Wall Street's view of nursing facilities : investor sentiment is mostly negative due to uncertainties related to government payment and the rising cost of liability insurance

28 Pages·2003·1.4 MB·English

by  Van der Walde, Lambert

HealthCareIndustry
aurasforMMCNMUBXJUOSBtVKtS MarketUpdate Nursing
Facilities
May20,2003
DearFriendsofCMS:
Astheregulatorsofover$500billionperyearofMedicare,Medicaid,andS-CHIPfunds,webelieveitis
incumbentonus tobetterunderstand the finances ofourcontractors, healthproviders, andotherrelated
businessesthatprovideservicestothemorethan70millionbeneficiariestheseprogramsserve.Healthplans,
hospitals,nursinghomes,homehealthagencies,medicaldevicemanufacturers,andpharmaceuticalcompaniesare
justsomeofthosewhosefinancesdependheavilyonthesepublicprograms.
—
IhavealwaysbeensurprisedathowlittleWallStreetandWashingtoninteract andhowcompaniesoftenpaint
differentfinancialpicturesforeachaudience.Iamastrongbelieverinadequatefundingforourmajorpartnersin
theseprograms,butIdonotthinktheyshouldbesayingonethingtoinvestorsandanothertoregulators(asitis
occasionallyintheirinteresttodo).Ifhealthplansorprovidersarestrugglingtoserveourbeneficiaries,we
shouldhaveathoroughunderstandingoftheirrealfinancialstatustoassessthetruelevelofneed.Many
investmentbankingfirmsconductdetailedanalysesofmajorhealthproviders,bothfortheequityinvestorsinfor-
profitcompanies,andforthedebtholdersoffor-profitandnonprofitentities.Healthsystemstypicallyprovide
theseinvestorswithclearfinancialdata.Thesedatacanbeusedbyregulatorsandlegislatorstoassessfunding
adequacyortheneedforregulatoryreforms.
CMS'OfficeofResearch,Development&Information(ORDI)hasgatheredresearchreportsfromthemajor
investmentfirms,summarizedtheiranalyses,andcondensedthemintoashort,andhopefully,understandable
format.OurgoalistoprovideobjectivesummaryinformationthatcanbequicklyusedbyCMS,HHS,Congress,
and their staffs that oversee these programs. The primary person at CMS assigned to this task is
LambertvanderWalde.LambertpreviouslyworkedforSalomonSmithBarneyinNewYorkandisexperienced
withcorporatefinancialanalysisandresearchreview.AlsoontheteamisKristenChoiwhopreviouslyworked
forJPMorganinNewYorkinhealthcareequityresearch.
ThisMarketUpdatefocusesonnursingfacilitycompanies,updatingourfirstreportaboutthissectorpublished
February6,2002.TheindustrycurrentlyfacesissuesincludingtheeffectofthesunsetofcertainMedicareadd-on
paymentprovisions,risktoMedicaidpaymentsasstatesbalancetightbudgets,andrisingliabilitycosts.In
comingmonths,wewillcontinuetoreviewthemajorproviderandsuppliersectors.ThoughIamproudofthis
effort,andbelieveitwilladdtounderstandingoftheprograms,wewelcomecommentsonthecontentandformat
ofthisreport.Wewanttomakethisasconsumerfriendlyaspossibleforeveryonewhoreadsit.Pleaseprovide
commentstoLambertvanderWaldeatlvanderwalde@[email protected].
Sincerely,
TomScully
REPORTS
RA
997
V36
2003
w
2-oo3 CA4S/ Health Care Industry
CCHrmfamDICAKSUlDKAIDSBtVKB MarketUpdate Nursing
Facilities
May20,2003
TomScully
Administrator
OfficeofResearch,Development
&Information:
LambertvanderWalde
[email protected]
[email protected] Wall Street's View of Nursing Facilities
Investorsentimentismostlynegativeduetouncertaintiesrelatedto
governmentpaymentandtherisingcostofliabilityinsurance.
ProfitmarginscontinuetodeclineaftertheOctober
2002sunsetofover$1 billionoffederal Medicareadd-
onpaymentprovisions,exacerbatingWallStreet's
concernsaboutMedicaidpaymentlevels.
Risinginsurancecostsandaggressivelitigationhave
ledtotheexitofmanynursingfacilitychainsfrom
stateswhereliabilitycostsarehigh.
Analystsworryhowsomechains,especiallythose
thathaverecentlyemergedfrombankruptcy,will
weathertheuncertaingovernmentpayment
environment.
Threechainshavefiledforbankruptcyinthelastsix
months.
Fornursingfacilities,accesstoequityfinancingis
essentiallynonexistentanddebtfinancingis
availabletoonlyafew.
4
Contents
ExecutiveSummary 3
WallStreet'sView 4
IndustryOverview 5
IndustryPerformance 8
Add-onPaymentSunset 8
For-profit,PubliclyTradedNursingFacilityChains 8
Not-for-profitNursingFacilities 11
Expenses 12
AccesstoCapital 14
Sources&UsesofCapital 1
Solvency 20
Not-for-profitAccesstoCapital 21
RevenueSources 23
PrivateSources 23
PublicSources 24
Summary 26
CMS*
NursingFacilities-May20,2003
,
ExecutiveSummary
WpaelslsiSmtirseteitciasbmoourte yWeaalrl.SItnrveeestt'smeonuttlaonaolkyfsotrs'thmeaniunrscionngcefrancisliatryestehcetosrunhsaestgorfocwenrtmaionrMeendeigcaatrieveaodvde-ronthepast
sectorprospects. paymentprovisions,potentialMedicaidcutsbystates,andskyrocketingliabilitycosts.
TheMedicareadd-onpaymentprovisionssunsetonOctober1,2002.Congressoriginally
createdtheseadd-onpaymentstohelpskillednursingfacilitiestransitionfromacost-
basedtoaprospectivepaymentsystem.Averageprofitmarginsofthepubliclytraded,
About$1.4billionof for-profitnursingfacilitycompaniesweredecliningbothbeforethesunset,(from2.8%in
s2Mp0uea0ndy2sim.ecetanrtoenparOdocdvt-ioosbnieorns1 tbtheheeliffeiovruesrtttqhhueaqruntaoetr-rtfeoorrf-o2pf0r2o0f02i0tt2oaan2nd.d0s%m1a.i1lnl%etrhienfatfcihirilsritdtiqqeusuaarmrttaeeyrr)obfaen2h0di0ta3fh)ta.errdSteohrmebesyuintnshveeetssu(tnmdseoentwt.naTtnhoael1sy.set4s%in
facilitiesmaybelessabletoabsorbthesunset'simpactduetoslimmeroperatingprofit
marginsanddeclinesininvestmentincomefromendowmentsandcharitablecontributions
WallStreetanalystsunderstandthatmanynursingfacilitiesusehigherMedicareand
privatepayratestosubsidizelowerMedicaidpayments.Medicare,however,coversonly
about10%-15%ofnursingfacilityresidentswhileMedicaidcovers65%-70%attypically
HploiawgyehmreernMetMdesidsciuacbiasdriedize alnoawleyrstpecrondcieermnsraatebso.utThMeedMiecdaiicdarpeayamdedn-to.nApnraolvyisstisonwosurnrsyetthhaatsfiesxcaaclecrobnacteerdnWsamlalyStfroerecte
paymentsfornursing statestoreduceorfreezeMedicaidrates.AccordingtoaJanuary2003Kaiser
facilities. CommissiononMedicaidandtheUninsuredstudy,37statesplantoreduceorfreeze
fundingfornursingcareinfiscal2004.
Nursingfacilitymarginshavealsodeclinedduetoincreasesinpatientcareliabilitycases,
averageclaimsizes,andinsurancepremiumcosts.Highandunpredictableliabilitycosts
Manychainsare havebecomeasignificantdriverinmanybusinessdecisions,includingassetsales,
elpixraiobthiiilnibtgiytsictvoaestlteysshawirghehe.re rdeilvaetsitvienlgyneuxrpseinnsgivfaecifliintaiensciinngthstorsuectsutraetse,sawnhderbeanlkiarbuiplittcyycfoisltisngasr.eMdaisnpyrocphoaritnisonaarteelyhigh.
In2002,thethreelargestnursingfacilitychainseachhadlarge,unexpectedincreasesto
theamountofresourcesreservedthatestimatefuturesettlementpayments.
Althoughmostinvestmentanalystsbelievetheindustryisstruggling,manydonotbelieve
thattheindustryisnecessarilyreturningtotheearlydaysofPPSimplementation,during
whichtimefiveofthetopeightnursingfacilitychainsfiledforbankruptcy.Twoofthese
companiesemergedfrombankruptcyin2001,andanothertwoemergedin2002.Some
investors,however,areconcernedthatcurrentmarketconditionscouldresultinasecond
waveofbankruptcies.SinceDecember2002,CentennialHealthcare(the12thlargest
chain)andtwosmallerregionalchainshavefiledforbankruptcy.
Withtheseuncertaintieslooming,accesstocapitalislimited.Newequitycapitalisalmost
non-existent,whilepublicly-helddebtisavailabletoonlythehighestqualityissuers.
Othersourcesofcapital,includingrealestateinvestmenttrusts(REITs)andcommercial
Accesstocapitalis banks,havealsodiminishedforthosefacilitiesthathavenotbranchedoutintoothermore
extremelylimited. profitabletypesofseniorcarebusinesses,suchasassistedlivingandcontinuingcare
retirementcommunities(CCRCs).Theindustrywillrequireasignificantamountof
capitaltorefinancematuringdebtandmaintainfacilitiesinthenear-term.
NursingFacilities-May20,2003 -3-
WallStreet'sView
SkillednursingfacilitiesstruggledaftertheBBAandprofitmarginscontinueto
declineduetothesunsetofcertainBBRAandBIPAadd-onprovisionsonOctober1,
2002.1Congresscreatedthesetemporaryprovisionstohelpnursingfacilitiestransition
fromacost-basedtoaprospectivepaymentsystem.Waxingandwaningprospectsfor
legislationthatwouldrestoretheseadd-onpaymentshavecloudedtheoutlookforthe
DecreasedMedicare sector,whoseprofitmarginshavebeendeclining.JerryDoctrowofLeggMasonwrites,
paymentshave "2002beganandendedwithconcernsovergovernmentreimbursementfornursinghome
rmaerdguicnesd.profit noopte-rfaotro-rpsrotfaiktihngomaetso,llaosnweslhlaraesptrhiecelsa.r"geTrhcehafiutnusrtehiastehsapveeciraelcleynmtluyrrkey-efomrertgheedsmfarlolmerand
Chapter11bankruptcyfilings.A.J.RiceofMerrillLynchdescribesCMS'recently
proposed2.9%fullmarketbasketincreasetoMedicareSNFpaymentsinfiscal2004as
"welcome,"although"thenursinghomeindustrycontinuestobeindirestraights...."
Withstatesunderincreasingfiscalpressure,analystsworrythatMedicaidnursing
facilityratesmaybefrozenorreduced.EveryWallStreetnursingfacilityanalystis
concernedstateswillfreezeorcutMedicaidpaymentstonursingfacilityprovidersdueto
mountingfiscaldistressandrisingMedicaidcosts.Unlikethefederalgovernment,many
statesmustbalancetheirbudgets.Asstaterevenuesfall,fundingmustbecut.Several
stateshaveannouncedMedicaidproviderpaymentcuts,othershavemaintainedexisting
Innnuovtresbsietnogarbsflawceioltriotriayebstshwoiarltlb Wleavlells,StarneedtathsamtalflorermonsutmbneurrshianvgefaacnilniotiuenscheidghmeordeMsedtiicnacrreeaspeasy.mIetnitswhiedlpeslysuubnsdiedriszteoloodwbeyr
Medicaidcuts. Medicaidpayment.WiththesunsetofMedicareadd-onprovisions,investorsworrythat
nursingfacilitieswillnothavemuchroomtoabsorbpotentialMedicaidcutsaswell.
Skyrocketingliabilityinsurancecostincreasesareamajorcontributortowardthe
exitorbankruptcyofnursingfacilityoperatorsincertainstates.JasonKrollofBear
Stearnsestimatesthatnursingfacilityliabilityinsurancecostscontinuetorisebetween
25%and35%.Boththenumberoflawsuitsper1,000bedsaswellastheaverageclaim
sizehavetripledoverthepasttenyears,accordingtoAONRiskConsultants.Unexpected
materialincreasesininsuranceaccruals(i.e.,reservedresourceswhichestimatefuture
settlementpayments)havealsodepressedstockprices:in2002,Beverly'sannual
Aggressivepatient insuranceaccrualsgrew50%to$66million,Kindred'sgrew50%to$82million,and
cdarirveelnituipgaitinosnuhraansce ManorCare'sgrew20%to$72million.Doctrowwrites,"[V]eryhighliabilityexpense
premiumsand levelswillcontinuetopressurenursinghomeoperatorcashflowsandoperatingmargins
uncertaintyoverthe forthenextyearortwoatleast,insomecasesforcingfirmsintobankruptcy
toifmfiuntguraensdetmtalgenmietnutde reorganizationwhenliabilitycostsareaddedtoMedicareandpotentialMedicaidcuts."In
payments. stateswhereliabilitycostshavebecometooburdensome,orwhereliabilityinsurershave
beenunwillingtoofferproductstolong-termcareproviders,nursingfacilitiesarebeing
closedordivested.WallStreetanalystsbelievestatetortreformmayhelpcontrolrising
costs.
1BBA:BalancedBudgetActof1997.
BBRA:BalancedBudgetRefinementActof1999.
BIPA:BeneficiaryImprovementandProtectionActof2000.
cms/
NursingFacilities-May20,2003 -4- *
IndustryOverview
Nursinghomesprovidebothshort-termrehabilitativeandlong-termcareforpatientswho
requireskillednursingandtherapycareonaninpatientbasis.Thereareabout16,500
nursinghomescertifiedtoprovideMedicareand/orMedicaidcareintheUnitedStates,
withapproximately1.8milliontotalbeds.About3.5millionpeoplewillliveinanursing
homeduringthecourseofayear.
Skillednursingfacility(SNF)istheMedicaredesignationforafacilitythatprovides
beneficiarieswithshort-term,residentially-basedskillednursingandtherapycare.
MedicareSNFcoverageislimitedto100daysperspellofillnessforthosebeneficiaries
whorequiredailyskilledcarefollowingadischargefromastayinanacutecarehospital
cMoevdeircanruersdionegscnaorteon lastingatleastthreedays.MedicaredoesnotcoverSNFcareonalong-termbasis.If
along-termbasis,as beneficiariescontinuetorequirecareinaskillednursingfacilityonceMedicarecoverage
Medicaiddoes. expires,theycanpayout-of-pocket(privatepay)aslongastheyhaveassetsorsufficient
income.Oncetheirassetsare"spent-down,"theybecomeMedicaideligible.2MostSNFs
arealsocertifiedasnursingfacilitiesunderMedicaidandfurnishMedicaidandprivate
paypatientswithacombinationofskilledrehabilitativecareandlong-termtreatmentfor
functionaldeficitsandchronicconditions.
Medicareclassifiesabout15,000nursinghomesasSNFs.About85%ofSNFsare
freestandingnursinghomeswhiletheother15%arehospital-based(aSNFunitofan
acutecarehospitalorunderadministrativecontrolofahospital).Three-quartersof
freestandingSNFsareoperatedasfor-profitentities,whilethemajorityofhospital-based
SNFsareattachedtonot-for-profithospitals.
Intotal,approximately65%ofnursinghomesareownedbyfor-profitentities,while28%
areownedbynot-for-profitorganizationsandtheremainderareownedbygovernment
agenciesusuallyatthecityorcountylevel.AbouthalfofallfreestandingSNFs,ortwo-
thirdsofallfor-profitSNFs,areownedoroperatedbychains.Manyofthelargestchains
alsohavesignificantnon-nursingfacilitylinesofbusinessincludinghomehealthservices,
long-termacutecarehospitals,andassistedlivingfacilities.Thefinancialresultsforthese
chainsarepresentedonaconsolidatedbasisinthisreport.
Figure1:NursingHomeFacilitiesandBeds,byTypeofOwnership
TypeofOwnership NumberofFacilities Percent NumberofBeds Percent
6Fhoo5rm%-eprosof.fnituresnitintgiesown NFGoootrv--efporrronf-mipetronftit 1401,,,670175196 62586...441%%% 1,411828508,,,796042336 62667...271%%%
Total 16,446 100.0% 1,795,272 100.0%
Source:CMS,OSCARdataasofApril2003.
Theindustryremainsveryfragmented,withnodominantproviders.AsofApril2003,the
toptennursingfacilitycompaniesbybedcountaccountedfor15.5%ofbeds,declining
from18.5%inJanuary2002.Thelargestchainshavedivestedbedsfasterthantheoverall
sector.Thecombinedbedcountofthetoptenchainsshowedadeclineof17.9%
comparedtoanoveralldeclineinnursingfacilitybedsof2.1%.Thistrendmaybedueto
recentexitsofthelargestchainsfromstateswithhighliabilitycostssuchasFlorida.
IncomeandassetteststodetermineMedicaideligibilityvaryfromstatetostate
CA*S
t
NursingFacilities-May20,2003 -5-
Figure2:TopTenNursingHomeFacilityCompaniesbyBedCount
NumberAopfril-0%3ofTotal NumbeJranoufary%-0o2fTotal ChaNnugmebeinr
Beds Beds Beds Beds ofBeds
BeverlyEnterprisesInc. 49,396 2.8% 61,716 3.4% -20.0%
ManorCare,Inc. 38,666 2.2% 39,659 2.2% -2.5%
fTshaeahscvetteeolrrda.trighveaesnstttechdheaboievndesrsall KSGMIineautnnrneedigsrHnrieeeasadrtleHHHtdeeehaHaacllelattatrhhlhectVaGCherarenSro,teeuur,pIvr,niIeccns.Ice,n.s(c,If.noIcrn.mc.erlyVencor) 3322246454,,,,,247126106677294 21111.....04944%%%%% 3433228489,,,,,396261008619726 22211.....14186%%%%% ----2231-42486.....92324%%%%%
LifeCareCentersofAmerica 16,587 0.9% 19,928 1.1% -16.8%
TheEvangelicalLutheranGoodSamaritanSociety 14,892 0.8% 16,077 0.9% -7.4%
ExtendicareHealthServices.Inc. 13,600 0.8% 17,529 1.0% -22.4%
Top10Total 277,960 15.5% 338,684 18.5% -17.9%
TotalBeds 1,795,272 100.0% 1,834,448 100.0% -2.1%
Source:CMS,OSCARdata.
AccordingtoCMS'OfficeoftheActuary,U.S.spendingonfreestandingnursinghome
From1980to1997, carewas$98.9billionin2001,up5.5%from2000.AsseeninFigure3,national
Medicarenursing freestandingnursinghomeexpendituresgrewfrom$17.7billionin1980to$85.1billion
etshoipotgeamhnltednitusnirpgmse.einsndgmionhrgoemgrteheawn iMbineldl1ii9oc9na7,,rgegrroforwewtethshtoaofnfd3i30n82g12n%%uroosrrinaagnnhaavoveemrreaaggeeexpaaennnnnduuiaatllurrreaastteeeooxffpl93o.0d7.e%0d.%.DfurNrouimrns$gi3nt0gh7ihsmosimlalemieocnapreteroiw$oa9d,.s6one
ofthefastestgrowingcomponentsoftheMedicareprogramduringthattime.
Figure3:NationalFreestandingNursingHomeCareExpenditureGrowth,1980-2012E
BeforeBBA1997mandatedtheimplementationofSNFPPS,MedicarepaidSNFsbased
ontheirreportedcostsofcare,subjecttocertainlimitsforroutinecosts{e.g.,nursing,
room,andboard).Notbeingsubjecttothesamelimits,ancillaryservicesskyrocketed
duringthistime.Utilizationalsogrewrapidly,whileaverageacute-carehospitallengthof
staydecreased.
Tocurbthesegrowthrates,CongressmandatedtheimplementationofaSNFprospective
paymentsystem,whichpaysaperdiemrateadjustedforresourceneedsandgeographic
c/urs,
NursingFacilities-May20,2003 -6-
location.TheimplementationofSNFPPScausedMedicarefreestandingnursinghome
spendingtodecline18%in1999andnationalfreestandingnursinghomespendinggrew
only0.5%.GrowthpickedupagainafterCongresscreatedtemporaryadd-onpayment
provisionstohelptheindustrytransitionfromthecost-basedtothePPSinBBRA1999
andBIPA2000.
CreditSuisseFirstBoston(CSFB)believesthatMedicare'sprospectivepaymentsystem
forinpatienthospitalstays,implementedin1983,encourageshospitalstodischarge
patients"quickerandsicker"comparedtoacost-basedpaymentsystem.Theaverage
acute-carehospitallengthofstaydecreasedfrom4.95daysin1992to4.00daysin1999,
adropof19%.CSFBbelievesthistrendresultedinrelativelysickerhospitaldischarges,
increasingthenumberandacuityofcasesrequiringskillednursingfacilitycare.Increased
utilizationandpaymentperstaycontributedtotherapidriseofMedicarenursinghome
careexpendituresinthe1990s.
NursingFacilities-May20,2003 -7-
IndustryPerformance
Add-onPaymentSunset
About$1.4billionofSNFadd-onpaymentprovisionssunsetonOctober1,2002.For
fiscal2003,theeffectofthesunsetwaspartiallyoffsetbyamarketbasket3increaseof
3.1%minus0.5%assetforthinBIPA2000,foranetincreaseof2.6%(about$400
million).Inaddition,SNFsretainedabout$1.0billionofseparateadd-onpaymentsin
fiscal2003,whichwillremainineffectuntilcase-mixrefinementsaremadetothe
resourceutilizationgroup(RUG)system.4CMShasindicatedthatitdoesnotplanto
implementthecase-mixrefinementsforfiscal2004.CMSisrequiredtoreportto
CongressalternativestotheexistingRUGsystembyJanuary1,2005.Theadd-on
provisionsunsetisfurtherdescribedinthetextboxonpage9.InMay2003,CMS
proposedafullmarketbasketincreaseof2.9%toMedicareSNFpaymentsforfiscal
2004.Theproposedrulewillresultinnearly$400millioninincreasedpayments.
For-profit,PubliclyTradedNursingFacilityChains
Themajor,publiclytraded,U.S.-basedcompaniesinthenursingfacilitysectorareManor
Care,BeverlyEnterprises,ExtendicareHealthServices(theU.S.subsidiaryofthe
Canadian-basedExtendicare,Inc.),KindredHealthcare(formerlyVencor),Mariner
HealthCare(formerlyMarinerPost-AcuteNetwork),SunHealthcare,andGenesisHealth
Ventures.KindredandGenesisbothemergedfrombankruptcyproceedingsin2001.
MarinerandSunemergedfrombankruptcyin2002.IntegratedHealthServices,whichis
notpubliclytraded,continuestoundergoChapter11bankruptcyrestructuring.
Figure4:MarketCapTable,U.S.NursingFacilityCompanies
($inmillions)
Ticker MarketCap
ManorCare HCR $2,113
GenesisHealthVentures GHVI $672
BeverlyEnterprises BEV $322
KindredHealthcare KIND $293
ExtendicareHealthServices EXE/A $200
MarinerHealthCare MHCA $91
SunHealthcare SUHG $15
NSootuer:ceM:aBrlkoeotmcbaeprigt.aliAzsatoifonMiasyam15e,as2u00r3e.ofcompany'sequityvalueorsize,calculatedbymultiplyingsharepricebythenumberofsharesoutstanding.
3CMSusesaskillednursingfacility"marketbasket"tomeasureinflationinthepricesofanappropriatemixof
goodsandservicesincludedincoveredskillednursingfacilitystays.Thepriceofitemsinthemarketbasketis
measuredeachyear,andMedicarepaymentsareadjustedaccordingly.
4MedicarepaysforSNFservicesunderaprospectivepaymentsystem(PPS).UnderthePPS,eachbeneficiaryis
designatedtooneof44resourceutilizationgroups(RUGs).EachRUGincludespatientswithsimilarserviceneeds
thatareexpectedtorequiresimilaramountsofresources.TheperdiempaymentrateforeachRUGiscalculatedas
thesumofthreecomponentsfor1)routineservices(e.g.,roomandboard,linens,andadministrativeservices),2)
nursingservices,and3)therapyservices.
NursingFacilities-May20,2003 -8- '
.
Post-BBAMedicareAdd-OnPayments
Aftertheskillednursingfacilityindustryassertedfinancialdifficultyasaresultoftheprospectivepaymentssystem
(PPS)implementation,CongresspassedseveraltemporaryMedicarereimbursementincreasesinBBRA1999and
BIPA2000tohelpskillednursingfacilitiestransitionfromacost-basedpaymentsystemtothePPS.Congress
mandatedtheSNFPPSinordertoencourageefficiencyandcontrolskyrocketingcostsofMedicarenursingfacility
care.DeutscheBank'sHenryReukaufbelievesthenursingfacilityindustryhasalreadycutcostssignificantlyand
doesnothavemanymoreremainingavenuestoimproveefficiency.
Figure5:SNFAdd-onPaymentDescriptions
Average
PerDiem Annual
Effect, Payments,
Add-onDescription Statute Comment Status FY2003 FY2003
a2c0ui%tyinRcUreGassef'or15high- B19B9R9A 2H0H%SirnecfrienaessetwhielRlUbeGseliminatedonce Current $19.88 $1.0billion
6re.h7ab%iliintcarteiaosnetfhoerra1p4yRUGs B20I0P0A RaBenBdaiRdrdAeictt1ieo9dn9a9tlhfe1r21om0R%U3Giosnfctrheoasseeg1r5aRntUeGdSinto Current Neutral NBienBcurtRerAaasle1ti9on9290%
4%increaseacrossallRUGs B19B9R9A pInacyrmeeanstedraatdej,uesxtcelduFseidveeroalf2pe0r%iidnecmrease S1u0n/1s/e0t2on $9.94 $500million
16.66%increasefornursing BIPA Increasednursingcomponentofcase-mix Sunseton $17.89 $900million
component 2000 adjustedFederalrate 10/1/02
(EielnnidamecixtneraedtdibuoycntBoiofBnmAoafr1k19e.9t70)b%asket B20I0P0A if1in.sb0caa%lsei2n0rc0art2eearswaehteeisnnfCisMcaSlyaepaprli2e0d01uprdeattaeinfeodr Current $1.99 $100million
SNooutrec:eA:vCeMraSg.eMedicareperdiempayment,includingbeneficiaryco-payment,isestimatedtobe$295infiscalyear2003.ThefiscalyearforSNFMedicarepayment
wb(1ie)tgihRnesssiomOiuclrtacorebseUertriv1liiczeatnieoendGsrtohautpa(reRUeGx)p:ectUenddetrortehqeuSirNeFsipmriolsaprecatmiovuenptasyomfernetsosuyrscteesm.,EeaacchhRbeUnGefihcaisaraypiesrddesiiegmnaptaeydmetontonreatoe.f44RUGs.EachRUGincludespatients
Provisionsforthe4%across-the-boardincreaseandthe16.66%nursingcomponentincreasesunsetasscheduledon
October1,2002.WallStreetanalystsgenerallydonotexpectlegislationtorestoretheseadd-onpaymentsgiven
increasedconcernsaboutdeficitspendingandconflictintheMiddleEast.EvenAnkurGandhi,aGoldmanSachs
debtanalystwhoisknownforheratypicallymorepositiveoutlookonthenursingfacilitysector,characterizesthe
negativeimpactoncertainnursingfacilityoperators:
[T]heOctober1,2002reductioninMedicarereimbursementhasbeendetrimentalforthenursinghome
sector.This,combinedwithMedicaidratepressureandincreasesinprofessionalliabilitycosts,hasresulted
inaworseningofoperatingresultsfornursinghomesandminimalfuturegrowthpotential,alackofaccess
tocapitalmarketsformanyoperators,andbankruptciesofsmallerchainssuchasCentennialHealthcare
andnowpotentiallySunHealthcare.
c/vrs,
NursingFacilities-May20,2003 -9-