Symptom of an Ailing Industry : Care’s Bankruptcy Focuses Attention on Nursing Homes

The bankruptcy of Tustin-based Care Enterprises has focused attention on the financial plight of the nation’s nursing home operators, many of whom are adopting crisis strategies to contend with runaway expenses and reduced revenues.

Soaring labor costs, burdensome debt loads caused by over-ambitous expansions, competition from acute-care hospitals and a government-dependent payment structure are causing profits to plummet at a number of major nursing home companies.

Their responses range from reductions in administrative staffs, heightened competition for a limited pool of well-heeled patients and the recruitment of nurses from foreign countries.

Chapter 11

Care, which operates 103 nursing homes in six states, sought protection from its creditors under Chapter 11 of the federal bankruptcy code last week after trying unsuccessfully for three months to restructure its debts.

Founded in 1965, Care grew rapidly to become one of the 10 largest nursing home chains in the nation. In 1985, the company embarked on an aggressive program to expand its holdings and expand outside of California by acquiring 35 nursing homes from a company called Americare.

“Care is probably one of the first major fallouts of what is a general problem,” said Paul Willging, executive vice president of American Health Care Assn., a Washington lobbying group representing about half of the 19,000 nursing homes in the country.

“It is unfortunate that it takes something like a bankruptcy of a very large nursing home chain to force this issue into the public consciousness.”

While Care’s troubles appear to be among the most acute, other nursing home chains have seen once-healthy profits dive or disappear entirely.

Beverly Enterprises, a Pasadena firm that operates the nation’s largest nursing home chain, reported a loss of $30.5 million for 1987, contrasted with a profit of $44 million a year earlier. As recently as 1985, Beverly posted record earnings of $59.8 million.

Because of its financial problems, Beverly may be forced to redeem $148 million in notes in September. To raise the necessary funds, the firm said it may sell more than 150 of its 1,052 nursing homes and mortgage some of the remaining properties.

Los Angeles-based National Medical Enterprises, owner of Hillhaven Corp., the nation’s second-largest nursing home chain, reported last week that operating profits from its nursing homes fell 36% to $40.5 million during the first nine months of its 1988 fiscal year.

The problems afflicting operators like Beverly and Care prompted industry analyst Lindsay Rosenwald, with the brokerage firm of D.H. Blair & Co. in New York, to describe nursing homes as “an industry whose time came and passed years ago.”

Rosenwald, a physician, stopped encouraging clients to invest in the nursing home industry in the early 1980s and said that now he “wouldn’t touch it with a 10-foot pole.”

Yet others said an expected increase in the need for geriatric health care--fueled by the inexorable aging of the American population--could persuade Congress, the states and private insurers to provide nursing homes with some form of financial relief.

Industry analysts said the nursing home industry is a victim of runaway inflation, in part self-inflicted.

Edwin Gordon, an analyst at the securities firm of Tucker, Anthony & R.L. Day in New York, said some operators are suffering the effects of a rush of acquisitions and consolidations in the early 1980s, when chains gobbled up many mom-and-pop operations.

Fortunes were made as some nursing homes originally acquired for $15,000 a bed were resold two or three years later for as much as $35,000 a bed, Gordon said.

Price Increase

Prices for nursing homes rose on the premise that the nation’s elderly population was destined to burgeon, creating an insatiable demand for long-term convalescent care. To cover the cost of the acquisitions, facilities raised their rates.

“People seemed to forget there was another side of the equation: who would pay the bill,” Gordon said.

About four years ago, state and federal governments clamped down, refusing to allow nursing home companies to pass on the full cost of acquisitions that had left some companies, such as Care, highly leveraged.

At the time, most nursing home operators didn’t realize that labor costs would suddenly soar in response to severe shortages of both licensed nurses and unskilled labor and that increases in government reimbursements would lag far behind.

Because nursing homes typically charge private patients $50 to $80 a day and the federally administered Medicare program covers only 30 days of nursing home care on average, most long-term convalescent patients quickly exhaust their own financial resources.

As a result, they generally enroll in Medicaid, a state-administered medical insurance program for the elderly poor. Nationally, about 65% of nursing home patients participate in Medicaid programs, which provide reimbursements averaging about $55 a day.

Costs Rising

Frank Ruffo, senior vice president of administration for Hillhaven, said his company’s operating costs have risen about 7% over the past year. During the same period, reimbursements from Medi-Cal, California’s Medicaid program, have averaged 2% to 3%. “The long and short of it is a pinch on our operating profit,” he said.

While utilities, food and other overhead expenses also are rising, labor costs have outstripped them all.

“The nursing home industry has been under siege now for a year by cost increases that are almost exclusively labor,” said Margo Vignol, an analyst with Salomon Brothers in New York.

Ruffo said Hillhaven’s labor costs in the past 12 months have risen 10% to 12%, and the end isn’t in sight. In 1988, he said, the company expects that its payroll costs for nurses will rise 15% to 17% over this year.

American Health Care Assn. spokeswoman Linda Keegan said proposed federal legislation to increase the minimum wage could have a pronounced effect on nursing homes, where about one-third of all nurses aides earn the minimum wage.

Depending on the extent of the “ripple effect” on higher wage categories, Keegan said, the association calculates that passage of the legislation would boost industry labor costs by $500 million to $6.8 billion a year.

Labor Costs Up

The primary cause of soaring labor costs has been worker shortages, which may worsen in the wake of the passage of the federal Nursing Home Quality Reform Act in December. The law requires nursing home operators to increase the number of nurses on their staffs and to impose more stringent training requirements for nurses aides.

Operators contend that more pressure has been placed on their staffs by the increasing tendency of hospitals to cut costs by releasing patients earlier to nursing homes for recovery and rehabilitation.

At the same time, nursing home officials complain that hospitals have been converting vacant acute-care beds to convalescent beds to siphon off the most lucrative nursing home business: short-term patients insured by the federal government’s Medicare program.

In California, the number of such “swing” hospital beds has increased from 800 in 1984 to 5,800 now, according to the California Assn. of Health Facilities. New Medicare legislation designed to reduce costs, however, will require hospitals to send all eligible patients to nursing homes as soon as beds are available.

Across the nation, nursing homes are faced with a severe shortage of nurses caused in part by a decline in nursing school graduates. The problem is compounded by the preference of most nurses to work for hospitals, where RNs earn salaries averaging 23% more than those paid by nursing homes, Keegan said.

To fill the gaps in their nursing staffs, nursing homes are calling on nurse registries, temporary placement services that frequently charge far more than the hourly wages that nursing homes pay their own nurses.

Shortage of Nurses

“For some reason, Orange County has one of the greatest nursing shortages in the nation,” said Michael Ball, administrator of Nurse Finders of Orange County.

In the past year, Ball said, his company’s nursing home temporary placement business has increased 30%. He said he pays his RNs 40% to 50% more than nursing homes pay comparable workers because his benefits are not as extensive.

Ball said nurse registries and nursing homes have a “love-hate relationship. . . . They love us because we are able to fill their needs, but they hate us because we destroy their budgets and our nurses recruit their nurses.” He said he doesn’t encourage such recruitment.

Nursing homes have also been forced to raise wages paid to semiskilled laborers such as nurses aides, housekeepers and kitchen help, many of whom could earn comparable or better pay working for hospitals, hotels, golf courses and fast-food outlets.

Nursing home officials said low unemployment, particularly in vibrant economic areas of the Northeast and West Coast, is pushing up wages for those workers.

“Clearly, a recession and more unemployment would help us,” said Hillhaven spokesman Paul Russell.

Foreign Nurses

Virginia Ortis, who supervises staff recruitment for Hillhaven in New England, said she has begun recruiting nurses from England, Scotland, Ireland and Sweden and is considering extending her efforts to Thailand. Ortis said Hillhaven will pay air fare to the United States and housing expenses for two months while the foreign nurses get settled.

To attract nurses aides and other workers, Ortis said she has also begun recruitment programs aimed at New England’s settlements of Haitians, Cambodians, Hispanics and Portuguese. Those programs include classes in English as a second language.

She said Hillhaven is also beginning to establish day-care centers in nursing homes to supervise the children of staff members.

“Training is a key to recruitment and retention (of workers) these days,” said Jim Paxton, vice president of human resources for Beverly Enterprises.

The objective, Paxton said, is to make nursing home work a satisfying, long-term career. That’s no small task, since Beverly’s annual turnover rate averages 83% for service employees such as kitchen workers and nurses aides and 70% for nurses.

Beverly has begun to establish regional employment and training centers throughout the country for nurses aides, partly in anticipation of new federal requirements. The firm also has announced a joint agreement with the American Red Cross to develop a training program leading to the certification of nurse assistants. The program is intended to be used as a national model by other nursing home operators.

Private Patients

Nursing homes also are doing whatever they can to attract more private-payment and Medicare-reimbursed patients. Those efforts range from adding hotel-like comforts to building new facilities in affluent communities.

In turn, they are trying to minimize the number of patients who depend on Medicaid.

One of the most successful examples of this selective marketing effort is Manor Healthcare, a division of Manor Care Inc. of Silver Springs, Maryland. Jim Clifford, Healthcare vice president of development operations, said the company has raised the portion of private-payment patients to 60% at its 148 facilities, contrasted with an estimated industry average of 30% to 40%.

Clifford said the company has attracted private-payment patients by gaining a reputation for quality nursing care and by placing its homes in “upscale markets.” Manor Healthcare has one of the most ambitious expansion programs in the nursing home industry, building at a pace of about 20 facilities a year.

In choosing construction sites, Clifford said, the company does “a tremendous amount of market research” to look for areas with a large elderly population and a growing economy. He said studies have shown that 80% of nursing home patients choose a facility within six miles of where they or their relatives live.

Clifford said the company attempts to build well-appointed facilities featuring, for instance, wallpaper rather than institutional green paint. Some facilities, he said, offer different levels of accommodations. The highest level, called Williamsburg, provides a private dining room where residents who pay $100 to $130 a day enjoy fine linen, china and crystal and order dishes prepared by a chef.

Payment Shortfall

Attracting private patients is especially important, Clifford said, in states such as California, Texas, Illinois and Oklahoma, where Medicaid reimbursements often are insufficient to cover the cost of patient care. In those areas, revenues from private-payment patients are used to subsidize Medicaid patients.

Ken Eckery, spokesman for the California Assn. of Health Facilities, an industry lobbying organization in Sacramento, said Medi-Cal reimbursements for nursing home care average $48.90 a day, about $7 a day less than the cost of providing the care.

But the cost crunch is not the same throughout the state, primarily because labor costs vary.

“In a small town, the California (Medi-Cal) rate is probably profitable,” said Robert Van Tuyle, Beverly Enterprises chairman. But that would not be the case in downtown Los Angeles or Orange County, he said.

Van Tuyle said Beverly’s nursing home in Laguna Hills seeks to maintain a patient mix of 80% private pay, 10% Medi-Cal and 10% Medicare. To do so, he said, the facility refuses to admit additional Medi-Cal patients, although by law, patients who shift from private pay to Medi-Cal are allowed to stay.

Van Tuyle said Medi-Cal’s “flat-rate” reimbursement system, which makes no distinctions regarding the physical condition of patients, causes nursing homes to try to avoid “heavy-duty patients” who need a lot of care.

‘Choosy’ Homes

Bonnie Brunet, owner of a San Juan Capistrano firm that specializes in finding long-term care for the elderly, said that because most nursing homes are nearly full, they tend to be choosy.

“We turn away hundreds each week that we can’t help,” she said. “It is difficult to find a home, particularly if you are on Medi-Cal. It’s a lousy situation.”

Nursing home officials acknowledge that the clients they are trying hardest to attract--the elderly who can afford to pay out of pocket for long-term care--represent only a fraction of those who need such care.

But they say they are hopeful that a combination of private insurance and increased government support eventually will make serving the larger population profitable.

Willging said the American Healthcare Assn. is supporting legislation being drafted to set up a new public-private partnership for financing long-term care for the elderly. Under one plan, he said, the government would require an individual to finance such care for two years, after which the government would pick up the tab.

By limiting a patient’s financial responsibility to two years, Willging said, it would be feasible for many people to purchase insurance for long-term care--either in nursing homes or the home--that is priced within reason.

“We definitely see long-term care insurance as a product whose time has come,” said Dona Desanctis, spokeswoman for the Health Insurance Assn. of America. In the past two years the number of insurance companies offering such coverage has grown from only a handful to 70, she said.

Desanctis said the cost of such insurance ranges from $300 to $1,500 a year and is expected to decrease as more people buy it. She said the association hopes that long-term nursing care insurance “will become an employee benefit the way that dental and medical insurance is.”