Buffeted IHS reports loss in third quarter

Firm not complying with some covenants in bank credit line

Bankruptcy near?

Poor earnings blamed on new Medicare payment method

November 17, 1999|By Shanon D. Murray | Shanon D. Murray,SUN STAFF

Integrated Health Services Inc., the struggling Sparks-based health care provider, yesterday reported a third-quarter loss, and revealed it is not in compliance with certain financial covenants with its bank credit line.

The company also disclosed it did not to make an interest payment of approximately $17 million that was due yesterday. Earlier this month, IHS said it elected not to make a $7.7 million interest payment on $150 million in bonds.

Analysts said IHS is likely to file for bankruptcy soon.

"It's no one's best option for bankruptcy to occur," said Robert M. Mains, analyst with Advest Inc. in New York. "Unless they can come up with a restructuring plan involving all of their banks, it seems likely."

Marc B. Levin, IHS executive vice president, would not discuss the prospect of filing for reorganization. "We are in discussions with our lenders about restructuring our debt. We won't speculate beyond that," he said yesterday.

IHS attributed its earnings loss to the continuing adverse impact of a new Medicare payment system.

IHS and others in the industry say they are suffering from the impact of the Balanced Budget Amendment of 1997, which slashed payments for patients covered by Medicare, the government health program for the elderly.

As part of the amendment, the new Medicare "prospective payment system," or PPS, was designed to save $9.2 billion over five years.

Under the reduced-payment system, nursing homes that contract with IHS have been ordering fewer therapy sessions per patient and admitting fewer Medicare patients, the company has said.

"The implementation of PPS is clearly having a devastating impact on the revenues and cash flow of our industry and IHS," Robert N. Elkins, the company's chairman and chief executive, said in a statement yesterday.

The troubles with dealing with the new Medicare payment system are not exclusive to IHS, Mains said. Since September two major nursing home and sub-acute care operators, Vencor Inc. and Sun Healthcare Group Inc., have filed for Chapter 11 bankruptcy protection.

"Unfortunately, the substantial [cost] reductions we made are not sufficient to offset the dramatic impact of the implementation of this law," Elkins said.

The company said yesterday it suffered before nonrecurring charges a net loss of $41.3 million, or 85 cents a share, in the third quarter. In the corresponding period last year, IHS had net earnings of $43 million, or 77 cents per diluted share, from continuing operations before nonrecurring charges.

When one-time charges are included, IHS had a net third-quarter loss $1.82 billion, or a loss of $37.64 per share, compared with a net loss of $157.8 million, or $3.02 per share, in the corresponding period a year ago.

Revenue for the third quarter totaled $659.9 million, a 12 percent decline from $750.9 million for the third quarter 1998.

Because of its third-quarter financial results, IHS said, it is out of compliance with certain financial covenants for its bank credit line. The company said it is seeking a waiver but does not know whether it will receive one.

The company said it elected not to make the interest payment of about $17 million due yesterday to make sure it had enough cash to operate.

For the first nine months, IHS posted a net loss before nonrecurring items of $52.5 million, or $1.04 per share, compared to net earnings of $126.1 million, or $2.34 per share, for the same period last year.

For the first nine months, net revenues were $1.9 billion, a 15.5 percent decline from $2.3 billion for the prior year.

IHS' shares closed yesterday at 37.5 cents, down 31.25 cents. They were trading at $40 in June 1998.

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