In 1963, a Los Angeles accountant named Roy Christiansen looked at the books of a nursing home and saw a good thing. Christiansen bought three nursing homes in the greater Los Angeles area with a total of 256 beds and set out to fashion a system to manage his little company.
Within a few years, Christiansen had his system designed and decided to take his show on the road. By 1969, his company, Beverly Enterprises Inc., owned 60 nursing homes with about 7,000 beds. Today, with 500 nursing homes in 34 states, Beverly is the largest nursing home operator in one of America's boom industries. Last year Beverly, whose only business is nursing homes, grossed $486 million, while Americans were spending--directly or through their governments--roughly $24.5 billion to keep 1.3 million mostly elderly Americans in nursing homes across the country.
Beverly Enterprises is a prime example of corporate expansion in the swollen health-care field. Nursing homes have become big business. Roughly 70 percent of the country's nursing home beds are run by privately owned companies trying to make a profit. Within the nursing home industry large chains employing sophisticated management techniques have eclipsed the smaller "mom and pop" operations that once characterized the industry.
By any measure, the growth in nursing home expenditures has been extraordinary. In 1965, when Congress passed Medicare and Medicaid--government-supported programs providing medical care for the elderly and the indigent--America was spending $2.1 billion on nursing homes, or just under 5 percent of the total health-care budget. By the end of the decade, when the health-care budget will be vastly greater than it was in 1965, the $82 billion spent for nursing home care will represent 10 percent of the total health-care expenditure.
These figures represent a significant--some experts would say an alarming--problem of national scope. Declining death rates and stable or only slightly rising birth rates are combining to increase the over-65 population in both absolute and relative terms. In 1950, about 12 million people were 65 or older in this country, and only 600,000 were 85 or older. In 1980, the figures were closer to 28 million over 65, with 2 million 85 or older. In another 30 years 33 million will be over 65, almost 4 million 85 or older. Although only 5 percent of all people 65 or older are in nursing homes, 20 percent of those 80 or older are.
The nation's nursing home residents constitute less than 1 percent of the total population. Yet that small minority will account for 10 percent of America's health budget by the end of the decade.
Congress and the administration already have started grappling with the implications of this demographic shift in terms of what it means for the Social Security system. But as a society, the United States has made only the barest start toward plumbing the meaning beyond Social Security:
How, in an era of diminishing public budgets, will America pay to care for those elderly no longer able to care for themselves?
Will the country have enough nursing home beds to accommodate the elderly in the same way that they are accommodated now?
Beverly's bullish expansion, along with other large chains, has been impressive but somewhat misleading. The large chains that are coming to dominate the nursing home industry have grown for the most part by buying existing homes rather than by building new ones. As a result, the coming crunch that some experts see as the elderly population increases has not been and will not be alleviated by the growth of Beverly and the other chains.
In this era of high interest rates it is simpler for an expansion-minded company like Beverly Enterprises to buy existing facilities than to borrow money to design and build a nursing home that will not begin producing revenue for another year or two at least.
Two factors--substantially higher construction costs and tighter planning controls--have prompted experts to question whether the supply of nursing home beds will keep pace with the country's increasing elderly population. They suggest that current practices will have to change and that less costly alternatives will have to be found to handle all but the most difficult cases.
David R. Banks, president of Beverly Enterprises, cites government statistics indicating that over the next decade the United States will need another 300,000 nursing home beds to accommodate the aging population. The cost of building those beds could be as much as $5 billion to $6 billion. "We don't think that's possible," Banks said in an interview. "I don't think this industry can afford that. I don't think government can afford it. I don't think anybody can afford it."
An analysis of the projected increases for nursing home care by the Health Care Finance Administration attributes roughly half of the increase to overall inflation between now and 1990. Another quarter is attributed to an expected increase in the per capita use of nursing homes, probably reflecting a growth in the elderly population. The rest is due to a variety of causes.
In addition, local health planning laws have been enacted to meet federal regulations and thus qualify localities for federal health funds. These laws, requiring a prospective nursing home builder to obtain a certificate of need from the local planning agency before building a facility, have virtually eliminated new construction.
Facilities for almost two-thirds of the country's nursing home beds have been built since the middle 1960s, a large percentage of them by independent entrepreneurs who hoped to cash in on the revenues they believed Medicare and Medicaid would supply. By now their original owners, if they are still running the homes, already have derived their principal tax advantage from owning them.
Besides the depletion of the tax incentives by the original owners, the federal government's cutbacks in Medicare benefits for nursing home care and compelling market forces have driven many of the small independent operators out of the market.
Chain operators have found that their size gives them a competitive advantage over smaller operations. Central offices can do much of the administrative work for individual homes, allowing overhead to be spread out over a broader base. Beverly and other nursing homes also enter into central purchasing contracts, allowing individual homes to buy supplies for less than what an individually owned home pays.
Size is not a guarantee of quality. Although experts interviewed said that care in the large chains was generally adequate, they said nonprofit nursing homes--usually religiously affiliated--often offered a higher standard of care than was available in privately owned homes.
Chains also can suffer because of mismanagement, like any other company, leaving residents with substandard care in a particular home or in many homes, depending upon whether the problem is at the corporate level or localized in a single home.
After the Wisconsin Avenue Nursing Home--a Beverly-owned facility--sharply curtailed its staff in March following a decline in the number of residents, for example, several nurses resigned in protest. One nurse, still employed at the home, said in an interview that the quality of care had "deteriorated."
James T. Williams, executive vice president for operations of Beverly's Eastern Division, said the cutbacks had been too severe and that corrective measures have been taken. The D.C. Office of Licensing and Certification, responding to a complaint from a nurse who resigned, has ordered the home to file weekly--rather than the normal quarterly--staffing reports.
With a high-rate of occupancy assured by growing demand, a well-managed company can count on making a profit. Beverly, which has borrowed heavily although apparently not imprudently to finance its expansion, had an after-tax profit of about $16 million on revenues of almost $486 million for1981.
In calendar year 1980 alone, Beverly increased the number of nursing home beds it owned or operated by 50 percent. Other chains, although neither as large nor growing as rapidly as Beverly, also are expanding.
Beverly now operates 60,000 beds and plans to grow at the rate of 15,000 beds a year for the next three or four years, according to Banks. Only a small fraction of those beds will be new, according to Banks. Beverly currently is building 20 homes in five states with a total of 2,800 beds, but Banks said that new construction will become a rarity because of tighter controls and, more important, rising interest rates. Despite a projected need of 300,000 to 400,000 new beds over the next decade, new beds are being built at a rate of only 1 percent a year--far below the projected need.
Cost is a major reason for this lack of construction. Manorcare, a smaller chain operating nursing homes across the country, built a 120-bed home in Largo, Md., which opened in 1966, with an average construction cost of $11,666 per bed. Manorcare has just begun construction of another 120-bed nursing home similar to the Largo home, in Clearwater, Fla. The cost per bed of that facility is $24,400--more than twice the cost of the Largo home. And, according to a Manorcare official, if planning were begun today for a home, the cost would be roughly $27,000 per bed.
Although experts are projecting dramatic increases in spending for nursing home care in the next decade, a consensus appears to be developing, even within the nursing home industry, that less costly alternatives will have to be found. Banks said that his company and others are experimenting with home nursing care, which uses the nursing home's resources as a base but leaves all but the most acutely ill patients at home, where they are seen as needed by trained personnel.
Dr. Robert N. Butler, director of the National Institute on Aging, took issue with Banks' skepticism that any significant additions would be made to the country's nursing home inventory. "I think there'll be a pressure to build," Butler said, "and with decentralization from the federal sector, states will be deciding on certificates of needs. I think the economic forces and family forces and other forces might lead to considerable expansion."
For elderly persons who need none or only minimal nursing care, a variety of options exists short of a nursing home. In some areas, including Washington, church groups and other nonprofit groups sponsor apartments for older persons, arranging for a homemaker to visit daily and a social worker to come in periodically to help with personal problems.
Another option is specially designed housing projects, located near or adjacent to a medical facility so that help is near when needed. Some communities have been successful in sponsoring high-rise apartment buildings with nurses in the building to assist frail elderly persons who cannot manage entirely on their own.
Butler and Banks agreed that nursing homes should be looked upon only as a last resort. "I think by and large people really want to be home," Butler said. "There are very few people I'm aware of that actually want to be put away in a nursing home or home for the aged."
"We think," Banks said, "that if a person can stay out of a home, that he'll be better off with home health care as long as it's logical."