With more Americans getting older and living longer, you would think the nursing home industry would be one of those safe, sure investments, like Treasury bonds.

But it turns out that investing in the business of providing long-term care to the elderly has been one of the more treacherous bets in the stock market.

Four of the largest nursing home companies have sought Chapter 11 bankruptcy protection in the past four months, dragging their stock prices down to a fraction of their original values.

Nevertheless, there are faint rays of optimism in the nursing home industry that suggest investors should not write it off.

While rivals struggle through bankruptcy reorganization,

HCR-Manor Care

(HCR) - Get Report

is now viewed as relatively strong. It's perhaps the sole company that can take advantage of a time when the number of Americans 85 years and older is projected to double to 7 million between 1994 and 2020 and swell to between 19 million and 27 million by 2050.

HCR-Manor Care could benefit from a proposal

President Clinton

is expected to make in his Jan. 27 State of the Union address for up to $3,000 in tax credits per person to help the 2 million Americans who are struggling to provide long-term care for elderly or disabled relatives. The measure, part of a broader health care plan Clinton is expected to propose and which is believed to have a reasonable chance of passage, would cost $28 billion over 10 years.

The inability of many Americans to pay for long-term care is partly responsible for the retreat in the nursing home industry.

The bankruptcies have come fast and furiously. Last September,

Vencor

(VCRI)

sought Chapter 11 protection,

Sun Healthcare Group

(SHGE)

did the same in October, as did privately held

Lenox Healthcare

in November. The most recent bankruptcy came earlier this week --

Mariner Post-Acute Network

(MPAN)

, the second-largest nursing home operator. (No. 1

Beverly Enterprises

(BEV)

is solvent.)

Others are teetering financially.

Integrated Health Services

, for example, is barely solvent and is just hanging on to its listing on the

New York Stock Exchange

, industry watchers said.

To some extent, the U.S. government is responsible for the troubles in the nursing home industry. The passage of the

Balanced Budget Act of 1997

included a payment system for skilled nursing facilities, including nursing homes, that severely cut back the amount of reimbursements from

Medicare

, the federal insurance plan for the elderly. With this plan, Congress expected to cut benefit payments by $9.5 billion over five years, according to the

American Health Care Association

.

Prior to the introduction of this system, there had been an incentive to run higher costs. In the old system, the more money a nursing home billed Medicare, the more it would be reimbursed. Under that system, nursing home operators sought to reap additional federal money by expanding into high-margin ancillary businesses, such as home health care and rehabilitation services.

At the same time, heavy consolidation reduced the number of publicly traded nursing home operators to 10 in 1998 from 28 in 1995, resulting in heavily indebted balance sheets among the survivors. That meant these companies "were not in a position to weather the storm" when the government's new payment system guidelines took effect in July 1998, said analyst Andrew Gitlin of

PaineWebber

.

The new guidelines made cuts across the board, including the ancillary businesses, which suddenly were not so profitable anymore. In addition, the cuts were considered especially draconian because there were no provisions made for higher levels of reimbursement for patients who required more care. The impact "hit nursing homes in a weakened financial state," said Gitlin. And "margins went dramatically south and cash flow dried up," said analyst Nancy Weaver of

Stephens

.

"They got in trouble because they took advantage of an opportunity and then that window closed very rapidly," added Gitlin. "They designed and structured a business where Medicare was most lax."

Congress

refined some of the cutbacks in November 1999, but some nursing homes had already suffered too much by then, with the bankruptcies accelerating soon after that. Further revision is expected, especially in the area of reimbursement of drug prescriptions.

But through all the travails of the industry, HCR-Manor Care has kept its head above water, partly because it didn't embark on an acquisition binge. Also, analysts cite the company's quality management, strong balance sheet, locations in relatively affluent areas of the country and a relatively low-cost structure. Equally important is that 48% of HCR-Manor Care's business comes from private pay, or residents who do not rely on insurance to foot the bill, while 20% comes from Medicare and the rest from

Medicaid

and other forms of insurance.

A.J. Rice, an analyst at

Merrill Lynch

, said HCR-Manor Care's mix of customers gives it "better pricing flexibility and the ability to flourish." He rates HCR-Manor Care both a long-term and intermediate-term buy and his firm has done no recent underwriting for the company.

Even so, HCR-Manor Care has not been immune to the selloff in nursing home stocks. Shares of the Toledo, Ohio-based company are down 49% in the last 12 months. They were trading Friday at 14 5/16, near the 52-week low of 12 3/4 and off 55% from the 52-week high of 32 3/8. At the beginning of December, HCR also warned of a fourth-quarter earnings shortfall because of higher-than-expected operating and administrative expenses for more expensive nurses and other skilled help.

"Is it

HCR an opportunity? If you have some patience, yeah," said one analyst, who preferred to remain anonymous. "Further refinement is going to have to be addressed, maybe later in the year, because the current rates are inadequate."

As for the nursing home operators struggling through bankruptcy, analysts advise staying away. If an investor were to buy the shares now, "the money would be earning nothing for an unknown period of time," said Gitlin. "The risk/reward ratio is so unbalanced."

"From an equity standpoint, there's little or no value in those shares," said Rice. "In a bankruptcy, the equity gets restructured and diluted away." He and other analysts cautioned that once a company emerges from bankruptcy, debt holders get first crack at any assets. Their demands too are often greater than the total value of the company, and it's not unusual for them to end up owning a significant amount of equity. There could be an investment opportunity then, but "that's too early for the average investor. You need a distressed debt specialist," Rice said.

Vencor is perceived to be the farthest along in its bankruptcy proceedings, with Rice predicting that it could emerge from bankruptcy sometime this year, but not before late summer.

"The best way to play this group is to look at the best companies first and HCR-Manor Care is far and away the best and the only clean play," recommended one analyst. "Then go down the spectrum. Buying the worst cases in a depressed sector is a losing option."