In January 2001, five of the 10 largest national nursing home chains were camped out in bankruptcy court. While three of the post-acute providers still are entrenched in Chapter 11 proceedings, they are making progress to emerge as reorganized companies, however slowly.
Louisville, Ky.-based Kindred Healthcare, formerly Vencor, pulled itself through 18 months in bankruptcy court to emerge from Chapter 11 in April 2001. Competitor Genesis Health Ventures, Kennett Square, Pa., was next to exit in October 2001 after 15 months. Those still tangled in bankruptcy are Integrated Health Services, Sparks, Md.; Mariner Post-Acute Network, Atlanta; and Sun Healthcare Group, Albuquerque, which Modern Healthcare has learned is likely to be the next provider to successfully complete reorganization.
After pursuing bold acquisition strategies in the 1990s, many post-acute providers are slowing down to get their houses in order. Accepting the promise of inevitable swings in reimbursements along with increasing Medicare cuts, the larger chains are strengthening existing infrastructures and divesting unprofitable properties. Providers are integrating operations to improve profitability and compliance with safety and quality standards, and restructuring debt to make amends with shareholders and the investment community.
Long-term-care leader Sun said the U.S. Bankruptcy Court in Wilmington, Del., has approved the disclosure statement for the company's reorganization plan, and final confirmation hearings to close its Chapter 11 status will take place on Feb. 4 and 5. Sun expects to exit bankruptcy by the close of the first quarter ending March 31, said Richard Matros, its new chairman and chief executive officer. In November 2001, he replaced Mark Wimer, who was president and CEO.
Although Matros would not disclose an amount for the new line of credit, he said the financing is workable and will allow the company to adequately address its liquidity issues. According to Sun's reorganization plan, the provider's senior bank creditors will receive approximately 89% of the reorganized company's common stock. Sun's general unsecured creditors and senior subordinated note holders will own 11%. Sun's reorganization plan also includes an $11 million global settlement with HHS and the U.S. Justice Department related to Medicare overpayments made to the company before July 1, 1998, and alleged federal False Claims Act violations, according to a supplement filing (Nov. 12, p. 12).
Sun and its subsidiaries voluntarily filed for bankruptcy protection in October 1999 with reported assets of $1.8 billion and debt totaling $2.1 billion. For the second quarter of 1999 ended June 30, the company reported a loss of $589 million, or $10.06 per share, on revenue of $601 million.
Like many nursing home chains faced with rising red ink, Sun attributed mounting debt to Medicare cuts. But Matros said Medicare was only partially to blame for a faltering bottom line.
"The reimbursement changes were a trigger that pushed all these companies into Chapter 11, but not at all the sole reason," said Matros, who was CEO of a nursing home chain bought by Sun in 1997 before Sun's creditors recruited him two months ago to oversee its restructuring. "Most of these companies, under a lot of pressure from the investment community, grew very rapidly over the 90s with one acquisition after another-you don't really take time to catch your breath and assimilate things."
Sun, like Kindred, expanded faster than it could repay loans. In 1998, the company bought 98 facilities from Retirement Care Associates, Atlanta, for $320 million. When Sun filed for bankruptcy protection, it owned 369 skilled-nursing facilities and 34 assisted-living centers. By the close of Chapter 11 proceedings in the next few months, the company will operate about 240 facilities, Matros said.
"If you look at the companies in our business that didn't go into Chapter 11, they didn't grow in the same way, they didn't accumulate debt in the same way," he said. "They took the same hit on reimbursement that others did, but it didn't force them to go into Chapter 11. And I think that's important to know because it's an important message that I give to our employees, too: We have to perform. We have to do a better job."
For Genesis, Chapter 11 reorganization also afforded a chance to examine its cost-cutting strategies in response to Medicare rate cuts.
"What we've learned is that we will experience based on political dynamics, based on state and federal budget dynamics, periods where our levels of costs will move differently than our incremental reimbursements," said Genesis Chief Financial Officer George Hager. "That tells us that we need to operate under leverage conditions that are lower than the industry has historically operated under."