For the first four months of 2005, nursing home operators, and investors, were all a twitter about looming cuts in Medicare reimbursement. The industry is just a few years into the financial rebound from the Medicare changes in the late 1990s that had quite a negative earnings impact on many of the largest skilled nursing companies, and no one wants to revisit those disastrous times. But when the mid-May recommendations from CMS came out that increased the rates by a full market basket factor of 3%, combined with a revision of the RUG categories that added nine new groupings for high levels of care, nursing home stock prices jumped and everyone breathed a collective sigh of relief.
Although nothing is final until the ink dries, and the Medicare revisions are still just “proposed,” there is a reasonable chance that any tweaking will be minor. Now, the focus will be on Medicaid and President Bush’s desire to cut up to $10 billion from the Medicaid budget over the next five years. Total annual spending on Medicaid is over $300 billion, so a $2 billion a year cut in the federal portion represents close to a 1% cut in the federal contribution. What nursing home operators fear is that a significant portion will come out of their funding. Nursing home care is the largest budget item in most state budgets, averaging 22% across the states. The governors spent last week in Washington pleading with Congress that Medicaid as we know it has got to be completely revamped before it bankrupts a few states. While we completely agree with that sentiment, what the governors left out of the discussion was the current surge in state tax revenues. Although the boost in revenues is welcome, the timing does not exactly help the governors’ case.
According to a recent report from the Nelson A. Rockefeller Institute of Government, total state tax revenue collections are up 9.5% for the first three quarters of the fiscal years ending June 30, 2005, compared with the previous period in 2004. California, which has had its well-publicized budget battles between the “Governator” and special interest groups, has seen a 17% increase in those first three quarters, with four other states posting double-digit increases as well. Although these increases will not last forever, and are usually only good until the next recession, the governors’ request for the necessary help, or change, may fall on deaf ears, especially if the surpluses increase and the excess funds disappear into a discretionary spending abyss. But with almost two-thirds of the nation’s nursing home patients funded by Medicaid, the long-term problem will not disappear with a cyclical increase in tax revenues, especially with the 78 million baby-boomers knocking on the entitlement door.
Related links:
Read the press release from CMS on the Medicare reimbursement changes
Get the inside scoop on senior care M&A at The SeniorCare Investor
Information on health care M&A activity, including assisted living facilities
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