Integrated Health Services Inc. of Owings Mills said yesterday that it will take over the long-term rehabilitation services of NovaCare Inc. of King of Prussia, Pa., for an undisclosed amount.
The sale comes in spite of industry concerns about the profitability of long-term physical and occupational rehabilitation, a sector of the health care business that has been squeezed by Medicare cutbacks.
"Although there's been a dramatic reduction in revenues and earnings in contract rehabilitation businesses throughout the country, we believe it is still a viable business," said Marc B. Levin, executive vice president of IHS.
IHS is betting that by becoming a bigger player in contract rehabilitation, it will develop enough of a market presence to make money. IHS's contract rehabilitation division, called RehabWorks, has contracts with about 1,100 long-term care facilities.
NovaCare's contract rehabilitation business has contracts with 1,200 facilities.
The markets of the two companies largely overlap: More than 90 percent of NovaCare facilities are in markets that RehabWorks already serves.
"They're trying to become the leader in this contract-therapy area," said analyst Robert M. Wasserman of IHS.
The NovaCare transaction "shores up [IHS'] market leadership," said Wasserman, an analyst with Southeast Research Partners Inc. of Boca Raton, Fla.
The agreement goes into effect Tuesday. Under its terms, NovaCare will sell its contract rehabilitation business to a newly formed private firm, Chance Murphy Inc., for a nominal fee.
Chance Murphy, founded specifically for this transaction by two IHS executives, has hired IHS to manage the business. As its payment, IHS will receive a fee equal to virtually all of the cash flow of the operations. The estimated value of the deal was not disclosed.
Wasserman said this complex setup seemed to be designed to make the transaction look better on IHS' accounting ledger. IHS's Levin said accounting considerations did not influence the deal's structure, but said the transaction was constructed to protect against liability.
The agreement is initially for 10 years, and can be extended for up to an additional 40 years. IHS shares gained 81.25 cents in yesterday's trading, closing at $5.875. NovaCare's stock edged down 12.5 cents to finish the day at $2.125.
Pub Date: 5/29/99