Health chain turns pale

IHS has suffered 82% stock plunge, cut 1,000 jobs

Medical services

February 21, 1999|By M. William Salganik | M. William Salganik,SUN STAFF

Integrated Health Services Inc. has hit an atypical bad patch.

The Owings Mills nursing home chain has grown spectacularly since it went public in 1991.

Through the purchase of nursing homes and related businesses, IHS' revenue increased from less than $150 million in 1991 to more than $3 billion in 1998.

But recently:

The stock lost more than 80 percent of its value, plummeting from a 52-week high of $39.375 in April to an all-time low of $7.0625 on Friday.

IHS warned Feb. 11 that earnings for the last quarter of 1998 are likely to be 35 to 45 cents a share, not the 75 cents expected by analysts.

The company took a charge of more than $200 million in the third quarter of last year to cover losses in its home care division and to write down the subsidiary's assets.

IHS was forced to eliminate 1,000 jobs in its contract therapy division and was expecting "further reductions" in its overall work force of more than 80,000 employees in 47 states.

IHS is not suffering alone. Over the past few months, the large nursing home chains have experienced precipitous drops in stock prices after surprising Wall Street with negative earnings or other bad news.

The jolts were the result of a new Medicare reimbursement structure that not only cut payments, but also set limited national payment rates based on each patient's health problems. Previously, payments were determined by costs reported by each nursing home.

The new system, which is being phased in but hit the largest number of nursing homes Jan. 1, has made it impossible to predict revenue and earnings with any confidence.

"The whole industry has been hit very hard with the transition," said Joel M. Ray, an analyst with First Union Capital Markets in Richmond, Va.

This has made February a miserable month for the industry.

Genesis Health Ventures of Kennett Square, Pa., which has extensive operations in the Baltimore area, announced that its Medicare payments had fallen from $364 a day for each patient to $305.

Hardest hit was Sun Healthcare Group, based in Albuquerque, N.M., which fired 7,490 workers after saying it would lose money in the fourth quarter.

"Effectively, Medicare is changing the rules of the game, and now the players have to figure out how to play, " said Robert M. Mains, a health care analyst with Advest Inc. in Albany, N.Y.

The upheaval has meant a shift in strategy for IHS, one of the pioneers in revolutionizing nursing home care.

Until recently, IHS had been buying up a range of health businesses with the aim of becoming a full-service provider for people leaving the hospital. But now, it's not adding business lines, it's shedding them.

`Ball and chain'

In August, it sold its pharmacy operations, saying they were too small to be efficient. This month, it sold its money-losing home care division. "Home care has been a ball and chain for them," Ray said.

Then, to raise cash to reduce debt and boost the sagging stock price, the company announced it might sell or spin off all or part of its successful RoTech division, which provides patients with home respiratory therapy and durable medical equipment, such as wheelchairs.

"Clearly, they're focusing more of their efforts on the nursing home side," said Mains, the Advent analyst.

IHS was founded in 1986 by Dr. Robert N. Elkins, a psychiatrist who anticipated that as managed care grew, so would the demand for "subacute" services -- care that is less intense than that of a hospital but more intense than that of a traditional nursing home.

He bought nursing homes and converted many of the rooms to subacute care.

(Although the company is based here, none of its nursing homes is in Maryland. Elkins once said he hadn't been able to acquire any in this market at a price he wanted to pay.)

At times, the company used the slogan: "Hospital care without hospital costs."

That concept caught the attention of Medicare, the federal government's insurance program for the elderly, which was seeking ways to lower its spiraling payments for post-hospital care.

Spending soars

Medicare spending for skilled nursing facilities zoomed from $2.8 billion in 1989, or 4.7 percent of all Medicare spending, to $10.6 billion in 1996, 9 percent of all Medicare spending.

As IHS grew and developed a business dependent on federal reimbursement, Elkins became one of the country's largest political contributors.

In the 1996 election cycle, Elkins and IHS gave $572,500 to the Clinton-Gore campaign and the Democratic Party, winning him invitations to three White House coffees for donors.

IHS was not the only large chain collecting Medicare reimbursements by boosting its level of care.

Other companies began drawing substantial revenue from shorter-stay post-hospital Medicare patients, shifting away somewhat from the long-term care of frail elderly that had traditionally made up most of their business.

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