Plan shake-up

Nursing home operators are pressing reset on their plans for this year and next after the CMS's decision to cut Medicare skilled-nursing facility reimbursement by a total of $3.9 billion in the fiscal year starting Oct. 1.

Though the CMS in April had presented the 11.1% cut in reimbursement as one of two options it could take with the final rule released July 29, the industry now must scramble to prepare for the drop in revenue and fight to prevent any more reduced federal payments (Aug. 1, p. 4).

Among the industry's concerns are further potential cuts to Medicare coming from Congress as well as continued financial pressure on the Medicaid program, said Greg Crist, a spokesman for the American Health Care Association, Washington, a nursing home association.

But the more immediate concern is the loss of close to $4 billion in Medicare revenue plus the loss of future reimbursement as a result of the CMS' recalibration of its payment structure designed to prevent further overpayments. In addition, some publicly traded SNF companies have to deal with the repercussion of a huge hit to their share prices.

“Our members are reeling from this unexpected” move by the CMS, said Dr. Cheryl Phillips, senior vice president of advocacy for LeadingAge, Washington, which represents not-for-profit nursing homes.

The CMS reduced reimbursement for fiscal 2012 to claw back estimated excess billing by SNFs in the current fiscal year ending Sept. 30. That excess billing resulted from previous changes the CMS had made in how SNFs were reimbursed for Medicare therapy (July 25, p. 14). In addition to the reimbursement cut, the CMS tried to eliminate the financial incentives that led to the overpayments in the first place, changing how it reimbursed for group therapy and adding requirements for calculating estimates for how much therapy is required.

Phillips and Crist say it's too early to determine what the exact effects will be for their members, but the response by some public companies as well as the market's reaction offered some clues. Public companies with SNF operations saw their shares drop sharply Aug. 1, the first day of normal trading after the announcement.

The Medicare rate cut “is generally bad for everyone,” said Frank Morgan, a managing director and healthcare analyst for investment firm RBC Capital Markets, though some will be hit less than others. Companies that have not sold off their assets and leased them back to real estate investment trusts should fare better, as they should have a higher existing cash flow, Morgan said. And Moody's Investor Service said those nursing home companies that are less focused on the higher-acuity therapy that Medicare pays for should be less affected.

Amid earnings reporting season for many publicly traded nursing home companies, executives told investors that they were working furiously to prepare for the loss of future revenue. “We will focus in the near term to mitigate the impact of the rate cuts by reducing expenses, however, we're not yet prepared to discuss in what areas these cost savings can be achieved,” Boyd Hendrickson, chairman and CEO of Skilled Healthcare Group, said during a second-quarter earnings call last week.

Skilled Healthcare executives on the call said the change will reduce the Foothill Ranch, Calif.-based company's revenue by about $40 million to $45 million, with $28 million coming as a result of the rate cut and $12 million to $17 million leading from the therapy program changes. Skilled Healthcare's stock price closed down more than 42% to $5.06 on Aug. 1 from $8.80 on July 29.

Skilled also announced that it would put plans for a possible sale of the company on hold as a result of the payment cut.

The story is similar at Sun Healthcare Group, Irvine, Calif., though the company put a hard number on its potential savings. Sun Healthcare expects to take a hit of $65 million in total with $58 million caused by the reduction in reimbursement. But Sun executives say they have a plan for reducing the effect by $20 million.

“Obviously, we'll have to take a hard look at our infrastructure and make changes as aggressively as we can,” William Mathies, chairman and CEO of Sun, said during an earnings call. “We've found ways to cut as little into muscle as possible,” he said.

Sun's share price fell more than 52% to close at $3.35 on Aug. 1 in reaction to the change. Sun executives dismissed speculation that it would be unable to meet the financial requirements of its debt covenants, saying they believe they can meet such covenants in 2012. They also noted that the company finished the second quarter with $90 million in cash and $145 million in debt.

Brookdale Senior Living, Brentwood, Tenn., on Aug. 1 announced that its full-year revenue will fall $20 million to $25 million, which is 10.8% to 13.5% of its estimated related revenue of $180 million to $185 million. Brookdale planned to update its numbers during an Aug. 9 second-quarter earnings call.

Brookdale's share price fell close to 5% to $20.33 on Aug. 1, a day that the broader market as measured by the Standard and Poor's 500 index fell 0.41%.

Skilled Healthcare and Sun were two of six nursing home companies whose credits were put on “CreditWatch” with negative implications by ratings agency Standard and Poor's, which noted the companies could see large reductions to their earnings before interest, taxes, depreciation and amortization, or EBITDA. “The consequent reimbursement changes could reduce EBITDA for the six nursing home companies we rate in a range from 30%-60%, though this is a rough estimate subject to change as further details emerge,” noted a news release on the matter from S&P.

Also on the list were Drumm Investors, the holding company for Golden Living, Fort Smith, Ark.; privately held Genoa Healthcare Group, Tampa, Fla.; privately held HCR HealthCare, Toledo, Ohio; and publicly traded Kindred Healthcare, Louisville, Ky.

Moody's said it was taking no action in its own report as the industry should meet Moody's' expectations of low-to-mid single-digit growth over the next 12 to 18 months and Moody's had not considered the extra revenues the industry was earning into its ratings.