Bankrupt, and without a plan
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November 06, 2000 12:00 AM

Bankrupt, and without a plan

As nursing home industry continues to founder, most ailing chains still seek funding

Vince Galloro
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    It's been more than a year since the first of five of the country's largest for-profit nursing home chains filed for bankruptcy protection, but only one has come up with a plan to right its financial ship.

    "The issue is how much debt was taken on in conjunction with aggressive acquisition activity. The higher the overvaluation on the acquisitions, the greater the amount of debt that has to be cut in bankruptcy, and the more time it might take to do that," said Michael Kaplan, a nursing home analyst for the Standard & Poor's credit-rating agency in New York.

    Nursing homes are caught in the classic squeeze of falling revenue and rising costs, analysts said. And the chains that have fallen the hardest are the ones that piled on the most debt for acquisitions (See chart, p. 51).

    The key for the bankrupt nursing home providers will be how much of their collective $12 billion in debt their creditors will forgive and how soon, according to the S&P analysis.

    And S&P is not alone in that assessment. "The view overall is negative, and it's not really as a result of (the Balanced Budget Act of 1997). It's a result of staffing and labor pressures," said Robert Wetzler, a long-term-care analyst for the Fitch credit-rating agency in New York.

    "On the for-profit side, a lot of their woes are from overextending themselves," Wetzler said. "They were doing deals based on an old system (cost-based Medicare reimbursement). Some providers made a lot of acquisitions, bought a lot of freestanding facilities. At the time, it looked like a good thing."

    Those purchases no longer look so good. Many of the nursing home industry's best customers--private-pay patients--have long since left for the less-restrictive environment of assisted-living facilities. Not only had those patients been paying higher rates than those under government programs, they also tended to be less sick and to require fewer services, Kaplan said. Their departure leaves Medicaid as the most prominent but least profitable payer.

    Medicare's prospective payment system for skilled-nursing facilities also has tightened payments since its July 1998 inception, but only about one in 10 nursing home residents is covered by Medicare, accounting for just 12% of nursing home revenue, according to HCFA.

    At the same time, nursing homes are coming under increasing federal pressure to boost staffing levels. Exacerbating the situation is the shortage of labor across the board, from nurses and certified nursing assistants to food preparation and laundry workers.

    Proposals to increase funding for staffing, including one by President Clinton to spend $1 billion on recruitment, are part of the negotiations over the federal budget for fiscal 2001, which began Oct. 1.

    On top of all that, skilled-nursing providers are being hard hit by patient liability lawsuits in California, Florida and Texas, which account for 19% of the 1.8 million nursing home beds in the U.S., according to the American Association of Homes and Services for the Aging.

    The suits and judgments, including a $20 million award handed down by a Pinellas County, Fla., jury in September against Milwaukee-based Extendicare Health Services, are fueling skyrocketing liability insurance premiums in Florida. The company was sued by the survivors of a man who died three months after he was pulled from an Extendicare home. The survivors allege that he was neglected at the home, resulting in dehydration, malnutrition and bedsores. Extendicare plans to appeal the verdict.

    The litigation climate has even financially healthy providers, including Extendicare, looking to exit the state, further depressing the prices that the bankrupt chains may hope to fetch for their properties there.

    The litigation and labor issues both relate to the same point--quality of care concerns are driving up costs, said S&P's Kaplan.

    "Whether in fact there are quality issues or not, clearly there is concern with the quality issue, and it has provided a lot of fodder for lawyers looking to attack the nursing homes on that basis," he said.

    Lower selling prices for distressed Florida homes could be a boon to smaller providers looking to expand, but they better not count on any bank loans.

    "It's pretty hard to convince bank credit committees to put good money after bad," Kaplan said.

    Aggressive venture capitalists are about the only financing available to nursing home operators in this climate, Kaplan added.

    There is some brighter news. In 1999, Congress approved a temporary reimbursement increase of 20% to nursing homes for certain resident categories, depending on how many services they require, and across-the-board PPS increases of 4%.

    Of the five chains that have filed for bankruptcy, only Louisville, Ky.-based Vencor has submitted a reorganization plan to bankruptcy court.

    Under the plan, Vencor's bank lenders would receive 65.5% of the reorganized company and $300 million in new bonds; other bondholders would receive 24.5% of the reorganized company; and Ventas, the Vencor spinoff that owns most of the homes Vencor leases, would receive 10% in return for a $52 million cut in annual rent. The plan has not yet been approved by the court.

    Vencor's negotiations with its creditors will be closely watched to see how much debt lenders are willing to write off.

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