Business Switch Raises Profit, But Increases Medicare Risk

Manor Care, a long-term healthcare provider, has switched its focus to short-stay patients from custodial-type patients, creating more profitability and reducing competition from other assisted living centers, according to Moody's Investors Service. But while the successful transition of the business model is a factor in the Ba1 rating of Manor Care's $200 million unsecured credit, Moody's also considers that the company has subsequently taken on more risk through increased dependence on Medicare patients.

According to Diana Lee, v.p. and senior credit officer at Moody's, all long-term care providers are facing ongoing uncertainty, in part, from constraints from both Medicare and Medicaid. "State budget deficits are causing all state governments to consider reductions in reimbursement," Lee explained. "On the Medicare side, [healthcare operators] are faced with the elimination of certain give-backs under some earlier relief programs," she added. The flipside to Manor Care's more profitable business model is that short-term, post-acute care patients tend to be backed by Medicare, heightening reimbursement risk.

However, Moody's outlook for Manor Care is positive, owing to its improved performance over the past several years. The outlook reflects Manor Care's debt reduction over the last couple of years, despite a tough business environment and thanks to free cash flow generated from the new business model and one-time improvements in working capital. The outlook is further supported by the stabilization in patient liability expenses, which have risen with other long-term care providers. Moody's believes the early introduction of internal initiatives such as "voluntary arbitration" agreements as well as partial relief from tort reform measures passed in Florida in 2001 have played a role in stabilizing those expenses.

Moody's expects that the rating could be upgraded if patient liability expenses continue to stabilize and Medicaid and Medicare reimbursement constraints do not worsen. The possible deleveraging of the company following its plan for accelerated share repurchases could also influence a ratings boost. Calls to Geoffrey Meyers, Manor Care's cfo, were not returned.