Investors.com had a flattering story about the profitable Ensign Group who owns and operates dozens of nursing homes throughout the country. I guess if you were looking at it from the point of view of profits and business models instead of quality of care, the flattery may be deserving.
The article mentions that despite the bad economic times for most workers and consumers, Ensign Group has money to spare in credit-challenged times and are taking advantage of the market. Ensign picked up two nursing homes in California and Texas to ring in the new year.
Chief Executive Christopher Christensen says the holding company is actively seeking more long-term care properties in the West. Last week, the company acquired four in Colorado. Since its founding a decade ago, Ensign has acquired its way to 67 facilities in seven Western states: California, Arizona, Texas, Washington, Utah, Idaho and now Colorado.
At the end of the third quarter, Ensign had $56.4 million in cash, including $35.6 million generated since the first of the year. Other funds came from the remaining proceeds from its November 2007 initial public offering, some of which had already been used for other asset buys and upgrades.
"Adding such facilities obviously has a negative impact on our short-term overall operating metrics," he said, "but also represents tremendous upside opportunity as we turn them around."
Though Ensign has yet to report fourth-quarter and full-year earnings, analysts polled by Thomson Reuters estimate that profit grew 13% in 2008 to $1.32 a share. For 2009, earnings are seen growing 22%.
Ensign’s balance sheet is one of the strongest in the industry, with a debt-to-capital ratio of 29%. From a demographic perspective, the industry itself is well-positioned for growth.
Seniors 85 and older are skilled nursing homes’ prime demographic. That population will grow 80% to 9.6 million by 2030. That translates to a compounded annual growth rate of 2.4%.
Nursing home spending is forecast to rise 5.1% a year to $210.9 billion by 2016, from $105.7 billion in 2002, according to the Centers for Medicare and Medicaid Services.
Meanwhile, nursing home beds have been declining, from 1.8 million in 2000 to 1.5 million in 2007.
The oldest Americans aren’t the only users. Nursing homes are also benefiting from a growing number of younger, short-term, post-acute-care patients, such as those recovering from joint replacements and other surgeries. A lot of them are the still-active baby boomers.
Medicare and managed care firms are increasingly steering these patients to skilled nursing units rather than pricier rehab centers.
They reimburse Ensign and other nursing operators at higher rates than Medicaid, which pays for the bulk of nursing homes’ mainstay elderly residents. "On a per-patient basis, Medicaid is least preferred because reimbursements are at the lowest rate per day." Medicaid payments accounted for 42% of Ensign’s third-quarter revenue, which rose 12% from the earlier year to a record $116.3 million. Medicare made up 32%, while managed care comprised almost 14% and private insurers 12%.
Government reimbursements, though, remain a key risk because of cost-cutting pressures. A Medicare rate cut to skilled nursing homes was reversed in August when the Centers for Medicare and Medicaid Services approved a 3.4% increase to account for inflation.
State Medicaid budgets are also under pressure. "Forty-four states are projecting budget shortfalls in the next fiscal year (starting in July). I’m personally modeling flat rates for both Medicaid and Medicare, which most people view as a worst-case scenario."
Ensign also remains under the cloud of a whistle-blower investigation the Justice Department began in 2006, said to be related to Medicare claims submitted for rehab services. Search warrants issued in mid-December focused on six nursing homes in Southern California.