Nursing-Home Woes

UNCERTAINTY OVER Medicare spending is slamming the brakes on the investment capital that had been flowing into the nursing-home industry.

Until recently, vulture investors and others had been buying up nursing homes and operating companies, taking advantage of the carnage in the industry sparked by a 1998 change in Medicare reimbursement rates. Many of the top nursing-home operators and owners that were forced to seek bankruptcy-law protection then are now emerging from Chapter 11, owned primarily by investors who bought up their debt at steep discounts. Other investors have begun to buy just the real estate, snapping up the nursing homes that are leased to reviving operators.

But the strategy of these investors depends in part on Medicare reimbursement increases that Congress approved in 1999 and 2000, to make up for going too far with cutbacks in 1998. Stocks of nursing-home companies plummeted in January when signals began emerging that those increases won't be extended past Oct. 1. "That's put a cloud over the sector that could affect deal flow," says Jerry Doctrow, an analyst with Legg Mason Wood Walker.

Another wave of bankruptcies is unlikely because nursing homes aren't as highly leveraged today as in 1998. But investor appetite for new deals is diminished. "There are a number of deals we've looked at that we've shied away from," says Daniel Straus, a New Jersey-based investor who bought 79 nursing homes for $440 million last year in a venture with Angelo Gordon & Co. , an investment company.

Nursing-home owners also warn the budget proposal will put a damper on new development, which is needed to meet the needs of the country's aging population. The number of nursing-home beds has barely grown, to 1. 73 million in 2000 from 1. 66 million in 1993. Meantime, the number of people over 85 is growing three times faster than the general population.