Health firm takes aim at 'fat cat' hospitals By cutting costs, Integrated profits

February 28, 1993|By Patricia Meisol | Patricia Meisol,Staff Writer

Across the country, health care experts are searching for ways to cut the cost of hospital care for thousands of patients too ill to go home. Integrated Health Services Inc. of Hunt Valley offers a solution: a few weeks in one of its "minihospitals," conveniently located at nursing homes in 21 cities.

At about $550 a day, a bed with hospital-quality nurses in one of Integrated's properties is expensive, but still 30 to 60 percent cheaper than a hospital bed. That's the cornerstone of co-founder Robert N. Elkins' business strategy: Without spending on costly construction, he has strung together a nationwide chain of nursing homes, adding minihospitals to meet demand.

Dr. Elkins, a psychiatrist-turned-entrepreneur, has forged one of the nation's fastest-growing companies by undercutting what he calls "fat cat" hospitals. Now, as President Clinton moves to squeeze health care costs, Dr. Elkins' young company is poised to expand even faster.

"We are in the right place at the right time," Dr. Elkins says.

Integrated created the niche of "sub-acute" care, for patients who are recovering from cancer, cardiac problems or surgery; who are learning to use ventilators; or who are recovering from trauma or massive wounds. One third of its beds are filled by patients under age 65, and a stay can last six weeks to two months.

And for more than a year, Integrated has been the darling of Wall Street health care analysts. It has lots of cash, has outperformed analysts' projections in every quarter since going public in 1991 and has forged links that could boost its capacity four-fold to take advantage of prevailing reform winds.

Integrated isn't immune to the stock market's uncertainty. Its stock recently fell, along with other health stocks -- it was down to $22.75 Friday, from a high of $31 in mid-February. (It sold for $14 when it went public.)

But the small, aggressive company should have an edge over big hospitals, which have been slow to lower prices on unused beds -- even as their occupancy rates were falling, from about 76 percent in 1981 to 66 percent in 1991.

"The betting is, hospitals won't wake up," says Uwe Reinhardt, James Madison professor of political economy at Princeton University. "I have no faith in hospitals to price right."


Dr. Elkins, who once worked at the National Institutes of Health, gave up psychiatry after concluding -- prematurely, it turned out -- that the halcyon days of inpatient psychiatric care were over.

His first business was a nursing home, which he sold in 1986. The next day, he and Timothy F. Nicholson invested $1 million of their own money and $4 million from the venture capital firms ABS Ventures and New Enterprise Associates into a new company, Integrated Health.

The company's strategy: to buy or lease nursing homes and convert a wing, sometimes 10 or 20 beds, into minihospitals to support patients in transition from hospital to home.

The biggest hurdle was the "cultural differences" between the staffs of a nursing home, where people came to die, and a hospital, where patients were expected to recover. Nursing home nurses didn't mind two-day delays in obtaining prescriptions or skimping on a special diet, but hospital nurses expected prescriptions to be delivered in 20 minutes and diets to be strictly followed, Dr. Elkins says.

Early on, staff turnover approached 150 percent.

"It was gradual, push-push-push," Dr. Elkins recalls. "I had to say, Anyone who doesn't have a successful unit will be fired.' "

The problems abated, although the company still has a 25 percent turnover rate.

Today, more than 40 percent of Integrated's revenue comes from these specialized units, though they account for only 624 of the 8,400 beds it owns or manages. The reason: They yield a much higher profit. IHS receives an estimated $550 a day, compared with $97 a day for a standard nursing home bed.

Such favorable pricing is fueling the company's rapid growth. Last year, revenues hit $195 million, a 36 percent increase; profits rose to $9 million, a 54 percent jump.

And Integrated executives believe the industry will grow to more than $4 billion.

Integrated, which has 63 facilities in 15 states, is converting beds faster than expected. In 1993 it hopes to top 1,000 minihospital beds. This month, the company secured exclusive rights to develop specialty beds for a Missouri company that has 8,000 beds.

Use of nursing homes

To continue that growth, Integrated executives are focusing on four strategies, including the original plan to buy or lease facilities and install minihospitals.

(Although Integrated calls itself a Maryland success story, it has no Maryland facilities. Dr. Elkins says Maryland homes are too expensive, because they receive much higher Medicare reimbursements.)

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