The second wave of nursing home bankruptcies forecast by some in the industry never materialized last year. The so-called Medicare cliff-the sunset of two reimbursement add-ons in October 2002-did not mean the end of the road, or even a falloff in profits, for most long-term-care chains.
Despite the loss of some $1.4 billion in payment add-ons under the "sunset" provisions of the Benefits Improvement and Protection Act of 2000 and the Balanced Budget Refinement Act of 1999, post-acute-care companies participating in Modern Healthcare's fifth annual industry survey reported firmer financial footing.
For the 39 respondents that provided comparable figures for both years, net revenue increased 10% to $20.5 billion, and net income soared 86% to $586.4 million. Of the 46 total respondents, down from 56 last year, 19 are not-for-profits, 15 are privately held for-profits and 12 are publicly traded for-profits. The Post-Acute-Care Survey provides an unscientific sample of companies that own or operate two or more facilities, just a fraction of the fragmented industry. Companies that declined to provide financial information were excluded from the survey results.
"In the midst of uncertainty this time last year, the picture was considerably brighter later in the year," says A.J. Rice, an analyst with Merrill Lynch & Co., "with some stellar performers," especially in the nursing home, long-term acute-care and hospice sectors.
Effects of the Medicare cliff were softened by an administrative fix from the CMS worth several hundred million dollars, as well as status quo Medicaid funding in many states. In October 2003, providers received a 6.2% Medicare inflationary increase that included a one-time 3.2% adjustment, according to Rice.
With nursing home operators "struggling to get on their feet, (the administration) took note of the situation and decided to give the industry some relief," Rice says. "It set the stage for (providers) to have a fairly strong second half of the year last year."
Providers increased revenue by pumping up Medicare volume and shifting beds to more profitable lines such as assisted living and continuing-care retirement communities, while boosting their bottom lines by shedding money-losing ventures, cutting labor costs and fleeing high-cost liability states, providers say. Better investment returns also made a difference, at least on paper.
"We've achieved some sense of stability for the time being," says John Schaeffler,senior vice president of policy and regulatory affairs at the American Health Care Association, which represents 12,000 for-profit and not-for-profit nursing home operators and other long-term-care providers. "But the system is very disjointed and Medicaid is woefully underfunded."
Two additional refinement add-ons-from the balanced budget and benefits improvement acts-were scheduled to expire in October 2003 but were extended until 2005, leaving intact more than $1 billion in Medicare reimbursements.
The temporary add-on provisions-including the sunset clauses that expired in 2002-were intended to help long-term-care facilities transition to a prospective payment system that took effect in 1998 under the Balanced Budget Act of 1997. But the refinement add-ons could be retained indefinitely as the CMS reviews possible fallout from ending the provisions, Schaeffler says. Other possible action from the CMS includes a 30% reduction in bad-debt payments, one of several things the industry is fighting that threaten the "viability of long-term care.
As was expected, the biggest post-acute outfits weathered the reimbursement changes best, issuing strong earnings reports that lifted the overall industry. The largest publicly traded companies saw profit margins of 3% in 2003 vs. 1.6% the previous year, while their smaller not-for-profit counterparts saw margins of 1.9% vs. 0.7% in 2002. Of the top nine companies that reported comparable figures for both years, only Kindred Healthcare reported a net loss. Of the 19 not-for-profits, only the two largest systems-Evangelical Lutheran Good Samaritan Society, Sioux Falls, S.D., with $33.5 million, and Jewish Hospital HealthCare Services, Louisville, Ky., with $18.8 million-saw eight-figure profits, with margins of 4% and 3%, respectively. Of the rest, one out of three providers saw a net loss and posted an overall loss of 0.2%.
The nine largest participants, all publicly traded companies, constituted three-quarters of the total revenue and almost four-fifths of profits.
HealthSouth Corp., the Birmingham, Ala.-based rehabilitation chain that occupied the top spot in the 2003 post-acute survey chart with $4.3 billion in revenue and more than 1,600 facilities, has been embroiled in a $2.7 billion accounting scandal and said it won't file 2003 financials until 2005.
Mariner Health Care, Atlanta, and Sun Healthcare Group, Irvine, Calif., were excluded from financial calculations because debt reorganization clouded 2002 net income, which included $1 billion or more in debt forgiveness. Both companies were ensnared in the first round of bankruptcy filings after PPS implementation.
Sun Healthcare, which filed for Chapter 11 protection in fall 1999, emerged from bankruptcy in February 2002 "quite unhealthy," says Richard Matros, chairman and chief executive officer. By October of that year, the company was insolvent, or, as Matros puts it, "dead in the water." Sun executives, along with industry analysts and investors, feared a second bankruptcy filing was inevitable.
Unwilling to "give the company away," Matros, who came to the company in November 2001 to nurse it back to health, says Sun underwent a massive restructuring that included selling half its core nursing home business. The company shed money-losing facilities, left high-cost liability states and sold its pharmacy line and its software business to finance the restructuring effort. The company also issued some stock to raise capital and whittled its debt to about $60 million from about $200 million.
"We had an opportunity to survive, and we've done more than survive," Matros says. "We're a player in the sector again. We're sort of back in the game."
Earlier this year, Sun, just a shadow of the former $2.6 billion nursing home giant of 2001, reported $400,000 in profits on revenue of $834 million for 2003, although net income includes a $35 million loss on operations.
Matros says now that the company has cash and borrowing power, Sun is ready to go shopping again. "We pared the company down to the best remaining parts and we'll grow from that," Matros says.
Catching his eyes now are rehabilitation facilities and long-term acute-care hospitals, which, in a highly fragmented industry with many small regional players, could be up for grabs.
Many providers are billing themselves as major LTAC players. Kindred officials say their main business line is now long-term acute-care hospitals even though the company's nursing component is slightly larger at $1.8 billion.
Even as LTACs moved to a prospective payment system in 2002, providers have been reaping the benefits of tending to high-acuity patients under Medicare, which, along with private pay, often subsidizes lower-paying Medicaid patients.
LifeCare Holdings, a privately held LTAC company based in Shreveport, La., saw net income more than triple to $12.2 million on revenue of $283.2 million. Promise Healthcare, formerly Camelot Healthcare, in Boca Raton, Fla., more than doubled its profits to $3.1 million on net revenue of $50.2 million.
LTAC companies routinely get 70% to 80% of their payments from Medicare, while nursing homes get about half their reimbursements from Medicaid, which are often 10% or more below costs, according to Schaeffler.
According to survey results, LTAC heavyweights Kindred Healthcare and Select Medical Corp. dominate the field with almost three-quarters of facilities. Kindred, with 64 hospitals-mostly larger freestanding hospitals-leads the pack when ranked by number of beds with more than 5,000 and annual division revenue of $1.4 billion. Mechanicsburg, Pa.-based Select Medical is the largest provider by number of facilities with 79, mostly hospital-based.
Hospital-based LTACs, such as those operated by Select Medical, have lower startup costs, but generate lower revenue and are less efficient than bigger standalone facilities, says Robert Ortenzio, the company's president and CEO.
Select Medical moved up in the overall rankings to the No. 6 spot of all post-acute-care companies with $1.4 billion in revenue by acquiring Kessler Rehabilitation Corp., West Orange, N.J. Kessler presented a "singular opportunity," Ortenzio says, with its dominance in the region and the state's stringent certificate-of-need laws expected to help keep competitors at bay.
Merrill Lynch's Rice says the takeover allows Select Medical to "broaden their revenue base" and gives it a "platform to pursue growth opportunities" as rehabilitation giant HealthSouth founders.
Sunrise Senior Living, formerly Sunrise Assisted Living, also bulked up thanks to key acquisitions in 2003. The McLean, Va.-based assisted-living company acquired 126 senior-living communities from Marriott Senior Living, Washington, and assumed management of 22 facilities from EdenCare Senior Living Services communities. Sunrise, No. 8 overall, reported revenue had more than doubled to nearly $1.2 billion last year, and net income rose 13% to $62 million.
In general, the post-acute-care sector was a "good place to be in 2003, especially for a lot of niche players like Select ... (and) home-health companies," Rice says.
But with many states continuing to face budget shortfalls and the federal government looking to close some loopholes in Medicaid matching funds, Rice says providers need to watch for "clouds on the horizon."