Wall Street's view of nursing facilities : troubled sector performs better but its future remains uncertain

21 Pages·2002·0.93 MB·English

by  Van der Walde, Lambert

HealthCareIndustry
Nursing
CENJIUSforMCDKAReaMEDICAIDS&VtOS MarketUpdate
Facilities
February6,2002
DearFriendsofCMS:
Astheregulatorsofover$500bmioiiperyearofMedicare,Medicaid,andS-CHIPfunds,webelieveitis
incumbent onustobetterunderstandthefinances ofour contractors, healthproviders, andother related
businessesthatprovideservicestothemorethan70millionbeneficiariestheseprogramsserve.Healthplans,
hospitals, nursing homes, home health agencies, DME suppliers, medical device manufacturers, and
pharmaceuticalcompaniesarejustsomeofthosewhosefinancesareheavilyreliantonthesepublicprograms.
Aansdanloan-wpyreorfiatn.dIfowramseraltwraadyesassusropcriiasteidonaCtEhOo,wIlritetplreeWseanltledStmraeentyaonfdthWeassehcionmgptaonnieisn,tebroatchtesdh—araenhdoldheorwowthneesde
companiesoftenprovideddifferentfinancialinformationtoeach.Iamastrongbelieverinadequatefundingfor
ourmajorpartnersintheseprograms,butIdonotthinktheyshouldbesayingonethingtoinvestorsandanother
toregulators(asitisoccasionallyintheirinteresttodo).Ifhealthplansorprovidersneedhelp,weshouldhavea
thoroughunderstandingoftheirrealfinancialstatustoassessthetruelevelofneed.
Withthatinmind,whenIjoinedCMS,Idecidedtheagencyshouldreviewthevastarrayofdataavailablefrom
WallStreetanalyststhatisnotwidelyreviewedinWashington.Manyinvestmentbankingfirmsconductdetailed
analysesofmajorhealthproviders,bothfortheequityinvestorsinfor-profitcompanies,andforthedebtholders
offor-profitandnon-profitentities.Healthsystemstypicallyprovidetheseinvestorswithclearfinancialdata.
Thesedatacanbeusedbyregulatorsandlegislatorstoassessfundingadequacy,ortheneedforregulatory
reforms.
IaskedCMS'OfficeofResearch,Development&Information(ORDI)togetresearchreportsfromthemajor
investmentfirms,summarizetheiranalyses,andcondensethemintoashort,andhopefully,understandable
format.OurgoalistoprovideobjectivesummaryinformationthatcanbequicklyusedbyCMS,HHS,Congress,
andtheirstaffsthatoverseetheseprograms.TheprimarypersonatCMSassignedtothistaskisLambertvander
Walde,anORDIanalystwhopreviouslyworkedforSalomonSmithBarneyinNewYorkandisexperiencedwith
corporatefinancialanalysisandreviewingcorporateresearch.
This,oursecondreport,focusesonnursingfacilitycompanies.Incomingmonths,wewillreviewthefinancial
andmarketperformanceofhospitals,homehealthagencies,andvirtuallyeverothermajorprovidersector.
ThoughIamproudofthiseffort,andbelieveitwilladdtounderstandingoftheprograms,wewelcomecomments
onthecontentandformatofthisreport.Wewanttomakethisasconsumerfriendlyaspossibleforeveryonewho
[e-mail]
[email protected].
Sincerely,
TomScully
u
t^—**'
HealthCareIndustry
Nursing
C£h7£RSfofMEDICARE&MEDICAIDSERVICES MarketUpdate Facilities
February6,2002
TomScully
Administrator
LambertvanderWalde
OfficeofResearch,Development
&Information
[email protected]
Wall Street's View of Nursing Facilities
Troubledsectorperformsbetterbutitsfutureremainsuncertain
Severalpublicly-heldnursingfacilitycompanies
struggletoemergefrombankruptcy
Investorsexpectthatdemographictrendswillbring
long-termstabilityandreturnsinthenursingfacility
sector
Troubledcompanieswereoftenover-leveragedor
aggressivelypursuinghighlyreimbursedancillary
services,orboth
Followingirrationalpre-BBAMedicarepolicy
incentivesledtothedownfallofmanychains
Post-bankruptcy,de-leveragedcompaniesare
emergingwithimprovednetincomemargins
Companiesemergingfrombankruptcywithclean
balancesheetshaveacompetitiveadvantageover
thosethatdonot
CompaniesthatstucktobasicssurvivedtheSNFPPS
implementation
Not-for-profitsstillstruggletoaccesscapital
Medicarereimbursementismorethansufficient
Medicaidreimbursementisinsufficientinmoststates
Shouldtheadd-onpaymentscontinueinMedicare?
Howmuchshould Medicarecross-subsidizeother
payors?
StateoftheIndustry—EquityMarketPerspective
WallStreetremainsskittishaboutthenursingfacilitysector.Investorswatchednursing
facilitiesstruggleandoftenfailthroughthelate1990'sand2000astheSkilledNursing
Facility(SNF)Medicareprospectivepaymentsystem(PPS)wasimplementedaspartof
theBalancedBudgetActof1997(BBA).Congresstemporarilyadded-onsomeoftheper
diemreimbursementSNFslostunderPPSwiththeBalancedBudgetRefinementActof
1999(BBRA)andtheBenefitsImprovementandPatientProtectionActof2000(BIPA).
WallStreetbelievesthattheseadd-onswerecriticalinhelpingtheindustrygetbackonits
feet.Investor—sfearthattheindustrymaysufferfurtherturmoiliftheadd-onpaymentsare
notextended repeatingtheindustrystrugglethroughPPSimplementation.
Thestockpricesforpublicly-tradednursingfacilitiesrecentlytradeddownonnewsthat
WvaelrlySptoroereltyrteoancteewds tChoengMreedsiscaarleloPwatyhmeeenxtpiArdavtiisonoroyfCtowmomoifstshieotnhr(eMeekdePyApCr)ov1iisnitoennsdosfttohreeBcBomRmAenadndthBaItPA
taaahdldadlvtioitwsMieo$en1Cda.oPl7nAbSgiCNrlleFwisiolsnltino awnduodrr-stoihnnsga.nfa(ecSsieltieitmiAaedsteddd-rO$o1pn.p7Seudbnis1lel2it.o9ns%utomomtnhaeJrasyneucoatnroyrpai1gn7e,fi24s.0c)a0lT2hyweeahsreen2t0wt0oh3e.sMpeSechidafPriecAspCrfoovripsuibolnisclwyi-llhebled
typehaaeyrme.enndtosfttoheexfpiiscraelat rMeecdoPmmAeCnddaidt,iohnowweavsera,nnroeucnocmemdeannddtbhayttChoen2g3rredshsaidncfaolrlpeonrabtye1t6h.e62%0.%(saede—dF-iognurteo1).
ResourceUtilizationGroups(RUG)intothebaserateforfiscalyear2003 retainingan
estimated$1.0billioninaggregatepayments.2
Figure1:NursingFacilityIndexvs.Standard&Poor's500Index,January2002
100%
95%
JNstauorncsukiasnrgyfeFl1la7c,1il22i0.t09y2%.on rESo -S&P500
Q. 90% Nursing
Facilities
CO
85%
80%
Source:NYSE,NASDAQ,TSO,andcompanyfilings.
NursingFacilities:Beverly,Extendicare,Genesis,Kindred,andManorCare,onamarketcapitalizationweightedbasis.
1MedPACisanindependentfederalbodythatadvisestheU.S.CongressonissuesaffectingtheMedicareprogram.
2CMSOfficeoftheActuary
SubsequenttotheMedPACannouncement,JerryDoctrowofLeggMasondowngraded
threeofthefournursingfacilitystockshecoverssaying,"...giventheincreased
uncertaintyoverMedicareratesandthelikelihoodthatanyfinalresolutionof2003rates
maywaituntilthebudgetisapprovedinthesummerorfallof2002,wearenot
recommendingthesestockstoourclientsatthistime,despitewhatappeartobeattractive
valuationsbasedoncurrent2002estimates."Investorpanicandtheresultingsell-offon
"hCaoMvneegdrtPehAseCsfidannoaldessCanyMo,St J"s.ua.gn.guuealsrttyiimo1an7tset,hlymi.aCe.oynMhgeardveesPsAbehCaesndotaehnseonavouettrhlhoyarivhteaysttthoyeirfemiapncallteismoaenyn,atsCooAr.nJgd.riseRrsiescgeaarondfdMMCeerMdrSiPlAldCoL'.y"snRcihcen,otes,
do." however,remindsinvestorsthat,"Somenursinghomeoperatorsthathaverecentlybeen
abletoswingmarginallyprofitablecouldbepushedbackintothered[bytheuncertainty
offundingpolicy]."
WiththeJanuary17thsell-off,investorshavebeengivenfurthercausetobewaryofthe
nursingfacilitysectoratatimewhentheindustrywillbegintoseekcapitalinorderto
expandtoservetheagingUnitedStatespopulation.WallStreetanalystsdonotbelieve
Accesstoequity thiscapitalwillbeavailablewithoutsomeclarityastothefutureofgovernment
capitalisrestrictedby reimbursementfornursinghomecare.A.J.Ricestates,"Ataminimum,theuncertainty
tMheediucnacreertfauinndtiynogf. ansusrosciinagthedomwiethintdhuestsrtya,tumsuocfhthoefMwehdiiccharreemgaiivnes-bfaincaknsciwaillllymtarkoueblietdv,ertoyghaairndafcocretshseto
desperatelyneededcapital....itcouldalsothwarteffortsbysometoemergefrom
bankruptcy."
Thedecisiononhowtofundthissector,indeed,isnotMedPAC's,butCongress's
andCMS'.Theevidenceismixedandcomplex,andthegoalofthisreportistolay
outtheevidencethatispubliclyavailable.
1
Add-OnSunset
AftertheindustrycameunderfinancialpressureasaresultofthePPSimplementationandotherBBAof1997
provisions,Congresspassedtwoactstoprovidesomerelief—BBRAof1999andBIPAof2000.Theselaws
containedprovisionstoassistprovidersastheyadjusttothePPS.
Themajorelementsoftheadd-onsare:
Sec101BBRA1999:
• 2ac"lfn0aods%lsdwiiieflndilccirarneteiatmosonaeitsfhnyoersibtn1ae5esmfe.of,ef"IctttoihrsueneetRlsieitlsmitoimhunaeatrteciedemdpt—UlhtaeitMmleeiozndnatictaceitaoitnrhoeGenrprooaefuyfrpmiesnefeni(mtnReseUnmttGeosin)sSt.sNcoFTimshnpitlwsheiewltleacu—sbreriaermnneptddluRtechmUieesdGn2tbc0eyad%saienin-nemcAsirptexriaimslaetoiefsd2t$0h1u0.s00
billionannually.
• 4%across-the-boardincreaseoftheadjustedFederalperdiempaymentrate(theFederalpartoftherate),
exclusiveofthe20%RUGincrease.Thisisatemporaryincrease,foradurationoftwo-and-a-halfyears,
fromAprilof2000untiltheendoffiscalyear2002andisvaluedatapproximately$600millionannually.
Sec.312BIPA2000:
• i1n6c.r6ea6s%e,infocrreaasdeurianttihoennoufresiignhgtceeonmpmoonntehnst,offrtohmeAcparsiel-moifx20ad0j1usutnetdilFtehdeereanldroatfef.iTschailsyiesaart2e0m0p2oraanrdyis
• v6a.l7u%edinactraenaseesitnimtahteed14$1R.U1Gbilplaiyonmeanntnusalfloyr.rehabilitationtherapyservices.Thisisanadjustmenttothe20%
ruinenthciarlbeiatlshieetagetrniadonntoRefdUfGiisnsc.aBlBTyhReiaAsri21s09a092t9eaamnnpddorisasprbryeuadidgnscerttehaneseeuf,turnfaodlrstadoidtruherecattteoidtoanalto23f0oe%ifgtihhntocesreeenas1me5oniRntUhBGsB,sRftrAooamonfAap1dr9di9il9t.ioofn2al0011
• EinlcirmeiansaetipornovoifdtehdefBorBhAigohfer19p9a7ymMeanrtksetinBfaisskcealtyIenadrex20r0e1duacntdiownaosfr1e.ta0i%nefdorinfitshcaelbyaesaerr2a0te01w.hTehnisCM1.S0%
appliedtheupdateforthefiscalyear2002rates.
T1h5eRiUnGdusstwrhyiicsheawiglelretloihmainvaetethtehsee2"a0d%d-poanysm"eenxttienncdreedasbee,ytohnedintdhueisrtreyxpiisrhaotpiionngorf,orinatCheMcSasdeeolafyt.herefinementof
WallStreetrecognizestheconcernbutanticipatesthatalogicalpaymentschemewilleventuallyemergeandthatthe
publicly-tradednursingfacilitycompaniesaretradingatadiscountduetothedoubtregardinggovernmentpayment.
CreditSuisseFirstBostonstates,"WeconsidertheuncertaintysurroundingthefutureofMedicarePPS
rbeeliimebvuersstehmate,nt".t.o.tbheetinhteemntosotfCsoignngirfeiscasntinrissikgnfaicntgorB.B.R.fAor-t9h9enaunrdsBinIgPAh-o2m0e00indwuasstrtyo."prCorveiddietpSeuirsmsaeneFinrtstreBloisetfotonthe
nursinghomeindustryaftertheseverepainthatwasinflictedbyBBA-97."Italsostatesthat,"Whilethe
BunIcPerAt/aiBnBtRyAissmuonrseettihsaancreofnlceecrtne,dwinecbuerlrieenvtestthoactkrperaiscoens,abalnedrtahtaetsawinlylcelvaernittyuaolnlythbiessiussstuaeiwneodu.l.d.wleikbeelylireevseultthaitntahe
rallyforthegroup."
AahpadpvaeeamwrisFtetnioenssbtseeeildintatotlefpmLrooetvhiimvdaeatrnisoBinrnoortnehceberenshtaaylgefraeoresfs.,CToshntugastri,ensgw,se"tboWeecluitdevoneunrtoshtiatnkgtnhhoeowremwewhiarllteimwmioblslutrhslaiepkmepelenyntbaeftostlholiomswejiuncngoctmtuphrereo,dimbfiufsitcetuhlotenyretwheis
issue."
AccordingtoCMSestimates,theperdiemeffectoftheBBRAandBIPAadd-onscomestoanaverageof$56.25per
dthaey.inIdfutshteryMewidllPAloCseraencoamvemreangdeatpieronditoemalalmoowutnhteonfur$s3i5n.g42c.omTphoenreenmtaiannidntgh$e2a0c.r8o3ssi-stthiee-dbtooartdhein2c0re%asienctroesausneseatn,d,
undercurrentlaw,willceaseoncetheRUGshavebeenrefinedbyCMS.
-5-
Investorsexpectthatdemographictrendswillbringlong-termstability
andreturnsinthenursingfacilitysector
Whilethesectorhasfailedtogeneratestablereturnsasoflate,long-terminvestorsseethe
futuredemandfornursingfacilitiesasalong-terminvestmentopportunity.
Thenursingfacilityindustrycurrentlycomprisesthelargestpartofthelong-termcare
business,withspendingin2000of$92.2billion,withfurtherexpectedgrowthasthe
populationages.Nursingfacilityspendinggrowthactuallydeclinedfrom9.1%in1995to
0.2%in1999andthenincreasedin2000to3.3%.3
AccordingtoCMSdataforJanuary2001,therewere16,944certifiednursingfacilitiesin
theUnitedStateswithanaverageoccupancyof80.91%.Therewere1,834,448totalbeds
intheU.S.Approximately66%ofthebedswereownedbyfor-profitentities,while34%
wereownedbynot-for-profitorganizationsorgovernmentagencies.Theindustryisvery
fragmented,withnodominantproviders.Thelargestprovider,BeverlyEnterprises,
operatesonly3.36%ofthebeds(seeFigures2and3).4
Figure2:TotalU.S.Nursingfacility Figure3:TopTenNursingfacilityCompanies
OwnershipbyBedCount4 byBedCount(18.46%oftotal)4
Government
Anothertrendofwhichpolicymakersshouldbeawareistherisingcasecomplexityin
nursingfacilityadmissions.InanoverviewoftheLong-TermCareIndustry,CreditSuisse
FirstBostonnotesthatthehospitaldiagnosis-relatedgroup(DRG)systemincents
hospitalstodischargepatients,"quickerandsicker,"andthatasaresult,"...acute-care
hospitallengthofstayhassteadilydecreasedtoamedianof4.00daysin1999from4.95
daysin1992,adropof19%."Manybelievethatthishospitaltrendresultsinrelatively
sickeraveragehospitaldischarges,increasingthenumberofpatientsrequiringmore
complexcareandlengthystaysinnursingfacilities.
OnewouldexpectthattheagingAmericanpopulationwouldpresentanopportunityfor
investorsasthehealthcareinfrastructureforseniorswillberequiredtoexpand(see
Figure4).Whileoccupancyaveragesapproximately81%,demandisexpectedtoincrease
theneedforcapacity,especiallywhenthebabyboomersstartreachingretirementagein
2010-2015.
43NCuMrsSinOgffHicoemoefCthoemApcatruearPyr,ovNiadteironFailleH,eJaalntuharStyat2i0s0t1ic,sCGernotuepr,fforreMeesdtaincdaiindg&facSitliattieesOpoenrlaytions
CMS,
Figure4:ProjectedU.S.PopulationGrowthRate
1992-2020
AnnualGrowthRate'
Under65 0.7%
Above65 1.8%
Above85 2.6%
Source:UnitedStatesBureauoftheCensus
(1) CompoundAnnualizedGrowthRate(CAGR)
IndustryPerformance
AttheJanuary2002MedPACmeeting,theCommission'sstaffpresentedtheiranalysisof
themarginsSNFshaveachieved.MedPACforecaststhatfreestandingSNFswillgenerate
2002consolidatednetincomemarginsof-2.0%assumingthatthetwosunsetting
provisionsofBBRAandBIPAadd-onsarenotincluded.FortheirMedicarelinesof
MedPACforecasts business,MedPACforecastsmarginsof9.4%forfreestandingfacilities.Whilethesedata
9m.ar4g%iMnesdfiocrar20e02. aersetiemxattreaspuolsaitnegdsfirmiolmar19m9e9thcoodsotlroegpyo.rtCs,omitpiasntiheesmoinstthceurirnednutstarnydhaisvceonnositsmteandtewiatphraCctMiSce
ofshowingtheiroperatingcostsbrokenoutbypayorinpublicfilings.Theycontendthat
whiletheirMedicaremarginsappearhealthy,theseearningscross-subsidizeMedicaid,
whichpaysatmuchlowerrates,dependingonthestate.Therevenuesreportedtellpartof
thestory.Forexample,ExtendicareHealthServices(TSE&NYSE:EXE.A)averaged
$304perMedicarepatientperdaywhilegetting$112perMedicaidpatientperday.While
Medicarepatientsaremorecostlytotreat,thenetresultisthatnursingfacilitieswithany
imbalancetowardMedicaidexposurearestruggling.
Despitethedifficultiesinthelate1990s,thepublicly-heldnursingfacilitycompaniesare
beginningtoreturntoprofitability.KindredHealthcareInc.(NASDAQ:KIND),which
Publicly-heldnursing emergedfrombankruptcyproceedingsinAprilof2001,reporteda14.2%marginonits
facilitycompaniesare earningsbeforeinterest,taxes,depreciation,amortization,andrent(EBITDAR)forthe
bpreogfiitnanbiilnigtyt.oreturnto qHueaarlttehrVeenndtiunrgesS,epIntce.m(beNrAS30D,A2Q0:01.GHKViEnd)r,edwhailscohraelpsoorrteecdeantploysietmievregneedtifnrcoommeb.anGkernuepsticsy
de-leveraged,isgeneratingpositiveEBITDARandisexpectedtogonetincomepositive
inthenextquarter.Figure5showsincomestatementsummariesforbothofthese
companiesandalsoBeverlyEnterprisesInc.(NYSE:BEV)andManorCare,Inc.(NYSE:
HCR),twocompaniesthatmanagedtoavoidbankruptcy.
-7-
Figure5:Publicly-HeldNursingFacilityCompanyIncomeStatementSummaries
LargestFor-ProfitSkilledNursingFacilityChains
ResultsofOperationsandMargins
ThirdQuarter2001
($000's) Beverly(BEV) Genesis(GHVE)
Revenue $690,875 - $660,095
EBITDAR 91,338 13.22% 62,037 9.40%
EBITDA 63,929 9.25% 49,410 7.49%
EBIT 40,560 5.87% 22,203 3.36%
EBT 21,950 3.18% 1,868 0.28%
NetIncomebeforePreferredDividends 12,073 1.75% 1,868 0.28%
NetIncometoCommon $12,073 1.75% $(9,631) (1.46)%
Kindred(KIND) ManorCare(HCR)
Revenue $768,680 $687,639
EBITDAR 109,476 14.24% 99,268 14.44%
EBITDA 47,162 6.14% 94,718 13.77%
EBIT 30,394 3.95% 61,621 8.96%
EBT 26,081 3.39% 50,556 7.35%
NetIncomebeforePreferredDividends 14,799 1.93% 31,218 4.54%
NetIncometoCommon $14,799 1.93% $31,218 4.54%
Source:Publicfilings,companyinformation,andWallStreetestimates
Note:Incomestatementdatapresentedonaconsolidatedbasisandincludesnon-nursingfacilitylinesofbusiness
CAsTS,
-8-
StateoftheIndustry—DebtMarketPerspective
Ifthenursingcomponentandtheacross-the-boardadd-onssunset,theindustryreduction
cBroeonincmdebruannraesldeymstehtnasttare oavfetrhaegtiengmpaoprparroyxiamdadt-eolnys$w3o3u8l)d.bWealalnSatvreeretagheigphe-ryideiledmbaomnoduanntaloyfst$s3,5w.h42o(loonokabatasneursing
reductioncould facilitycreditworthiness,areconcernedthatthisreductioninreimbursementcouldhavea
restrictaccessto verynegativeimpactonnursingfacilitycompanycreditprofilesandtheirabilitytoaccess
capital.
capital
Figure6demonstratestheimpactofaslightlyloweraverageratereductionof$30.00per
dayonthreestatisticsthatbondanalystsandinvestorslookatwhenevaluatinga
company'sabilitytopayitsdebtserviceandotherobligations.Thestatisticsare:
• EBITDAR-earningsbeforeinterest,taxes,rent,andnon-cashcharges(depreciation
andamortization).EBITDARshowscashflowavailabletopayinterest,rent,and
taxesafterpayingoperationalcosts.EBITDARisusedtomakeapples-to-apples
comparisonsbetweencompaniesbecausemostcompaniesfinancetheirbusinesses
differentlyanditrepresentsearningsbeforefinancingcosts.5
• RentAdjustedLeverage-measureshowmuchthecompanyhasborrowedor
obligatedthroughleasesasamultipleofthecashflowavailabletopaysuchdebt
serviceandleasepayments.Theruleofthumbistha—tatarentadjustedleverage
multipleof5xitisverydifficulttoraisenewcapital at6xitisnearlyimpossible.
• FixedChargeCoverage-indicatesthecompany'sabilitytopayrentandinterest
basedontheamountofcashflowremainingaftercapitalexpenditures.Analysts
considera2xfixedchargecoveragetobetheminimumrequiredtoraisecapital.
Figure6:Impactofa$30.00AveragePerDiemReduction
ThirdQuarter2001 StatisticsAssuming$30.00
(Annualized) CurrentStatistics AveragePerDiemReduction
Adjusted NetRent Adjusted NetRent Fixed
EBITDAR Adjusted FixedCharge EBITDAR111 Adjusted Charge
Company Margin Leverage12t Coverage(3> Margin Leverage121 Coverage,3'
BeverlyEnterprises 13.2% 4.2x 1.5x 11.6% 4.9x 1.2x
ExtendicareHealthServices 11.9 5.2 1.5 10.1 6.1 1.2
GHeCneRsiMsaHneoarltCharVeentures 194.44 32..54 23..37 182..24 42.91 21..99
MarinerPostAcuteNetwork 10.8 3.7 1.6 8.9 5.9 1.3
KindredHealthcare 14.2 5.4 11 13.9 5.9 1.1
Average 12.3% 4.1x 2.0x 10.8% 5.0x 1.6x
Source:CompanyreportsandWallStreetestimates
(((t23)))ENFeiBxtIedRTeDCnhAtaRArdgijesuEsCatorevndeirnLagegsveeBreafg(oerEeB=II(nTtNeeDrtAesRLt.o-nTCgaaxTp,eeDrxe)mpr/De(ecRibeatntit+oEn8,xxpARemneosrmetiE*zxaNpteeintosnI,en)tRe/ernEetsB,t)IaTndDAunRusualorextraordinaryitems
Figure6illustratesthatapplyingaratedropof$30.00totheMedicarepatientperdiem
Aperdiemratedrop forseveralofthelargeproviderscreatesaonepointaverageincreaseinrentadjusted
foaifcnc$ae3ns0csiwntogouddliedfbfimtcaulktefor tleervreirtaogrey,.mEaxtkeinndgicfaurret,heMradreibnterf,inaanndciKnigndverreyddwoouubltfdulm.oFviexeidntCoh6axrgreentcoavdejruasgtee,dcluervreernatgley
mostoftheindustry. averaging2xforthesector,woulddropbelowthatlevelforallcompaniesbutManor
Care.
5Note:TheEBITDARmarginisnotthesameasanetincomemargin.Anetincomemarginisearnings(profits)
afterallotherobligationshavebeenmet,dividedbynetrevenues.MedPAChasestimatedthatthenetincome
marginforallfreestandingSNFsisalossof-2%.
1
For-profit,publicly-heldcompanies
Themajorpublicly-tradedcompaniesinthenursingfacilitysectorareManorCare,Inc.,
BeverlyEnterprisesInc.,ExtendicareHealthServices,Inc.,KindredHealthcareInc.,and
GenesisHealthVentures,Inc.KindredandGenesisbothemergedfrombankruptcyin
2001.IntegratedHealthServices,MarinerPost-AcuteNetwork,andSunHealthcarewere
publicly-tradednursingfacilitychainsthatarecurrentlyundergoingChapter1
bankruptcyrestructuring.
Troubledcompanieswereoftenover-leveragedoraggressivelypursuing
highlyreimbursedancillaryservices,orboth
AdamFeinsteinofLehmanBrothersrecountedtherecenthistoryoftheindustryina
recentreport:
"Nursinghomespendinggrewrapidlythroughoutthelate1980sandintothemid-
1990s,representing$85billioninannualexpendituresin1997,versusonly$45billion
in1989(34%CAGR[(CompoundAnnualizedGrowthRate)]from1988to1994).
ThekeycatalystforthisgrowthwasachangeinMedicarereimbursement
guidelinesthroughOBRA-87withthefederalgovernment:(1)expandingthe
availabilityofthenursinghomebenefit,leadingtoincreasedbeneficiaryutilization,
and(2)creatingacost-basedreimbursementsystem,includingancillaryservices
providedatanursinghome.Nursinghomeoperatorsexpandedancillaryservice
offeringstotakeadvantageofthisnewsystem,leadingtoadramaticincreasein
physical,occupational,andspeechtherapycosts.Asaresult,theindustry
prosperedduringthatperiodandwasdeemedthemostattractiveandfastest-
growthhealthcaresegment.However,BBA-97changedtherulesofthegamewith
theimplementationofaprospectivepaymentsystem.Asaresult,[therateofgrowth
in]governmentspendingsloweddowndramatically,causingmanynursinghome
operatorstofileforbankruptcy.Nonetheless,providersreceivedsomemajorrelief
fromthegovernmentwithMedicaregive-backsenactedthroughBBRA-99andBIPA-
00,implyingthatgovernmentreimbursementcutshadbeentooseverein1997.Thus,
wehavejustenteredtheearlystagesofthenextbigupcycleinMedicarespending."
Thisistheopenpolicyquestion:shouldMedicareenterabigupcycle?
-10-