Health care companies say federal cuts hurt industry

Government report shifts blame from changes in Medicare


February 03, 2000|By Sean Somerville and Kristine Henry | Sean Somerville and Kristine Henry,SUN STAFF

The changes in Medicare that Integrated Health Services Inc. blames for its troubles have hurt other nursing home companies too, analysts said.

In the past six months alone, six other national health care providers filed for bankruptcy protection -- a list that includes Vencor Inc., Sun Healthcare Group Inc., Mariner Post-Acute Network Inc., Lenox Health Care Inc., Frontier Group Inc. and Newcare Health.

"We've just bankrupted an entire industry when that industry was about to undergo more growth than it's ever had," said Charles Newhall, a venture capitalist and former member of Integrated Health Services' board. "It's going to go down as one of the greatest mistakes."

Wall Street analysts agree, saying the changes precipitated Integrated Health's bankruptcy.

But running contrary to that assessment is a report by the General Accounting Office released in December. That report says Medicare cuts were only one of several factors that caused the financial problems of nursing home companies such as Albuquerque, N.M.-based Sun Healthcare Group and Louisville, Ky.-based Vencor.

At issue is the effect of $9 billion in Medicare cuts passed as part of 1997 budget-balancing legislation. Those cuts slashed payments covered by the government's Medicare health program for the elderly. Integrated Health, which made several acquisitions in anticipation of less severe cuts, swelled to 84,000 employees with $3 billion in annual revenue in 1998.

Analysts said Integrated Health incorrectly assumed it could reduce operational costs more quickly than it would lose revenue from Medicare. The company also failed to foresee that customers and payments for ancillary or rehabilitation therapy -- for patients such as stroke victims -- would decline, additionally suppressing revenue.

"The dramatic impact of the implementation of the 1997 Balanced Budget Act on our revenues and cash flow severely impacted the company's ability to service our capital structure," said Robert N. Elkins, Integrated Health's chairman and chief executive officer, in a statement yesterday.

The changes began with the Prospective Payment System, a fee structure phased in over five years starting in 1998. Under that system, nursing home operators and sub-acute centers are paid a fixed fee per patient based on the patient's condition. Before PPS, operations were reimbursed whatever they billed, usually a fee based on their cost of care for specific patients plus a profit margin averaging 35 percent.

"The changes that came were different than what they thought was to happen. The reimbursement was significantly less -- 20 percent to 30 percent less than what was anticipated," said Bill McGahan, managing director for Warburg Dillon Read, who is advising Integrated Health.

The new system cut cash flow in half, from about $600 million to $300 million, McGahan said. "That's basically all the profits," he said.

But the GAO report said that while the new reimbursement system may be paying too little for the care of some high-cost patients, it may be paying too much for others.

Addressing the troubles of the industry, the GAO said "the losses reported by the companies stem in large part" from high capital-related costs, reduced demand for nursing home support services such as rehabilitation and "substantial nonrecurring expenses and write-offs."

The nursing home industry disputes the findings of the GAO, saying the agency lacked the data, the focus and the ability to do an impartial study. "Their client is Congress, and the main thing they have to tell Congress is what they did wasn't a bad decision," said Gary Capistrant, senior vice president for health with U.S. Strategies Corp., an organization that lobbies for the nursing home industry.

Through U.S. Strategies Corp., the industry took issue with what it called "particularly outrageous GAO statements." In its report, the GAO said facilities "benefited from furnishing more ancillary services to Medicare patients, without regard for their services' price or necessity." But the industry said that patients benefited and that facilities were paid for "reasonable costs."

The Republican-controlled Congress and the White House last November moved to restore some of the Medicare spending cuts, increasing Medicare payments to nursing homes by $2.1 billion over five years.

The GAO said those changes will temporarily increase payments for certain types of patients and may eliminate disincentives to admit patients. But the industry said the changes will not return fired workers and restore discontinued ancillary services.

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