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 long1Medicare 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,

2Skilled 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 21st 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).

3Such 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

1991 1992 1993 1994 1995 1996 1997 1998 1999

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.

4See 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/HEHS- 95-23, Mar. 1995).

5Under 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

Routine Costs Ancillary 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.

6Skilled Nursing Facilities: Medicare Payment Changes Require Provider

Adjustments But Maintain Access (GAO/HEHS-00-23, Dec. 1999).

7This 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.

8The 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.

9The 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)

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