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Chain Reaction
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Charlene Harrington
University of California, San Francisco
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Chain Reaction
a b
Martin Kitchener PhD , Ciaran O'Neill PhD &
c
Charlene Harrington PhD
a
Department of Social and Behavioral Sciences ,
University of California , San Francisco, USA
b
University of Ulster , U.K.
c
Department of Social and Behavioral Sciences ,
University of California , San Francisco, USA
Published online: 11 Oct 2008.
To cite this article: Martin Kitchener PhD , Ciaran O'Neill PhD & Charlene Harrington
PhD (2005) Chain Reaction, Journal of Aging & Social Policy, 17:4, 19-35, DOI:
10.1300/J031v17n04_02
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GENERAL ARTICLE
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Chain Reaction:
An Exploratory Study
of Nursing Home Bankruptcy in California
Martin Kitchener, PhD
University of California, San Francisco
INTRODUCTION
In 2001, there was mounting concern over reports that 1,800 of the
nation’s 16,500 nursing homes were operating in bankruptcy while re-
structuring under protection of Chapter 11 of the U.S. Bankruptcy Code
(American Health Care Association [AHCA], 2001). In contrast to the
knowledge of hospital failures derived from national datasets and so-
phisticated models (Lee & Alexander, 1999), fewer data and limited re-
search presented policymakers with an inadequate basis from which to
assess the nature or scope of nursing home bankruptcy (Centers for
Medicare and Medicaid Services [CMS], 2002a).
At the national level, the nursing home industry depicted a “rising tide”
of bankruptcy, attributed it to the 1998 introduction of the Medicare
Nursing Facility Prospective Payment System (PPS) and demanded
higher reimbursement rates to ensure facility survival and quality (Apple-
by, 1999; AHCA, 2001). By contrast, the U.S. General Accounting Of-
fice (GAO, 2000) ascribed the bankruptcy of five of the largest chains
(multi-facility organizations) to factors including poor business deci-
sions. In California, as in other states, a lack of research evidence left per-
ceptions to be shaped by providers’ framing of the issue and media
coverage of a small number of sudden facility closures involving: the
Kitchener, O’Neill, and Harrington 21
CONCEPTUAL FRAMEWORK
Facility Characteristics
revenues (HCIA & Arthur Andersen, 1999), better facility financial sta-
tus (Cohen & Spector, l996), and fewer closures (Angelelli et al., 2003).
California nursing home cost reports for 1999 show that facilities with
1-59 beds had an average loss of income per patient day of $4.86, com-
pared with earnings of $1.82 per patient day for facilities with 60-99
beds, and earnings of $2.55 per patient day for facilities with 100 or
more beds (California Office of Statewide Health Planning and Devel-
opment [COSHPD], 2002).
Occupancy Rates. Nursing home studies report that facilities with
lower occupancy rates have higher average patient costs (Ullmann, 1984)
and are more likely to close because of poor quality of care (Angelelli et
al., 2003). Hospital studies also suggest that low occupancy affects fa-
cility financial position and hence, the likelihood of bankruptcy (Wert-
heim & Lynn, 1993).
Chain Membership. Cost studies of hospitals and nursing homes re-
port that chain facilities have generally lower operating costs (Arling et
al., 1991; McKay, 1991) that could lead to better financial status, and
hence reduce the likelihood of bankruptcy.
Ownership Type. While nursing home ownership type (e.g., for-
profit, not-for-profit) is associated with facility outcomes including li-
censing termination (Angelelli et al., 2003) and closure (Kitchener et
al., 2004), non-profit and government facilities are omitted from this
study because they are not eligible to declare Chapter 11 bankruptcy.
Expenditure Factors
Resident Characteristics
Market Competition
(Zinn, 1994; Banaszak-Holl et al., 1996) and that facilities are more
likely to fail (Angelelli et al., 2003). Thus, more competitive county
markets were expected to be associated with facility bankruptcy.
Sample
The primary sources of data for this study were the cost and utiliza-
tion reports compiled from the uniform reports that all California fa-
cilities submit for all payers (COSHPD, 2002). Table 1 displays the
variables selected to operate our conceptual framework, their defini-
tions, data sources, and the hypotheses for facility bankruptcy.
All facility and market characteristics (Herfindahl Index) were taken,
or calculated, from COSHPD (2001) cost reports. Consistent with stan-
dard practice in bankruptcy studies, revenue and cost variables were
standardized by resident day, and all financial data were examined for
the year prior to bankruptcy (1998-99). Resident characteristics were
taken from facility utilization reports (COSHPD, 2001). Because other
acuity measures were not available for this study, facility average need
for assistance with activities of daily living (ADL) data were taken from
26 JOURNAL OF AGING & SOCIAL POLICY
Hypotheses
Facility Characteristics
Number of Beds Total number of licensed beds. COSHPD -
Cost Report
Occupancy Rate Resident days divided by bed days. COSHPD -
Cost Report
Revenue Factors
Percent Medicare Days paid by Medicare as percent of total days COSHPD +
Resident Days care per facility. Cost Report
Percent Medicaid Days paid by Medicaid as percent of total days COSHPD -
Resident Days care per facility. Cost Report
Los Angeles Region Facilities receiving lower Medicaid Medicaid +
reimbursement rate for L.A. counties. Rate Areas
Bay Area Region Facilities receiving higher Medicaid Medicaid _
reimbursement rate for Bay Area Counties. Rate Areas
Expenditure Factors
Administrative Costs Total administrative costs standardized by COSHPD +
per Resident Day resident days. Cost Report
Maintenance Costs Total maintenance costs standardized by COSHPD +
per Resident Day resident days. Cost Report
Net Related Party Total Receivables minus Payables from COSHPD _
Payables Per related party companies standardized per Cost Report
Resident Day resident day.
Nurse Staffing Hours Total productive hours (excluding vacations, COSHPD +
per Resident Day sick days, mealtimes) for: full-time, part-time, Cost Report
and contract staff; directors of nursing;
supervisory and registered nurses (RN),
licensed practical/vocational (LVN/LPN) for
the year, standardized by resident days.
Financial Indicators
Profitability Net Income Margin: ratio of net income to COSHPD -
total healthcare revenue. Higher ratio shows Cost Report
a stronger position.
Liquidity Acid Test Ratio: cash plus marketable COSHPD -
securities divided by total current liabilities. Cost Report
Higher ratios indicate a stronger financial
position.
Solvency Liability to Assets Ratio: total liabilities to total COSHPD +
assets. Higher ratios show a weaker position. Cost Report
Resident Characteristics
Percent Aged Over 85 Annual percent of facility residents aged over COSHPD +
85 years. Utilization Rpt
Percent Black Annual percent of African American facility COSHPD +
residents. Utilization Rpt
Kitchener, O’Neill, and Harrington 27
Analysis
Given the exploratory nature of the project, the available data, and
the sample characteristics (all identified bankrupt facilities being chain
members), the dataset was analyzed descriptively in three main steps.
First, for each nursing home in the study, a record file was created to
comprise bankruptcy status in 2000 (yes/no) plus facility variables
for the previous year. Second, descriptive statistics were computed
on all variables for four categories of facility: (a) all freestanding
(955); (b) non-bankrupt independent (188); (c) bankrupt chain mem-
28 JOURNAL OF AGING & SOCIAL POLICY
bers (155); and (d) non-bankrupt chain members (612). Because some
of the variable distributions were slightly skewed, the data were nor-
malized using a series of Box Cox transformations (Greene, 1997). For
variables whose range covered non-positive values (e.g., net income),
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the amount necessary to make the minimum value positive was added to
the distribution. Third, differences in means (Z) tests were conducted to
identify significant differences between facilities in bankrupt chains
and facilities in non-bankrupt chains. To account for the multiple com-
parisons made, results are reported with Bonferroni corrections (Bland &
Altman, 1995).
FINDINGS
TABLE 2 (continued)
lated parties (i.e., they paid more than they received). There were no dif-
ferences in nursing hours per resident day or in maintenance costs per
day. When compared with homes in non-bankrupt chains, facilities in
bankrupt chains displayed significantly weaker financial liquidity but
had superior solvency and no difference in profitability. Thus, weaker
liquidity was the only indicator of financial jeopardy of bankrupt chain
facilities.
Other than having significantly fewer Hispanic residents, nursing
homes in bankrupt chains had no significant difference in resident char-
acteristics (percentages of residents over age 85, Black residents, and
residents with higher acuity levels). Finally, and perhaps most surpris-
ingly, higher percentages of facilities in bankrupt chains were located in
less competitive county markets and in regions where the Medicaid re-
imbursement rates were higher (e.g., the Bay Area).
Studies of nursing home costs and hospital failures suggested that fa-
cility and market characteristics would be predictors of nursing home
bankruptcy. This exploratory study of nursing home bankruptcy in Cal-
ifornia reports, however, that all bankrupt facilities were members of
Kitchener, O’Neill, and Harrington 31
chains and while they had significantly worse financial liquidity, higher
administrative costs, and higher payables to related parties, they also
had more Medicare residents, fewer Medicaid residents, better sol-
vency, and were located in less competitive county markets and in areas
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mitted, “If you look at the companies in our business that didn’t go into
Chapter 11, they didn’t grow in the same way, they didn’t accumulate
debt in the same way. They took the same hit on reimbursement that
others did, but it didn’t force them into Chapter 11” (Piotrowski, 2002).
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In light of this admission, the findings presented here, and because gov-
ernment provides 71% of revenues for the large corporate nursing home
chains (CMS, 2002a), they could be required to provide federal and
state governments with more and better information to demonstrate that
vulnerable residents are being cared for in stable facilities.
In the absence of a national effort such as the one recommended by
the Institute of Medicine (2001), networks of information exchanges
should be established between states. Data from these efforts could then
be made available to consumers, policymakers, and regulators by post-
ing them on nursing home websites maintained by CMS and roughly
half of all states (Harrington et al., 2003). A model for development
may emerge from California where the facility-level financial data and
the bankruptcy data collected for this study are reported on a public
website. This study underscores the need to collect and analyze such fi-
nancial and bankruptcy data on a national basis to better inform the pub-
lic and reduce the potential for nursing home policy to be driven by
partial understandings of phenomena such as bankruptcy.
RECEIVED: 09/03
REVISED: 06/04
ACCEPTED: 09/04
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