Vencor last week became the first national nursing home chain to file for bankruptcy since dramatic Medicare rate changes for the industry went into effect last year. Vencor blamed Medicare cuts, but others said the company's downfall was its own doing.
There was, however, no disagreement on the immediate cause of the bankruptcy: Vencor couldn't make good on its debts or rent.
In the bankruptcy petition, filed in Wilmington, Del., Vencor reported $1.4 billion in debt and $1.7 billion in assets. By filing under Chapter 11 of the U.S. Bankruptcy Code, Vencor can do business as usual while it works out a new financial structure with creditors.
The Louisville, Ky.-based long-term-care company said patient care would not be disrupted at its 293 nursing homes and 56 long-term acute-care hospitals. The company has obtained temporary court approval for debtor-in-possession financing of $100 million to fund operations.
The bankruptcy followed months of huge financial losses and ongoing negotiations with creditors. The filing appears to mark the success, not the failure, of those negotiations.
Under an agreement approved by the court, Vencor will get an immediate 20% rent reduction from its primary landlord, Ventas. Vencor had not paid its monthly $19 million rent on time since March.
Ventas was formed last year when Vencor split into two companies. It kept the Vencor name for its healthcare operations and reorganized its real estate holdings under the name Ventas.
Nonbinding agreements reached prior to the filing would give Vencor's main bank lenders a 56% stake in a reorganized Vencor, according to a Ventas report. In return, banks would claim only $320 million of $520 million they are owed.
Ventas would receive a 15% stake in exchange for lower rent. And bondholders would relinquish their claim on $300 million in exchange for the remaining 29% stake.
Those agreements have yet to be approved by the court.
Steven Downey, Ventas' chief financial officer, said the agreed-to reorganization would "be good news for our shareholders . . . (and would) allow Vencor to emerge with a sound capital structure, which will benefit patients and employees."
Absent from Vencor's list of creditors was the U.S. Justice Department, which is in settlement talks with Vencor and Ventas over Medicare fraud charges stemming from a 1997 whistleblower lawsuit. The Justice Department would not comment on the status of those talks.
Separately, Vencor's debts also include $82 million owed to HCFA to cover Medicare cost report adjustments-a repayment need made public in April.
In a written statement, Edward Kuntz, chairman, chief executive officer and president, blamed Vencor's financial problems on "decreased Medicare reimbursement." Undoubtedly, a flood of federal funding now flows more slowly. Congressionally mandated cuts contributed to a 19% decrease in Vencor's hospital operating income, which dropped to $118 million for the six months ended June 30 from $145 million in the year-ago period.
The new Medicare prospective payment system for skilled-nursing facilities cut per-patient daily payments to Vencor nursing homes by about 20% to under $300, according to company filings. The rates fell again in July.
Demand for contract therapy, Vencor's third offering, also has dried up as nursing homes cut costs under the PPS.
All this contributed to a loss of $82.5 million, or $1.22 per share, on $1.6 billion in revenues for the six months ended June 30.
Linda Keegan, vice president of the American Health Care Association, said the bankruptcy was "part of a growing trend" of industry insolvencies.
Charles Lynch, a New York-based analyst with Schroder's, agreed that Medicare payment changes hurt, but he pointed out that they were not the only problem. "Vencor gave itself some black eyes over the years," he said.
Evicting Medicaid patients from facilities to make room for higher paying Medicare patients, a practice the company stopped in April, was one black eye. Allegations of Medicare fraud, which surfaced earlier this year, also caused bruises.
Strategic decisions worsened the PPS' impact. Since 1993 company diversification led to increasing dependence on Medicare because the business lines Vencor entered served large numbers of very sick elderly, for which Medicare reimbursed handsomely. In 1993 Medicare accounted for 21% of the company's total revenues. By 1997 that proportion had jumped to 34%. That meant the company was particularly vulnerable to federal funding cuts.
A second miscalculation came last year in Vencor's decision to split off its real estate into a separate company. That move came just before Vencor facilities were due to go on the PPS, which management believed would boost the bottom line. Vencor agreed to rents that reflected those rosy projections. But the projections didn't pan out and the company had difficulty paying rent.