The SeniorCare Investor: SNFs At The Cliff, While ALFs Move On

Is the skilled nursing industry really at the edge of a cliff, waiting to see what happens to Medicare rates in October? Is that really what drove Mike Walker, the CEO of Genesis Health Ventures (NASDAQ: GHVI), to resign from his position at the company he founded, grew into a multi-billion dollar company, took into bankruptcy and guided it out, being the only industry CEO to survive that corporate trauma?

Although the stated reason for Mr. Walker’s departure from Genesis is to devote full time to industry issues as chairman of The Alliance for Quality Nursing Home Care, an industry lobbying group that primarily represents the large corporate chains, you do not voluntarily walk away from your baby after recovering from months in the intensive care unit.

Something else is up at Genesis, and either the Board (former creditors and now shareholders) wanted to take the company in a different direction than Mr. Walker, or there were simple personality clashes. Whatever the case, and we may never know for sure, it is most likely that he will turn up again and form a new company, because lobbying Congress on behalf of the nursing home industry is probably more frustrating than actually operating a nursing home in the current environment, hard as that may be to believe. However, we wish him well in his current endeavor, the success of which will be measured in a matter of months.

We are referring, of course, to the Medicare "cliff," set to expire on October 1, 2002. While no one really believes that a full 10% cut in Medicare reimbursement will take place in October, one has to wonder why our elected officials so frequently claim that they want to "save" Social Security and Medicare and will do nothing to hurt the elderly, but fall deafeningly silent on an issue so important to those who take care of the elderly. The states with the largest expected drop in the average daily Medicare rate in 2003 if nothing is done include California ($43.14), New Jersey ($40.32), Colorado ($38.99), Washington ($38.89), Rhode Island ($38.61), Florida ($38.30) and Oregon ($38.13), according to a recent report from Cowles Research Group. It only gets worse in 2004.

Sun Healthcare Group (OTCBB: SUHG) has already stated that its financial condition will be seriously jeopardized if Medicare rates are cut, and what is a company like Mariner Health Care (OTCBB: MHCAV), recently emerged from bankruptcy as well, supposed to do? With almost $2 billion in annual revenues and 34.5% of that derived from Medicare, the company can ill afford even a 5% drop in Medicare rates (more than $30 million in lost revenue). While the Medicare cliff is a top priority, the industry still needs to focus on the issues of liability insurance and litigation, as well as nursing shortages and a government that will do little to help it succeed.