Golden years fade for nursing home chains

An industry booming only a few years ago struggles to survive

March 05, 2000|By M. William Salganik | M. William Salganik,SUN STAFF

Long-term care has a cloudy short-term future.

With Integrated Health Service's filing for bankruptcy protection last month, four of the nation's seven largest nursing-home chains -- with 177,000 beds -- are in bankruptcy.

Of the country's 17,000 nursing homes, 1,651 are operating under the supervision of the bankruptcy courts.

Last year, reduced Medicare payments triggered a series of disastrous earning reports.

The red ink was quickly followed by a slide in stock prices so steep that, by last summer, people in the industry referred to some nursing-home chains as "drill-bit companies" because their share prices -- 3/8, 7/16, 1/4 -- are also the sizes for drill bits.

With states over the past few years squeezing Medicaid payments -- traditionally the largest source of nursing-home revenue -- and the Medicare cuts, "Most [sources]of your cash flow are loss leaders," complained Dr. Charles Roadman, president and chief executive officer of the American Health Care Association, a trade group.

Despite the turmoil and the parade to Bankruptcy Court, many analysts expect the companies to reorganize and survive. The nursing homes remain about 90 percent full, and Congress voted in November to restore some of the Medicare cuts.

"The bankrupt companies will emerge, a little smaller. With less debt and restructured leases, they should be fine," said Stephen M. Monroe, editor of the SeniorCare Investor, an industry newsletter. "They've weathered the worst."

Joshua Wiener, a long-term care researcher at the Urban Institute, agreed: "The companies will reorganize or be bought. I don't think there's any chance these facilities would close."

Others in the industry are not as sanguine.

Michael R. Walker, chairman and chief executive officer of Genesis Health Ventures Inc., a Pennsylvania firm with extensive operations in Maryland, said his own company -- which is not in bankruptcy --- is finding that selling assets to reduce debt is fine in theory, but hard to do in the industry's current climate.

"To meet our debt obligations, we have to sell some facilities," Walker said, "but banks won't lend to buyers."

The current crunch in the industry has its roots in the mid-1980s, when companies like Genesis and Integrated Health were getting started. They took nursing homes in a new direction -- a direction that made the term "long-term care" somewhat misleading.

Dr. Robert Elkins, who founded IHS in 1986, anticipated a demand for "subacute" services -- care that is less intense (and less expensive) than what hospitals provide.

Integrated Health Services and other nursing-home chains began shifting their business away from traditional, long-term care for frail elderly clients, and began providing shorter-term care for patients leaving the hospital -- at higher rates than those usually charged by nursing homes.

At Genesis, the shift to shorter-term patients meant the average length of stay dropped from about 450 days -- when the company began in the mid-80s -- to about 150 days now, according to Walker, who says "45 percent of the people go home in less than 60 days."

More expensive

While their stays were shorter, the subacute patients received more expensive services -- therapy, lab tests, medications -- than traditional long-term care residents. From 1990 to 1998, the daily cost for Medicare patients at nursing homes more than doubled -- from $98 to $262.

Meanwhile, the number of Medicare patients treated in nursing homes was more than doubling as well -- from 638,000 to 1.6 million. Medicare spending in skilled nursing facilities -- known in the trade as "sniffs," from the initials SNF -- grew from $578 million in 1986 to $13.6 billion in 1998.

The nursing home chains followed the money, becoming more dependent on Medicare payments for subacute patients -- now 25 to 40 percent of revenue for large chains -- in addition to the traditional Medicaid payments for indigent elderly residents.

Growing rapidly, the chains bought more and more nursing homes and more and more related businesses -- therapy companies, home-nursing operators, institutional pharmacies -- to serve the subacute patients.

Integrated Health Services was one of the most aggressively acquisitive. The Sparks company's revenue increased from less than $150 million in 1991 to more than $3 billion in 1998, making it one of Maryland's largest publicly-owned companies. Similarly, Genesis grew from $219.7 million in fiscal 1993 to $1.87 billion in fiscal 1999.

But the growth in spending on subacute care caught the attention of Congress, which cut payments as part of the Balanced Budget Act of 1997.

The government cut its payments and, instead of simply reimbursing nursing homes for the cost of subacute care -- whatever the cost was -- the government switched to a per-day rate.

Rate cuts and new formulas were an attempt to deal with the problem of expensive and unneeded care without directly cutting services, said Urban Instititute's Wiener.

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