KANSAS CITY, Mo. -- The bankruptcy filing of another nationwide nursing home operator this week points up the increasing fragility of an industry reeling from Medicare cuts, loads of debt and heightened Justice Department scrutiny.

Integrated Health Services Inc., which sought Chapter 11 protection in Delaware on Wednesday operates five facilities in the Kansas City area with a total of 586 beds, or about 5 percent of all the beds in the metropolitan area.

The company is the seventh big provider to seek bankruptcy protection in the last six months.

Los Angeles resident David Schafer said he was disturbed when his lawyer called Friday and informed him of the Integrated Health Services bankruptcy. His mother, 84-year-old Alma Schafer, has lived in Alpine North nursing home in Riverside since last September.

"I don't know what this means," Schafer said, noting he was happy with the care his mother had received. "I would have appreciated some notification from them if this was in the works."

Schafer said it had been hard to find the right nursing home for his mother, who has Alzheimer's disease.

"It's such a difficult process to find the right facility," he said. "The idea of having to go through this again is something that will be another emotional roller coaster to go through, not to mention the wear and tear and psychological strain it puts on my mom."

Marc Levin, Integrated Health Services' executive vice president, said Friday that all of the company's nursing homes would remain open and the bankruptcy would not lead to employee layoffs.

"The residents and employees should see no change as a result of the recent filing," Levin said. "At each facility, the administrator is taking action to notify and reassure affected parties, including residents, family members and employees."

Besides its locations in the Kansas City area, Integrated Health Services runs nursing homes in St. Louis and Tarkio, Mo., as well as the Kansas cities Wichita, Topeka, Hutchinson, Great Bend and Ellinwood.

Integrated Health Services, based in Sparks, Md., attributed its problems to Medicare cuts resulting from the Balanced Budget Act of 1997, which shifted Medicare reimbursements from a system based on operating costs to one based on fixed fees.

"This situation hurts the sickest, most vulnerable Medicare beneficiaries -- those needing the most intensive skilled nursing care," Charles Roadman, president and chief executive of the American Health Care Association in Washington, said in a release. "…this crisis has reached epidemic proportions."

For those who meet its guidelines, Medicare pays 100 percent of skilled nursing care or skilled rehabilitation for the first 20 days of a resident's stay in a skilled nursing home. Medicare pays part of those costs for the next 80 days, but does not pay for long-term placements. Those costs are borne by the residents, third-party private payers or Medicaid, which covers indigent patients.

The Missouri Division of Aging and the Kansas Department of Health and Environment were informed of the filing by Integrated Health Services, which plans to continue operating under Chapter 11 while it restructures its debts. The company has obtained up to $300 million in financing from Citibank.

Integrated Health Services joins national operators Vencor Inc., Sun Healthcare Group Inc., Mariner Post-Acute Network Inc., Lenox Health Care Inc., Frontier Group Inc. and NewCare Health Corp. in bankruptcy court.

Published estimates put nursing home assets in Chapter 11 at $10 billion.

All told, 1,651 skilled nursing facilities, accounting for 175,000 patients annually, are in bankruptcy, according to the American Health Care Association. That accounts for nearly 10 percent of the industry.

Most operators incurred substantial debts as they went on nursing home buying sprees, banking on easy money from Medicare. A recent report by the General Accounting Office noted industry losses "may reflect a combination of inflated purchase prices" and lower expectations for the business.

"For the past several years, these companies went on an aggressive acquisition binge, partially to maximize their Medicare reimbursements from ancillary medical services," said Michael Flanagan, a lawyer who represents the Tutera Group, a Kansas City-based manager of 50 nursing homes in 10 states. "But they did it without regard for whether the prices made any sense for the nursing homes as stand-alone operations."

Many of the bankrupt companies depended on Medicare for the rehabilitation services they provided to short-term residents, who typically spent a couple of weeks in a nursing home following a hospital stay.

The Balanced Budget Act of 1997 "cut too deep," said John Kiefhaber, executive vice president of the Kansas Health Care Association, which represents 200 for-profit and nonprofit nursing home and assisted care facilities.

"When you cap rehabilitation services, people run out of that benefit too quickly and their rehab isn't finished yet. So they have to go back to the hospital and you've accomplished the opposite of what you wanted to accomplish."

Last year the American Health Care Association urged Congress to restore $7 billion of more than $15 billion that was cut from Medicare as part of the 1997 balanced budget deal. Congress responded with the Balanced Budget Refinement Act, which will restore about $2.7 billion for skilled nursing care.

But the act came "too late for the companies that were heavy into rehab," Kiefhaber said.

Dan Rexroth, vice president of health services for John Knox Village, a long-term care community in Lee's Summit, said the funds restored by Congress represent a "small adjustment. It certainly won't make up for the cuts."

Mary Schworer, chief executive officer of Foxwood Springs Living Center in Raymore, said Foxwood opted out of the Medicare program at the end of 1998 because it could no longer operate skilled nursing beds on the money it got from Medicare. Other long-term care centers, such as John Knox Village, have shifted costs to residents, who pay out of their own pockets.

But it's not just declining Medicare reimbursements that have eaten into operators' profits. The General Accounting Office report said that additional factors -- including high capital costs, reduced demand for nursing home support services such as rehabilitation and substantial one-time expenses and write-offs -- had contributed to the strain on nursing home finances.

Beverly Enterprises Inc., the largest U.S. nursing home chain, said in November that its third-quarter earnings fell 63 percent amid declining Medicare revenues.

But falling earnings aren't the industry's only problem.

The Justice Department announced Thursday that Beverly, which has nursing homes in Kansas and Missouri, had agreed to pay $175 million -- the biggest settlement ever in a nursing home case -- and relinquish 10 of its nursing homes for defrauding Medicare.

Vencor, too, was investigated for its Medicare billing practices. The company last year agreed to a $90 million repayment plan, which will extend through 2004.

And NewCare's chairman and president face Medicaid fraud charges in Florida.

The two have denied wrongdoing.

Despite the recent bankruptcies, the financial woes of the national operators may not be a bad development, as inefficient operators are weeded out and companies get their operating expenses in line with reduced reimbursements.

Many experts said the corrections were overdue.

"The strong facilities that can operate with lower Medicare payments and still provide a high quality of care will continue to survive," said Matt Hickam of the Office of the State Long-Term Ombudsman, which advocates for Kansas nursing home residents. "What you're seeing is a culling of the herd.

"I'm sure that wasn't intended…when Congress passed the Balanced Budget Act, but maybe things will work out for the best."

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