Skilled Nursing Home Facilities The Challenges of the 21st Century

Skilled Nursing Home Facilities The Challenges of the 21st Century

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In the late 90s, the health care industry, particularly the skilled nursing industry, was plagued by financial difficulties with many industry players taking advantage of the protections of the Bankruptcy Code. For example, as discussed below, within a one-year period, several large industry players—Sun Healthcare Group Inc., Integrated Health Services Inc., Genesis Health Ventures Inc., Vencor Inc. and Mariner Post-Acute Network Inc. (to name a few)—sought bankruptcy protection in Delaware. Ultimately, these companies emerged from chapter 11. Some emerged as leaner companies by shedding their unprofitable facilities through sales or closure and restructuring their debt; while others liquidated and sold their assets with the proceeds distributed to the creditors.

Since then, the performance of the health care industry has improved and yet again attracted investors. Many of the more successful health care companies have focused their operations on the growth areas of Continuing Care Retirement Communities (CCRCs), independent living facilities (ILFs) and/or assisted living facilities (ALFs). So, have we seen the end of health care bankruptcy filings? The answer is clearly "no." Many health care companies continue to face the financial difficulties that have plagued the industry. In particular, those smaller health care companies whose operations are comprised exclusively or primarily of skilled nursing home facilities continue to struggle with the financial and competitive pressures. In this article, we explore some of the inherent pressures these entities face in today's market and some potential solutions.

The Long-term Care Industry in the Late '90s and Early 2000

On Sept. 13, 1999, Vencor Inc. filed for chapter 11 protection in the U.S. Bankruptcy Court for the District of Delaware. At the time, Vencor was the largest operator of long-term care facilities within the United States, operating 293 skilled nursing centers in 46 states. From October 1999 through June 2000, Vencor was followed into bankruptcy by the next four largest operators of skilled nursing facilities in the United States: Sun Healthcare Group Inc., Mariner Post-Acute Network Inc., Integrated Health Services Inc. and Genesis Health Ventures Inc. These five companies pointed to the financial impact of The Balanced Budget Act of 1997 (BBA) as the reason for their bankruptcy filings.

Prior to the BBA, skilled nursing homes were reimbursed for 100 percent of costs incurred for care provided to individual patients. Congress' specific concern in enacting the BBA was to eliminate the nursing homes' alleged incentive to commit fraud by providing unnecessary services to patients and receiving full reimbursement for those services. Instead of a full reimbursement policy, Congress created a prospective reimbursement policy, capping the total amount reimbursable for services provided to an individual patient.2 To illustrate, according to Mariner, the BBA reduced the Medicare reimbursement rate by $115 per patient.3 In addition, the BBA created predetermined rates of reimbursement to the skilled nursing facilities, thereby limiting the amounts paid for certain services, regardless of the actual cost.4 Ultimately, many of the chapter 11 cases filed in late 1999 to 2000 resulted in reorganizations or sales. The "second wave" of chapter 11 filings, expected to follow the initial flood, never really occurred.

The Ongoing Struggles of the Skilled Nursing Facilities

With this refocusing within the industry, those health care companies with significant skilled nursing operations experienced financial pressures due to, among other things, competition from more attractive alternatives to the traditional skilled nursing facilities (i.e., CCRCs, ILFs and ALFs), aging facilities and a lack of resources to modernize, the ongoing financial pressures of Medicaid reimbursements, and the increased competition for competent staff. Many of these skilled nursing providers found themselves unable to effectively compete in the marketplace. Many lacked the financial resources to modernize facilities and expand services to CCRCs or ALFs or acquire such facilities in order to diversify their business. Creating a snowball effect, the skilled nursing providers are then unable to attract private pay and Medicare patients, more apt to choose CCRCs and ALFs, and are then unable to compete for staff due to inherent budget limitations. Altogether, the current climate in the skilled nursing care industry remains difficult for those companies with significant skilled nursing operations. Below, we discuss the various pressures facing skilled nursing facilities today.

Alternative Nursing Facilities

The emergence of alternative assisted living facilities is perhaps the single greatest pressure facing skilled nursing care providers today. In the early- to mid-20th century, only one true form of assisted living facility existed: the traditional skilled nursing care facility. However, in the late 20th century and now the early 21st century, new forms of assisted living facilities exist. These assisted living facilities provide a flexible level of care and more traditional lifestyle that is often unavailable at a traditional nursing home. These institutions have increased the competition for self-funding, financially viable patients. As the baby boom generation ages, its members often choose to move into CCRCs or ALFs and shun traditional skilled nursing homes. For those with the financial wherewithal, the home health care providers are yet another alternative to the traditional nursing facility.

Consequently, nursing homes' already dwindling market share has decreased even more. Due to the expansion of ALFs and CCRCs, the percentage of Medicaid patients at traditional skilled nursing facilities has increased even more, leaving skilled nursing homes with patients at low Medicaid reimbursement rates but high needs in terms of care. Therefore, skilled nursing facilities see their expenses rising with their revenue declining or, at best, remaining flat. Skilled nursing facilities that are part of a larger continuum of care community may be able to absorb these costs. Stand-alone nursing homes or companies consisting primarily of nursing homes are often unable to absorb these costs.

The Trickle-down Effect

To be profitable or at least break even, a skilled nursing facility needs to modernize its facility or expand the services to attract the proper mix of private pay, Medicare and Medicaid patients and to continue to increase or maintain patient census. With the advent of CCRCs and ALFs, many potential nursing home residents would rather move into these newer, more modernized facilities than suffer the stigma associated with living in "nursing homes." Consequently, a "trickle-down" effect is created as the patient's health deteriorates and more care is needed. Patients may start by paying the fees associated with a CCRC. As their health fails, they may move into an ALF that provides more critical and consistent nursing care. Finally, as their health fails altogether, they may finally be forced to move to a skilled nursing facility. For a CCRC, this model may work. But for a health care company with operations focused primarily or exclusively on skilled nursing homes, they are left to care for the sickest, most frail patients who require the most expensive care. The skilled nursing facility is left to depend on Medicaid for reimbursement. In order to absorb the costs associated with caring for a Medicaid patient, the nursing home must be able to attract a sufficient number of private pay and Medicare patients to subsidize the unpaid expenses.


One of the primary problems plaguing the nursing home industry continues to be Medicaid reimbursements—both the dollar amount and the timing. Medicaid remains the primary source of revenue within the skilled nursing industry. Consequently, any reductions in Medicaid reimbursements or delays in payment will likely have a dramatic effect on a skilled nursing facility's financial performance.

In addition, Medicaid reimbursements are often increased or decreased with little to no warning. For example, in Illinois, from 1994 to 2002, the average costs at nursing homes increased by 51 percent.5 By contrast, Medicaid rates paid to the facilities only increased 29 percent.6 In 2002, Gov. George Ryan proposed a 8.8 percent reduction in Medicaid funding to Illinois nursing homes, totaling $171 million, illustrating the large fluctuations Medicaid can undergo at the behest of state regulation.7 Recently, Illinois increased the Medicaid rates by 6 percent, but Illinois facilities are still expected to struggle.

In order to counteract the financial impact of Medicaid in the nursing home market, skilled nursing facilities must modernize and expand their service offerings to increase the number of private pay and Medicare patients to offset the Medicaid losses. This requires a significant investment and a focused and aggressive marketing campaign for patients that is often impossible with the budgetary restrictions facing the nursing homes. With so much competition from larger and more diversified facilities, the skilled nursing facilities find themselves in the proverbial Catch 22, needing more Medicare and private pay customers, yet unable to compete for their business.

Staff for the Skilled Nursing Facility

Skilled nursing facilities also suffer from high overhead costs and the inability to hire and maintain their staff. Across the industry, there is a shortage of nurses. Consequently, while Medicaid reimbursements remain flat, decrease or increase at insufficient levels, the cost of caring for the patients increases, and the ability to find and keep nurses at these facilities is a difficult obstacle for the skilled nursing home.

Obsolete Facilities

Many skilled nursing facilities lack the modern amenities of a CCRC or ALF. While adult children increasingly seek first-rate, progressive homes for their parents, these nursing homes lack sufficient funding to modernize their facilities, again impeding their ability to compete for market share. Often, a potential client, given the choice of a modern, private CCRC or a skilled nursing facility, will not even consider the nursing facility.

Potential Options and Solutions

1. Partnership. One possible solution for a struggling skilled nursing facility is to partner with another facility or with a CCRC or ALF with skilled nursing needs. For example, if a nursing home has a small market share in a particular community, it could acquire or combine with another facility in that market. The combined facility may form one profitable entity.

2. Creating a Core Business. Some skilled nursing facilities may have particular programs or areas in which they excel. In order to sustain financial viability and assuming the facility can operate these programs profitably, these facilities should identify those areas in which they are particularly strong, place the bulk of their financial resources in those areas and aggressively market their strengths. For instance, a facility may have a strong Alzheimer unit. In that case, the facility may realize greater profits in marketing itself as a renowned Alzheimer care facility, rather than simply a general care facility. If such changes are made to program offerings, the facility will necessarily reduce other programs that are not profitable, but will have to expend resources to obtain sufficient staffing for the new program (or focus of the facility). If the economics of the program and the marketing for the program are successful, the facility's census and profitability should increase.

3. Modernization. As discussed above, modernization and program expansion requires significant financial resources. Skilled nursing facilities must take an aggressive, proactive approach to raising money for capital improvements and expansion of services in order to create a more competitive facility. In particular, communal living arrangements must be eliminated, no longer representing a viable alternative to private care afforded by CCRCs, ALFs and through HHPs. Without such capital infusions, many nursing facilities will lack the essential elements necessary to compete with those facilities with modern amenities offering a broad range of services.

4. Market, Market, Market. Skilled nursing facilities must aggressively market themselves within their geographic region. Such a marketing campaign will require a thorough strategy, financial support and sufficient resources to proliferate the information. Without actively promoting the product throughout their communities, these facilities will fail to compete with the more diversified CCRCs, ALFs and HHPs.

Predicting the Future

The health care industry continues to be both a growth area and a challenge—particularly for skilled nursing facilities. In recent times, the nursing home industry has expanded to include CCRCs, ALFs and HHPs. While many national entities have endured financial hardship, some have survived through a recreation of their businesses into more modern-day alternatives such as CCRCs and ALFs. However, many health care companies with operations focused primarily or exclusively on skilled nursing facilities often lack the resources and infrastructure to undertake such restructurings. Consequently, most private pay patients flock to the CCRCs and ALFs, leaving the skilled nursing care facilities with primarily Medicaid patients, which typically bring low reimbursement rates and high care requirements. In order to survive in this new, highly competitive market place, skilled nursing homes must obtain the capital necessary to modernize their facilities and expand services in order to attract an appropriate payor mix and maintain or increase the patient census.

Many of the more successful health care industry players reinvented themselves by shifting their focus from traditional skilled nursing facilities to CCRCs, ILFs and ALFs. By shifting focus from historically money-draining ventures such as skilled nursing facilities to more profitable services such as CCRCs, ILFs and ALFs, many providers have been able to attract investors, improve their facilities and return to financial growth. Nevertheless, with the continuing struggles and uncertainties within the health care industry, particularly in skilled nursing, we can expect additional bankruptcy filings and restructurings involving the smaller skilled nursing facilities.


1 Board Certified in Business Bankruptcy Law by the American Board of Certification. Return to article

2 Martin, Natalie D. and Rourke, Elizabeth, "Les Jeux Ne Sont Pas Faits: The Right to Dignified Long-term Care in the Face of Industry-wide Financial Failure," 10 Cornell J.L. & Pub. Pol'y. 129, 134-137 (2000). Return to article

3 "Mariner Post-acute Network Files Chapter 11," 2 No. 8 Andrews Nursing Home Litig. Rep. 9. Return to article

4 Id. Return to article

5 See Return to article

6 Id. Return to article

7 Id. Return to article

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Tuesday, March 1, 2005