Much of the nation's nursing home industry is in such dire financial straits that regulators and other observers are worried about the care elderly residents will receive.

Some of the largest nursing home chains have reported huge losses and missed payments to creditors. Shares of major companies are trading for mere pocket change. One large firm, Vencor Inc., reported in April that it may not be able to stay in business.

The industry's problems are so glaring that the Health and Human Services Department recently issued an alert to the state agencies that license and monitor nursing homes.

"While we hope that these organizations will see their way through these difficult periods, we are nevertheless concerned that the quality of care residents receive in chain facilities citing financial pressures be protected," Sally K. Richardson, director of the government's Center for Medicaid and State Operations, wrote in the May 7 letter.

The companies hurting the most blame their financial woes chiefly on a new, stricter Medicare payment system that began coming online about a year ago. The system was intended to keep the federal health insurance program from going broke. Having structured themselves to take advantage of the old system's largesse, some firms were ill-prepared for the change.

A series of mergers and acquisitions in recent years and an accumulation of debt had left the industry in a precarious position, analysts said.

"Basically they've been expanding much too fast . . . and it sort of backfired on them," bond analyst Frank Bianco of McMahan Securities said of nursing home chains. "I'd say that had they not expanded to the extent they did they'd probably still be in good shape now," Bianco said.

The financial turmoil isn't the only threat to patient care. Nursing homes have long struggled to attract and retain the low-paid front-line workers who perform such sensitive tasks as bathing, feeding and helping patients use the toilet. In a robust economy, the industry's chronic labor problems have worsened, because workers face a wider choice of jobs, industry officials say.

Beverly Enterprises Inc. says improvements in its training and the like have reduced employee turnover, but even so, it has been losing certified nurse assistants so fast it has to replace more than 80 percent of them each year.

"You can make the same amount of money being a CNA as you can . . . working in a burger joint," Beverly spokesman Dan Springer said. "Which would you choose?"

While rivals denounce the new Medicare payment system, Beverly sounds a calmer note. "Beverly prepared for PPS [the new Medicare payment system] and we believe we are well prepared to continue to operate under it," Springer said.

Under the old system, Medicare reimbursed individual facilities for the money they spent to care for Medicare patients, within limits. Even nursing home executives say that rewarded excess.

Under the new system, the government is moving toward standardized daily payments. The transition began last July for some companies and in January for others. For companies such as Vencor and Genesis Health Ventures Inc., the average daily payment for a Medicare patient declined by more than 20 percent during the first quarter of 1999, compared with a year earlier. For Genesis, the average sank from $393 to $312.

Though Medicare pays the bills for only a minority of nursing home patients, it has contributed a disproportionately large share of many facilities' revenue.

Vencor might have been banking on too much money from Medicare. The company announced in April that it had negotiated an installment plan to repay $90 million of Medicare "overpayments."

One patient advocate says she is skeptical of the industry's pleas for relief from the new payment system. `We've seen poor care for so long by so many of these large corporations that it's too early to tell whether this is going to make it worse or not," said Elma Holder, founder of National Citizens' Coalition for Nursing Home Reform. "If they were gaming [the Medicare system] and the . . . system changes and they're not able to do that the same way, that obviously would have a major impact on their financial situation."

Whatever the cause may be, the industry's vital statistics paint a bleak picture. Take, for example, losses reported for the quarter that ended March 31, which include some one-time charges:

$23.6 million at Louisville-based Vencor, compared with a profit of $18.9 million a year earlier;

$78.8 million at Atlanta-based Mariner Post-Acute Network Inc., compared with a loss of $4.5 million a year earlier;

and $113.1 million at Sun Healthcare Group Inc. of Albuquerque, compared with a profit of $18.4 million a year earlier.

Some share prices have plummeted. Vencor last traded at 62 1/2 cents, down from $8.93 3/4 a year earlier, before being suspended from the New York Stock Exchange this month. Sun Healthcare closed at 40.62 1/2 cents yesterday, down from a 52-week high of $17.68 3/4 last July.

At Sun, the core nursing home business "never made money," spokesman Charlie Leonard said. Sun and other companies profited by selling "ancillary" services such as physical therapy to nursing homes, both their own and others. But now those "ancillaries" are included in Medicare's daily rates and nursing homes can't simply pass along the cost to the government. As a result, demand for the services has shrunk.

Nursing home companies say they aren't compromising the quality of care, but some analysts wonder.

Some companies have halved the amount of rehabilitation therapy they provide, said Victor Seoane, a health care services researcher at the Robinson Humphrey investment firm.

Before, "there were companies out there that were pushing the envelope . . . providing far more therapy than was needed," Seoane said, but he added, "I find it difficult to believe that patients were receiving twice the amount of rehabilitation that they needed."

Whether the financial pressures and staffing problems are affecting the overall quality of care is hard to determine.

"We are receiving more complaints from staff themselves about facility conditions and the quality of care than we have in the past, a significant increase," said Mark Miller, Virginia's long-term-care ombudsman, an advocate for nursing home patients.

"If a facility's in trouble financially they're much more likely to make up the costs in the care they provide, which means less services, less staffing, and that all equates to a poor quality of care," Miller said. "People just aren't going to get the services that they need."

In District of Columbia nursing homes, "we've got quite a few cases of just not enough staff on duty to do the things that residents need," though that isn't a new problem, said Anne Hart, who until recently was the ombudsman for the District.

In Maryland, "I think that the quality of care in nursing homes has probably deteriorated in the last 12 to 18 months," said Carol Benner, director of licensing and certification.

Five Maryland nursing homes were dropped from Medicare and Medicaid during the fiscal year that began Oct. 1, compared with none during the previous fiscal year. The increase may partly reflect stricter government standards and heightened enforcement, Benner said.

Nationally, the number of nursing homes voluntarily withdrawing from Medicare or being banned from the program more than doubled during the fourth quarter of 1998, to 120 from 54 a year earlier, according to the American Health Care Association, an industry group. Though "dissatisfaction with reimbursement" was one of the possible reasons nursing homes could state for withdrawing, none cited that reason.


The stock of both Sun Healthcare Group and Mariner Post-Acute have lost nearly all of their value.

Index of change, weekly, June 12, 1998 = 100

S&P 500 index: Up 22%

Sun Healthcare Group: Down 98 %

Mariner Post-Acute: Down 96 %

SOURCE: Bloomberg News