Citing a flurry of patient-liability lawsuits filed by aggressive attorneys in Florida, where tort reform is allowing for costly judgments, Kindred Healthcare announced last week it has begun divesting some or all of its Florida operations.
"Our major priority at the moment is to simply get out of the state," Kindred Chairman and Chief Executive Officer Edward Kuntz said last week in a conference call with investors. He later added: "The litigation generally has not been favorable for the company."
Kindred, Louisville, Ky., like its rival Beverly Enterprises, Fort Smith, Ark., said it sees little alternative, based on shrinking margins, to closing facilities rather than continuing to face financial fallout from an increase in liability suits.
"As an operator, there are a lot of different things you can do, and for some, the right decision is to cut and run," said Alan Dahl, executive vice president of strategic development at Centennial HealthCare Corp., Atlanta, which operates 86 skilled-nursing facilities in 19 states and Washington. Dahl spoke earlier this month at a Washington conference on senior housing and care sponsored by the National Investment Center.
"The plaintiffs' attorneys don't care about our industry, about nursing homes and patient care," Dahl said. "What they've gone after is the deep pockets." Publicly traded companies and large regional providers have been the hardest hit, he said.
Shares of Kindred lost as much as 60% of their value on Oct. 10, after the nursing home chain announced it was revising its 2002 earnings forecast, citing a "dramatic increase" in resident-liability costs. The company said it would add $55 million in reserves for resident-care lawsuits over and above its normal provision for the third quarter for claims incurred in 2001 and 2002. About two-thirds of the claims resulted from Kindred's operations in Florida, the company said.
Kuntz told investors on the call there are "a number of other states that are concerning the company and the industry" in terms of litigious environments, including California.
Kindred is not the first large operator to take a hit to its bottom line because of swelling patient-liability payouts. In July, Beverly said it would add $43.3 million to its reserves for resident-care liability costs related to previous years and warned investors it expected to report a loss of about $14 million in the second quarter because of rising patient-liability costs. Earlier this year, Beverly divested its Florida operations entirely, selling four assisted-living centers and 49 skilled-nursing facilities to FC Properties for $165 million.
Within hours of Kindred's disclosure that it was adding the $55 million in reserves, Beverly; Genesis Health Ventures, Kennett Square, Pa.; and Manor Care, Toledo, Ohio, quickly issued news releases affirming that their liability reserves were adequate.
Since the announcement, Kindred has been hit with several shareholder class-action lawsuits alleging the nursing home chain made false and misleading statements. Kindred "reported quarter after quarter of improved financial results and acquisitions," but "failed to reveal that due to a dramatic increase in professional liability claims, especially in Florida, defendants were not properly reserving for these incurred claims," said one suit filed in U.S. District Court in Louisville by Milberg Weiss Bershad Hynes & Lerach, New York. The suit contends the company "assured investors and analysts that Kindred (which was largely self-insured) carefully reviewed its reserves for claims on a monthly basis and would not have to take a large `catch-up' charge."
Last week, Kindred reported an operating loss of $11.6 million, or 66 cents per share, compared with net income of $14.8 million or 80 cents per share, in the year-ago quarter, reflecting the $55 million charge to increase reserves for lawsuits. Revenue rose 12% to $860 million. Kindred said it would accrue another $10 million in liability claims costs for the fourth quarter.
Kindred said it would not issue earnings guidance for the remainder of the year because of the uncertainty of future Medicare reimbursement. On Oct. 1, skilled-nursing facilities saw their federal reimbursement drop 10% as a result of temporary allocations, or add-ons, that expired.