Fitch Says CCRC Outlook Stable; Reimbursement a Challenge for Freestanding Nonprofit Nursing Homes

March 9, 2005

The combination of a strong demand for services and an improving economy will lead to continued strong cash flows, solid debt service coverage, and improved liquidity for the continuing care retirement community (CCRC), according to Fitch Ratings.

In a new special report issued Wednesday, Fitch’s 2005 outlook for the CCRC industry calls for continued improvement; however, the outlook for free-standing nonprofit nursing homes continues to be negative.

Fitch views strong demand, high occupancy rates, and sound management practices as the core industry strengths.

However, capital spending needs will be a major industry pressure over the near term as many providers are weighing strategic repositioning or facility upgrades. Operating expenses such as labor and insurance will continue to present challenges; however, Fitch believes they have moderated significantly and their pressure on financial performance will be less acute over the years.

Fitch’s outlook for the freestanding nonprofit nursing home industry is negative. Reimbursement pressures, including expected reductions in Medicaid and Medicare funding will lead to pressure on profitability and likely lead to downward rating pressure. Budgetary shortfalls at the state level have led to cuts in Medicaid budgets. These cuts vary by state and include reduced provider reimbursement, tightened eligibility requirements, reduced benefits, and implementation of a bed tax.

“Medicaid payors make up the largest component of a nursing home’s census and we believe that long-term stability in the nursing home sector will not occur without significant reform to the current reimbursement environment,” commented Jim Mitchell, Fitch Ratings analyst for Health Care and Higher Education.

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