After posting what analysts said was the largest bottom-line loss in nursing home history, Integrated Health Services last week defaulted on $17 million in interest due on bank loans and began discussions with lenders to restructure its debt.
The news followed IHS' failure earlier this month to pay $7 million in interest due to bondholders and an announcement in October that it had abandoned efforts to sell its RoTech division, a respiratory therapy provider.
The company's filing with the Securities and Exchange Commission acknowledged that the Sparks, Md.-based company might seek a court-approved reorganization.
But company spokesman Mark Levin said operations at IHS' 297 skilled-nursing facilities would continue as usual. The company is current on its rent payments and payments to vendors, he said.
Last month, IHS hired an outside consultant and a financial adviser. The advisers will help develop cash-flow forecasts as a basis for a financial restructuring, predicted Markey Hall, a senior analyst at Greenwich, Conn.-based Credit Research Trading.
"It occurred with Vencor, it occurred with Sun (Healthcare Group). In a restructuring like this, a bankruptcy filing appears almost inevitable," she said.
Vencor, IHS' Louisville, Ky.-based competitor, filed for bankruptcy in September. The company blamed losses largely on Medicare's new prospective payment system for skilled-nursing facilities.
In October, Albuquerque-based Sun submitted its own Chapter 11 bankruptcy petition, citing similar problems.
But IHS' loss of $1.8 billion, or $37.64 per share, in the third quarter ended Sept. 30 highlighted the role of an aggressive acquisition strategy in creating fiscal turmoil at publicly traded nursing home companies. The loss reflected a $1.4 billion charge for asset impairment, a $425 million charge for its failure to sell RoTech and other one-time losses.
The record $1.4 billion asset write-off was essentially an admission of overpaying for acquisitions, said Sheryl Skolnick, a healthcare analyst at BancBoston Robertson Stephens.
"They goofed," she said. "The surprise is that it is only $1.4 billion. They did a lot of acquisitions for a lot of money (over the years). The economic environment is so bad that there is no way that you can justify carrying that much value (on the company's books)."
About half of the $1.4 billion charge reflected projections of permanently lower earnings from IHS nursing homes.
IHS and other nursing home companies have reported lower revenues and losses from operations since the PPS was first introduced last year.
In the months before their bankruptcy filings, Sun and Vencor both wrote off hundreds of millions of dollars for impaired assets. Many of those assets had been acquired in large purchases made over the past few years.
IHS also runs the industry's largest contract rehabilitation division, which has taken a severe hit as nursing homes cut down on use of outside therapists to save costs under the PPS.
About $434 million of the write-off reflected lower earnings from contract therapy.
"IHS was one of the most aggressive consolidators in healthcare," said Leslie Henshaw, a healthcare analyst at ING Barings. Many were large cash-financed acquisitions, such as the 1997 purchase of Horizon/CMS Healthcare Corp.'s long-term-care assets for $1.2 billion in cash plus $100 million in debt assumption.
Accounting rules require companies to record the premium paid above the tangible value of acquisitions as an asset. Generally that excess payment for reputation and other intangibles, known as goodwill, is written off over a period of 40 years, Henshaw said.
But if a company sees a permanent downturn in projected cash flows for assets, it's required to write off the impaired value of the assets in one fell swoop, she said. That's what happened last quarter, when the last of IHS' nursing home facilities transitioned to Medicare's prospective payment system.
Despite the potential for more bankruptcies among large nursing home companies, for the most part it's a financial crisis, not an operational one, analysts said. "You'd have to have a much more catastrophic failure in the industry" to make it difficult for hospitals to discharge patients to nursing homes, said Victor Seoane, an Atlanta-based analyst at Robinson-Humphrey Co.
He added that with the passage of federal legislation to increase Medicare provider payments, "nursing home companies will be going after the high-acuity patients again."