Posted: Feb. 24, 2008

Shortly after becoming a public company in November 2006, Assisted Living Concepts began forcing hundreds of elderly residents in Medicaid programs to leave its assisted living centers.

The company's goal was to increase the number of residents who pay for their own care - and pay higher rates. But it meant forcing people, most of them in their 80s, all of them infirm and impoverished, to leave what essentially were their homes.

Assisted Living Concepts, based in Menomonee Falls, is paying a price for that decision.

Occupancy has fallen. Many residents who were paying for their own care have moved out. And its stock is down more than 50% from its 52-week high.

When the company reports its fourth-quarter results this week, marking its first full year as a public company, it is expected to report that occupancy at its existing centers has remained flat or declined.

Wall Street analysts don't expect that to change until the second half of this year. And several project that the company's net income will be little changed this year.

"The company has yet to prove it can be successful in attracting more private-pay residents," according to a recent research report by Jerry Doctrow, an analyst with Stifel Nicolaus, a brokerage and investment bank based in St. Louis.

Assisted Living Concepts had 26 more residents who pay for their own care on Sept. 30 than at the start of last year. It also had 500 fewer residents whose care was paid for by Medicaid programs.

The result: The company's overall occupancy fell from 86.4% on Dec. 31, 2006, to 78% on Sept. 30.

Operates in 20 states

Assisted living centers are designed for people who don't need the intensive care of a nursing home but still require help with bathing, meals and other daily activities.

Assisted Living Concepts operates about 216 centers in 20 states. Most of its centers are designed for 35 to 60 residents. It was spun off as a public company in late 2006 by Extendicare Inc. a Canadian company that operated nursing homes and assisted living centers in the United States.

Company executives could not comment on the past year because of the pending release of its earnings.

All companies that operate assisted living centers have seen their stock price fall in the past year. But the decline in Assisted Living Concepts' stock has outpaced that of its peers.

The company's rocky start also has overshadowed its many strengths.

It gets high marks for being an efficient operator of assisted living centers. It has a stellar balance sheet with little long-term debt, enabling it to buy back stock and to make several promising acquisitions. And it plans to add 400 units to existing centers, a relatively inexpensive way to increase capacity and revenue.

Further, the company's move to increase the percentage of private-pay residents is expected to enable it to increase profits eventually.

Rates for those residents were 42.9% higher on average than what state Medicaid programs paid in the third quarter ended Sept. 30, according to the company.

"It's hard to argue that transitioning away from Medicaid to private pay is a bad strategy," said Derrick Dagnan, an analyst with Avondale Partners LLC, an investment bank based in Nashville, Tenn.

Medicaid, a state-and-federal program, is the main source of funding for long-term care for senior citizens and the disabled who are impoverished. To be eligible, people typically must have almost no assets or savings.

They also must turn over to the state any income from Social Security and pensions, excluding a small allowance.

Assisted Living Concepts has had a higher percentage of residents in Medicaid programs than other publicly traded companies that operate assisted living centers.

"Over time, as they finish this process, they will look more like the other publicly traded assisted living companies," said Frank Morgan, an analyst with Jefferies & Co., an investment bank based in New York.

But the move - which affected residents in Texas, Nebraska and Indiana - may have taken place too quickly.

"It certainly has slowed down the rate of growth," Morgan said.

Image hurt

The average stay for a resident in an assisted living center is about 18 months. And enraged family members contended that the company should have allowed existing residents to remain until they required the higher level of care of a nursing home or died.

Jody Perkins, whose mother Gladys Dixon, 103 years old at the time, was forced to leave a center in Canyon, Texas, understood the company's decision to stop accepting Medicaid patients.

"But don't just kick out people who are in their 80s and 90s," Perkins said.

The company's move brought an unexpected consequence: Some residents with limited savings or income, who wanted to preserve the option of drawing on Medicaid, have moved out.

"That certainly was a surprise to us," said Dagnan of Avondale Partners

The move also hurt the Assisted Living Concepts' image in some small towns, where local newspapers covered the story of a company's forcing elderly and infirm people to leave its centers.

"Reputation is everything in a small town," said Dagnan. "It certainly paints the company in an unfavorable light."

The question now is how long it will take for Assisted Living Concepts to attract enough new residents to fill the empty rooms and suites at its centers.

Stifel Nicolaus doesn't expect growth in so-called private-pay residents to offset the loss of residents in Medicaid programs until the fourth quarter of this year - although the benefits of the move should show up in the company's bottom line earlier than that.

It expects Assisted Living Concepts' net income to fall slightly this year.

"The company's business transition efforts have not produced the desired results," the report notes.

Morgan, of Jefferies & Co., is more optimistic. He expects the company's earnings to increase.

"Over the long haul, their strategy will probably turn out to be the right thing to do," Morgan said.