Post-acute providers significantly improved their plummeting profit margins during the past year, but many contend that Medicare cuts looming on the horizon threaten the industry's long-term viability.
Results from Modern Healthcare's third annual post-acute-care survey show that providers are hanging tough by trying to operate leaner. Bold acquisition strategies that defined several of the larger companies during the late 1990s have slowed as elder-care providers and other post-acute companies work to get their houses in order. Many are integrating operations and divesting unprofitable properties to survive red ink attributable, in part, to the pendulum of federal reimbursement policy.
Of the 52 post-acute companies that supplied net income figures for both 2000 and 2001, the overall bottom line improved dramatically. Post-acute providers responding to this year's survey collectively reported net income of $560.9 million in 2001, compared with an overall loss of $889.4 million reported by the 55 respondents in last year's survey that reported net income for both 1999 and 2000. The substantial difference between total net income figures for this year and last is arguably related to progress made by three top-tier nursing home chains that have emerged from bankruptcy since the completion of last year's survey. For the 65 providers that gave revenue numbers this year, total revenue rose about 5% in 2000 to $28.9 billion.
"The stability provided by some of the (payment relief legislation passed in 1999 and 2000) has provided the industry with sufficient levels of profitability overall for the bankrupt firms to be able to emerge from bankruptcy," says Alex Converse, an analyst for Credit Suisse First Boston in New York. "You're seeing general earnings growth in the companies, but there's a lot of uncertainty about what's going to happen in fiscal 2003 for skilled-nursing facilities."
Although this year's survey results portray a diverse group of post-acute providers, many of which have returned to profitability, the number choosing to disclose their balance sheets has dwindled since Modern Healthcare's inaugural post-acute survey in 2000. The number of respondents this year, 65, is down from 78 in last year's survey and 81 respondents in the 2000 survey. Nearly a dozen companies declined to disclose their net revenue and related financial information this year, and, therefore, were not included in the survey. The 12 respondents that provided net revenue but withheld net income were included, however. The survey is an unscientific poll of providers in skilled-nursing, assisted-living, home health, rehabilitation, outpatient and congregate community care. Long-term acute-care hospitals, which provide acute care for medically complex patients, are also included in the post-acute survey.
It was a bittersweet year for skilled-nursing facilities. The good news is that three of the largest providers extricated themselves from high-profile bankruptcies after filing for protection since September 1999. Louisville, Ky.-based Kindred Healthcare, formerly known as Vencor, was the first to emerge in April 2001 after 18 months in Chapter 11. It was followed by Genesis Health Ventures, Kennett Square, Pa., in October 2001. Albuquerque-based Sun Healthcare Group, which declined to participate in this year's survey, left bankruptcy in March.
The remaining two nursing chains in Chapter 11-Mariner Post-Acute Network, Atlanta, and Integrated Health Services, Sparks, Md.-are still tangled in court proceedings. Melody Chatelle, a spokeswoman for Mariner, told Modern Healthcare the company expects to emerge by May pending final approval and negotiations with the U.S. Bankruptcy Court in Wilmington, Del., which confirmed Mariner's reorganization plan.
"We are very pleased by the action taken by the court (in confirming the plan) and look forward to final resolution on this issue," Chatelle says.
While Kindred and other elder-care companies are looking at life after bankruptcy, the industry still must navigate some treacherous waters. Industry leaders and advocates warn that some providers, both large and small, could find themselves back in bankruptcy court if a 17% cut in Medicare payments to nursing homes created under the Balanced Budget Refinement Act of 1999 goes into effect as scheduled effective Oct. 1. Nursing homes won a partial and temporary victory April 23 when HHS announced it would continue through 2003 one of three add-on Medicare payments, amounting to roughly 7% of the initial 17% cut. Though the decision will preserve an estimated $1 billion, two other add-on payments, worth about $1.4 billion annually, still are scheduled to end Oct. 1.
"If those (Balanced Budget Refinement Act of 1999 add-ons) aren't sustained between now and Oct. 1, there will be what we're estimating to be a 10% cut in the amount of Medicare to long-term-care providers," says John Gillan spokesman for the American Health Care Association.
Says Jim Griffith, spokesman for Fort Smith, Ark.-based Beverly Enterprises, the nation's largest operator of nursing homes: "We are lobbying on our own and also lobbying as part of the American Health Care Association's efforts. We have a high degree of confidence that Medicare funding will be continued at current levels because the alternative would involve a significant, adverse impact on quality of care as well as access to care."
Beverly, which divested 63 underperforming skilled-nursing facilities in fiscal 2001, remains the largest operator of nursing homes in this year's survey, with 471 facilities and 52,115 staffed beds. Beverly expects to close, sell or let its leases expire on another 20 facilities this year, Griffith says.
Overall, skilled-nursing facilities spent 2001 getting smaller. They operated 4.3% fewer facilities, 2,255 compared with 2,357 in 2000, according to survey data.
The rehabilitation industry also scaled down, but net income was up about 8%. In 2001, providers designating themselves as rehabilitation companies operated 6.1% fewer facilities, 1,936 vs. 2,061 in 2000. Net income for the seven respondents reporting in 2001 was $328.5 million, up from $305.4 million in the previous year.
HealthSouth Corp., a Birmingham, Ala., operator of rehabilitation hospitals, is the largest company to complete the post-acute survey again this year, with nearly $4.4 billion in revenue. "We could easily open 100 facilities this year across all 50 states and product lines," says Chairman and Chief Executive Officer Richard Scrushy of the provider's swift growth. Although HealthSouth has divested several underperforming rehabilitation hospitals, the company remained the survey's leader in outpatient facilities with 1,763 in 2001. The company, which added 59 new locations in 2001, reported net income of $326 million, or 82 cents per share, during 2001, compared with net income of $278 million, or 71 cents per share, in the previous year. Revenue rose 4.4% to $4.4 billion.
Scrushy says the stock's upward performance in the recent quarter to about $15 per share anticipates positive results from Medicare's new prospective payment system for rehabilitation hospitals, under which the company began operating Jan. 1. The PPS replaces the previous cost-based payment system used to reimburse rehabilitation providers. Scrushy says HealthSouth stands to benefit from the PPS because the company's costs remain lower than average.
Although industry leaders and advocates report Medicare's new home health PPS brought relief to the sector through predictable reimbursement rates, they argue that a 15% Medicare cut specifically aimed at home health and scheduled to take effect Oct. 1 will cause long-term problems. The Balanced Budget Act of 1997 mandated $16.2 billion in federal savings over five years, but home-care advocates say the original goal more than doubled from fiscal 1998 to 2000, growing to $35.8 billion in savings for the government.
"The PPS is a fair methodology for reimbursement and it has helped to stabilize the industry again," says Kim Herman, spokeswoman for Melville, N.Y.-based Gentiva Health Services, the largest home health provider in the industry. "But if the 15% cut is not repealed, it will be another devastating move for the industry."
James Pyles, counsel for the American Association for Homecare, Alexandria, Va., says another round of bankruptcies will be inevitable after the October cuts.
"No question about it, there's going to be many more closures," he says. "MedPAC (the Medicare Payment Advisory Commission, which makes recommendations to Congress on Medicare issues) had it right when they said in the latest recommendations to Congress that this benefit (home healthcare) really needs some stability. We need to have some time to let the PPS work, collect good cost data and then make valid adjustments. To make further cuts in this benefit blindly, without having good data, is just irresponsible health policy."
Home health survey respondents operated 11.5% more agencies in 2001, or 922 compared with 827 in 2000. Gentiva repeats its place as the largest home health provider operating 400 branches across 46 states, up nearly 25% from 321 branches in 2000. The company earned $21 million, compared with a net loss of $104 million in the previous year. Excluding special charges, the company posted a $2.8 million profit in 2000. Revenue remained roughly the same at $1.4 billion.
Meanwhile, it was a weed-out year for the assisted-living sector. Seven of the 10 companies that answered the 2000 survey supplied net income for the year and reported earnings totaling a combined $11.6 million. Two of the four assisted-living companies that released their net income numbers for this year's survey reported a combined net income of $53.4 million, a 300% surge compared with 2000 numbers. McLean, Va.-based Sunrise Assisted Living was again the leader with 186 facilities in 2001, compared with 164 facilities in 2000. The company's net income almost doubled to $47.2 million from $24.3 million in the previous year. Revenue rose 24% to $428 million.