While post-acute-care providers have been enjoying robust financials in the past few years, changes expected in federal reimbursement policy could sap some of that strength.
The group most disgruntled over looming changes in reimbursements appears to be skilled-nursing providers, but grumbling can also be heard from inpatient rehabilitation companies. Most industry insiders say, however, that changes in government reimbursement could have been harsher.
Skilled-nursing providers were expecting a cut in reimbursements from the CMS for fiscal 2006, but now they aren't expecting cuts until 2007, based on a proposed payment update from the CMS. Also, the providers' recent economic health makes them better suited to handle changes from the CMS, observers say.
"The headache is not as bad as it might have been," says Hal Daub, president and chief executive officer of the American Health Care Association, a trade group that represents about 10,000 skilled-nursing providers.
Favorable reimbursements in recent years and stronger occupancy rates have helped to improve nursing homes' 2004 earnings, a finding supported by the results of Modern Healthcare's sixth annual Post-Acute-Care Survey.
According to the 11 skilled-nursing companies that provided data for both fiscal 2004 and 2003, their combined 2004 net income rose 84% compared to the previous year, while revenue rose 10%. For those companies, net income totaled $237.2 million on revenue of $5.7 billion in 2004, compared with net income of $128.9 million on revenue of $5.2 billion in 2003. For all respondents to this year's survey, revenue increased 14% to $14.1 billion, and for the companies that reported net income figures for both years, earnings rose 160% to $514.8 million in 2004 from $197.7 million in the previous year.
Of the 30 companies that responded to this year's survey, down from 46 last year, 11 are not-for-profits, 12 are privately held for-profits and seven are publicly traded for-profits. The post-acute survey provides an unscientific sample of companies that own or operate two or more facilities, just a fraction of the fragmented industry.
"A lot of things that went bad in 2001 and 2002 went good in 2003," says Nancy Weaver, a managing director at investment bank Stephens who covers long-term-care companies for the firm.
Of the survey respondents, Beverly Enterprises, Fort Smith, Ark., saw the largest total dollar drop in net income-to $28 million in 2004, down 65.2% compared with $80.5 million in 2003-but even data from that company showed signs of the industry's strong year. Beverly blamed its income drop on divestitures and pointed to continuing operations that showed 2004 earnings totaling $42.7 million, up 54.2% from $27.7 million in the previous year.
"To do an apples-to-apples comparison you have to look at continuing operations," says Jim Griffith, Beverly's senior vice president of investor relations and corporate communications.
Nursing home companies' solid results are partly attributed to an extra payment the facilities received through the Balanced Budget Refinement Act of 1999. Congress mandated that skilled-nursing facilities receive an add-on payment starting in fiscal 2000 because the lawmakers determined the facilities were being underpaid under the prospective payment system. The add-on payment totaled at least $1.4 billion in fiscal 2004 and added $30 per Medicare patient per day, according to the AHCA.
The refinement act called for the annual add-on payment until the CMS updated the resource utilization groups, or RUGs, which determine how long-term-care providers are paid through the PPS. Under the proposed rule, the refinements to the RUGs will take effect Jan. 1, 2006, the start of the second quarter of federal fiscal 2006, and the facilities will be paid under the current system until that date.
The proposed rule, which the CMS is taking comments on until July 16, calls for an inflation increase of about 3% for fiscal 2006; however, after changes to the RUGs are made, the overall payments to skilled-nursing facilities will be the same in fiscal 2006 as in fiscal 2005. This bothers Daub because that essentially means there's really no inflation increase, so the facilities would see their earnings erode.
Back to the '90s?
Daub added that the only reason the fiscal 2006 payments are even with fiscal 2005 is because the RUG refinements wouldn't go into effect until the second quarter, which means some of the add-on payment will be included in the first-quarter payments. So as it stands now, fiscal 2007 could even be worse than fiscal 2006.
"We feel like it's 1997 again," Daub says, referring to the rash of bankruptcies that hit the nursing home industry in the late 1990s. The industry mostly blamed the poor financials in the late 1990s on high malpractice costs and inadequate Medicare and Medicaid funding. However, many nursing homes were also criticized for poor quality of care and lax business practices.
Others in the industry aren't as pessimistic as Daub but do say the overall impact of the proposed regulations will pose challenges for providers. Beverly-like many others in the industry-is still analyzing the numbers, but the company says that beyond fiscal 2006 it expects the RUG refinements to range from no change in payments to slightly negative results, Griffith says.
"Slightly negative" is much better than Weaver and other analysts were expecting. "We thought it was going to be real negative," Weaver says.
Jerry Doctrow, a senior analyst for investment bank Legg Mason Wood Walker, said in a research note that analysts were expecting a $10-per-day cut for each Medicare patient, and more extreme estimates put the cuts at $20 per day. "The zero cuts is much better than we had anticipated and we believe better than the market expected," according to the note.
Still Doctrow's report acknowledged that the zero cut also means the industry isn't getting an inflation increase, which could be compounded in fiscal 2007 when the entire add-on payment disappears.
On the positive side, the RUG refinements will offer the industry payment stability, says Brad Shiverick, a spokesman for Harborside Healthcare, a private skilled-nursing company based in Boston. Over the past five years, companies weren't sure if they would get the add-on payment or the RUG refinement. Now that they have an idea of what the refinement will entail, they're better situated to make long-term plans, Weaver says.
The predictability in payments also could make some long-term-care facilities more attractive on the merger-and-acquisition front, Weaver says. She doesn't expect many large mergers but does expect to see more acquisitions similar to the deal Harborside announced earlier this month. Harborside said it was buying nine nursing homes from Louisville, Ky.-based SeniorCare but didn't disclose terms.
Daub, a former congressman from Nebraska, says he will be petitioning the CMS to increase its allotment to skilled-nursing facilities. His association is also lobbying Congress to do away with therapy caps-which limit the amount providers can receive for speech-language pathology, physical therapy and occupational therapy-that are scheduled to be reinstated Jan. 1, 2006.
The caps were part of the Balanced Budget Act of 1997 and were designed to slow growth in government spending. However, they were only in place for about three months until the Medicare Modernization Act of 2003 placed a moratorium on them until the end of this calendar year. Bills calling for the repealing of the caps were introduced in the House and Senate in February and they have been referred to committees.
One financial positive Daub acknowledged for his members is the "75% rule," which will likely drive patients out of rehabilitation hospitals and into skilled-nursing facilities where the same type of treatment can be two to three times cheaper (May 2, p. 14). Last year, the CMS updated the 75% rule, which outlines the criteria for classifying facilities as inpatient rehabilitation facilities. At least 75% of their total patient population has to have at least one of 13 clinical conditions in order for the rehabilitation facilities to qualify for Medicare payments.
Changes to the rule restrict who qualifies for the 75% threshold. For example, before the new criteria, patients who were recovering from hip replacement surgery at inpatient rehabilitation facilities would qualify for one of the conditions. The new rules say patients must be recovering from replacement surgery of both hips before qualifying for one of the conditions.
Rehabilitation hospitals were hoping a Government Accountability Office report released in April would call for a reversal of the changes, but it didn't. Rehabilitation providers were also dealt a setback when the CMS issued its proposed payment update for fiscal 2006. That update calls for a 1.9% across-the-board cut to these facilities because an analysis showed evidence of upcoding. Although the proposed overall increase to rehabilitation providers will be 2.9%, the American Hospital Association called the upcoding cut unnecessary and said it will fight the changes.
About the only post-acute group that was happy with its proposed fiscal 2006 update is long-term acute-care hospitals, which are slated for a 3.4% increase. The three companies in the survey that labeled themselves as LTAC companies all showed improvements in net income for 2004 compared with the previous year.
The turnaround that Kindred Healthcare, Louisville, Ky., made to its bottom line in 2004 offers an example of how long-term-care companies have benefited from better business practices in recent years. Kindred, which operated 249 skilled-nursing facilities and 72 long-term acute-care hospitals at the end of 2004, lost $75.3 million in 2003. The company blamed those losses on divestitures, most of which were facilities in two typically high-malpractice-premium states: Florida and Texas.
Kindred stated in a Securities and Exchange Commission filing that it was able to lower its malpractice costs in 2004, which helped the company earn net income of $70.6 million. David Peknay, a healthcare credit analyst for Standard & Poor's, says those and other operating efficiencies will help long-term-care companies absorb changes in government reimbursement.
"The balance sheets are better and their portfolios are better; they have sold less favorable facilities," he says.
More charts can be found in the Surveys/Lists/Data section of modernhealthcare.com