Printer Friendly

Prescriptions for bankruptcy: "The code" can offer substantial protection for SNE owners. (Finance).

IT'S BEEN A BUMPY COUPLE OF YEARS FOR THE LONG TERM CARE industry, especially for the big players. Surveys throughout the late 1990s reported that as many as 10 percent of all nursing homes nationwide were in bankruptcy proceedings. Pundits blamed lower Medicare and Medicaid reimbursement rates, higher insurance premiums, and poor strategizing by the large chains, few of which emerged from their financial difficulties unscathed. Many of these difficulties led nursing home owners into financial tumult and the complexities of federal bankruptcy court.

Lessons of insolvency

While the preceding years of crisis hit the entire country hard, some states fared worse than others. "In Illinois over 10 percent of all nursing homes have been in bankruptcy, but in some states it's been closer to 50 percent," says Mike Flanagan, an attorney specializing in nursing homes.

Patrick Hurst, managing director and the national head of health care with Houlihan Lokey Howard and Zukin, an investment banking firm that helps reorganize, sell and purchase nursing homes, agrees. "In Florida and Texas, tort suits have been horrendous," he says. "National insurance costs per bed have been somewhere between $600 and $800 per year, but in Florida, it's been almost $10,000 to $12,000. It's gotten so that insurance is becoming almost the biggest cost in the industry."

It has consistently been the larger chains that have suffered the most, although some smaller operations have been in bankruptcy as well. "There has been a significant increase in cost over the last few years, particularly for those that don't have the opportunity to do volume purchasing," says Flanagan.

Bankruptcy advantages

There are some unique aspects to the Federal Bankruptcy Code that participants in the industry should be aware of. The Code offers debtors protections including the automatic stay, which has often been used against the Medicare program when the federal government has sought to recoup "overpayments" from entities, which then sought the protection of the courts. The Code also offers old owners the opportunity to hold onto some of their ailing company, even if creditors have not all been paid in full or have not agreed to a plan. Some of these advantages were overlooked by large operations that did not see the disaster looming before them.

John Otrompke is a law graduate in Chicago and is currently awaiting admission to the bar. He can be reached at 773-508-5531, or by e-mail at <Otrompke@law.com>.

"Bankruptcy offers lots of advantages for nursing homes; for example, a lot of creditors get to cancel leases, under the leases and executory contracts section of the Code," says Hurst. "But things got complicated for the big chains because a lot of them had master leases, with 30 facilities on one lease. If there had been just a single lease involving a bad facility, it would have been possible under the Code to release just that lease."

Troubled debtors are often impressed by the dramatic results of a bankruptcy filing. Typically, a filing invokes the Code's "automatic stay," which means, for most kinds of debt, that all collection actions are immediately put on hold until the bankruptcy proceeding begins. The automatic stay can also put a freeze on some types of contempt-of-court proceedings and civil actions.

Staying afloat

For many operators, part of the problem with filing for bankruptcy under Chapter 11--the section dealing with corporate reorganizations--is that the owners may lose out completely.

"Let's say I'm the sole shareholder of a nursing home company in Chapter 11," says Flanagan. "It's my livelihood, and I'm going to scramble around to find something of value in it. If I went into bankruptcy and didn't come out still holding some stock, what good did it do me?"

The solution is the "new-value exception"--a corollary to the Code's absolute-priority rule, which, though ambiguous, has been upheld by some bankruptcy courts. Essentially, absolute priority means that unless the debtor can get a plan approved by its creditors unanimously, or pay] everybody off in full, it must "cram down" the plan--in other words, cram it down the creditors' throats. Unless the plan is approved or the creditors are paid in full, the company's shareholders are not allowed to keep anything.

Under the new-value corollary, the theory is that old equity, being more familiar with the workings of a company-- especially in a subtle field like nursing homes--might continue to be of value to the creditors and to the economy by remaining in charge of an operation. However, any new-value plan must face the test of "market exposure."

According to Flanagan, the definition of a "market test" is not clear. "Some circuits recognize it, others don't," he said. "Some people argue that the exclusivity period for the debtor to file a plan must have expired, which gives anybody out there the Opportunity to let the market pay more for what the company's worth."
COPYRIGHT 2001 Non Profit Times Publishing Group
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2001, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:nursing home finance
Author:Otriompke, John
Publication:Contemporary Long Term Care
Geographic Code:1USA
Date:Dec 1, 2001
Words:811
Previous Article:Wandering: repaving the way you think. (Cover story).
Next Article:Building the bridge. (Editor's Notebook).
Topics:


Related Articles
Financing growth: more necessary, less difficult.
NewCare Health Corp. files Chapter 11.
Texas SNF chain files for bankruptcy protection.
BANKRUPT!
Bankruptcy is bad medicine. (Viewpoint).
The other prescription drug benefit plan. (View on Washington).
Don't be scared off from receivables-based financing: recent negative headlines shouldn't deter you from using this valuable capital resource.
Ventas exits Florida, then Kindred says buy, bye to senior health.

Terms of use | Privacy policy | Copyright © 2018 Farlex, Inc. | Feedback | For webmasters