualify for Medicaid, a widespread occurrence in Maryland, which has seen its budget jump as a result. (Many states and the federal government are drafting laws to end this practice.)

At the same time, alternatives to nursing homes have grown in popularity for paying patients. These include home health care programs, group homes in residential neighborhoods and life-care communities such as Charlestown in Catonsville, where people live with various degrees of independence.

Now Maryland is about to fund assisted-living programs that will push patients who do not need much care out of nursing homes altogether.

In place of patients it loses to such alternative care options, nursing homes have been accepting patients who require more medical care -- including many discharged directly from hospitals. In the past decade, nursing homes saw a 30 percent increase in patients who require heavy care, says Joe Coble, legislative affairs director for the Health Facilities Association of Maryland.

But state Medicaid reimbursements in the past five years have dropped steadily -- nursing homes in Maryland got 8 percent less this year than they expected, he said.

To keep pace, the industry is forced to find new sources of payment and to offer new services.

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