Nursing Homes: Aggregate Medicare Payments Are Adequate Despite
Bankruptcies (Testimony, 09/05/2000, GAO/T-HEHS-00-192).
Pursuant to a congressional request, GAO discussed the causes of the
bankruptcies of large corporations owning nursing homes and the
implications for nursing home residents, focusing on: (1) the adequacy
of Medicare's payment rates for skilled nursing services furnished in
nursing homes; (2) the relationship between the changes wrought by the
Balanced Budget Act and recent nursing home bankruptcies; and (3) what
exists to protect patients.
GAO noted that: (1) aggregate Medicare payments for covered nursing home
services likely cover the cost of care needed by beneficiaries, although
some refinements to the payment system are needed; (2) Medicare policy
changes have required many nursing homes to adjust their operations; (3)
the adjustments have been particularly disruptive for homes that took
advantage of Medicare's previous payment policies to finance inefficient
and unnecessary care delivery and for those companies that invested
heavily in the provision of ancillary services (such as rehabilitation
therapies) to nursing homes; (4) the problems experienced by some
providers of nursing home and ancillary services are therefore the
result of business decisions made during a period when Medicare
exercised too little control over its payments; (5) filing for
bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code
allows these providers time to restructure their debts and streamline
their operations while continuing to care for their nursing home
residents; and (6) should any of these providers not emerge from
bankruptcy, however, the nursing homes will be sold or the residents may
have to find alternative care arrangements.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: T-HEHS-00-192
TITLE: Nursing Homes: Aggregate Medicare Payments Are Adequate
Despite Bankruptcies
DATE: 09/05/2000
SUBJECT: Patient care services
Nursing homes
Health care cost control
Health care programs
Medical services rates
Bankruptcy
Skilled nursing facilities
Health services administration
IDENTIFIER: Medicare Program
Medicaid Program
******************************************************************
** This file contains an ASCII representation of the text of a **
** GAO Testimony. **
** **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced. Tables are included, but **
** may not resemble those in the printed version. **
** **
** Please see the PDF (Portable Document Format) file, when **
** available, for a complete electronic file of the printed **
** document's contents. **
** **
******************************************************************
GAO/T-HEHS-00-192
For Release on Delivery Expected at 2: 15 p. m. Tuesday, September 5, 2000
GAO/ T- HEHS- 00- 192
NURSING HOMES Aggregate Medicare Payments Are Adequate Despite Bankruptcies
Statement of Laura A. Dummit, Associate Director Health Financing and Public
Health Issues Health, Education, and Human Services Division Testimony
Before the Special Committee on Aging, United States Senate
United States General Accounting Office
GAO
Page 1 GAO/ T- HEHS- 00- 192
Mr. Chairman and Members of the Committee: I am pleased to be here today as
you discuss the causes of the bankruptcies of large corporations owning
nursing homes, particularly whether recent Medicare payment reforms affected
the bankruptcies, and implications for nursing home residents. Those payment
reforms, set forth in the Balanced Budget Act of 1997 (BBA), were enacted to
control rapid spending growth for Medicare- covered services furnished in
nursing homes- spending growth that was neither sustainable nor readily
linked to demonstrated changes in beneficiary needs. The reforms altered the
financial incentives inherent in the former cost- based payment system to
reward providers for delivering care efficiently.
Since the BBA provisions were implemented, five large nursing home chains-
comprising almost 1,800 of the nation's 17,000 nursing homes- have filed for
bankruptcy protection under Chapter 11 of the U. S. Bankruptcy Code. These
bankruptcies and the large reported losses of these companies have received
much public attention because of the number of homes involved and because of
the fear that residents will be displaced if nursing homes close. Because
the distribution of these facilities is concentrated, the potential threat
of closure looms much larger for some states than for others. Almost half of
the nursing homes in New Mexico and Nevada, for example, are operating in
bankruptcy, compared with the national average of about 12 percent. Twelve
other states have more than 20 percent of their homes operating in
bankruptcy.
Many providers have blamed Medicare policies and the BBA for their financial
difficulties and have pressured the Congress to undo some of the act's
payment reforms. In response, the Congress has monitored the results of
these reforms and made certain modifications in the Balanced Budget
Refinement Act of 1999 (BBRA). But many in the industry argue that more
changes are needed and are calling for higher payments.
Calls for increased payments come at a time when federal budget surpluses
and reduced Medicare outlays could make it easier to consider increases in
Medicare payment rates. However, in view of the coming surge in the
Medicare- eligible population, the Comptroller General has cautioned
repeatedly that projected Medicare spending threatens to absorb ever-
increasing shares of the nation's budgetary and economic resources. Without
meaningful reform, demographic trends alone will drive Medicare spending to
levels that will prove unsustainable for future generations of taxpayers. 1
It is therefore critical to the program's long1
Medicare Reform: Leading Proposals Lay Groundwork, While Design Decisions
Lie Ahead( GAO/ T- HEHS/ AIMD- 00- 103, Feb. 24, 2000). Nursing Homes:
Aggregate Medicare
Payments Are Adequate Despite Bankruptcies
Nursing Homes: Aggregate Medicare Payments Are Adequate Despite Bankruptcies
Page 2 GAO/ T- HEHS- 00- 192
term solvency and sustainability that we continue to evaluate provider
payments and monitor beneficiary service use to ensure that beneficiaries
receive needed services at the same time Medicare receives the best value
for its money.
My comments today focus on the adequacy of Medicare's payment rates for
skilled nursing services furnished in nursing homes, the relationship
between the changes wrought by the BBA and recent nursing home bankruptcies,
and what exists to protect patients. My remarks are based on our extensive
published and ongoing work for this committee. 2
In brief, our analysis indicates that aggregate Medicare payments for
covered nursing home services likely cover the cost of care needed by
beneficiaries, although some refinements to the payment system are needed.
But Medicare policy changes have required many nursing homes to adjust their
operations. The adjustments have been particularly disruptive for homes that
took advantage of Medicare's previous payment policies to finance
inefficient and unnecessary care delivery and for those companies that
invested heavily in the provision of ancillary services (such as
rehabilitation therapies) to nursing homes. The problems experienced by some
providers of nursing home and ancillary services are therefore the result of
business decisions made during a period when Medicare exercised too little
control over its payments. Filing for bankruptcy protection under Chapter 11
allows these providers time to restructure their debts and streamline their
operations while continuing to care for their nursing home residents. Should
any of these providers not emerge from bankruptcy, however, the nursing
homes will be sold or the residents may have to find alternative care
arrangements.
Nursing homes in the United States- numbering about 17,000 nationwide- play
an essential role in our health care system. They provide care for 1.6
million elderly and disabled persons who are temporarily or permanently
unable to care for themselves but who do not require the level of care
furnished in an acute care hospital. Nursing homes furnish a variety of
services to residents, including nursing and custodial care; physical,
occupational, respiratory, and speech therapy; and medical social services.
Medicaid is the largest single source of nursing home revenue. In 1998,
Medicaid accounted for 46 percent of total nursing home expenditures, while
Medicare, out- of- pocket, and private insurance payments accounted for 12
percent, 33 percent, and 5 percent,
2 Skilled Nursing Facilities: Medicare Payment Changes Require Provider
Adjustments But Maintain Access( GAO/ HEHS- 00- 23, Dec. 1999). Background
Nursing Homes: Aggregate Medicare Payments Are Adequate Despite Bankruptcies
Page 3 GAO/ T- HEHS- 00- 192
respectively. Two- thirds of nursing homes are for- profit entities; and
about half are owned or operated by corporations operating multiple
facilities known as chains. Many of these chains also operate other lines of
business in addition to nursing homes, such as long- term care hospitals,
assisted living facilities, pharmacies, and companies that furnish therapy.
Medicare covers nursing home care for beneficiaries who need skilled nursing
or rehabilitative therapy services for conditions related to a hospital stay
of at least 3 days occurring within 30 days before admission to a nursing
home. All necessary services- including room and board, nursing care, and
ancillary services such as drugs, laboratory tests, and physical therapy-
are covered for up to 100 days of care per spell of illness. Beginning on
the 21 st day of care, the beneficiary is responsible for a daily
coinsurance payment, which currently is $97.
Spending for skilled nursing services furnished in Medicare- certified
nursing homes represents a growing share of total Medicare expenditures. 3
Between 1990 and 1998, Medicare expenditures for skilled nursing facility
(SNF) services increased, on average, 25 percent annually, reaching $13.6
billion in 1998. This growth was due primarily to a rise in the number of
beneficiaries using SNF services and to an increase in the provision of
services to each SNF patient. Between 1991 and 1998, the number of
beneficiaries receiving SNF care more than doubled, rising from 671,000 to
1.5 million. Over that period, Medicare's average payment per day increased,
on average, 12 percent annually, reaching $268 in 1998, although the SNF
market basket index, which measures yearly changes in the prices of goods
and services purchased by nursing homes, rose only an average of 3 percent
per year (see figure 1).
3 Such facilities are referred to as skilled nursing facilities or SNFs.
Nursing Homes: Aggregate Medicare Payments Are Adequate Despite Bankruptcies
Page 4 GAO/ T- HEHS- 00- 192
Figure 1. Average Medicare SNF Payments per Day Compared With Changes in
Prices Paid by SNFs, 1991- 1999
$0.00 $50.00
$100.00 $150.00
$200.00 $250.00
$300.00 1999 1998 1997 1996 1995 1994 1993 1992 1991
Average Payment per Day (in Dollars)
Average Medicare Payment per Day Change in Prices Paid by SNFs
Source: GAO analysis of data from the Health Care Financing Administration,
Office of the Actuary, and DRI/ McGraw- Hill, Inc.
Medicare's cost- based reimbursement method, combined with a lack of
appropriate program oversight, provided few checks on the growth in Medicare
spending for SNF services. We believe, and the Department of Health and
Human Services' Office of Inspector General (OIG) agrees, that the growth in
costs for ancillary services, such as rehabilitation therapies,
Nursing Homes: Aggregate Medicare Payments Are Adequate Despite Bankruptcies
Page 5 GAO/ T- HEHS- 00- 192
was excessive. 4 Before implementation of the BBA, Medicare paid nursing
homes the reasonable costs they incurred in providing Medicare- covered
services. Routine services (which include general nursing, room and board,
and administrative overhead) were subject to cost limits, but payments for
ancillary services and capital- related costs were virtually unlimited.
Because higher ancillary service costs triggered higher payments, facilities
had no financial incentive to furnish only clinically necessary services and
little incentive to deliver them efficiently. Further, high ancillary costs
could be used to justify a request for exceptions payments for routine costs
over and above the cost limits. 5 Indeed, the growth in Medicare per day
expenditures was driven largely by increases in payments for ancillary
services. An analysis of SNF costs from 1992 through 1995 found that
reported ancillary costs per day rose 19 percent per year, on average,
compared to 6 percent per year for routine costs (see fig. 2). This rapid
cost growth is not explained by a commensurate increase in Medicare
beneficiaries' needs.
4 See Medicare Post- Acute Care: Better Information Needed Before Modifying
BBA Reforms( GAO/ T- HEHS- 99- 192, Sept. 15, 1999); Department of Health
and Human Services, Office of Inspector General, Office of Evaluation and
Inspections, Physical and Occupational Therapy in Nursing Homes: Cost of
Improper Billings to Medicare( OEI- 09- 97- 00122, Aug. 1999); Medicare:
Tighter Rules Needed to Curtail Overcharges for Therapy in Nursing Homes(
GAO/ HEHS95-
23, Mar. 1995). 5 Under cost- based reimbursement, providers with reasonable
costs that exceeded the routine cost limits could be granted exceptions from
the limits if they provided information indicating that they served patients
requiring more services than the average.
Nursing Homes: Aggregate Medicare Payments Are Adequate Despite Bankruptcies
Page 6 GAO/ T- HEHS- 00- 192
Figure 2: Percentage Growth in SNF Routine and Ancillary Costs per Day,
1992- 1995
Source: Prospective Payment Assessment Commission
This was the situation facing the Congress when it mandated in the BBA the
implementation of a prospective payment system (PPS) for Medicarecovered SNF
care. As required, the Health Care Financing Administration (HCFA) began
phasing in the PPS on July 1, 1998. Under the new system, facilities receive
a fixed payment for each day of care provided to an eligible Medicare
beneficiary. Because not all patients require the same amount of care,
payments are adjusted to reflect differences in patient characteristics and
service needs. In fiscal year 2001, the payment for those patients expected
to be the most costly will be more than three times greater than the payment
for those with the lowest expected costs. By establishing fixed payments and
including most services under the per
0 5
10 15
20 25
Ancillary Costs Routine Costs
Percentage Change
1992- 93 1993- 94 1994- 95
7.1 6.9 5.1
19.6 17.3
18.6
Nursing Homes: Aggregate Medicare Payments Are Adequate Despite Bankruptcies
Page 7 GAO/ T- HEHS- 00- 192
diem payment, the PPS attempts to provide incentives for nursing homes to
furnish only necessary services and to deliver those services more
efficiently. Facilities that can care for beneficiaries for less than the
adjusted per diem payment can retain the difference as profit. Those with
average costs higher than the per diem payments they receive will incur a
loss.
Nursing home companies that recently have filed for bankruptcy and reported
large losses have blamed Medicare payment policies, charging, among other
things, that payment rates under the PPS are too low. Before we turn to the
causes of the bankruptcies, let us address this issue. We believe that
Medicare SNF payments are likely to provide sufficient- and in some cases,
even generous- compensation for services furnished to Medicare
beneficiaries. The average Medicare payment per day declined about $25 or 9
percent between FY 1998 and FY 1999, reaching about the same average rate as
in FY 1996. This is noteworthy, because payments per day in 1996 were
thought to be excessive, given that they reflected 6 years of growth of more
than 12 percent per year at a time when prices for goods and services
purchased by SNFs were rising about 3 percent each year.
Even with the reduction in average payments per day under PPS, we see no
evidence that beneficiary access to SNF care has been compromised. Surveys
of hospital discharge planners and nursing home administrators conducted by
us and the OIG indicate that beneficiaries needing SNF care continue to
receive it, even though some patients may have more difficulty finding a
nursing home that can care for them. However, hospital lengths of stay for
admissions likely to lead to a SNF stay continue to decline, providing no
evidence that patients are “backing up” in hospitals.
Although aggregate Medicare payments are adequate to cover the costs of
caring for Medicare patients, constraining payments to nursing homes may
have created financial difficulties for some providers. Nursing homes with
average daily costs that are higher than their payments must modify their
treatment patterns and business strategies if they are to operate
profitably. In addition, homes that used historically generous Medicare
payments to make up for the uncovered costs of other residents may find that
their Medicare revenues no longer stretch this far. Some industry
representatives and analysts argue that Medicaid payments were often
inadequate to cover the costs of Medicaid residents, so Medicare profits
were used to make up the difference. But Medicare payments were never
intended to finance the costs of these or other non- Medicare residents. SNF
PPS Rates Cover
Medicare- Related Costs
Nursing Homes: Aggregate Medicare Payments Are Adequate Despite Bankruptcies
Page 8 GAO/ T- HEHS- 00- 192
At the same time, the new incentives for efficiency created by the PPS have
come at a time when providers are facing other external cost pressures. For
example, in our healthy economy, nursing homes may be experiencing increased
competition for staff. Competition for workers may have forced nursing homes
to increase wages and expand benefits to attract and retain qualified
personnel. Nursing homes have also been experiencing slight but steady
reductions in occupancy rates over the last few years. Industry
representatives contend that competition from assisted living facilities and
other residential alternatives has spurred this decline. Still, the median
nursing home occupancy rate is 88 percent.
We believe that aggregate payments are adequate, but we are concerned that
the system may not adequately identify the most costly patients and
distribute payments accordingly. Facilities treating a disproportionate
number of high- cost cases may not receive adequate payments for those
patients, which could result in access problems or inadequate care for some
high- cost beneficiaries. At the same time, nursing homes treating patients
with low service needs may be overpaid. 6 HCFA is aware of these
distributional problems and is working to refine the system so that payments
more accurately reflect differences in patient needs.
In the meantime, the BBRA, which modified some elements of the BBA, included
a provision that temporarily boosts payments for certain cases by 20
percent. 7 At the same time, the Act increased payment rates acrossthe-
board by 4 percent for fiscal years 2001 and 2002. These changes will add an
estimated $200 million to Medicare SNF spending in fiscal year 2000 and, if
allowed to remain in effect for 5 years, will increase total spending by
$1.4 billion. To the extent that shortcomings in the payment system created
access problems for some patients, the BBRA increase will ease concerns
about the distribution of payments across patients. But fiscal prudence and
the need for accurate payments to ensure appropriate service provision
argues for implementing research- based improvements to the rates as soon as
practicable. Such improvements aim to distribute existing payments more
appropriately, avoiding the unwarranted expenditure of an additional
hundreds of millions of dollars each year.
6 Skilled Nursing Facilities: Medicare Payment Changes Require Provider
Adjustments But Maintain Access( GAO/ HEHS- 00- 23, Dec. 1999). 7 This BBRA
provision is scheduled to expire on October 1, 2000, or when HCFA implements
refinements to the payment system, whichever comes later. No refinements are
planned for fiscal year 2001.
Nursing Homes: Aggregate Medicare Payments Are Adequate Despite Bankruptcies
Page 9 GAO/ T- HEHS- 00- 192
The nursing home chains that have filed for bankruptcy in recent months have
blamed the Medicare PPS for their financial difficulties. Yet our work
indicates that the problems experienced by these corporations can be traced
to strategic business decisions made during a period when Medicare was
exercising too little control over its payments. The former SNF payment
system encouraged nursing homes to increase their ancillary and capital
costs, because doing so increased their payments. It also created
opportunities for other organizations to supply services such as therapy at
inflated prices to nursing homes, which then passed the costs onto the
Medicare program. The PPS replaced these incentives with ones that are more
closely aligned with Medicare's goals of encouraging provider efficiency and
ensuring that payments are adequate for efficient providers to furnish
needed services to Medicare beneficiaries. Not surprisingly, providers that
most aggressively responded to the incentives in the old payment system have
had to make the most adjustments under the new system.
To better understand the issues surrounding the nursing home bankruptcies
seen in the past year, we examined financial information submitted to us by
seven of the largest nursing home chains, including four of the five
corporations that have filed for bankruptcy. 8 We found a number of common
elements among the bankrupt corporations. First, most of the chains in
bankruptcy reported higher than average nursing home costs, which is
detrimental under a payment system based on national average costs. Although
Medicare's 1998 average payment per day (which was based on facility costs)
was $268, some of the chains reported pre- PPS payments exceeding $300 per
day. It is not clear why their costs and resulting payments were higher than
average. Their nursing homes may have served patients who needed more
intensive care than the average Medicare SNF patient, in which case their
PPS payments will likely also be higher than average. Higher costs might
also, however, reflect provider inefficiencies, inflated prices, or over-
provision of ancillary services.
8 The companies included in our analysis were: Beverly Enterprises, Inc.,
Extendicare Health Services, Inc., HCR- Manor Care, Inc., Integrated Health
Services, Inc., Mariner Post- Acute Care Network, Inc., Sun Healthcare
Group, Inc., and Vencor, Inc. Documentary evidence used in analyzing the
effect of the BBA included both financial information provided by the
companies and their corporate filings from the United States Security and
Exchange Commission, which contain material financial and business
information on publicly traded companies. Nursing Home
Performance Under PPS is Primarily a Function of Previous Business Practices
Nursing Homes: Aggregate Medicare Payments Are Adequate Despite Bankruptcies
Page 10 GAO/ T- HEHS- 00- 192
Since implementation of the PPS, most of the companies we analyzed have cut
costs to improve overall performance in their nursing home businesses.
Several chains, for example, report that they have decreased costs by
reducing the number of ancillary services provided to their nursing home
patients and purchasing ancillary services and supplies at lower prices.
Some also are opting not to purchase ancillary services from contractors and
instead are hiring their own staff to furnish necessary services. At least
one chain reports seeking to reduce its costs by admitting patients needing
fewer ancillary services.
Some costs, however, are more difficult to reduce in the short term. For two
of the bankrupt companies we examined, reported capital- related costs such
as depreciation, interest on debt, and rent are substantially higher than
the industry average. These companies invested heavily in the nursing home
and ancillary service businesses in the years immediately preceding the PPS,
both expanding their acquisitions and upgrading facilities to provide more
intensive services. Under constrained payments, these debt- laden
enterprises are particularly challenged.
A third company now operating in bankruptcy reported a four- fold increase
in its rental costs between 1997 and 1999. This increase was due to a
business decision to separate the property side of the business from the
operating side, with the new real estate company leasing the nursing homes
back to the operating company. Under this new structure, the operating
company reported its nursing home rental expenses rose from $42 million in
1997 to $171 million in 1999, without a commensurate decline in other
capital costs. As might be expected, this business decision greatly affected
the operating company's bottom line. In fact, had the company's capital
costs remained at the 1997 level, profits from their nursing home operations
would have fallen 9 percent between 1997 and 1999, due primarily to
reductions in nursing home revenues. Instead, the company's profits from
their nursing home operations fell 78 percent.
The pattern with regard to nursing home revenues is less clear. Almost all
of the companies we analyzed, including those not operating in bankruptcy,
reported reductions in the proportion of their total nursing home revenues
attributable to Medicare. In 1998, the companies we examined had an average
Medicare revenue share of 26 percent. In 1999, that average fell to 22
percent.
Declining Medicare revenues resulted in reductions in total nursing home
revenues for most of the chains we examined (although one of the companies
now operating in bankruptcy saw its total nursing home revenues climb 13
percent between 1998 and 1999). Most of the
Nursing Homes: Aggregate Medicare Payments Are Adequate Despite Bankruptcies
Page 11 GAO/ T- HEHS- 00- 192
companies expect total nursing home revenues to be higher in 2000 than in
1999. Moreover, three of the four companies operating in bankruptcy have
continued to generate profits in their nursing home operations throughout
the transition to the PPS. The remaining company had been operating its
nursing homes at a loss even before the implementation of the PPS.
That companies can generate profits in their nursing home operations and at
the same time file for bankruptcy can be explained in large part by losses
from their ancillary service lines of business. Most corporations that have
filed for bankruptcy had invested heavily in the business of furnishing
ancillary services to their own nursing homes and others. Two companies
attributed about 25 percent of their total corporate revenues in 1998 to
their ancillary service lines of business, while one company attributed
almost half. But the PPS has made nursing homes, those belonging to these
chains as well as others, more cost- conscious in purchasing contracted
services, which had the effect of reducing both the demand for and the price
of ancillary services. As a result, revenues from ancillary service lines of
business have plummeted.
Without the prospect of overly generous, rapidly rising Medicare revenues,
these publicly owned corporations were forced to post asset impairment
losses on their balance sheets. Accounting principles dictate that such
losses be calculated and recognized to inform investors that future expected
revenue streams will be lower than anticipated. 9 Companies also have
downsized their businesses by selling nursing homes and ancillary service
providers, often at a loss. Losses from asset impairment and sales account
for much of the bankrupt corporations' reported total shortfalls but reflect
business and accounting practices rather than losses from current
operations. They are, in effect, paper losses that do not contribute to the
companies' bankruptcy filings, although they do affect calculations of the
companies' worth.
9 The losses appearing on their income statements reflect the difference
between the original value of assets and the revised value, based on the
revenue the asset is expected to generate in the future. The American
Institute of Certified Public Accountants' Statement of Financial Accounting
Standards No. 121 (SFAS No. 121), entitled Accounting for the Impairment of
Long- Lived Assets and for Long- Lived Assets to be Disposed of, requires
such impairment losses to be recognized.
Nursing Homes: Aggregate Medicare Payments Are Adequate Despite Bankruptcies
Page 12 GAO/ T- HEHS- 00- 192
Given the protections and benefits available under the U. S. Bankruptcy Code
(Code), it is unlikely that the bankruptcy filings of the five large nursing
home chains will affect the short- term operations of their nursing homes.
The five chains have filed for bankruptcy under Chapter 11 of the Code.
Filing for bankruptcy protection under this chapter offers a number of
benefits to companies. First, Chapter 11 bankruptcy proceedings focus on
restructuring a company's debt and reorganizing its business operations with
the goal of achieving future profitability and some debt repayment.
Protection under Chapter 11 allows a company to cease making debt payments
while it renegotiates the terms of those debts, including loan amounts and
payment schedules.
A company in Chapter 11 usually retains control of its assets as the
“debtor in possession,” while a creditor committee is appointed
to protect the interests of the creditors. Because Chapter 11 allows the
companies to continue to operate as they establish a payment schedule with
their creditors, the bankruptcy proceedings should not affect the chains'
shortterm ability to provide services to their residents. In fact, the Code
allows a business to obtain special financing while in bankruptcy to help
ensure that it has the funding necessary to operate. All five nursing home
chains that have filed petitions under Chapter 11 have obtained such
funding. With access to this cash, operations of the nursing homes run by
the chains should continue.
Bankruptcy protection under Chapter 11 is designed to allow a company to
continue operating, so a nursing home in bankruptcy can continue to care for
its residents. However, a nursing home chain that does not emerge from a
Chapter 11 proceeding will convert to a proceeding under Chapter 7, in which
case residents of the chain's nursing homes would not be protected under
federal law, because there are no provisions to do so. In a Chapter 7
bankruptcy, a company is dissolved and its assets are sold to pay its debts.
Assets are put under the control of a court- appointed trustee, whose
responsibility is primarily to the creditors. Many states have trusteeship
(or receivership) laws that allow the state to intercede in a Chapter 7
bankruptcy proceeding involving a health care provider, delaying asset
liquidation to protect patients. In such a case, a state courtappointed
trustee continues to operate the facility until a buyer is found or until
alternative care arrangements can be made for residents. Trusteeship
statutes are not present in every state, however, and even if they do exist,
implementing them may not be easy. Finding qualified and interested
individuals to act as trustees may be problematic, particularly if many are
needed, as might be the case in some states if a major nursing home chain
files for Chapter 7 bankruptcy. Neither is it clear who would finance the
costs of continued operations or the costs of transferring patients to
alternative care settings. In some cases, states have argued to the court,
generally with little success, that these costs should be charged Operations
Continue
While Companies Restructure, but Some Facilities May Be Closed
Nursing Homes: Aggregate Medicare Payments Are Adequate Despite Bankruptcies
Page 13 GAO/ T- HEHS- 00- 192
to the bankrupt company and should receive priority over other debts. Such
an arrangement would not be in the interest of other creditors, since the
company's remaining assets may not be enough to retire its debts.
Although industry analysts and government officials expect that most public
chains currently operating in bankruptcy will recover, it is important for
states to be prepared to address nursing home closures, particularly in
states where large numbers of nursing homes are operating in bankruptcy.
HCFA has been involved on a limited scale in states' contingency planning
processes, by providing guidance to state agencies for the enhanced
monitoring of bankrupt facilities and surveying states' contingency planning
efforts. Unfortunately, our discussions with HCFA suggest that, in the
unlikely event of substantial nursing home closures, some states may not be
adequately prepared.
Even if nursing home chains emerge from bankruptcy, some of their facilities
may be sold. Given the current climate, corporations may reevaluate their
cost structures and decide to get rid of certain facilities based on their
profitability or other factors. If no buyers can be found, some facilities
may be closed.
The recent bankruptcy filings and the resulting recapitalization or
reorganization of nursing homes' debt structures also has had consequences
for the industry as a whole. According to market analysts and industry
representatives, lenders are now more hesitant to provide capital to nursing
homes. Nursing homes that do not have established relationships with lenders
may have difficulty obtaining funds for expansions or upgrades to current
facilities. This may be problematic for businesses that want to expand or
for homes that need improvements. However, prospects for raising capital may
improve with recognition of the fact that our aging population will
dramatically increase demand for long- term care services.
As anticipated, BBA reforms have had significant effects on the delivery,
cost, and use of SNF services. The changes wrought by the BBA have required
providers to adjust both their patterns of care and their business
strategies. These adjustments have not been easy for some, and those who
have experienced the most difficulty have been quick to attribute their
problems to inadequate Medicare payments and call for additional federal
dollars. However, our analysis indicates that the nursing homes' responses
are adaptations to appropriately tightened Medicare payments following a
period of unchecked growth. Conclusions
Nursing Homes: Aggregate Medicare Payments Are Adequate Despite Bankruptcies
Page 14 GAO/ T- HEHS- 00- 192
The SNF PPS needs some refinements, which are under development. In
assessing the merits of these refinements, prudence suggests that
beneficiary needs and the program's prospects for long- term financial
sustainability should be of paramount concern. We will continue to monitor
the effects of the BBA to help the Congress ensure that beneficiary access
is protected, providers are fairly compensated, and taxpayers do not
shoulder the burden of funding unnecessary or inefficient spending by
nursing homes.
Mr. Chairman, this concludes my prepared statement. I will be happy to
answer any questions you or other Members of the Committee may have.
For future contacts regarding this testimony, please call Laura A. Dummit at
(202) 512- 7118. Individuals who made key contributions to this testimony
include Carol L. Carter, Jennifer DuLac, Dana K. Kelley, and Erin M. Kuhls.
(201088) GAO Contact And
Acknowledgments
Orders by Internet For information on how to access GAO reports on the
Internet, send an e- mail message with “info” in the body to:
Info@ www. gao. gov or visit GAO's World Wide Web home page at: http:// www.
gao. gov
Contact one: Web site: http:// www. gao. gov/ fraudnet/ fraudnet. htm E-
mail: fraudnet@ gao. gov 1- 800- 424- 5454 (automated answering system)
Ordering Information
To Report Fraud, Waste, and Abuse in Federal Programs
*** End of document. ***