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Nursing homes try to survive
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May 4, 1999: 2:11 p.m. ET
The struggles of financially troubled Vencor are hardly unique, analysts say
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NEW YORK (CNNfn) - Some of the nation's biggest nursing home operators are struggling to keep afloat, amid tumult in the industry sparked by Medicare cuts that have put at least one company on the brink of bankruptcy.
This week, Vencor Inc. (VC) said it would not be able to come up with about $14.8 million in interest payments on $300 million of notes that are due in 2005. The company has a month to come up with a plan for repaying the interest before Chapter 11 bankruptcy proceedings can begin. The Louisville, Ky.-based company is negotiating with its chief lenders and with the real estate investment trust Ventas Inc. (VTR), which controls the leases on most of Vencor's properties.
Vencor's financial woes are hardly unique, as nursing home chains have come under increasing financial pressure after the federal government decided to change the way it reimburses them for Medicare payments.
Also hit hard by the Medicare cutbacks has been Albuquerque, N.M.-based Sun Healthcare Group Inc. (SHG), which is in the midst of eliminating more than 10,000 jobs and is exploring the sale of some of its non-core assets. Mariner Post Acute Network (MPN), with headquarters in Atlanta, also is struggling with financial problems.
Vencor's stock was trading up 1/16 at 15/16 on Tuesday, compared with a 52-week high of 12-7/8. Shares in Sun also have lost most of their value this year, trading at a mere 1-1/2 on Tuesday, down from a 52-week high of 18-1/4. Mariner was trading unchanged at 3-3/8, off a high of 18-7/8 over the past year.
"What the market is saying is these are companies that are in a distressed state and ... may end up in Chapter 11," said Lori Price, a health care analyst at CIBC Oppenheimer. "The market may or may not prove to be right."
Before Congress passed sweeping Medicare restructuring in 1997, nursing homes were reimbursed for all of the Medicare costs, plus overhead, that they incurred. Under the revised "prospective payment system," which went into effect beginning last July, the government now provides flat reimbursement rates instead of extra fees for different services, such as outside therapy.
"The key difference is that a facility's operating costs are no longer directly tied to the revenues," said Charles Lynch, an industry analyst with Schroder & Co. "Now, your revenues are driven by the services you are providing."
Vencor was hit particularly hard because all 309 of its nursing homes were required to adapt to the new system at once, and the company also depended on the outside care providers for a lot of its revenues, Price said.
But some companies in the sector are prospering. For example, HCR Manor Care Inc. (HCR), the biggest in the industry in terms of market capitalization, and Beverly Enterprises Inc. (BEV), are in healthy shape in large part because they had strong balance sheets, a lower percentage of revenues based on Medicare payments and they have been able to conform better to the new system, analysts said.
The entire sector was ground down by the problem companies, making stocks such as HCR and Beverly good buys, Price said.
For the short term, shares in companies such as Vencor and Sun may plunge further, she said. But the industry may recover somewhat as Washington considers some small revisions in the Medicare payment system.
"We're starting to see signs of life," Lynch said of the stocks. "The question is how quick the rest of the industry can scale down its infrastructure to make it viable."
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