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Chain Reaction
a b
Martin Kitchener PhD , Ciaran O'Neill PhD &
c
Charlene Harrington PhD
a
Department of Social and Behavioral Sciences ,
University of California , San Francisco, USA
b
University of Ulster , U.K.
c
Department of Social and Behavioral Sciences ,
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GENERAL ARTICLE
Chain Reaction:
An Exploratory Study
of Nursing Home Bankruptcy in California
Martin Kitchener, PhD
Ciaran O’Neill, PhD

University of Ulster, U.K.
Charlene Harrington, PhD

Martin Kitchener is Associate Adjunct Professor, Department of Social and Behavioral

Sciences, University of California, San Francisco. His research interests include health care
organization, policy, and long-term care.
Ciaran O’Neill is Professor, University of Ulster, U.K. His research concentrates on
health economics and policy.
Charlene Harrington is Professor, Department of Social and Behavioral Sciences,
University of California, San Francisco. Her research interests include health policy
and long-term care for the elderly and disabled.
Address correspondance to: Dr. Martin Kitchener, Department of Social and Be-
havioral Sciences, University of California, San Francisco, 3333 California Street,
Suite 455, San Francisco, CA 94118 (E-mail: martink@itsa.ucsf.edu).
This research was funded by the California Research Bureau’s Contract Research
Fund, Grant #L-1821, at the request of Senate Rules Committee. The views expressed
in the paper are those of the authors and do not necessarily reflect those of the Califor-
nia Research Bureau or the California State Senate.
Journal of Aging & Social Policy, Vol. 17(4) 2005

Available online at http://www.haworthpress.com/web/JASP
 2005 by The Haworth Press, Inc. All rights reserved.
doi:10.1300/J031v17n04_02 19
20 JOURNAL OF AGING & SOCIAL POLICY
ABSTRACT. This paper reports on an exploratory study of nursing

home bankruptcy. From state and industry data regarding nearly 1,000
California facilities, it was possible to identify 155 homes in five chains
(multi-facility organizations) that were operating in bankruptcy in 2000.
When compared with facilities in non-bankrupt chains, while the bank-

rupt chain facilities had significantly worse financial liquidity, higher
administrative costs, and higher payables to related parties, they also had
more Medicare residents, fewer Medicaid residents, better solvency, and
were located in less competitive county markets and in areas with higher
Medicaid reimbursement rates. These findings indicate that, rather than
facility characteristics and local market factors, strategic decisions taken
at the corporate (chain) level are the major determinants of nursing facil-
ity bankruptcy status. [Article copies available for a fee from The Haworth
Document Delivery Service: 1-800-HAWORTH. E-mail address: <docdelivery@
haworthpress.com> Website: <http://www.HaworthPress.com> © 2005 by The
Haworth Press, Inc. All rights reserved.]
KEYWORDS. Nursing homes, chains, bankruptcy, policy
INTRODUCTION
In 2001, there was mounting concern over reports that 1,800 of the
nation’s 16,500 nursing homes were operating in bankruptcy while re-
structuring under protection of Chapter 11 of the U.S. Bankruptcy Code
(American Health Care Association [AHCA], 2001). In contrast to the
knowledge of hospital failures derived from national datasets and so-
phisticated models (Lee & Alexander, 1999), fewer data and limited re-
search presented policymakers with an inadequate basis from which to
assess the nature or scope of nursing home bankruptcy (Centers for
Medicare and Medicaid Services [CMS], 2002a).
At the national level, the nursing home industry depicted a “rising tide”
of bankruptcy, attributed it to the 1998 introduction of the Medicare
Nursing Facility Prospective Payment System (PPS) and demanded
higher reimbursement rates to ensure facility survival and quality (Apple-
by, 1999; AHCA, 2001). By contrast, the U.S. General Accounting Of-
fice (GAO, 2000) ascribed the bankruptcy of five of the largest chains
(multi-facility organizations) to factors including poor business deci-
sions. In California, as in other states, a lack of research evidence left per-
ceptions to be shaped by providers’ framing of the issue and media
coverage of a small number of sudden facility closures involving: the
Kitchener, O’Neill, and Harrington 21
traumatic transfer of frail residents, the state’s incurring temporary ad-

ministration costs of $2m (California Department of Health Services
[CDHS], 2002a), and a review of state oversight procedures (Bonnet,
2001).
The primary aim of this study is to provide a foundation of evidence

about nursing home bankruptcy for policymakers, the public, and future
researchers. In the absence of comparable national data on facility bank-
ruptcy, this exploratory study had two main goals: (1) to identify the
scale and nature of nursing home bankruptcy in California, and (2) to
use the state’s rich facility-level dataset to identify characteristics of
bankrupt homes that might provide early warning signals to regulators,
and which could be further examined (e.g., within predictive models) if
national data become available. The study is reported in the four main
sections of this paper: (1) conceptual framework, (2) research design
and methods, (3) findings, and (4) discussion of findings with reference
to national developments, areas for future research, and policy implica-
tions.
CONCEPTUAL FRAMEWORK
Because of the dearth of research into nursing home bankruptcy, the

conceptual model for this study was derived from nursing home cost
studies (Aaronson et al., 1995) and analyses of hospital bankruptcies
and closures (Wertheim & Lynn, 1993). While some variables em-
ployed in studies of hospital failure (e.g., leadership tenure) are not
available for nursing homes, two key findings from these literatures
were incorporated into our framework. First, facility characteristics
(e.g., size) and market factors were incorporated (Lee & Alexander,
1999). Second, because much of the variation contained within facility
financial data is explained by single ratios of leverage, profitability, and
liquidity (Zeller et al., 1997), a single ratio of each characteristic was in-
cluded in the framework.
Facility Characteristics
Following nursing home cost studies and hospital failure research,

facility characteristics were predicted to be associated with facility
costs and hence, with the likelihood of bankruptcy (Wertheim & Lynn,
1993).
Number of Beds (Size). Hospital studies suggest that as the relative

number of resources increases, facilities are better placed to avoid bank-
ruptcy (Cleverly, 1985). Similarly, nursing home analyses report asso-
ciations between size and outcomes, including: higher net patient
revenues (HCIA & Arthur Andersen, 1999), better facility financial sta-
tus (Cohen & Spector, l996), and fewer closures (Angelelli et al., 2003).
California nursing home cost reports for 1999 show that facilities with
1-59 beds had an average loss of income per patient day of $4.86, com-
pared with earnings of $1.82 per patient day for facilities with 60-99
beds, and earnings of $2.55 per patient day for facilities with 100 or
more beds (California Office of Statewide Health Planning and Devel-
opment [COSHPD], 2002).
Occupancy Rates. Nursing home studies report that facilities with
lower occupancy rates have higher average patient costs (Ullmann, 1984)
and are more likely to close because of poor quality of care (Angelelli et
al., 2003). Hospital studies also suggest that low occupancy affects fa-
cility financial position and hence, the likelihood of bankruptcy (Wert-
heim & Lynn, 1993).
Chain Membership. Cost studies of hospitals and nursing homes re-
port that chain facilities have generally lower operating costs (Arling et
al., 1991; McKay, 1991) that could lead to better financial status, and
hence reduce the likelihood of bankruptcy.
Ownership Type. While nursing home ownership type (e.g., for-
profit, not-for-profit) is associated with facility outcomes including li-
censing termination (Angelelli et al., 2003) and closure (Kitchener et
al., 2004), non-profit and government facilities are omitted from this
study because they are not eligible to declare Chapter 11 bankruptcy.
Revenue and Cost Factors
Medicare and Private Pay Residents. Because Medicare skilled nurs-

ing facility (SNF) reimbursement rates are set at the federal level and
are higher than most state Medicaid rates (Swan et al., 2001), facilities
with higher percentages of Medicare residents may have higher reve-
nues and net incomes. While higher percentages of Medicare residents
might once have reduced the likelihood of bankruptcy, following
Medicare PPS in 1998, the average Medicare reimbursement rate for
freestanding facilities declined from $305 in 1997 to $240 in 1999. This
may have increased the risk of bankruptcy among facilities with higher
percentages of Medicare residents (AHCA, 2001).
Medicaid Residents. Studies have identified a positive relationship

between percentage of Medicaid residents and factors such as costs per
day (Harrington et al., 1998) and the likelihood of closure (Angelelli et
al., 2003). California facilities with higher levels of Medicaid residents
may be at greater risk of bankruptcy because, as noted earlier, Medicaid

reimbursement rates are lower than Medicare and private pay rates
(COSHPD, 2002).
Reimbursement Rates and Geographic Regions. While urban nursing
homes have been found to have higher costs (Ullmann, 1984) and be
more likely to close (Angelelli et al., 2003), rural facilities are reported
to have more financial problems (Smith et al., 1992). To take geograph-
ical differences in costs of living into account, California sets its Medi-
caid reimbursement rate to vary by size and geographic region. Patient
day rates for homes with 59 beds or less are: $87.26 in the Los Angeles
(L.A.) Region, $100.28 in the (San Francisco) Bay Area counties, and
$93.31 in all other counties (COSHPD, 2002). While facilities in regions
with higher Medicaid reimbursement rates may be less likely to experi-
ence bankruptcy, this would depend on the extent to which Medicaid
rates cover the regional costs.
Expenditure Factors
Administrative Costs. Administrative costs may influence the finan-

cial viability of nursing facilities in two ways (Wertheim & Lynn,
1993). On one hand, paying sufficient wages and benefits to adminis-
trators may help attract and retain individuals who may have the ca-
pacity to identify and deal with financial problems early. Against this,
administration represents an overhead, which if allowed to become
unnecessarily high, could endanger the financial position of a facility.
Maintenance Costs. High maintenance costs could place a facility
in financial jeopardy as well as indicating that the building is in need
of remodeling or rebuilding. This would drive up maintenance costs
and probably other costs as well, for example, administration dealing
with contractors, etc. A case study of nursing home closures in Michi-
gan identified high maintenance costs among older homes as an im-
portant factor (Hirschel, 2002).
Funds Paid to Related Parties. As more nursing facilities join chains,
an increasing number have financial relationships with parent organi-
zations (related parties). From parents, facilities may receive funds
that can help with operating costs, but many also pay administrative
fees to parents. It could be expected that “better” facility net flows

(funds received minus funds paid) could improve the stability of a fa-
cility and hence be negatively associated with bankruptcy.
Nurse Staffing Levels. Nurse staffing levels vary widely; they are a
highly significant positive factor in average operating costs, and they

may have negative effects on facility financial outcomes (Bliesmer et
al., 1998). On the other hand, where facilities compete on staffing and
quality, higher staffing could lead to higher revenues and improve the
financial status of the facility.
Financial Status Indicators
While financial status (as indicated by measures of liquidity, leverage,

and solvency) is central within bankruptcy studies, Zeller et al. (1997)
demonstrated that most variance within measures can be explained with
the use of a single ratio for each. In general, higher liquidity (acid test ra-
tio) indicates a stronger financial position, higher leverage (liabilities to
asset ratio) indicates financial problems, and higher profitability (net in-
come ratio) indicates better financial health. Thus, facility bankruptcy
should be negatively associated with profitability and liquidity, and be
positively associated with leverage.
Resident Characteristics
Socio-Demographic Factors. Higher facility percentages of the aged

85 and over population should increase the casemix of residents (and
thus the per-patient cost of care) and could weaken the financial posi-
tion of the facility (Ullmann, 1990). Higher disability rates among Afri-
can Americans may have a negative effect on the net income of facilities
with higher proportions of such residents (Headen, 1992). While the ev-
idence is mixed on this issue (Ullmann, 1990), homes with higher pro-
portions of minorities may also provide a proxy for low-income areas,
which in turn could negatively impact on facility viability.
Resident Acuity (Casemix). Nursing facility studies have shown a
strong positive relationship between acuity (casemix) and nurse staffing
time and hence, cost (Fries et al., 1994). As staff hours increase, the
costs for a facility should increase, and, if not adequately reimbursed,
higher facility casemix could increase the likelihood of bankruptcy.
Market Competition
Nursing home and hospital studies suggest that in more competitive

county markets, private pay rates and facility income may be lower
(Zinn, 1994; Banaszak-Holl et al., 1996) and that facilities are more
likely to fail (Angelelli et al., 2003). Thus, more competitive county
markets were expected to be associated with facility bankruptcy.
RESEARCH DESIGN AND METHODS
Sample
All free-standing, licensed, and/or certified nursing facilities operat-

ing in California in 2000 were considered for inclusion in the study (n =
1,156). Hospital-based nursing homes (211) were excluded because
none was reported to be in bankruptcy, and cost report data for these fa-
cilities are not comparable with those of freestanding facilities. All gov-
ernment and other non-profit facilities (160) were omitted because they
are not eligible to file for Chapter 11 bankruptcy status. Forty-one free-
standing homes were omitted because they either did not file cost re-
ports for the study period and/or had extensive missing data. Thus, the
final study sample comprised the 955 freestanding California facilities
that were comparable in terms of data availability and eligibility to op-
erate under Chapter 11 bankruptcy status.
Variables and Data Sources
The primary sources of data for this study were the cost and utiliza-
tion reports compiled from the uniform reports that all California fa-
cilities submit for all payers (COSHPD, 2002). Table 1 displays the
variables selected to operate our conceptual framework, their defini-
tions, data sources, and the hypotheses for facility bankruptcy.
All facility and market characteristics (Herfindahl Index) were taken,
or calculated, from COSHPD (2001) cost reports. Consistent with stan-
dard practice in bankruptcy studies, revenue and cost variables were
standardized by resident day, and all financial data were examined for
the year prior to bankruptcy (1998-99). Resident characteristics were
taken from facility utilization reports (COSHPD, 2001). Because other
acuity measures were not available for this study, facility average need
for assistance with activities of daily living (ADL) data were taken from
TABLE 1. Variables, Measures, Data Sources, and Hypotheses
Variables Measures Data Sources Bankruptcy

Hypotheses
Facility Characteristics
Number of Beds Total number of licensed beds. COSHPD -
Cost Report
Occupancy Rate Resident days divided by bed days. COSHPD -
Cost Report
Revenue Factors
Percent Medicare Days paid by Medicare as percent of total days COSHPD +
Resident Days care per facility. Cost Report
Percent Medicaid Days paid by Medicaid as percent of total days COSHPD -
Resident Days care per facility. Cost Report
Los Angeles Region Facilities receiving lower Medicaid Medicaid +
reimbursement rate for L.A. counties. Rate Areas
Bay Area Region Facilities receiving higher Medicaid Medicaid _
reimbursement rate for Bay Area Counties. Rate Areas
Expenditure Factors
Administrative Costs Total administrative costs standardized by COSHPD +
per Resident Day resident days. Cost Report
Maintenance Costs Total maintenance costs standardized by COSHPD +
per Resident Day resident days. Cost Report
Net Related Party Total Receivables minus Payables from COSHPD _
Payables Per related party companies standardized per Cost Report
Resident Day resident day.
Nurse Staffing Hours Total productive hours (excluding vacations, COSHPD +
per Resident Day sick days, mealtimes) for: full-time, part-time, Cost Report
and contract staff; directors of nursing;
supervisory and registered nurses (RN),
licensed practical/vocational (LVN/LPN) for
the year, standardized by resident days.
Financial Indicators
Profitability Net Income Margin: ratio of net income to COSHPD -
total healthcare revenue. Higher ratio shows Cost Report
a stronger position.
Liquidity Acid Test Ratio: cash plus marketable COSHPD -
securities divided by total current liabilities. Cost Report
Higher ratios indicate a stronger financial
position.
Solvency Liability to Assets Ratio: total liabilities to total COSHPD +
assets. Higher ratios show a weaker position. Cost Report
Resident Characteristics
Percent Aged Over 85 Annual percent of facility residents aged over COSHPD +
85 years. Utilization Rpt
Percent Black Annual percent of African American facility COSHPD +
residents. Utilization Rpt
Variables Measures Data Bankruptcy

Sources Hypotheses
Percent Hispanic Annual percent of Latino facility residents. COSHPD +
Utilization
Rpt
Acuity The average percentage of residents that are OSCAR +

totally dependent in three activities of daily living Data
(ADLs) eating, toileting, transfer from bed/chair.
Market
Concentration
Herfindahl for Days The Herfindahl Index (HI) for each county was calcu- COSHPD -
of Care lated using total days of care for each facility in Cost
county in 1999. Days of care per facility were divided Report
by days of care in its county. For each county, facility
proportions were squared and summed to create HI.
Index range 0-1, with higher values representing less
competition/more concentration.
the federal On-Line Survey Certification and Reporting (OSCAR) sys-

tem for 1999 (CMS, 2002b). The region variable was derived from the
three California Medicaid reimbursement rate areas (COSHPD, 2002).
Identification of Bankrupt Facilities
Two stages of fieldwork were required to identify facilities operating

in bankruptcy in California. First, using multiple federal and industry
information sources and a press search conducted by the California Re-
search Bureau (CRB), a list was compiled of eight bankrupt chains op-
erating facilities in California in 2000. No bankrupt independent (non-
chain) nursing homes were identified. Second, the California nursing
home licensing information system (CDHS, 2002b) was used to iden-
tify 155 Californian facilities in the eight bankrupt chains.
Analysis
Given the exploratory nature of the project, the available data, and
the sample characteristics (all identified bankrupt facilities being chain
members), the dataset was analyzed descriptively in three main steps.
First, for each nursing home in the study, a record file was created to
comprise bankruptcy status in 2000 (yes/no) plus facility variables
for the previous year. Second, descriptive statistics were computed
on all variables for four categories of facility: (a) all freestanding
(955); (b) non-bankrupt independent (188); (c) bankrupt chain mem-
bers (155); and (d) non-bankrupt chain members (612). Because some
of the variable distributions were slightly skewed, the data were nor-
malized using a series of Box Cox transformations (Greene, 1997). For
variables whose range covered non-positive values (e.g., net income),
the amount necessary to make the minimum value positive was added to
the distribution. Third, differences in means (Z) tests were conducted to
identify significant differences between facilities in bankrupt chains
and facilities in non-bankrupt chains. To account for the multiple com-
parisons made, results are reported with Bonferroni corrections (Bland &
Altman, 1995).
FINDINGS
This study of nursing home bankruptcy in California produced three

sets of unexpected findings. First, the California state agency responsi-
ble for nursing home industry oversight did not monitor bankruptcy in
2002 and could not identify bankrupt facilities. Second, all cases of
nursing home bankruptcy identified in this study were members of eight
chains operating in the state. Unlike hospital failure studies (Wertheim &
Lynn, 1993), no independent facilities were identified as operating in
bankruptcy. Four of the identified bankrupt chains (113 Californian fa-
cilities) filed in 1999 and remained in bankruptcy through 2000 (Lenox,
Sun, Aspen & Vencor). The other four chains (42 Californian facilities)
entered bankruptcy in 2000 (IHS, Mariner, Hermitage, and TLC). Five
of the bankrupt chains were national, and three (Lenox, Aspen, and
TLC) were smaller, regional chains. With 155 bankrupt homes in 2000
(just over 16,000 beds), California’s 16% rate of bankrupt facilities was
higher than the 11% national average (AHCA, 2001).
The third surprising finding of this study was that, as shown in Table 2,
few facility or market factors were associated with the bankruptcy sta-
tus of individual facilities. Against expectations from hospital research
and nursing home cost studies, bankrupt chain facilities were no differ-
ent in terms of occupancy rates and size when compared with homes in
non-bankrupt chains. In terms of revenues, facilities in bankrupt chains
had higher percentages of Medicare days of care. Contrary to expecta-
tions, facilities in bankrupt chains had lower percentages of Medicaid
days of care than facilities in non-bankrupt chains.
In terms of expenditure factors, as expected, when compared with
homes in non-bankrupt chains, facilities in bankrupt chains had higher
administration costs and had less advantageous net flows of funds to re-
TABLE 2. Comparison of Free-Standing For-Profit Bankrupt and Non-Bank-

rupt Chain Facilities in California, 1999-2000
All Facilities Non-Bankrupt, Bankrupt Non-Bankrupt

N = 955 Independent Chain Chain Facilities

1
Facilities Facilities N = 612
N = 188 N = 155
Mean (Median) Mean (Median) Mean (Median) Mean (Median)
Facility
Characteristics
Occupancy Rate 87.29% 86.91% 88.56% 87.08%
(89.92) (89.61) (91.14) (89.72)
Mean SD Mean SD Mean SD Mean SD
(Median) (Median) (Median) (Median)
Number of Beds 103.92 49.59 94.10 51.64 105.76 41.38 106.46 50.55
(99.00) (92.50) (99.00) (99.00)
Revenue Factors
Percent Medicare 6.47 5.20 5.11 6.40 8.89** 5.07 6.27 4.59
Resident Days (5.90) (3.80) (8.10) (5.70)
Percent Medicaid 66.37 25.30 63.97 30.25 61.43* 21.45 68.35 24.33
Resident Days (74.00) (75.25) (67.80) (75.90)
Los Angeles region 32.25% 48.02% 20.00%** 34.31%
(lower Medicaid
reimbursement)
Bay Area region 17.49% 42.11% 25.16%** 13.89%
(higher Medicaid
reimbursement)
Expenditure Factors
Administrative Costs 18.66 7.92 18.12 8.92 20.84** 8.73 18.27 7.28
per Resident day (17.52) (16.13) (20.19) (17.38)
Maintenance Costs 11.96 3.05 12.68 3.64 11.82 2.32 11.78 2.99
per Resident Day (11.42) (11.86) (11.45) (11.29)
Net Related Party ⫺0.09 1.43 0.05 0.19 ⫺0.53* 3.18 ⫺0.02 0.75
Payables per (0.00) (0.00) (⫺0.04) (0.00)
Resident Day
Nurse Staffing Hours 3.03 0.71 3.14 0.91 3.05 0.49 2.99 0.68
Per Resident Day (2.90) (3.00) (3.00) (2.90)
Financial Indicators
Net Income Margin 1.47 10.87 1.57 10.04 2.96 7.42 1.06 11.80
Profitability (2.26) (2.13) (3.71) (1.79)
Acid Test Ratio Liquidity 0.30 0.87 0.71 1.42 0.15** 0.70 0.22 0.61
(0.02) (0.22) (0.01) (0.01)
Liability to Assets 0.87 1.15 0.85 0.94 0.62** 0.57 0.94 1.30
Ratio Solvency (0.67) (0.68) (0.43) (0.72)
Resident
Characteristics
Percent Aged Over 85 38.97 17.33 41.48 19.32 40.25 15.07 37.87 17.4
(40.83) (45.22) (41.05) (38.92)
TABLE 2 (continued)
All Facilities Non-Bankrupt, Bankrupt Non-Bankrupt

N = 955 Independent Chain Chain Facilities
Facilities Facilities1 N = 612

N = 188 N = 155
Mean (Median) Mean (Median) Mean (Median) Mean (Median)
Percent Black 10.21 15.49 10.26 16.57 8.64 13.52 10.61 15.62
(4.30) (3.89) (3.51) (4.76)
Percent Hispanic 10.98 11.67 10.13 10.35 8.19* 10.35 11.95 12.24
(7.69) (6.81) (4.82) (8.82)
Percent Dependent in 32.24 14.22 34.54 15.92 29.65 13.39 32.20 13.77
ADLS (32.33) (34.67) (29.67) (32.33)
Market Concentration
Herfindahl for Days 0.05 0.09 0.05 0.09 0.07** 0.12 0.05 0.09
of Care (0.02) (0.02) (0.03) (0.02)
1Z test of the difference in transformed means was conducted with Bonferroni corrections for all comparisons
between bankrupt chain facilities and non-bankrupt chain facilities.
*p < 0.05, **p < 0.01
lated parties (i.e., they paid more than they received). There were no dif-
ferences in nursing hours per resident day or in maintenance costs per
day. When compared with homes in non-bankrupt chains, facilities in
bankrupt chains displayed significantly weaker financial liquidity but
had superior solvency and no difference in profitability. Thus, weaker
liquidity was the only indicator of financial jeopardy of bankrupt chain
facilities.
Other than having significantly fewer Hispanic residents, nursing
homes in bankrupt chains had no significant difference in resident char-
acteristics (percentages of residents over age 85, Black residents, and
residents with higher acuity levels). Finally, and perhaps most surpris-
ingly, higher percentages of facilities in bankrupt chains were located in
less competitive county markets and in regions where the Medicaid re-
imbursement rates were higher (e.g., the Bay Area).
DISCUSSION AND CONCLUSION
Studies of nursing home costs and hospital failures suggested that fa-
cility and market characteristics would be predictors of nursing home
bankruptcy. This exploratory study of nursing home bankruptcy in Cal-
ifornia reports, however, that all bankrupt facilities were members of
chains and while they had significantly worse financial liquidity, higher
administrative costs, and higher payables to related parties, they also
had more Medicare residents, fewer Medicaid residents, better sol-
vency, and were located in less competitive county markets and in areas
with higher Medicaid reimbursement rates.

The finding that bankrupt chain facilities had higher rates of Medi-
care patients does offer some support to providers’ claims regarding the
negative impact of Medicare PPS (AHCA, 2001). However, a recent
GAO (2002) study found that the 10 largest chains had a median Medi-
care margin of 18.2% in 1999 and 25.2% in 2000. Moreover, while
profit margins (for all payers) for all facilities were about 1.8% in 2000,
the largest chains had margins of double this amount (3.8%). This sug-
gests that although chains’ bankruptcy decisions may have been im-
pacted by the change in the Medicare payment system, their Medicare
operations continued to be profitable in 1999 and 2000.
Overall, these study findings indicate that strategic decisions taken at
the corporate (chain) level are the major determinant of nursing facility
bankruptcy. Noting that some nursing home chain bankruptcy filings
may have involved separate petitions for operating divisions (geo-
graphic or functional), it seems that corporations could have entered
only some of their facilities into bankruptcy. While this point and our
findings underscore the general contention of the GAO (2000) that
some chain bankruptcies may have had little to do with facility viability,
they raise two important questions about the nature of nursing home
bankruptcy. First, because this study was unable to identify any bank-
rupt-independent facilities in California, national research is required to
establish whether this is a state-level phenomenon or whether, unlike
independent hospitals, independent nursing homes do not enter bank-
ruptcy. Any revealed difference could be explained by the possibility
that, when compared with nursing homes, independent hospitals enter
bankruptcy because they are harder to sell or close. However, at this
stage, it is not known whether any independent nursing homes have en-
tered bankruptcy in the nation.
Second, if national research established that independent nursing
homes do not enter bankruptcy, the question arises as to what does hap-
pen to failing nursing homes? While the present study was not designed
to assess the outcomes of nursing home bankruptcy, among our sample,
bankruptcy was followed by facility closure in only two chains (eight
homes) in California. Moreover, only 32 freestanding California nurs-
ing facilities closed during the five-year period 1997-2001 (Kitchener et
al., 2004). It is also worth noting that one of the small bankrupt chains
that closed facilities in California had serious quality-of-care problems

that may have been more important factors for closure than the facili-
ties’ financial status.
In light of this and other evidence that very few independent nursing
homes close (Angelelli et al., 2004), it seems that failing independent

nursing homes either continue to operate (possibly in a precarious state)
or are sold. It has been reported that following bankruptcy restructuring,
some large chains such as Sun have sold, or plan to sell, some of their
Californian facilities. Further evidence on the empirical nature of nurs-
ing home failure will require national analyses of the competing risks
(closure, bankruptcy, and sale) facing different types of nursing homes
(e.g., large and small chain-members vs. independent homes) to match
work conducted in fields of hospitals (Lee & Alexander, 1999).
Further research is also needed to examine the implications of chain
bankruptcy for quality of care, and for issues of health policy and gover-
nance. At the national level, since five of the largest nursing home
chains declared bankruptcy in 1999-2000, one has changed its name,
none has proceeded to corporate dissolution, and no evidence has
emerged of widespread facility closures. Rather, most chains have re-
duced their number of beds and reported improving financial positions
to Wall Street investors. By 2002, revenues among the top chains
ranged from $1.3 billion to $2.5 billion, and earnings before interest,
taxes, depreciation, amortization, and rent (EBITDAR) for the largest
seven chains averaged 11% (CMS, 2003).
The policy significance of nursing home chain bankruptcy came into
focus when, in response to mounting concern rather than evidence,
Congress used the Balanced Budget Refinement Act ([BBRA], 1999)
and the Benefits Improvement and Patient Protection Act ([BIPA],
2000) to reinstate temporarily some of the per diem reimbursement that
nursing homes lost under Medicare PPS. These two provisions were
worth an estimated $1.7 billion to the nursing home industry in 2003
(CMS, 2003). The development of such policy in the absence of evi-
dence underscores recommendations made in a recent Institute of Medi-
cine (2001) report regarding the need to better monitor the financial and
operational arrangements of the nursing home industry, particularly na-
tional chains.
The information deficit concerning nursing facility bankruptcy is in-
creasingly problematic in the light of growing concerns regarding cor-
porate governance. As some of the larger chains emerge from bank-
ruptcy with new leaders, there has been acknowledgement of (prior)
managerial problems. For example, the new Chair and CEO of Sun ad-
mitted, “If you look at the companies in our business that didn’t go into
Chapter 11, they didn’t grow in the same way, they didn’t accumulate
debt in the same way. They took the same hit on reimbursement that
others did, but it didn’t force them into Chapter 11” (Piotrowski, 2002).
In light of this admission, the findings presented here, and because gov-
ernment provides 71% of revenues for the large corporate nursing home
chains (CMS, 2002a), they could be required to provide federal and
state governments with more and better information to demonstrate that
vulnerable residents are being cared for in stable facilities.
In the absence of a national effort such as the one recommended by
the Institute of Medicine (2001), networks of information exchanges
should be established between states. Data from these efforts could then
be made available to consumers, policymakers, and regulators by post-
ing them on nursing home websites maintained by CMS and roughly
half of all states (Harrington et al., 2003). A model for development
may emerge from California where the facility-level financial data and
the bankruptcy data collected for this study are reported on a public
website. This study underscores the need to collect and analyze such fi-
nancial and bankruptcy data on a national basis to better inform the pub-
lic and reduce the potential for nursing home policy to be driven by
partial understandings of phenomena such as bankruptcy.
RECEIVED: 09/03
REVISED: 06/04
ACCEPTED: 09/04
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Article in Journal of Aging & Social Policy · October 2008

Martin Kitchener Ciaran O'Neill

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Ciaran O’Neill, PhD

Charlene Harrington, PhD

Martin Kitchener is Associate Adjunct Professor, Department of Social and Behavioral

Journal of Aging & Social Policy, Vol. 17(4) 2005

ABSTRACT. This paper reports on an exploratory study of nursing

When compared with facilities in non-bankrupt chains, while the bank-

KEYWORDS. Nursing homes, chains, bankruptcy, policy

traumatic transfer of frail residents, the state’s incurring temporary ad-

The primary aim of this study is to provide a foundation of evidence

Because of the dearth of research into nursing home bankruptcy, the

Following nursing home cost studies and hospital failure research,

Number of Beds (Size). Hospital studies suggest that as the relative

Revenue and Cost Factors

Medicare and Private Pay Residents. Because Medicare skilled nurs-

Medicaid Residents. Studies have identified a positive relationship

may be at greater risk of bankruptcy because, as noted earlier, Medicaid

Administrative Costs. Administrative costs may influence the finan-

fees to parents. It could be expected that “better” facility net flows

highly significant positive factor in average operating costs, and they

Financial Status Indicators

While financial status (as indicated by measures of liquidity, leverage,

Socio-Demographic Factors. Higher facility percentages of the aged

Nursing home and hospital studies suggest that in more competitive

RESEARCH DESIGN AND METHODS

All free-standing, licensed, and/or certified nursing facilities operat-

Variables and Data Sources

TABLE 1. Variables, Measures, Data Sources, and Hypotheses

Variables Measures Data Sources Bankruptcy

Variables Measures Data Bankruptcy

Acuity The average percentage of residents that are OSCAR +

the federal On-Line Survey Certification and Reporting (OSCAR) sys-

Identification of Bankrupt Facilities

Two stages of fieldwork were required to identify facilities operating

This study of nursing home bankruptcy in California produced three

TABLE 2. Comparison of Free-Standing For-Profit Bankrupt and Non-Bank-

All Facilities Non-Bankrupt, Bankrupt Non-Bankrupt

N = 955 Independent Chain Chain Facilities

All Facilities Non-Bankrupt, Bankrupt Non-Bankrupt

Facilities Facilities1 N = 612

DISCUSSION AND CONCLUSION

with higher Medicaid reimbursement rates.

that closed facilities in California had serious quality-of-care problems

homes close (Angelelli et al., 2004), it seems that failing independent

ington DC: HCIA and Arthur Andersen.

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