The nursing home industry is putting its squeaky wheel into high gear. It's rolling out an aggressive public relations campaign blaming its fiscal woes on overzealous government cost-cutting.
But critics say what's ailing nursing homes goes far beyond reimbursement changes imposed by Medicare's new prospective payment system. They say that many publicly traded companies are to blame for their problems.
"A lot of these companies are sitting on a pile of debt they can't manage," says John Ransom, an analyst for Raymond James Financial, St. Petersburg, Fla. Companies borrowed to fund expansion but didn't anticipate government cost cuts and other factors that reduced cash flow, he says. As a result, "the train wreck hit their balance sheets," he says.
Congress mandated the PPS in response to rising Medicare payments to skilled-nursing facilities. Medicare spending on nursing homes more than tripled, to $10.1 billion, from 1992 to 1997, according to HCFA estimates that were published last fall.
The industry is also being pressured by regulatory and anti-fraud crackdowns, which have picked up steam in the past year.
And making matters worse, the industry reports a concurrent decline in nursing home occupancy.
Under the PPS, nursing homes are paid about $300 per Medicare patient per day. The exact rate depends on the patient's treatment needs and the facility's Medicare payments in the 1995 base year.
Before the PPS went into effect in July 1998, many industry observers predicted that efficient operators could generate record profits. Under the old cost-based reimbursement system, Medicare revenues were tied to costs, and efficient operations simply meant lower revenues.
Many have not realized profits under the PPS, however, and nursing home managers that are losing money claim payment rates are too low.
According to a recent study commissioned by the American Health Care Association, a nursing home trade group based in Washington, the PPS trimmed almost $2 billion from Medicare's 1998 bill for skilled-nursing care. That is about 50% more than the $1.3 billion annual savings the Congressional Budget Office projected the system was proposed.
The AHCA study was based on a survey of 91 nursing home companies.
HCFA agrees that Medicare spending is down but says the PPS is not the only reason.
Other factors include an aggressive government campaign against fraud and improper payments, as well as slower claims processing under new systems, Robert Berenson, M.D., director of HCFA's Center for Health Plans and Providers, said in testimony before the Senate Finance Committee in June.
Spreading the word. The AHCA claims PPS reductions may hurt resident care, not just members' pocketbooks, and has leapt into action. Working with the Alliance for Quality Nursing Home Care, a Washington-based consortium of 11 of the country's largest nursing home companies, the AHCA is paying for a national cable television ad campaign and print ads running in 30 newspapers nationwide.
Officials at the AHCA and the alliance declined to reveal campaign costs.
The ads urge the public to call on their federal lawmakers to "restore funding for nursing home care."
Two bills in Congress would require Medicare to create exceptions to capped therapy payments. A third bill, to be introduced in the coming weeks by Sens. Orrin Hatch (R-Utah) and Pete Domenici (R-N.M.), would increase payments for several of the most common conditions requiring skilled-nursing care.
Current industry collaboration is a far cry from the situation last fall, when the for-profit nursing home industry split over the PPS. Then, one group lobbied Congress to create a carve-out for ancillary services, eventually losing to the other side, which wanted to maintain the status quo (Oct. 26, 1998, p. 6).
Industry representatives say they've united because of common concern about how the PPS is affecting resident care.
"On average the payment rate has dropped $50 a day," or about 15%, says Linda Keegan, AHCA vice president for public relations, citing the recent AHCA-commissioned study.
"That's definitely causing very real problems with real people," she says.
While not denying that heavy borrowing has hurt the fiscal health of some companies, Keegan maintains the PPS has caused a financial crisis in the nursing home sector.
But Ransom disagrees.
"The fact that a few public companies gambled and lost on Medicare is not necessarily a crisis for the government," Ransom says.
Despite the AHCA's claims to the contrary, most nursing home companies have not been devastated by the Medicare changes.
Robert Kramer, executive director of the National Investment Center for the Seniors Housing and Care Industries, says that while trouble at publicly traded companies "has sent a chill through the industry," preliminary results from the NIC's annual survey of senior housing lenders found that about half planned to extend more credit to nursing homes in the future. The not-for-profit NIC, based in Annapolis, Md., conducts and disseminates research on financial information.
Sarah Sumner Duggan, senior vice president of healthcare at GMAC Commercial Mortgage in Birmingham, Ala., remains bullish on the industry.
She says her firm has made as many loans since the PPS went into effect as it did before, but the loans are smaller. The PPS has prompted closer scrutiny of current and potential borrowers, she says, but it has not created a surge in defaults or violations of debt covenants on outstanding loans.
GMAC caters to nursing homes that typify the industry: small to medium-sized chains that draw most of their income from Medicaid.
"I don't see many facilities (of this type) collapsing or going bankrupt in the near future," she says. "They are survivors, and they were not as impacted by Medicare."
A small slice of Medicare. Most of the nation's 17,000 nursing homes draw only a small percentage of revenues from Medicare. Unlike hospitals, which depend on Medicare for 33.3% of their revenues, nursing homes draw only 12.3% of their revenues from Medicare, according to HCFA.
Medicaid pays for about 47.6% of nursing home costs, and out-of-pocket payments cover most of the balance. Some nursing homes have few or no Medicare patients, while others rely on Medicare for up to 40% of revenues. Generous reimbursement policies under the previous system made Medicare one of the industry's better payers, industry experts agree. As hospitals responded to pressure to cut their lengths of stay under the DRG system, some revenue-seeking nursing home companies carved out niches in the subacute business. They have been hurt the most by the PPS.
Relatively generous Medicare payments also offset historically low Medicaid payments, but the PPS makes maintaining that virtual subsidy more difficult.
Several of the nation's nine largest nursing home chains, which control about 20% of the nation's 1.8 million beds, are indeed in bad financial shape. But some have managed to pull off profits even in these volatile times. Smaller chains also report profits under the PPS, and many say they expect cost-cutting to create profitability in the long run.
"We are keeping our head above water," says Brenda Agius, director of healthcare accounting at 180-bed Shell Point Village, a continuing-care retirement community in Fort Myers, Fla., and Alliance Community for Retirement Living, a 130-bed subacute-care facility in Deland, Fla. She says lower PPS rates mean lower revenues, but smaller companies have surprised themselves by being able to cut costs.
"Nobody really thought how you could decrease expenses so much by negotiating with vendors," she says.
The fiscal problems of many of the large nursing home companies stem as much from management missteps as payment cuts, experts say.
"Those companies basically embarked on building ancillary provider businesses . . . and they did it largely with debt financing," says Debra Lawson, an analyst with Salomon Smith Barney in New York.
Other mistakes included badly timed acquisitions, such as Albuquerque-based Sun Healthcare Group's $320 million acquisition of Atlanta-based Retirement Care Associates just one day before RCA's 74 skilled-nursing facilities made a transition to the PPS.
Not too nimble. Large companies are also less nimble than smaller ones and can't cut costs fast enough to keep up with revenue drops, analysts and operators say.
Victor Seoane, an analyst for Robinson-Humphrey Co. in Atlanta, says profitability is down for large publicly held companies, and debt burdens are up.
Projections based on the first three months of the year for earnings before interest, taxes, depreciation, amortization and rent (EBITDAR) for nine large publicly traded companies fell an average 28% to $264 million from 1998 to 1999, he says.
Meanwhile the ratio of debt to EBITDAR earnings will rise to a projected 6.02 for 1999, based on results from the quarter ended March 31. That compared with 5.73 for the 12 months ended March 31, and 4.76 for the 12 months ended March 31, 1998.
Since adopting the PPS, Sun Healthcare and Louisville, Ky.-based Vencor have had such dismal financial results that their stocks were delisted from the New York Stock Exchange.
Both have defaulted on interest payments to bondholders and are negotiating with lenders to avert a full-scale fiscal meltdown. Vencor's 291 nursing facilities derived 29% of revenues from Medicare in 1998. Its financials for 1998 were also complicated by the spinoff of its properties into a real estate investment trust, Ventas.
Sun derived 24% of its revenues from Medicare in 1997.
Atlanta-based Mariner Post-Acute Network is similarly discussing repayment terms with its lenders, and its stock price has been below $1 per share since June, compared with $16 per share a year ago.
But other large companies-most notably Beverly Enterprises, Fort Smith, Ark., and HCR Manor Care, Toledo, Ohio-are finding the new system to their liking. Both companies saw positive earnings in the quarter ended March 31, when most of the other publicly held companies were foundering because of huge losses.
Highfliers nosedive. Highfliers under the old cost-reimbursement system tend to be most adversely affected by PPS.
Conversely, more conservatively managed companies have been better able to stay the course.
Before the PPS, companies such as Mariner, Sun and Vencor borrowed heavily to pay for acquisitions and other expansions. They also had historically high per-day Medicare revenues because they actively sought patients who were more difficult to treat and who could generate higher reimbursement, and they contracted to provide plenty of therapy to outside nursing homes. As long as Medicare revenues stayed high and contract therapy remained profitable, those companies could make good on their steep loan repayments.
But the PPS cut Medicare payments sharply and brought contract therapy to a near standstill. These companies can look forward to several more years of cuts as PPS rates are phased in.
HCR Manor Care and Beverly, on the other hand, were managed more conservatively and were thus shaken less when the Medicare cash cow died.
Neither was heavily involved in contract rehabilitation, which was devastated by the PPS because Medicare no longer paid separately for therapy.
Both companies borrowed far less than their competitors, and both own most of their real estate.
Beyond the PPS, however, the entire nursing home industry is dealing with what many say is overaggressive and unevenly applied regulatory enforcement.
HCFA recently issued new guidelines to states, allowing them to impose higher fines more easily. To block the rules, the AHCA sued the agency in May in federal court in Washington. A motion for summary judgment, filed in June, is still pending.
A recent report by the U.S. General Accounting Office also supported HCFA's contention that increased punitive measures would help keep nursing homes with poor records in line.
If the bar were raised as HCFA proposes, about 15% of homes would be subject to immediate sanctions, according to the GAO. Industry representatives say that imposing fines is counterproductive. But Sarah Burger, who heads the Washington-based National Citizens' Coalition for Nursing Home Care, isn't buying that line.
"All industry has an allergy to fines," she says. "That's how we know they are working."
Burger agrees that the industry does have some legitimate gripes against the PPS, including the objection to therapy caps, which may hinder residents' access to care. But she warns against attributing all ills to the PPS.
"They would like us to think that it's very simple and only has to do with (the Balanced Budget Act of 1997), when in fact there was some very poor management by some of the large companies," she says.
Complicating the situation are anecdotal reports from several states indicating that occupancy at skilled-nursing facilities is down. Gary Macomber, president and CEO of the Sacramento-based California Association of Health Facilities, thinks skilled-nursing facilities may be accepting fewer high-cost Medicare patients, who must remain hospitalized until they can be placed.
Some American Hospital Association members have corroborated that theory with reports of longer lengths of inpatient stay for patients who are eligible for skilled-nursing facilities, says Carmela Coyle, the association's vice president for policy. Half of all hospitals feel the PPS pinch because they run their own skilled-nursing units, which serve mostly Medicare beneficiaries. The other half would feel the pinch if skilled-nursing facilities were slow in taking high-cost patients.
The AHA has teamed with a nursing home trade association, the Washington-based American Association for Homes and Services for the Aging, to float a proposal for an outlier pool for high-cost patients. "If relief isn't provided, hospitals pay the price," she says.
Others say nursing homes are also having trouble filling non-Medicare beds because of competition from assisted-living facilities, many of which added capacity in 1998.
Debra Lawson, an analyst with Salomon Smith Barney, says residents' move to assisted living hurts nursing homes twice-first because lower occupancy means lower revenues to cover fixed costs, and second because patients who move to assisted living are more likely to have been paying higher out-of-pocket rates.
But few figures are available to shore up this theory.
The long-term impact of the PPS is still unclear. Even if some publicly held companies end up in bankruptcy court to shelter their operations from creditors' demands, residents will be protected, Lawson says.
"We're not talking about a crisis of monumental proportions," she says. "We're talking about banks and bondholders and stockholders ending up with not a lot."
Ransom predicts, "Everybody will eventually learn to deal with the system. The industry will go back to (one) where guys who keep their nose clean and run a clean business can expect cash flows in the 5% to 8% range."