Kindred Healthcare (KND)

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Kindred Healthcare, Inc. (NYSE:KND) (Kindred) manages hospitals, nursing and rehabilitation centers and contract rehabilitation businesses across the US. Its hospital division operates 83 long-term acute care (LTAC) hospitals in 24 states, and its health services division operates 222 nursing and rehabilitation centers in 27 states. It also runs a contract rehabilitation services business that provides rehabilitative services primarily in long-term care settings. Through the company's nursing and rehabilitation centers, Kindred provides short stay patients and long stay residents with a range of medical, nursing, rehabilitative, pharmacy and routine services, including daily dietary, social and recreational services.

The company operates in three divisions: the hospital division, the health services division and the rehabilitation division. The hospital division operates LTAC hospitals and accounts for about 45% of revenue. The health services division operates nursing and rehabilitation centers and makes up approximately 50% of revenue. The rehabilitation division provides rehabilitation services in long-term care settings. Substantially all of Kindred's nursing and rehabilitation centers are certified to provide services under the Medicare and Medicaid programs. The company derives more than 80% of health services and rehabilition revenues from the Medicare and Medicaid programs and the balance from other third party payors, such as commercial insurance companies, health maintenance organizations, preferred provider organizations and contracted providers.

Kindred has been focused on improving quality, customer service and clinical capabilities; reconfiguring bed capacity to eliminate 3 and 4-bed rooms and accommodate higher acuity patients; improving quality mix through service line development and sales and marketing programs; adding facilities in strategic markets; and disposing unprofitable and non-strategic assets. The company is focused on a bundling strategy, whereby it is attempting to more efficiently utilize centers that are in close proximity to each other. By clustering nursing centers in proximity, the company believes it can share certain services (e.g. lab and radiology), implement more effective sales and marketing strategies, and improve care coordination.

Financial performance

Kindred is now one of the largest operators of skilled nursing centers in the US, with nursing center revenue in the 2010 forecast to reach approximately $1.1 billion. The company's professional liability costs have steadily declined, leading to improved profit margin. In 2009, the company's professional liability expense was $48 million, which is down from $74 million in 2003. However, changes to Medicare skilled nursing reimbursement levels could negatively impact profit. In early 2010, Medicare rates for skilled nursing services declined by 1.1%. This reduction, while low, will limit profit growth in 2010.

In June 2009, it purchased for resale six under-performing nursing centers. In 2009, Kindred's revenues increased 4% to $4.27B. Net income from continued operations increased 4% to $61.9M. Revenues reflect an increase in income from Medicare and higher income from Medicaid. Net income was partially offset by an increase in salaries, wages & benefits, increased supplies expenses, higher rent expenses and an increase in other operating expenses.

Kindred has divested 29 underperforming nursing and rehabilitation centers with approximately 3,600 licensed beds between 2007 and 2009. During the same time, the company continued to seek additional growth opportunities through strategic acquisitions in selected target markets. Kindred has also made progress over the past few years in the recruitment, retention and development of employees. Investments in employee orientation, continuing clinical education, leadership development and employee recognition programs have helped Kindred achieve lower turnover percentages, a leading indicator of its business condition.

Threats Several parts of the health-care reform could change the nature of Kindred's revenue and services. The proposed reforms could include modifications to the conditions of qualification for payment, bundling payments to cover both acute and post-acute care and the imposition of enrollment limitations on new providers. In addition, a primary goal of healthcare reform is to reduce costs which could include reductions in the reimbursement paid to the company and other healthcare providers. Moreover, healthcare reform could negatively impact insurance companies, other third party payors and other healthcare providers.

The long-term acute care segment is being subjected to renewed scrutiny by press and policymakers regarding the sector’s place on the continuum of patient care. This scrutiny could lead to Medicare reimbursement changes that negatively impact the company's financial results.

References

Kindred Healthcare 10-k