Table Of Content

HealthCareIndustry aurasforMMCNMUBXJUOSBtVKtS MarketUpdate Nursing Facilities May20,2003 DearFriendsofCMS: Astheregulatorsofover$500billionperyearofMedicare,Medicaid,andS-CHIPfunds,webelieveitis incumbentonus tobetterunderstand the finances ofourcontractors, healthproviders, andotherrelated businessesthatprovideservicestothemorethan70millionbeneficiariestheseprogramsserve.Healthplans, hospitals,nursinghomes,homehealthagencies,medicaldevicemanufacturers,andpharmaceuticalcompaniesare justsomeofthosewhosefinancesdependheavilyonthesepublicprograms. — IhavealwaysbeensurprisedathowlittleWallStreetandWashingtoninteract andhowcompaniesoftenpaint differentfinancialpicturesforeachaudience.Iamastrongbelieverinadequatefundingforourmajorpartnersin theseprograms,butIdonotthinktheyshouldbesayingonethingtoinvestorsandanothertoregulators(asitis occasionallyintheirinteresttodo).Ifhealthplansorprovidersarestrugglingtoserveourbeneficiaries,we shouldhaveathoroughunderstandingoftheirrealfinancialstatustoassessthetruelevelofneed.Many investmentbankingfirmsconductdetailedanalysesofmajorhealthproviders,bothfortheequityinvestorsinfor- profitcompanies,andforthedebtholdersoffor-profitandnonprofitentities.Healthsystemstypicallyprovide theseinvestorswithclearfinancialdata.Thesedatacanbeusedbyregulatorsandlegislatorstoassessfunding adequacyortheneedforregulatoryreforms. CMS'OfficeofResearch,Development&Information(ORDI)hasgatheredresearchreportsfromthemajor investmentfirms,summarizedtheiranalyses,andcondensedthemintoashort,andhopefully,understandable format.OurgoalistoprovideobjectivesummaryinformationthatcanbequicklyusedbyCMS,HHS,Congress, and their staffs that oversee these programs. The primary person at CMS assigned to this task is LambertvanderWalde.LambertpreviouslyworkedforSalomonSmithBarneyinNewYorkandisexperienced withcorporatefinancialanalysisandresearchreview.AlsoontheteamisKristenChoiwhopreviouslyworked forJPMorganinNewYorkinhealthcareequityresearch. ThisMarketUpdatefocusesonnursingfacilitycompanies,updatingourfirstreportaboutthissectorpublished February6,2002.TheindustrycurrentlyfacesissuesincludingtheeffectofthesunsetofcertainMedicareadd-on paymentprovisions,risktoMedicaidpaymentsasstatesbalancetightbudgets,andrisingliabilitycosts.In comingmonths,wewillcontinuetoreviewthemajorproviderandsuppliersectors.ThoughIamproudofthis effort,andbelieveitwilladdtounderstandingoftheprograms,wewelcomecommentsonthecontentandformat ofthisreport.Wewanttomakethisasconsumerfriendlyaspossibleforeveryonewhoreadsit.Pleaseprovide commentstoLambertvanderWaldeatlvanderwalde@[email protected]. Sincerely, TomScully REPORTS RA 997 V36 2003 w 2-oo3 CA4S/ Health Care Industry CCHrmfamDICAKSUlDKAIDSBtVKB MarketUpdate Nursing Facilities May20,2003 TomScully Administrator OfficeofResearch,Development &Information: LambertvanderWalde [email protected] [email protected] Wall Street's View of Nursing Facilities Investorsentimentismostlynegativeduetouncertaintiesrelatedto governmentpaymentandtherisingcostofliabilityinsurance. ProfitmarginscontinuetodeclineaftertheOctober 2002sunsetofover$1 billionoffederal Medicareadd- onpaymentprovisions,exacerbatingWallStreet's concernsaboutMedicaidpaymentlevels. Risinginsurancecostsandaggressivelitigationhave ledtotheexitofmanynursingfacilitychainsfrom stateswhereliabilitycostsarehigh. Analystsworryhowsomechains,especiallythose thathaverecentlyemergedfrombankruptcy,will weathertheuncertaingovernmentpayment environment. Threechainshavefiledforbankruptcyinthelastsix months. Fornursingfacilities,accesstoequityfinancingis essentiallynonexistentanddebtfinancingis availabletoonlyafew. 4 Contents ExecutiveSummary 3 WallStreet'sView 4 IndustryOverview 5 IndustryPerformance 8 Add-onPaymentSunset 8 For-profit,PubliclyTradedNursingFacilityChains 8 Not-for-profitNursingFacilities 11 Expenses 12 AccesstoCapital 14 Sources&UsesofCapital 1 Solvency 20 Not-for-profitAccesstoCapital 21 RevenueSources 23 PrivateSources 23 PublicSources 24 Summary 26 CMS* NursingFacilities-May20,2003 , ExecutiveSummary WpaelslsiSmtirseteitciasbmoourte yWeaalrl.SItnrveeestt'smeonuttlaonaolkyfsotrs'thmeaniunrscionngcefrancisliatryestehcetosrunhsaestgorfocwenrtmaionrMeendeigcaatrieveaodvde-ronthepast sectorprospects. paymentprovisions,potentialMedicaidcutsbystates,andskyrocketingliabilitycosts. TheMedicareadd-onpaymentprovisionssunsetonOctober1,2002.Congressoriginally createdtheseadd-onpaymentstohelpskillednursingfacilitiestransitionfromacost- basedtoaprospectivepaymentsystem.Averageprofitmarginsofthepubliclytraded, About$1.4billionof for-profitnursingfacilitycompaniesweredecliningbothbeforethesunset,(from2.8%in s2Mp0uea0ndy2sim.ecetanrtoenparOdocdvt-ioosbnieorns1 tbtheheeliffeiovruesrtttqhhueaqruntaoetr-rtfeoorrf-o2pf0r2o0f02i0tt2oaan2nd.d0s%m1a.i1lnl%etrhienfatfcihirilsritdtiqqeusuaarmrttaeeyrr)obfaen2h0di0ta3fh)ta.errdSteohrmebesyuintnshveeetssu(tnmdseoentwt.naTtnhoael1sy.set4s%in facilitiesmaybelessabletoabsorbthesunset'simpactduetoslimmeroperatingprofit marginsanddeclinesininvestmentincomefromendowmentsandcharitablecontributions WallStreetanalystsunderstandthatmanynursingfacilitiesusehigherMedicareand privatepayratestosubsidizelowerMedicaidpayments.Medicare,however,coversonly about10%-15%ofnursingfacilityresidentswhileMedicaidcovers65%-70%attypically HploiawgyehmreernMetMdesidsciuacbiasdriedize alnoawleyrstpecrondcieermnsraatebso.utThMeedMiecdaiicdarpeayamdedn-to.nApnraolvyisstisonwosurnrsyetthhaatsfiesxcaaclecrobnacteerdnWsamlalyStfroerecte paymentsfornursing statestoreduceorfreezeMedicaidrates.AccordingtoaJanuary2003Kaiser facilities. CommissiononMedicaidandtheUninsuredstudy,37statesplantoreduceorfreeze fundingfornursingcareinfiscal2004. Nursingfacilitymarginshavealsodeclinedduetoincreasesinpatientcareliabilitycases, averageclaimsizes,andinsurancepremiumcosts.Highandunpredictableliabilitycosts Manychainsare havebecomeasignificantdriverinmanybusinessdecisions,includingassetsales, elpixraiobthiiilnibtgiytsictvoaestlteysshawirghehe.re rdeilvaetsitvienlgyneuxrpseinnsgivfaecifliintaiensciinngthstorsuectsutraetse,sawnhderbeanlkiarbuiplittcyycfoisltisngasr.eMdaisnpyrocphoaritnisonaarteelyhigh. In2002,thethreelargestnursingfacilitychainseachhadlarge,unexpectedincreasesto theamountofresourcesreservedthatestimatefuturesettlementpayments. Althoughmostinvestmentanalystsbelievetheindustryisstruggling,manydonotbelieve thattheindustryisnecessarilyreturningtotheearlydaysofPPSimplementation,during whichtimefiveofthetopeightnursingfacilitychainsfiledforbankruptcy.Twoofthese companiesemergedfrombankruptcyin2001,andanothertwoemergedin2002.Some investors,however,areconcernedthatcurrentmarketconditionscouldresultinasecond waveofbankruptcies.SinceDecember2002,CentennialHealthcare(the12thlargest chain)andtwosmallerregionalchainshavefiledforbankruptcy. Withtheseuncertaintieslooming,accesstocapitalislimited.Newequitycapitalisalmost non-existent,whilepublicly-helddebtisavailabletoonlythehighestqualityissuers. Othersourcesofcapital,includingrealestateinvestmenttrusts(REITs)andcommercial Accesstocapitalis banks,havealsodiminishedforthosefacilitiesthathavenotbranchedoutintoothermore extremelylimited. profitabletypesofseniorcarebusinesses,suchasassistedlivingandcontinuingcare retirementcommunities(CCRCs).Theindustrywillrequireasignificantamountof capitaltorefinancematuringdebtandmaintainfacilitiesinthenear-term. NursingFacilities-May20,2003 -3- WallStreet'sView SkillednursingfacilitiesstruggledaftertheBBAandprofitmarginscontinueto declineduetothesunsetofcertainBBRAandBIPAadd-onprovisionsonOctober1, 2002.1Congresscreatedthesetemporaryprovisionstohelpnursingfacilitiestransition fromacost-basedtoaprospectivepaymentsystem.Waxingandwaningprospectsfor legislationthatwouldrestoretheseadd-onpaymentshavecloudedtheoutlookforthe DecreasedMedicare sector,whoseprofitmarginshavebeendeclining.JerryDoctrowofLeggMasonwrites, paymentshave "2002beganandendedwithconcernsovergovernmentreimbursementfornursinghome rmaerdguicnesd.profit noopte-rfaotro-rpsrotfaiktihngomaetso,llaosnweslhlaraesptrhiecelsa.r"geTrhcehafiutnusrtehiastehsapveeciraelcleynmtluyrrkey-efomrertgheedsmfarlolmerand Chapter11bankruptcyfilings.A.J.RiceofMerrillLynchdescribesCMS'recently proposed2.9%fullmarketbasketincreasetoMedicareSNFpaymentsinfiscal2004as "welcome,"although"thenursinghomeindustrycontinuestobeindirestraights...." Withstatesunderincreasingfiscalpressure,analystsworrythatMedicaidnursing facilityratesmaybefrozenorreduced.EveryWallStreetnursingfacilityanalystis concernedstateswillfreezeorcutMedicaidpaymentstonursingfacilityprovidersdueto mountingfiscaldistressandrisingMedicaidcosts.Unlikethefederalgovernment,many statesmustbalancetheirbudgets.Asstaterevenuesfall,fundingmustbecut.Several stateshaveannouncedMedicaidproviderpaymentcuts,othershavemaintainedexisting Innnuovtresbsietnogarbsflawceioltriotriayebstshwoiarltlb Wleavlells,StarneedtathsamtalflorermonsutmbneurrshianvgefaacnilniotiuenscheidghmeordeMsedtiicnacrreeaspeasy.mIetnitswhiedlpeslysuubnsdiedriszteoloodwbeyr Medicaidcuts. Medicaidpayment.WiththesunsetofMedicareadd-onprovisions,investorsworrythat nursingfacilitieswillnothavemuchroomtoabsorbpotentialMedicaidcutsaswell. Skyrocketingliabilityinsurancecostincreasesareamajorcontributortowardthe exitorbankruptcyofnursingfacilityoperatorsincertainstates.JasonKrollofBear Stearnsestimatesthatnursingfacilityliabilityinsurancecostscontinuetorisebetween 25%and35%.Boththenumberoflawsuitsper1,000bedsaswellastheaverageclaim sizehavetripledoverthepasttenyears,accordingtoAONRiskConsultants.Unexpected materialincreasesininsuranceaccruals(i.e.,reservedresourceswhichestimatefuture settlementpayments)havealsodepressedstockprices:in2002,Beverly'sannual Aggressivepatient insuranceaccrualsgrew50%to$66million,Kindred'sgrew50%to$82million,and cdarirveelnituipgaitinosnuhraansce ManorCare'sgrew20%to$72million.Doctrowwrites,"[V]eryhighliabilityexpense premiumsand levelswillcontinuetopressurenursinghomeoperatorcashflowsandoperatingmargins uncertaintyoverthe forthenextyearortwoatleast,insomecasesforcingfirmsintobankruptcy toifmfiuntguraensdetmtalgenmietnutde reorganizationwhenliabilitycostsareaddedtoMedicareandpotentialMedicaidcuts."In payments. stateswhereliabilitycostshavebecometooburdensome,orwhereliabilityinsurershave beenunwillingtoofferproductstolong-termcareproviders,nursingfacilitiesarebeing closedordivested.WallStreetanalystsbelievestatetortreformmayhelpcontrolrising costs. 1BBA:BalancedBudgetActof1997. BBRA:BalancedBudgetRefinementActof1999. BIPA:BeneficiaryImprovementandProtectionActof2000. cms/ NursingFacilities-May20,2003 -4- * IndustryOverview Nursinghomesprovidebothshort-termrehabilitativeandlong-termcareforpatientswho requireskillednursingandtherapycareonaninpatientbasis.Thereareabout16,500 nursinghomescertifiedtoprovideMedicareand/orMedicaidcareintheUnitedStates, withapproximately1.8milliontotalbeds.About3.5millionpeoplewillliveinanursing homeduringthecourseofayear. Skillednursingfacility(SNF)istheMedicaredesignationforafacilitythatprovides beneficiarieswithshort-term,residentially-basedskillednursingandtherapycare. MedicareSNFcoverageislimitedto100daysperspellofillnessforthosebeneficiaries whorequiredailyskilledcarefollowingadischargefromastayinanacutecarehospital cMoevdeircanruersdionegscnaorteon lastingatleastthreedays.MedicaredoesnotcoverSNFcareonalong-termbasis.If along-termbasis,as beneficiariescontinuetorequirecareinaskillednursingfacilityonceMedicarecoverage Medicaiddoes. expires,theycanpayout-of-pocket(privatepay)aslongastheyhaveassetsorsufficient income.Oncetheirassetsare"spent-down,"theybecomeMedicaideligible.2MostSNFs arealsocertifiedasnursingfacilitiesunderMedicaidandfurnishMedicaidandprivate paypatientswithacombinationofskilledrehabilitativecareandlong-termtreatmentfor functionaldeficitsandchronicconditions. Medicareclassifiesabout15,000nursinghomesasSNFs.About85%ofSNFsare freestandingnursinghomeswhiletheother15%arehospital-based(aSNFunitofan acutecarehospitalorunderadministrativecontrolofahospital).Three-quartersof freestandingSNFsareoperatedasfor-profitentities,whilethemajorityofhospital-based SNFsareattachedtonot-for-profithospitals. Intotal,approximately65%ofnursinghomesareownedbyfor-profitentities,while28% areownedbynot-for-profitorganizationsandtheremainderareownedbygovernment agenciesusuallyatthecityorcountylevel.AbouthalfofallfreestandingSNFs,ortwo- thirdsofallfor-profitSNFs,areownedoroperatedbychains.Manyofthelargestchains alsohavesignificantnon-nursingfacilitylinesofbusinessincludinghomehealthservices, long-termacutecarehospitals,andassistedlivingfacilities.Thefinancialresultsforthese chainsarepresentedonaconsolidatedbasisinthisreport. Figure1:NursingHomeFacilitiesandBeds,byTypeofOwnership TypeofOwnership NumberofFacilities Percent NumberofBeds Percent 6Fhoo5rm%-eprosof.fnituresnitintgiesown NFGoootrv--efporrronf-mipetronftit 1401,,,670175196 62586...441%%% 1,411828508,,,796042336 62667...271%%% Total 16,446 100.0% 1,795,272 100.0% Source:CMS,OSCARdataasofApril2003. Theindustryremainsveryfragmented,withnodominantproviders.AsofApril2003,the toptennursingfacilitycompaniesbybedcountaccountedfor15.5%ofbeds,declining from18.5%inJanuary2002.Thelargestchainshavedivestedbedsfasterthantheoverall sector.Thecombinedbedcountofthetoptenchainsshowedadeclineof17.9% comparedtoanoveralldeclineinnursingfacilitybedsof2.1%.Thistrendmaybedueto recentexitsofthelargestchainsfromstateswithhighliabilitycostssuchasFlorida. IncomeandassetteststodetermineMedicaideligibilityvaryfromstatetostate CA*S t NursingFacilities-May20,2003 -5- Figure2:TopTenNursingHomeFacilityCompaniesbyBedCount NumberAopfril-0%3ofTotal NumbeJranoufary%-0o2fTotal ChaNnugmebeinr Beds Beds Beds Beds ofBeds BeverlyEnterprisesInc. 49,396 2.8% 61,716 3.4% -20.0% ManorCare,Inc. 38,666 2.2% 39,659 2.2% -2.5% fTshaeahscvetteeolrrda.trighveaesnstttechdheaboievndesrsall KSGMIineautnnrneedigsrHnrieeeasadrtleHHHtdeeehaHaacllelattatrhhlhectVaGCherarenSro,teeuur,pIvr,niIeccns.Ice,n.s(c,If.noIcrn.mc.erlyVencor) 3322246454,,,,,247126106677294 21111.....04944%%%%% 3433228489,,,,,396261008619726 22211.....14186%%%%% ----2231-42486.....92324%%%%% LifeCareCentersofAmerica 16,587 0.9% 19,928 1.1% -16.8% TheEvangelicalLutheranGoodSamaritanSociety 14,892 0.8% 16,077 0.9% -7.4% ExtendicareHealthServices.Inc. 13,600 0.8% 17,529 1.0% -22.4% Top10Total 277,960 15.5% 338,684 18.5% -17.9% TotalBeds 1,795,272 100.0% 1,834,448 100.0% -2.1% Source:CMS,OSCARdata. AccordingtoCMS'OfficeoftheActuary,U.S.spendingonfreestandingnursinghome From1980to1997, carewas$98.9billionin2001,up5.5%from2000.AsseeninFigure3,national Medicarenursing freestandingnursinghomeexpendituresgrewfrom$17.7billionin1980to$85.1billion etshoipotgeamhnltednitusnirpgmse.einsndgmionhrgoemgrteheawn iMbineldl1ii9oc9na7,,rgegrroforwewtethshtoaofnfd3i30n82g12n%%uroosrrinaagnnhaavoveemrreaaggeeexpaaennnnnduuiaatllurrreaastteeeooxffpl93o.0d7.e%0d.%.DfurNrouimrns$gi3nt0gh7ihsmosimlalemieocnapreteroiw$oa9d,.s6one ofthefastestgrowingcomponentsoftheMedicareprogramduringthattime. Figure3:NationalFreestandingNursingHomeCareExpenditureGrowth,1980-2012E BeforeBBA1997mandatedtheimplementationofSNFPPS,MedicarepaidSNFsbased ontheirreportedcostsofcare,subjecttocertainlimitsforroutinecosts{e.g.,nursing, room,andboard).Notbeingsubjecttothesamelimits,ancillaryservicesskyrocketed duringthistime.Utilizationalsogrewrapidly,whileaverageacute-carehospitallengthof staydecreased. Tocurbthesegrowthrates,CongressmandatedtheimplementationofaSNFprospective paymentsystem,whichpaysaperdiemrateadjustedforresourceneedsandgeographic c/urs, NursingFacilities-May20,2003 -6- location.TheimplementationofSNFPPScausedMedicarefreestandingnursinghome spendingtodecline18%in1999andnationalfreestandingnursinghomespendinggrew only0.5%.GrowthpickedupagainafterCongresscreatedtemporaryadd-onpayment provisionstohelptheindustrytransitionfromthecost-basedtothePPSinBBRA1999 andBIPA2000. CreditSuisseFirstBoston(CSFB)believesthatMedicare'sprospectivepaymentsystem forinpatienthospitalstays,implementedin1983,encourageshospitalstodischarge patients"quickerandsicker"comparedtoacost-basedpaymentsystem.Theaverage acute-carehospitallengthofstaydecreasedfrom4.95daysin1992to4.00daysin1999, adropof19%.CSFBbelievesthistrendresultedinrelativelysickerhospitaldischarges, increasingthenumberandacuityofcasesrequiringskillednursingfacilitycare.Increased utilizationandpaymentperstaycontributedtotherapidriseofMedicarenursinghome careexpendituresinthe1990s. NursingFacilities-May20,2003 -7- IndustryPerformance Add-onPaymentSunset About$1.4billionofSNFadd-onpaymentprovisionssunsetonOctober1,2002.For fiscal2003,theeffectofthesunsetwaspartiallyoffsetbyamarketbasket3increaseof 3.1%minus0.5%assetforthinBIPA2000,foranetincreaseof2.6%(about$400 million).Inaddition,SNFsretainedabout$1.0billionofseparateadd-onpaymentsin fiscal2003,whichwillremainineffectuntilcase-mixrefinementsaremadetothe resourceutilizationgroup(RUG)system.4CMShasindicatedthatitdoesnotplanto implementthecase-mixrefinementsforfiscal2004.CMSisrequiredtoreportto CongressalternativestotheexistingRUGsystembyJanuary1,2005.Theadd-on provisionsunsetisfurtherdescribedinthetextboxonpage9.InMay2003,CMS proposedafullmarketbasketincreaseof2.9%toMedicareSNFpaymentsforfiscal 2004.Theproposedrulewillresultinnearly$400millioninincreasedpayments. For-profit,PubliclyTradedNursingFacilityChains Themajor,publiclytraded,U.S.-basedcompaniesinthenursingfacilitysectorareManor Care,BeverlyEnterprises,ExtendicareHealthServices(theU.S.subsidiaryofthe Canadian-basedExtendicare,Inc.),KindredHealthcare(formerlyVencor),Mariner HealthCare(formerlyMarinerPost-AcuteNetwork),SunHealthcare,andGenesisHealth Ventures.KindredandGenesisbothemergedfrombankruptcyproceedingsin2001. MarinerandSunemergedfrombankruptcyin2002.IntegratedHealthServices,whichis notpubliclytraded,continuestoundergoChapter11bankruptcyrestructuring. Figure4:MarketCapTable,U.S.NursingFacilityCompanies ($inmillions) Ticker MarketCap ManorCare HCR $2,113 GenesisHealthVentures GHVI $672 BeverlyEnterprises BEV $322 KindredHealthcare KIND $293 ExtendicareHealthServices EXE/A $200 MarinerHealthCare MHCA $91 SunHealthcare SUHG $15 NSootuer:ceM:aBrlkoeotmcbaeprigt.aliAzsatoifonMiasyam15e,as2u00r3e.ofcompany'sequityvalueorsize,calculatedbymultiplyingsharepricebythenumberofsharesoutstanding. 3CMSusesaskillednursingfacility"marketbasket"tomeasureinflationinthepricesofanappropriatemixof goodsandservicesincludedincoveredskillednursingfacilitystays.Thepriceofitemsinthemarketbasketis measuredeachyear,andMedicarepaymentsareadjustedaccordingly. 4MedicarepaysforSNFservicesunderaprospectivepaymentsystem(PPS).UnderthePPS,eachbeneficiaryis designatedtooneof44resourceutilizationgroups(RUGs).EachRUGincludespatientswithsimilarserviceneeds thatareexpectedtorequiresimilaramountsofresources.TheperdiempaymentrateforeachRUGiscalculatedas thesumofthreecomponentsfor1)routineservices(e.g.,roomandboard,linens,andadministrativeservices),2) nursingservices,and3)therapyservices. NursingFacilities-May20,2003 -8- ' . Post-BBAMedicareAdd-OnPayments Aftertheskillednursingfacilityindustryassertedfinancialdifficultyasaresultoftheprospectivepaymentssystem (PPS)implementation,CongresspassedseveraltemporaryMedicarereimbursementincreasesinBBRA1999and BIPA2000tohelpskillednursingfacilitiestransitionfromacost-basedpaymentsystemtothePPS.Congress mandatedtheSNFPPSinordertoencourageefficiencyandcontrolskyrocketingcostsofMedicarenursingfacility care.DeutscheBank'sHenryReukaufbelievesthenursingfacilityindustryhasalreadycutcostssignificantlyand doesnothavemanymoreremainingavenuestoimproveefficiency. Figure5:SNFAdd-onPaymentDescriptions Average PerDiem Annual Effect, Payments, Add-onDescription Statute Comment Status FY2003 FY2003 a2c0ui%tyinRcUreGassef'or15high- B19B9R9A 2H0H%SirnecfrienaessetwhielRlUbeGseliminatedonce Current $19.88 $1.0billion 6re.h7ab%iliintcarteiaosnetfhoerra1p4yRUGs B20I0P0A RaBenBdaiRdrdAeictt1ieo9dn9a9tlhfe1r21om0R%U3Giosnfctrheoasseeg1r5aRntUeGdSinto Current Neutral NBienBcurtRerAaasle1ti9on9290% 4%increaseacrossallRUGs B19B9R9A pInacyrmeeanstedraatdej,uesxtcelduFseidveeroalf2pe0r%iidnecmrease S1u0n/1s/e0t2on $9.94 $500million 16.66%increasefornursing BIPA Increasednursingcomponentofcase-mix Sunseton $17.89 $900million component 2000 adjustedFederalrate 10/1/02 (EielnnidamecixtneraedtdibuoycntBoiofBnmAoafr1k19e.9t70)b%asket B20I0P0A if1in.sb0caa%lsei2n0rc0art2eearswaehteeisnnfCisMcaSlyaepaprli2e0d01uprdeattaeinfeodr Current $1.99 $100million SNooutrec:eA:vCeMraSg.eMedicareperdiempayment,includingbeneficiaryco-payment,isestimatedtobe$295infiscalyear2003.ThefiscalyearforSNFMedicarepayment wb(1ie)tgihRnesssiomOiuclrtacorebseUertriv1liiczeatnieoendGsrtohautpa(reRUeGx)p:ectUenddetrortehqeuSirNeFsipmriolsaprecatmiovuenptasyomfernetsosuyrscteesm.,EeaacchhRbeUnGefihcaisaraypiesrddesiiegmnaptaeydmetontonreatoe.f44RUGs.EachRUGincludespatients Provisionsforthe4%across-the-boardincreaseandthe16.66%nursingcomponentincreasesunsetasscheduledon October1,2002.WallStreetanalystsgenerallydonotexpectlegislationtorestoretheseadd-onpaymentsgiven increasedconcernsaboutdeficitspendingandconflictintheMiddleEast.EvenAnkurGandhi,aGoldmanSachs debtanalystwhoisknownforheratypicallymorepositiveoutlookonthenursingfacilitysector,characterizesthe negativeimpactoncertainnursingfacilityoperators: [T]heOctober1,2002reductioninMedicarereimbursementhasbeendetrimentalforthenursinghome sector.This,combinedwithMedicaidratepressureandincreasesinprofessionalliabilitycosts,hasresulted inaworseningofoperatingresultsfornursinghomesandminimalfuturegrowthpotential,alackofaccess tocapitalmarketsformanyoperators,andbankruptciesofsmallerchainssuchasCentennialHealthcare andnowpotentiallySunHealthcare. c/vrs, NursingFacilities-May20,2003 -9-