IHS buys assets of Horizon Deal with Healthsouth brings nursing homes, hospitals, pharmacies

$1.2 billion price tag

CEO says company off 'acquisition trail' after 2nd recent buy

November 04, 1997|By M. William Salganik | M. William Salganik,SUN STAFF

Putting an exclamation point at the end of three years of rapid growth, Integrated Health Services Inc. of Owings Mills announced yesterday that it will buy a large chunk of Horizon/CMS Healthcare from Healthsouth Corp. for $1.15 billion in cash and $100 million in assumed debt.

IHS gets 139 nursing homes, 12 specialty hospitals, 35 institutional pharmacies and more than 1,000 rehabilitation therapy contracts -- assets Healthsouth, based in Birmingham, Ala., acquired only last week when it closed a $1.65 billion deal for Horizon.

A company that first had $1 billion in revenue in 1995, IHS now projects annual revenue of $3.8 billion, said Dr. Robert Elkins, its chairman and chief executive officer.

Besides the Horizon deal, IHS two weeks ago closed a $858 million stock-and-assumed-debt deal for RoTech Medical Corp. of Orlando, Fla., bringing IHS a company strong in home respiratory services and durable medical equipment.

"I don't think we'll be on the acquisition trail for a while," Elkins said. "At this point, we want to prove we can make money with what we've bought."

The Horizon facilities mean IHS will be "getting more leverage off their past acquisitions," by strengthening its market position in Florida, Texas, Ohio and Nevada, said Thomas Shea, an analyst at Forum Capital Markets in Old Greenwich, Conn.

"This makes them bigger and stronger, and gives them a more powerful negotiating base" in hammering out contracts with managed care insurers, Shea said.

IHS' strategy has been to assemble a network that can provide all types of post-hospital care, and the Horizon purchase cements its position as the country's largest such company. It hopes to make money by moving patients to the most cost-efficient type of care.

IHS, which first went public in 1991, started with a chain of nursing homes and developed them into "subacute" facilities -- providing more care than a traditional nursing home, but less care -- at less cost -- than a hospital.

About 2 1/2 years ago, it began adding other types of post-hospital care businesses, such as home nursing and respiratory therapy.

"We took a calculated risk," Elkins said. While so far Medicare has paid for all post-hospital care on a fee-for-service basis, "and we couldn't make money," IHS figured that the government would eventually shift to paying per case -- so low-cost operators could profit.

"What makes IHS remarkable is how much they have shifted from revenue maximization to cost containment," bringing the per-day cost of subacute care in its facilities down from about $425 a day to $348 over the past two years, said Robert Mains, a health care analyst for Advest Inc. in Albany, N.Y.

"Pressure to keep costs down is just beginning," Elkins said. "Being a flexible, low-cost provider will be very important -- a life-or-death kind of thing."

In addition to keeping costs low, IHS stands to profit even further if it receives per-case rates and can move patients from hospitals to subacute facilities to home health.

Elkins said while a day in a hospital might cost $800 and a day in a subacute facility $300, a day of home care costs about $80.

"As you shift the patient down the continuum, you save money," he said.

With an aging population, it makes sense to "build a mechanism to focus on that stream of business," said Michael Bronfein, CEO of Baltimore-based NeighborCare. His company, with its parent, Genesis Health Ventures, which owns nursing homes and subacute facilities, is seeking to build a similar network, although more regionally focused compared to IHS's reach into more than 40 states.

While most of its recent acquisitions have been in different types of home health businesses, Elkins said it shifted back to subacute facilities in this deal because Congress recently decided to pay case rates for subacute care beginning in 1999.

He said Horizon's facilities and home health operations have run at lower margins than IHS's -- Horizon lost money last year -- but IHS says it can improve the margins by using its own business models and by eliminating duplication between Horizon and IHS. He said IHS would eliminate 600 positions over the next six months, the largest number in what had been Horizon's headquarters in Albuquerque, N.M.

Employment at IHS's Owings Mills headquarters, now about 800, will increase slightly, according to Elkins.

On a day when stock markets rallied broadly, IHS stock was up $1.4375 a share, to $33.1875. Healthsouth stock was up $2.25 a share, to $27.8125.

"It's certainly a good deal right off the bat for Healthsouth -- they don't want to be in the nursing home business," Mains said. Healthsouth will keep 31 inpatient rehabilitation hospitals and 275 other rehabilitation locations, which fit in with its business.

Pub Date: 11/04/97

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