Douglas Noble and his partner at nursing-home provider Commonwealth Communities were sitting in a meeting with HCFA officials in 1996 when they learned how their world was going to change.
That was when they heard about HCFA's plans to change Medicare reimbursement for skilled nursing from a cost-based method to a prospective payment system.
"They fired out a warning shot, saying, `This is what's going to happen,' " said Noble, chairman and president of the Stoughton, Mass.-based company. "Ninety percent of the industry laughed it off, said it was never going to happen. We decided we had better prepare in case it did."
By the time the PPS went into effect in July 1998, the 11 nursing homes owned by Commonwealth were ready. The homes had cut their costs for therapy and other ancillary services by hiring their own staff to provide those services for half the $100-per-hour cost often charged by contractors, Noble said. The homes also added staff who would spend more time assessing potential residents to ensure that the homes did not take on money-losing residents, he added.
"We found generally that the smaller companies were able to move quicker and deal with it faster than the big companies," Noble said. "They weren't able to move their big ships fast enough. We were the little boats in the water. We saw the wave coming and steered away from it."
A recent study of small and regional for-profit nursing-home operators similar to Commonwealth Communities bears out what Noble experienced: namely, that a skilled-nursing PPS wasn't a disaster for everyone, even though that was the impression left by the bankruptcy filings of a number of the larger chains.
The study was commissioned by the National Investment Council for the Seniors' Housing and Care Industry, Annapolis, Md., a not-for-profit group that provides information to investors. Noble is a member of the NIC's owner-operator advisory committee.
The accounting firm PricewaterhouseCoopers conducted the study. Seven lenders allowed accountants from the firm to scrutinize financial documents from 144 nursing homes that the lenders had financed. The nursing homes had to have a minimum of 30 beds, had to participate in the Medicare program and could not be startup properties. Financial information from 1996, 1997 and 1998 were reviewed in full, while figures from the first nine months of 1999 were annualized.
The report concluded that the nursing homes in the study cut their costs by reducing their use of rehabilitation and other therapy services that had been under a cost-based reimbursement method under Medicare Part B. Under the PPS, those services were no longer reimbursed separately; rather, they were accounted for in the Part A per-day reimbursements the homes received, thereby reducing the financial incentive to offer those services.
The homes in the study cut their expenses per resident day to $110.31 in 1999, the first full year of the PPS, from $115.89 in 1998. The 1997 average was $106.05 per resident day.
Nursing homes in the study took a hit in 1998, as net operating income fell to 12% of revenue from 14.7% in 1997. But the cost-cutting allowed the margin to increase to 14.6% in 1999, the study said.
That's not to say that the PPS didn't have negative effects on nursing home operators. Revenues slowed from $115.89 per resident day in 1998 (only half of which was under the PPS) to $110.31 per resident day in 1999.
The study serves to paint a more complete picture of the nursing-home industry, a picture that has been dominated by the bankruptcies of five of the largest chains in the country, said Robert Kramer, executive director of the National Investment Council. "You can't paint the industry with one broad brushstroke when it comes to PPS," Kramer said. "Its effects on nursing home profitability haven't been uniformly good or uniformly bad. Many smaller operators have actually done better under PPS."
The bankruptcies of Genesis Health Ventures, Kennett Square, Pa.; Integrated Health Services, Sparks, Md.; Mariner Post-Acute Network, Atlanta; Sun Healthcare Group, Albuquerque; and Vencor, Louisville, Ky., practically shut off financing for the whole nursing-home industry, Kramer said. Genesis and Vencor, now known as Kindred Healthcare, have both emerged from bankruptcy protection as reorganized companies.
Kramer hopes the study will encourage lenders leery of the industry to give it another look. "What's important is what this says, as with any investment: Do your homework. Do your due diligence," he said.