Tamari Model Application

Fighting for Survival: The DireState of Nursing Home Finances in New York State

J a n u a ry 2004

EXECUTIVE SUMMARYA n a lysis of new ly released nursing home financial statements

s h ows that more and more nursing homes in New York state areslipping into serious financial distress. Almost all of the nega t ivetrends observed in the past several years continued unabated.Some became more seve r e .

Each ye a r, New Yo r k ’s nursing homes are required to submitcost reports to the New York State Department of Health (DOH).These reports include each fa c i l i t y ’s cert i fied financial statementsand other financial data. NYAHSA has analyzed this financial in-f o rmation for 524 facilities (about 77 percent of all nursing homesin the state) that filed calendar year cost reports for 2000, 2001 and2002, and used it as the basis for this comprehensive report .

This is the fourth year that NYAHSA has analyzed nursinghome finances in this way. Each year since 1997, we have ob-s e rved and reported an uninterrupted dow n ward trend in nursinghome financial performance. The conclusions have been similar:based on a variety of financial indicators, the fiscal standing ofN ew Yo r k ’s nursing homes has declined each ye a r. Not only havethe indicators shown a continuous deterioration of nursing home fi-nances, but the financial condition of many individual fa c i l i t i e swas disastrously poor, with many on the ve rge of bankru p t cy.1

The financial condition of nursing homes in the state continuedto deteriorate in 2002, primarily as a result of severe Medicaid un-d e rp ayments resulting from an outdated payment methodology andyears of Medicaid rate cuts, as well as spiraling costs for items suchas insurance and pharmaceuticals. These declines reached seve r a ldisturbing milestones in 2002.

When analyzing nursing home financial statements, the ques-tion no longer is whether the analysis will show financial deteriora-tion. Rather, the question is how much worse the financial condi-tion will be than in the previous ye a r, how many more homes willh ave dropped below any semblance of financial health, and howm a ny more will join the ranks of those on the ve rge of serious

N YAHSA PUBLIC POLICY SERIESN YAHSA PUBLIC POLICY SERIES

Among the major findings of thisanalysis are the following: 1 . A majority of the nursing

homes in New York state lostmoney on operations in 2002.

2 . 2002 marks the first time thatnursing homes collectively lostmoney from operations.

3 . For the first time, the total bot-tom line for all nursing homeswas negative. The number ofnursing homes with bottom-line losses increased dramati-cally from 2000 to 2002.

4 . Rural nursing homes, often theonly providers in their commu-nities, were in worse financialhealth than their urban coun-t e r p a rt s .

5 . All public homes in the studylost money, due in part to areduction in federal Medicaidfunding.

6 . M o re than a third of voluntarynursing homes face a height-ened risk of bankruptcy ori n s o l v e n c y.

(Continued on next page )

1 N YAHSA Report, Sounding the Alarm: New Yo rk ’s Nursing Homes inFinancial Crisis, December 2002. For more insight into the financial sta-tus of not-for- p r o fit and public nursing homes, see NYAHSA report ,2002: The Wo rst Year Yet for Not-fo r- P ro fit and Public Nursing HomeFinances, Fe b ru a ry 2003. All NYAHSA reports are ava i l a ble atw w w. ny a h s a . o rg.

ABOUT NYA H S A’S ANALY S I S

N YA H S A’s analysis is based on the 2000, 2001 and 2002 DataCollection Masterfile (DCM) obtained from the DOH. The DCMis a computerized database that contains the Residential HealthCare Facility Version 4 (RHCF-4) cost reports that nearly all nurs-ing homes in New York state file each ye a r.2 Among other things,the RHCF-4 report includes complete financial statements, wh i c hmust be prepared and cert i fied by an accountant.3

N YAHSA constructed a “matched sample” of nursing homesfor the 2000-2002 time period to obtain a more valid picture ofnursing home finances over time. To be included in the matchedsample, a facility must have filed a complete RHCF-4 report foreach of the calendar years 2000, 2001 and 2002. This approachhelps to improve the reliability and validity of ye a r- t o - year com-parisons of financial performance. Our matched database of 524nursing homes represents 77 percent of the total facilities in NewYork state, and closely approximates the overall proportions ofvo l u n t a ry, proprietary and public facilities as shown in Figure 1.4

F i g u re 1 Statewide Versus Sample Nursing Homes

N OTE: Statewide fi g u res are current as of January 1, 2002.

Hospital-based nursing homes are under-represented in thea n a lysis. Most of these facilities report nursing home fi n a n c i a l son the hospital cost report, which is not readily comparable tothe RHCF-4 report. Because recent analyses suggest that hospi-tal-based nursing homes are in worse financial condition thantheir freestanding counterp a rts, their exclusion from this analy-sis means that statewide nursing home finances may be in eve nmore dire condition than presented here.5

As part of this analysis, NYAHSA examined fa c i l i t i e s ’2 0 0 0 ,2001 and 2002 cert i fied financial statements to detect signifi-cant changes in reported dollar amounts (e.g., operating income,net income, etc.). While the dollar amounts that appear in fi n a n-cial statements are significant on their own, they only helps o m ewhat in assessing the relative financial condition of an or-ga n i z a t i o n .

Financial ratio analysis is a widely accepted analytical toolthat pinpoints and isolates significant relationships between thefigures found in financial statements. These relationships canoccur between various figures in the same accounting period orto values in previous years.

Using balance sheets and income statements, we calculated aseries of financial ratios and examined them closely for emerg-ing or continuing trends over the three-year period. The ratioswe selected are widely accepted and used by inve s t m e n tb a n kers, mort gage bankers, and debt-rating agencies invo l ve din nursing home financing.

For most of the ratios, we calculated median values. The me-dian value represents the midpoint of a series of numbers and ismost often the best indicator of central tendency. In a large setof values with few “outlier” numbers, the median and ave r a g eare ve ry similar.

Although median financial ratios offer insight into the ove r-all condition of the state’s nursing homes, they do not fully illus-trate the financial condition of individual facilities. T h e r e f o r e ,we also examined individual facility ratio values over time, andused them to identify those nursing homes in the sample that arethe most vulnerable from a financial perspective.

N YAHSA PUBLIC POLICY SERIES • JANUARY 20042

2 The RHCF-4 report database includes only a subset of hospital-basednursing homes, which make up about 10 percent of all nursing homes inthe state. Many of these facilities file a different report, the RHCF-2,which does not provide the financial data necessary for this analy s i s .3 The financial statements in the RHCF-4 reflect, in certain instances, fi-nancial transactions with owners of proprietary facilities, their fa m i l i e sand related companies. Eve ry eff o rt has been made to ensure that thea n a lysis was confined to relevant nursing home financial activ i t i e s .While we believe these types of transactions would not materially alterthe basic conclusions of the analysis, an assessment of their effect on thefinancial condition of the facilities invo l ved is beyond the scope of thisr e p o rt.

STATEWIDE SAMPLESponsor Number Percentage Number Percentage

Voluntary 309 45.0% 236 45.0%

Proprietary 322 46.9% 251 47.9%

Public 56 8.0% 37 7.1%

TOTAL 687 100.0% 524 100.0%

financial disruption or bankru p t cy. In 2003, New York losteight nursing homes, affecting the we s t e rn and nort h e rn part sof the state as well as the Capital Region. The 2002 fi n a n c i a lconditions described in this report contributed or led to theseclosures.

The $2 billion in cuts made to nursing home reimbu r s e-ment since 1995 have helped to cripple many facilities, withinadequate inflation adjustments in the Medicaid system ef-f e c t ive ly acting as further annual funding “cuts.” State leg i s-lators deserve commendation for rejecting proposed Medic-aid cuts in the 2003/04 budget that would have ex a c e r b a t e dthe crisis. Additional cuts would have precipitated even morefacility bankruptcies and closures, disrupting the lives of resi-dents. We urge law m a kers to reject any additional reductionsin nursing home payments in the 2004/05 fiscal ye a r.

We applaud recent eff o rts to address the need to reformthe state’s Medicaid program and long-term care infrastru c-ture. We are hopeful that these eff o rts will lead the way to-wards a system that will cover the actual costs of delive r i n gnursing home care, provide seniors in need with the most ap-propriate services, and do so in a sustainable, coordinatedway.

Executive Summary (continued from page 1)

4 For ratios involving debt calculations (debt service coverage, long-termdebt to total assets, and cushion ratio), medians are calculated using onlythose facilities that reported debt on designated lines of their cost reports. 5 Hospital-based nursing home data obtained from the Healthcare A s s o-ciation of New York State (HANYS) indicated that the median three-ye a roperating margin for the years 1999 through 2001 for these facilities wa sn ega t ive five percent, signifi c a n t ly worse than the statewide median ofn ega t ive 0.5 percent.

KEY FINDINGS

This report highlights eleven key findings from our analy s i s ,which are detailed below :

1 . A majority of the nursing homes in NewYork lost money on operations in 2002.

For the first time since NYAHSA has been analyzing nursinghome cost reports in this manner, more nursing homes lost moneyon operations than gained.

The most fundamental gauge of an orga n i z a t i o n ’s day - t o - d ayfinancial health, the operating margin, measures the relationshipb e t ween expenses and revenues. A nega t ive margin indicates thatan organization is generating insufficient revenue to cover its ex-penses. It is calculated as the ratio of operating revenues minusoperating expenses, divided by operating revenues.

For the 524 nursing homes in our database, the median operat-ing margin fell from a positive 1.5 percent in 2000 to a money -losing nega t ive 0.5 percent in 2002, with 52.5 percent of homess u ffering an operating loss. The number of nursing homes thatlost money on operations gr ew from 206 in 2000 to 275 in 2002,a 33 percent increase.

F i g u re 2

We validated this troubling milestone against the operating re-sults for all 594 nursing homes that filed a RHCF-4 cost reportfor 2002 to ensure that it was not a function of our matched sam-ple. We found that 311 of the 594 homes, or 52.4 percent, re-p o rted an operating loss. This was almost identical to the 52.5percent observed in the matched set.

For not-for- p r o fit facilities, hereinafter referred to as “vo l u n-t a ry” nursing homes, the trend was even worse, as indicated inFigure 3 below. The median operating margin for vo l u n t a ry fa c i l-ities plummeted from a positive 0.8 percent in 2000 to nega t ive1.9 percent in 2002, a precipitous drop of almost 3 percentagepoints. In other words, half of all vo l u n t a ry nursing homes ex p e-rienced an operating loss exceeding 1.9 percent of their operatingr evenues. In fact, 57 percent of the vo l u n t a ry facilities in thesample lost money on operations in 2002.

County and state operated facilities, commonly called “publ i c ”facilities, fared even worse than vo l u n t a ry homes. Of the 37 pub-lic nursing homes in the sample, all 37 lost money on operations

in 2002. The median operating margin for all public facilities wa sn ega t ive for all three years. For half of these providers, theamount lost on operations exceeded 20 percent of their reve n u e sin 2002. For a 250-bed-bed nursing home, the average size of ap u blic home in the state, this nega t ive 20 percent margin trans-lates to a $4-5 million dollar loss. These deficits are placing ex-treme financial burdens on the county, municipal and state gov-e rnments that operate these fa c i l i t i e s .

A total of 133 nursing homes (25% of the sample) lost moneyfrom operations all three years. Of this number, 78 percent we r eeither vo l u n t a ry or public homes.

G r owing numbers of nursing homes experienced operatinglosses mainly because patient care revenues did not keep pacewith operating costs. For the median fa c i l i t y, operating ex p e n s e sincreased 3.6 percentage points more than patient care reve n u e sb e t ween 2000 and 2002.

2 . 2002 also marks the first time that nursing homes collectively lost money f rom operations.

As troubling as it is that a majority of the state’s nursing homeslost money in 2002, a more ominous development invo l ves aggr e-gate operating gains and losses. For the first time sinceN YAHSA began analyzing nursing home finances in a compre-h e n s ive way, statewide operating losses have outweighed operat-ing gains. This means that if all of the homes in the state we r econsidered as one nursing home, that nursing home would havebeen unable to cover its operating expenses with operating rev-enues.

As Figure 4 shows, annually decreasing gains (profits for pro-p r i e t a ry facilities and surpluses for vo l u n t a ry / p u blic fa c i l i t i e s )h ave been surpassed by total operating losses. The net operatingresult for the matched set of nursing homes fell from a positive$137 million in 2000 to a nega t ive $100 million in 2002.

The total operating performance of vo l u n t a ry nursing homeswent from a $21 million net surplus in 2000 to a net loss of $74million in 2002. Public facilities were already experiencing ana g gr egate net loss of $46 million in 2000, a figure that more thand o u bled to a net loss of $108 million in 2002. Figure 5 depictsthe average operating loss, by sponsorship group, for nursinghomes with nega t ive operating margins. Between 2001 and 2002

FIGHTING FOR SURV I VAL: THE DIRE STATE OF NURSING HOME FINANCES IN NEW YORK 3

F i g u re 3

to as “total marg i n ,” “net income” or “total surp l u s ,” is a measureof what remains after all expenses, operating and non-operating,are subtracted from operating and non-operating revenue. Nega-t ive values indicate that even when revenues from all non-recur-ring sources are factored in, they are insufficient to cover ex-penses.

The aggr egate bottom line for the facilities in the study fell byalmost $300 million from 2000 to 2002, as shown in Figure 6b e l ow. Of the 524 facilities in the sample, 72 percent ex p e r i-enced lower bottom lines in 2002 than in 2000.

F i g u re 6 A g g regate Bottom Lines of NursingHomes in Sample: 2000 to 2002 (in $ millions)

Figure 7 illustrates that the number of nursing homes that suf-fered bottom-line losses gr ew by 61 percent from 2000 to 2002.Of the 85 nursing homes that lost money all three years, twothirds were vo l u n t a ry or public facilities.


alone, the total operating losses for money-losing facilities in-creased by 37 percent.

Losses from operations are a serious issue, since they indicatea fa c i l i t y ’s inability to meet ongoing operating expenses with reli-a ble revenue sources such as patient service revenues. When anursing home incurs an operating loss, it must try to cover it inone of two ways: (1) with non-operating revenues, which areoften non-recurring (e.g., bequests), ex t r a o r d i n a ry (e.g., gains onsales of assets) or inaccessible for operations (e.g., income on re-stricted funds); or (2) from existing fund balances/equity sources.

Of the 275 facilities in this situation in 2002, 90 percent we r eu n a ble to cover these operating losses with non-operating rev-enues. As a result, these nursing homes experienced bottom-linelosses during the ye a r.

3 . For the first time in recent memory, the totalbottom line for all nursing homes was nega-tive. The number of individual nursinghomes with bottom-line losses also incre a s e ddramatically from 2000 to 2002.

Continuing the series of undesirable precedents, the aggr ega t ebottom lines of all nursing homes in the analysis fell into nega t ivet e rr i t o ry for the first time in 2002. The bottom line, also referr e d

4

F i g u re 5

F i g u re 7

F i g u re 8

2 0 0 0 2 0 0 1 2 0 0 2 $ Change % Change 2 0 0 0 - 0 2 2000-02

TO TA L $281.5 $ 110.0 $(16.8) $(298.3) - 1 0 6 %

F i g u re 4

2001. This $99.1 million represented 10 percent of the total IGTp ayments made.

Local gove rnments and their nursing homes distribute and ac-count for these revenues in a variety of ways. Many local gove rn-ments allow their nursing homes to retain approx i m a t e ly 10 per-cent of the total IGT payment, although this figure ranges from 0percent to 100 percent in other localities. Local gove rn m e n t soften use IGT proceeds to reduce the local taxpayer subsidies thatwere needed to keep their nursing homes operating.

Late in 1999, the federal gove rnment made changes to Medic-aid laws and regulations that are directly impacting New Yo r k ’snursing home IGT program. Based on current estimates, the fed-eral gove rnment is gr a d u a l ly disallowing over $900 million of the$991.5 million IGT program over a multi-year period that start e din 2002.

Although New York state has been able to use other Medicaidfunding sources to recapture most of the federal IGT funding itstands to lose, state policy makers have made no commitments toreplace the IGT funds that public nursing homes and local gov-e rnments are losing.

Using information ava i l a ble from nursing home cost report s ,we were able to identify the amount of IGT monies booked asr evenues by 27 public nursing homes in our sample. Figure 9 il-lustrates the effect on the bottom lines, showing how the dismalfinancial picture of public nursing homes in 2002 becomes cata-strophic when IGT funding is factored out.7

F i g u re 9

Public Nursing Home Finances Without IGT Income (in $ millions)

The IGT program funding has helped public nursing homes tos e rve the poorest and most vulnerable seniors and disabled per-sons. Various fa c t o r s — d i fficult caseloads, increased mandatesand relative ly high payroll costs—often cause these facilities torun significant operating deficits. These funds have been used tom o d e rnize badly outdated physical plants, subsidize uncompen-sated care and address inadequate Medicaid payment rates.

5 . Rural nursing homes, often the onlyp roviders in their communities, were inworse financial health than their urban c o u n t e r p a rt s .

Nursing homes located in the 44 counties defined as “ru r a l ”by the New York Rural Development Council were more like ly to

The trend of falling bottom lines was even more pronouncedfor vo l u n t a ry facilities, with more than half of these facilities los-ing money in 2002. The percentage with bottom line losses in-creased dramatically from 35 percent in 2000 to 59 percent in2002, as shown in Figure 8. This means that income from sourcessuch as fund-raising and reserves was insufficient to make up forthe large operating losses sustained by the facilities.

A d d i t i o n a l ly, vo l u n t a ry nursing homes in our study report e dnet ex t r a o r d i n a ry losses totaling $41.5 million in 2002. These areone-time losses that are not reflected in the bottom-line fi g u r e spresented above but can have a significant impact on fa c i l i t i e s .Considering that vo l u n t a ry facilities reported net ex t r a o r d i n a rygains totaling $17 million in 2000, the combined effect was thesubtraction of an additional $57.5 million from the aggr egate bot-tom line for vo l u n t a ry nursing homes.

Although current national benchmarks are scarce, based onour calculations and 1998 national indicators, the median totalm a rgin of New Yo r k ’s vo l u n t a ry nursing homes is lower than thatof not-for- p r o fit facilities in the nation.6

4 . All public homes in the study lost money, due in part to a reduction in federal Medicaid funding.

In yet another troubling first, 2002 marked the first year of am u l t i - year federal phase-down of a source of revenue crucial top u blic nursing homes. This funding, known as the inter- g ove rn-mental transfer (IGT) program, is based on a methodology thatmaximizes federal Medicaid funds that the state receives. IGTfunding declined by nearly 18 percent from 2001 to 2002. By thetime the phase-down is complete, the net amount the publ i chomes and their sponsoring local gove rnments receive will like lyh ave dropped by more than $90 million.

In 2002, all public homes in our sample had nega t ive operatingm a rgins. Given the precarious financial state of public homesand the crucial role they play in the state’s long term care system,loss of this funding is a substantial threat for those who depend onthese safety net providers and a significant hardship to local gov-e rnments and taxpaye r s .

Medicaid is jointly funded by federal and state gove rn m e n t sand administered by the states. A few states—including NewYork—require county gove rnments to finance a portion of thenon-federal share of Medicaid costs through direct matching pay-ments. Under the IGT program, local gove rnment funds take theplace of the state share of Medicaid funding, thereby generatingfederal matching payments without incurring a state expense.

N ew Yo r k ’s IGT program for public nursing homes began in1995. In 2001, the 48 participating facilities received MedicaidIGT payments totaling $991.5 million. Under the program, thesponsoring local gove rnment provides the state and local sharesof the payment (i.e., 50% in total). The remaining 50 percent ofthe funding comes from the federal gove rnment. New York statecaptures 80 percent of these federal funds, thereby leaving publ i cnursing homes and their sponsoring local gove rnments with a netb e n e fit of 20 percent of the federal dollars, or $99.1 million in


6 HCIA-Sachs, LLC and A rthur Andersen, LLP, The Guide to the Nurs -ing Home Industry (HCIA-Sachs, LLP and A rthur Andersen, LLP 2000),p. 6.

7 Figures are based on 27 public nursing homes that reported IGT rev-enues in a readily identifi a ble manner. The remaining nine public fa c i l i-ties in the database reported these IGT revenues diff e r e n t ly.

Financial Indicator 2002 with IGT 2002 no IGT

Average Facility Net I n c o m e / ( L o s s ) ($1.13) million ($2.50) million

Total Margin - 7 . 9 % - 1 9 . 2 %

Percentage of Facilities with Bottom Line Loss 8 5 % 1 0 0 %


experience losses, and the losses were like ly to be larger thanthose experienced by their urban peers. Of the 126 rural fa c i l i t i e sin the study, 75 percent saw their operating margins decrease be-t ween 2000 and 2002. The median operating margin for rural fa-cilities in 2002 was a nega t ive 4 percent, over 4 percentage pointsl ower than the median of .01 percent for homes in urban counties.

In our study, 54 facilities located in rural counties (43% of thetotal rural facilities) lost money on operations in each of the threeyears examined (2000-2002). This figure stood at 20 percent forhomes in urban counties.

Often the only provider in a community, rural homes play avital role in the long term care system. The closure of a rural fa-cility is like ly to result in residents needing to seek nursing homecare that is further away from their community, fa m i ly andfriends. This was the case when Community Nursing Home inthe St. Lawrence County town of Potsdam closed in 2003 due tou n s u s t a i n a ble financial pressures.

F i g u re 11

When we applied a composite measure called the Index ofRisk (described in Section 11) to rural homes, we found that 41percent of all rural facilities were at an elevated risk of bank-ru p t cy or f inancial disruption. The rate for rural vo l u n t a ryp r oviders was even higher, topping 47 percent.

6 . Liquidity continues to be a significant andg rowing problem for many nursing homes inNew York State.

Four of five commonly used indicators of liquidity, indicatorsthat measure an orga n i z a t i o n ’s ability to generate and collect suf-ficient cash to meet payroll and pay vendors, continued to declineb e t ween 2000 and 2002.

A nursing home’s ability to meet its short - t e rm financial obl i g-ations without having to liquidate its long-term assets, or discon-tinue operations, is a ve ry important factor in how lenders, in-vestors and management define its f inancial condition. In theextreme, an inability to do so can result in bankru p t cy and assetliquidation. More often, a lack of liquidity leads to technical in-s o l ve n cy, which limits a fa c i l i t y ’s ability to invest in neededg o o d s / s e rvices or to obtain credit.

The current ratio measures how well an organization is able tomeet short - t e rm liabilities out of the cash value of its current as-sets. The median current ratio for all facilities in our sample fellfrom 1.32 in 2000 to 1.25 in 2002 (a 5.3% decrease). The medianc u rrent ratio for New Yo r k ’s nursing homes is below the corr e-sponding national figure for the most recent year ava i l a ble (i.e.,1 9 9 8 ) .8

A current ratio of less than 1.00 means that a nursing homedoes not have sufficient current assets to meet obl i gations comingdue in the near future. The number of nursing homes in our sam-ple with current ratios of less than 1.00 gr ew by 13 percent be-t ween 2000 and 2002. The 2002 figure of 193 facilities repre-sents more than one third of all facilities in the sample.

D ays of cash on hand is a more refined liquidity measure thatindicates how many days of operating expenses could be cove r e dout of an orga n i z a t i o n ’s cash, cash equivalents, and liquid inve s t-ments. The median number of days of cash on hand for the 524sample facilities fell by 23 percent from 2000 to 2002.

As shown in Figure 12, over half of the nursing homes in thesample had less than 20 days of cash on hand in 2002. T h i s

6

F i g u re 10

8 HCIA-Sachs, LLC and A rthur Andersen, LLP, The Guide to the Nurs -ing Home Industry (HCIA-Sachs, LLP and A rthur Andersen, LLP 2000),p. 24.

F i g u re 12

means that these facilities did not have enough cash and cashe q u ivalents to cover three we e k s ’ wo rth of operating ex p e n s e s .The importance of the twe n t y - d ay benchmark is discussed furt h e rin Section 10 of this report .

Since a fa c i l i t y ’s cash flow is larg e ly determined by its net in-come or loss, bottom-line losses contribute to declines in liquid-i t y. Almost 70 percent of the nursing homes with less than seve nd ays of cash on hand in 2002 also lost money that ye a r.

D ays in accounts receiva ble measures the average amount oftime, expressed in average daily revenues, that elapses before ac-counts are paid. It is a useful tool for evaluating the timeliness ofr e i m bursements from third party payers such as Medicaid andMedicare. Although still worse than most recently ava i l a ble na-tional averages, this indicator showed a modest positive trendfrom 2000 to 2002. The median number of days in accounts re-c e iva ble for the homes in the analysis declined slightly, from 52.2d ays to 50.5 days.

According to a recent report, the median days in accounts re-c e iva ble for New Yo r k ’s facilities exceeded the corresponding na-tional averages in eve ry sponsorship gr o u p .9

Various factors can increase days in accounts receiva ble in-cluding delays in eligibility determinations, delays by payors inr evising rates, changes in billing procedures and less timely pay-ments from patients and/or their representatives. Because theratio is calculated based on ye a r-end financial data in this case, itis unable to measure variations in receiva bles during the ye a r.

For example, not reflected in the days in accounts receiva bl eratio for year end 2002 is the lag in recruitment and retentionfunding payments made to nursing homes. Many facilities in-creased salaries at the beginning of 2002 pursuant to new unioncontracts funded in part through recruitment and retention moniesauthorized in the Health Care Reform Act of 2002. A l t h o u g hthese facilities paid the higher wages throughout the ye a r, theneed for federal approval of the program delayed disbursement ofthe funds until December. This issue, coupled with the need tom a ke payments on the six percent gross receipts tax, made man-aging cash flow especially difficult for many homes in 2002.

D ays in accounts pay a ble (also known as average payment pe-riod) measures the average amount of time, expressed in ave r a g e

d a i ly operating expenses, that elapses before pay a bles are met.As shown in Figure 13, the statewide median value for this ratiowas 17.9 days in 2002, up from 16.5 days in 2000. Stated anotherway, the median nursing home in New York owes the equiva l e n tof about two and a half we e k s ’ wo rth of operating expenses to itsvendors at any given time.

Anecdotal information suggests that actual vendor pay m e n tperiods are ranging between 15 and 150 days, depending on pri-ority level (e.g., utility companies must be paid timely). Sincesome vendors require accounts to be “cleaned up” at the end ofthe ye a r, prevailing delays may be even longer than these va l u e sindicate.

According to 1998 national data, both vo l u n t a ry and propri-e t a ry facilities in New York had higher median days in accountsp ay a ble than their national peers.1 0

For 2002, 113 of the facilities in our sample (23 percent) hadthe equivalent of over 30 days of expenses in accounts pay a bl e ,and 19 of these facilities had values greater than 60 days. W h i l ed e l aying payments to vendors is often good financial practice, itcan lead to strained relations with vendors and ultimately higherprices for goods and services, due to unavailability of purchasediscounts and the imposition of cash on delive ry payment term sin more extreme cases.

The operating ratio is another indicator that suggests thatm a ny nursing homes are having difficulty generating enoughcash to meet operating expenses. The ratio, calculated by div i d-ing cash operating expenses by cash operating revenues, is lessthan 1.00 if a facility is generating net cash from operations.

In 2002, 188 facilities had operating ratios above 1.00, a 53percent increase over the previous ye a r. During the 2000-2002p e r i o d, the operating ratios of 381 facilities (73%) increased, an ega t ive trend for this indicator. The median value in 2002 for allfacilities was 0.98, up from 0.95 in 2000.

7 . New Yo r k ’s nursing homes are having mored i fficulty covering their borrowing costs.

Whereas liquidity ratios try to measure an orga n i z a t i o n ’s abil-ity to pay for day - t o - d ay operating expenses, coverage ratios mea-sure the fa c i l i t y ’s ability to repay debt such as a mort gage. T h eymeasure a nursing home’s relative “riskiness” as a borr owe r.

Facilities with poor scores on these indicators may have a dif-ficult time making timely payments on their long-term debt. Fa-cilities with unfavo r a ble coverage ratios are like ly to find it hard,if not impossible, to borr ow money for needed improvements orr e n ovations.

The cash flow to total debt ratio is a we l l - r egarded indicator ofdebt repayment ability and has been shown to predict bankru p t cy.It is calculated by dividing cash flow (i.e., net income/loss plusdepreciation expense) by current liabilities plus long-term debt.As with other coverage ratios, lower values are associated withgreater risk of default on fi xed payment obl i gations. Figure 14s h ows the 2000, 2001 and 2002 values for this ratio for all fa c i l i-ties and by sponsorship group.


9 I b i d, pp. 5, 6, 95.

F i g u re 13

10 Ibid, pp. 5, 6, 95.


F i g u re 14

O verall, the median ratio fell by 51 percent from 2000 to 2002.This drop is not surprising, given that cash flow is larg e ly depen-dent on total margin, which fell by nearly $300 million from 2000to 2002 (see Figure 6). Vo l u n t a ry facilities, which are the mostdependent on long-term debt, showed the lowest debt repay m e n tability during the three-year period ex a m i n e d, although cata-strophic bottom line losses experienced by public homes pulledtheir 2002 median into the nega t ives. The number of vo l u n t a rynursing homes with a ratio value of less than ten percent in-creased from 135 in 2000 to 175 in 2002, a 30 percent increase.

Debt service coverage is a commonly used measure of an or-ga n i z a t i o n ’s ability to repay long-term debt or other fi xed pay-ment obl i gations. It compares the total amount of funds ava i l a bl efor debt service to a specific ye a r ’s principal and interest obl i ga-tions. Lenders frequently require borr owers to maintain mini-mum debt service coverage ratios through what are known as“loan covenants” (i.e., conditions in the loan agreement).

The median debt service coverage ratio for all nursing homesalso fell dramatically from 2000 to 2002, as shown in Figure 15b e l ow. Based on the 2002 figures, the median coverage ratio forvo l u n t a ry nursing homes stood at 1.2, while the public fa c i l i t ymedian slid to 0.5.

In 2002, 40 percent of all nursing homes reporting debt haddebt service coverage ratios of less than 1.1, a standard threshold

value used by lenders. Figure 16 indicates that the number of vo l-u n t a ry facilities with coverage ratios of less than 1.1 rose from 60to 94 (a 57% increase) from 2000 to 2002.

Another commonly used indicator, the “cushion ratio,” indi-cates if a facility has an unsustainable debt level or a cash balancethat is too low to meet obl i gations. It is calculated by dividing thesum of cash, drawings and investments (including board desig-nated funds) by annual debt service. A ratio below 2.5 indicates alack of cushion to service debt.

Of 418 facilities for which we were able to calculate cushionratios, 241 (58 percent) had a cushion ratio below the 2.5 thresh-old in 2002. As shown in Figure 17, two thirds of all vo l u n t a ryfacilities lacked the debt service cushion that financial analy s t sdeem appropriate.

8 . Vo l u n t a ry and public sponsors, many ofwhich are experiencing financial diff i c u l t i e s ,also have the oldest physical plants on a v e r a g e .

While hands-on care is a critical component of nursing homes e rvices, so too are residential services. This means that thep hysical plant plays a major role in care delive ry, and that ongo-ing investments in fi xed assets are vitally important. Since fi xe dasset investments are necessary and can represent a major use offunds, any analysis of nursing home finances should take inve n-

8

F i g u re 15

F i g u re 16

F i g u re 17

t o ry of the age of existing fi xed assets. The age of the assets canbe considered a proxy for the need for investments in propert y,plant and equipment.

Since it is not practical to catalog the age and remaining usefullife of all nursing home fi xed assets, the average age of plant ratiop r ovides a relevant measure of the accounting age of fi xed assets.This ratio is calculated by dividing a fa c i l i t y ’s total accumulateddepreciation on its physical assets by its annual depreciation ex-p e n s e .

Figure 18 identifies the median average age of plant for 2002by sponsorship group. As shown, proprietary facilities had thel owest median accounting age, followed by voluntaries andp u blics.

I r o n i c a l ly, those facilities that are experiencing financial diffi-culties and have older physical plants in need of upgrades willalso have the most difficulty securing financing and needed eq-uity capital.

9 . Most of the financial indicators we examined are showing downward t rends for New Yo r k ’s nursing homes.

For most of the ratios and financial statement values we ex a m-i n e d, we have provided either aggr egate numbers or median va l-ues by ye a r. We also analyzed these indicators at the fa c i l i t y - l eve lto identify trends or patterns over the three-year period. A ss h own in Figure 19, the prevailing trends from 2000 to 2002 ared e c i d e d ly nega t ive for all but one of the indicators.

1 0 . G rowing numbers of voluntary nursinghomes would not be considered c re d i t w o rt h y.

As prev i o u s ly indicated, many lenders (e.g., commercialbanks, mort gage banks, etc.) impose restrictions on borr owe r sk n own as loan covenants. When an organization violates any ofits loan covenants, it is typically considered to be in technical de-fault on the loan. When this occurs, the borr ower should ex p e c tits lender to: (1) monitor monthly results closely; (2) often be re-


F i g u re 19 Facility-Level Trends on Key Financial Indicators: 2000 to 2002

I n d i c a t o r Facility-Level Findings Desired Tr e n d Actual Tr e n d

1 . Operating 366 of 524 facilities (70%) with lower I n c o m e / L o s s operating income in 2002 than 2000 Increasing for most U n f a v o r a b l e

2 . Total Margin (i.e., 375 of 524 facilities (72%) with lower total net income/loss) margin in 2002 than 2000 Increasing for most U n f a v o r a b l e

3 . Current Ratio 316 of 524 facilities (60%) with lower current Increasing for most U n f a v o r a b l eratio in 2002 than 2000

4 . Days of Cash on 326 of 523 facilities (62%) with fewer days of Increasing for most U n f a v o r a b l eH a n d cash on hand in 2002 than 2000

5 . Days in Accounts 222 of 515 facilities (43%) with more days in Decreasing for most F a v o r a b l eR e c e i v a b l e accounts receivable in 2002 than 2000

6 . Days in Accounts 261 of 500 facilities (52%) with more days in Decreasing for most U n f a v o r a b l eP a y a b l e accounts payable in 2002 than 2000

7 . Cash Flow to 355 of 524 facilities (68%) with lower cash Increasing for most U n f a v o r a b l eTotal Debt flow to total debt in 2002 than 2000

8 . Debt Service 291 of 450 reporting facilities (65%) with Increasing for most U n f a v o r a b l eC o v e r a g e lower debt service coverage in 2002 than 2000

9 . Average Age of Plant 382 of 509 facilities (75%) with greater average Decreasing for most U n f a v o r a b l eage in 2002 than 2000

1 0 . Liabilities to A s s e t s 325 of 524 reporting facilities (62%) with higher Decreasing for most U n f a v o r a b l eliabilities to assets ratio in 2002 than in 2000

F i g u re 18

1 1 . Many voluntary nursing homes are at risk of bankruptcy or serious financiald i s ru p t i o n .

We applied a model called the “Index of Risk”1 1 to the nursinghomes in our sample for which we had sufficient data to calculateall six indicators to determine which facilities are at the most riskof bankru p t cy or severe financial disruption. Individual fi n a n c i a lratios may point in different directions and give the rev i ewer anunclear picture of the overall level of financial risk of a part i c u l a ro rganization. The Index of Risk combines a number of fi n a n c i a lratios, each of which has been shown to have some use in predict-ing business failures and bankruptcies.


luctant to extend additional credit; and (3) possibly even requirethe loan’s immediate repayment.

According to nursing home financing ex p e rts, the follow i n gthree covenants are most commonly found in loan agr e e m e n t s :

This portion of the analysis focuses on vo l u n t a ry nursinghomes because facilities in this sponsorship group are the mostdependent on long-term financing from ex t e rnal sources. To fur-ther illustrate this point, the 2002 median ratio of long-term debtto total assets for vo l u n t a ry facilities was 0.48, versus 0.09 and0.18 for proprietary and public facilities, respective ly.

Figure 20 identifies the gr owing number of vo l u n t a ry fa c i l i t i e sthat failed each of these three “tests” and all three of them duringthe period 2000 to 2002.

F i g u re 20

Based on 2002 figures, 185 of the vo l u n t a ry nursing homeswould have failed at least one of these three loan covenants. A ss h own below, this means that an astonishing 78 percent of thevo l u n t a ry facilities in the sample would have been in technicald e fault on their loans based on widely accepted loan covenants.

F i g u re 21

10

Typical Nursing Home Loan Covenants

1 . C u rrent ratio of 1.00 or gre at e r;

2 . At least 20 days of cash on hand in any ye a r, and 45d ays over two ye a rs ; a n d

3 . D ebt service cove rage of 1.10 or gre ater in any ye a r,and 1.25 over two ye a rs.

KEY FOR CALCULATING INDEX OF RISK 1 2

Indicators and Ranges P o i n t s

1 . Operating margin trend over a three-year period (45 possible points):

Facilities with positive margins eve ry year and rising margins 4 5Po s i t i ve margins eve ry year by no unifo rm trend in margins 3 6Po s i t i ve margins eve ry year but declining trend in margins 2 7N e g a t i ve margin during first year fo l l owed by positive margins 2 7N e g a t i ve margin in a single year other than first ye a r 1 8N e g a t i ve margin in first and second ye a r s, or first and third ye a r s 9N e g a t i ve margin in all three years or in last two ye a r s 0

2 . Operating margin in most recent year (5 possible points)Facilities with a positive margin 5Facilities with a margin between 0% and -2% 3Facilities with a margin lower than –2% 0

3 . D ays of cash on hand (10 possible points)Facilities with a ratio in the upper quartile of all fa c i l i t i e s 1 0Second Quart i l e 6Third Quart i l e 3Fo u rth Quart i l e 0

4 . D ays in Accounts Receiva ble (10 possible points)Facilities with a ratio in the lowest quartile of all fa c i l i t i e s 1 0Second Quart i l e 6Third Quart i l e 3Fo u rth Quart i l e 0

5 . D ays in Accounts Paya ble (10 possible points)Facilities with a ratio in the lowest quartile of all fa c i l i t i e s 1 0Second Quart i l e 6Third Quart i l e 3Fo u rth Quart i l e 0

6 . Total Liabilities to Total Assets (20 possible points)Facilities with a ratio in the lowest quartile of all fa c i l i t i e s 2 0Second Quart i l e 1 2Third Quart i l e 6Fo u rth Quart i l e 0

N OTE: Indicators are re fined as discussed in end notes.

1 1 M. Tamari, Financial ratios: A n a lysis and Prediction (Paul Elek, Ltd.1978), p.102-06.1 2 For vo l u n t a ry facilities, depreciation is not subtracted as a non-cashexpense in the Days Cash on Hand and Days in Accounts Pay a ble ratios,since depreciation reimbursement must be funded pursuant to DOH reg-ulations. Meeting these reg u l a t o ry requirements reduces a vo l u n t a ry fa-c i l i t y ’s ava i l a ble cash.

F i g u re 22

As originally deve l o p e d, the Index of Risk relies on a series ofratios that measure equity, cash flow, debt, and operating marg i nover a three-year period. We have adapted the index concept tomeasure a variety of ratios most relevant to nursing home perfor-mance. The scoring key we used for calculating our index of fi-nancial risk appears in Figure 22.

The sum of the six individual scores is the Index of Risk score,which can range from 0 to 100. Based on the research underly i n gthe original Index of Risk, fi rms with index scores of less than 30points are much more like ly to go bankrupt than those with scoresgreater than 60 points, and a majority of the fi rms with scoresless than 30 points went bankrupt during the study period. In ad-dition, fi rms with low index scores are more like ly to remain inthis categ o ry than fi rms with high index scores are to drop to al ower categ o ry.13

We found that 147 of the 487 total nursing homes for wh i c hwe could calculate index values (i.e., 30%) were at greater risk ofb a n k ru p t cy than other facilities with scores of less than 30 pointsas of the end of 2002. Of this total, 81 of the facilities were vo l-u n t a ry (representing 36% of all vo l u n t a ry facilities); 52 fa c i l i t i e swere proprietary (23% of all proprietary facilities); and 14 fa c i l i-ties were public (39% of all public facilities). We chose to focusour analysis on vo l u n t a ry nursing homes because this sector isg e n e r a l ly less able to rely on outside funding than other sponsor-ship groups.

Figure 23 profiles the vo l u n t a ry nursing homes with Index ofRisk scores of less than 30. Most of these “at risk” vo l u n t a ry fa-cilities would have violated all three of the typical loan cove n a n t sdiscussed above.

F i g u re 23

C O N C L U S I O NThe declines in nursing home finances that began in the 1990s

continued in 2002. Along with the continuation of nega t ivetrends, 2002 was a year marked by several troubling milestones.For the first time: (1) the majority of the state’s nursing homeslost money on operations; (2) aggr egate operating losses ex-ceeded aggr egate operating gains and total bottom line losses ex-ceeded total bottom line gains; and (3) it cost eve ry single publ i chome in our study more to operate than they were able to generatein operating revenues. This included the state-run ve t e r a n shomes.

By any measure—profi t a b i l i t y, liquidity, debt fi n a n c i n g – N ewYo r k ’s nursing homes are in financial diffi c u l t y. As losses erode afa c i l i t y ’s balance sheet, they limit the home’s capacity to borr owfor financial needs, part i c u l a r ly long-term needs. Poor liquidity

m a kes these facilities highly vulnerable to funding disru p t i o n s ,places them at risk of default, and leaves them without fundsneeded for future needs such as asset replacement. Grow i n gnumbers of nursing homes have low coverage ratios resultingfrom poor margins and ex c e s s ive leverage. These facilities havelittle or no capacity to borr ow additional funds to reconfi g u r etheir service delive ry.

Vo l u n t a ry and public facilities continue to be hit especiallyhard by these dow n ward trends. These are the ve ry mission-ori-ented and safety net providers most like ly to provide needed ser-vices to the most vulnerable New Yo r kers, those whose care is themost difficult and least like ly to be accompanied by sufficient re-i m bursement. Nursing homes in rural counties, including manythat are sole providers of service in their communities, are alsoe s p e c i a l ly vulnerable.

Vo l u n t a ry and public facilities tend to be older from an ac-counting perspective than their proprietary peers, and are less ca-p a ble of replacing or upgrading aging assets due to lower marg i n sand other factors. Most of these facilities were constructed inN ew York before 1980, and many are now in need of replacementor substantial renovation. In addition, public facilities are ve rydependent on a Medicaid revenue source that is being phased-outby the federal gove rnment.

What should be most alarming are the implications to thes t a t e ’s elderly and disabled persons that these figures represent.Vo l u n t a ry nursing homes must use donations and reserves to sub-sidize ongoing operations, rather than investing them on pro-grams and initiatives that further enhance the quality of life ofresidents or expand services in their communities. Public nursinghomes are forced to rely on subsidies from increasingly strappedlocal taxpayers. Even the boldest and most innova t ive prov i d e r sface a level of financial insecurity that inhibits many innova t i o n sthat would benefit the lives of elderly and disabled persons.When a home is no longer able to endure the financial strain andslips into bankru p t cy, the human costs to frail seniors and dis-a bled individuals whose lives are disrupted can be signifi c a n t .The stress of leaving a familiar place that is home is stressful fora nyone. It is even more stressful for an elderly person with de-mentia.

The difficulties many providers are experiencing are not theresult of a “bad year” or a temporary setback from which they cane a s i ly recove r. These are symptoms of organizations under seve r estress that have seen their financial condition deteriorate ye a rafter ye a r. That most New York nursing homes are able to con-tinue providing high quality service while facing such fi n a n c i a lchallenges is a testament to the dedication and perseverance ofp r oviders and their staff.

At the core of much of the financial stress among nursinghomes are inadequate Medicaid payments due in large part to theantiquated 1983-based reimbursement mechanism used in NewYork and the continuing effects of previous budget cuts. As Fi g-ure 24 shows, median operating margins for homes whose Medic-aid reimbursement is based on 1983 costs (those with a 1983“base year”) were noticeably worse than for facilities with a morerecent base ye a r. In 2000, the typical nursing home in New Yo r klost more than $13 per day on each Medicaid resident they serve d,a figure that gr ows each year as Medicaid inflationary adjust-ments fail to keep up with gr owth in costs. With 70 percent ormore of nursing home residents relying on Medicaid, this is a for-mula that can only lead to financial ru i n .14


1 3 I b i d, p.102-06.

Profile of Voluntary Nursing Homes with Low Index of Risk Scores

✔ 81 voluntary facilities with scores of less than 30

✔ Median score of 17

✔ 64 (79 percent) were located outside of New York City

✔ 28 percent were in rural counties, versus 22 percent ofall voluntaries

✔ 55 (68 percent) failed all three “loan covenants”discussed in Section 10

1 4 N YAHSA Report, Medicaid Payments to New Yo rk ’s Nursing Homes:Fact vs. Fi c t i o n , April 2003.

N ew Yo rk Association of Homes and S e rvices for the A g i n g150 State Street, Suite 301A l b a ny, New York 12207-16985 1 8 - 4 4 9 - 2 7 0 7518-449-8210 (fa x )w w w. ny a h s a . o rg

F i g u re 24

N YAHSA does not believe that a “re-basing” of the curr e n tm e t h o d o l ogy to a more recent cost basis than 1983 is the answe r.What is needed instead is a much more fundamental and compre-h e n s ive re-examination of the methodolog y. In NYA H S A’s view,a ny successor methodology needs to: (1) incorporate adequatep ayments to providers for services rendered; (2) promote desiredi n c e n t ives, such as high quality of care; (3) reflect today ’s de-mands and realities, including the evolving role of the nursinghome and changing reg u l a t o ry oversight; and (4) consider theneed for periodic updates to ensure a current, relevant system.

More broadly, Medicaid and long-term care reform are essen-tial to ensure that consumers receive the services they need,p r oviders are fa i r ly reimbursed for the services they provide, andstate and local taxpayers are not burdened with a long term caresystem that relies too heav i ly on Medicaid. We commend thestate Senate and the gove rnor for taking steps toward Medicaid re-f o rm and look forward to working together on common goals.1 5

With more specific regard to nursing home payments, we supportthe proposal of the Gove rn o r ’s Health Care Reform Wo r k i n gGroup to convene a group of key stakeholders to rev i ew the cur-rent reimbursement system.

As important as fundamental reform is, howeve r, the data inthis report shows that many providers may not surv ive longenough for fundamental changes to take place. The state must actto provide immediate assistance to those facilities that are on thebrink of financial disruption due to inadequate Medicaid reim-bursement. State law m a kers should: (1) immediately updateMedicaid reimbursement rates to reflect changes in labor costssince 1993 by adding a 2001 wage equalization factor (WEF) op-tion on a “hold harmless” basis; (2) provide some immediate fi-nancial relief to the most fi n a n c i a l ly disadvantaged nursinghomes through a formula-based adjustment; and (3) offer a new“amnesty” program to allow fi n a n c i a l ly troubled facilities that arebehind in their gross receipts assessment tax payments to gr a d u-a l ly repay their obl i gations without penalties and interest.

Making any additional Medicaid cuts or otherwise increasingthe financial pressure on nursing homes would only serve to un-d e rmine the desired effect of the immediate financial assistancewe propose, and diminish the prospects for systemic reform .Such Medicaid cost containment measures, if adopted in the2004/05 state budget, would cause further harm to nursing homesand the thousands of New Yo r kers who rely on them, and must berejected.

N YAHSA PUBLIC POL ICY SER IES

Fighting For Survival: The Dire State of NursingHome Finances in New Yo r k

1 5 In 2003, NYAHSA convened a Medicaid Reform Task Force that ex-amined the ways in which Medicaid funds long term care. The task forcer e p o rt, P reserving Long-Term Care for the Long-Term Future, includes aseries of detailed recommendations and can be found on the NYA H S AWeb site at www. ny a h s a . o rg.

ABOUT NYAHSA Founded in 1961, the New Yo rk Association of Homes andServices for the Aging (NYAHSA) is the only statewide orga -nization re p resenting the entire continuum of not-fo r- p ro fi t ,mission-driven and public continuing care, including nurs -ing homes, senior housing, adult care facilities, continuingc a re re t i rement communities, assisted living and communityservice prov i d e rs. NYA H S A’s more than 650 members servean estimated 500,000 New Yo rk e rs of all ages annually.

Documents

Tamari Model Application