Integrated Health files Chapter 11

Nursing, rehab giant in Sparks rocked by Medicare funding cuts

`Just been matter of when'

Employer of 900 here expected to survive

$2M award in question

Health care

February 03, 2000|By Kristine Henry and Sean Somerville | Kristine Henry and Sean Somerville,SUN STAFF

Integrated Health Services Inc. filed for bankruptcy protection yesterday, blaming cuts in Medicare payments for decreasing revenue and increasing debt.

The Sparks-based health care giant, which runs more than 1,700 nursing homes and rehabilitation centers nationwide, has missed several scheduled debt payments and analysts had long expected a reorganization filing.

"It's just been a matter of when," said Robert M. Mains, an analyst at Advest Inc. in Saratoga Springs, N.Y. In its Chapter 11 filing in U.S. Bankruptcy Court in Wilmington, Del., Integrated Health listed assets of $4.1 billion and debt of $3.5 billion.

The decreased payments were a result of the Republican-backed Balanced Budget Act of 1997, which cut $9 billion in Medicare spending.

"If the Medicare payment system had not been radically altered, we would not be having this discussion," Mains said. Kenneth Abramowitz, an analyst for Sanford Bernstein, also attributed the majority of the company's troubles to the Medicare change.

"Ninety percent of it was that the government decided to put them into bankruptcy," he said. "It was the Health Care Financing Administration essentially attacking the nursing home industry."

But Abramowitz said Integrated Health officials deserve some of the blame for overleveraging the company.

"They had about $1 billion in equity and $3 billion in debt," Abramowitz said. "It's not prudent to have more debt than equity. When they had $1 billion of debt, they should have stopped acquiring [other companies]. In that sense they contributed to this themselves."

Marc B. Levin, Integrated Health's executive vice president, said the company would have been in a comfortable position were it not for the Medicare changes.

"Of course companies that have more debt are going to be more affected by dramatic reductions in earnings and cash flow," he said. "But what caused that was the Balanced Budget Amendment."

Integrated Health, which employs about 900 at its headquarters but has no nursing homes in Maryland, said on Jan. 3 it was skipping a $4.1 million interest payment on a $143.8 million debt -- its third missed payment in about a month. It reported a $1.83 billion net loss for the first three quarters of 1999 and has since missed nearly $30 million in payments.

The bankruptcy filing throws into question $2.5 million awarded to Integrated Health by the Maryland Department of Business and Economic Development.

To keep that money, which was intended to subsidize the company's new headquarters, Integrated Health had to maintain employment of 685, add 315 additional jobs by the end of this year, and maintain 1,000 jobs through the end of 2001. Failure to reach those benchmarks would require repayment at 5 percent interest over a 10-year period beginning in 2002.

"As of today, they were in compliance with the performance criteria," said Linda West, a spokeswoman for the Department of Business and Economic Development.

But she added that the bankruptcy filing puts the loan in default, meaning the company would not have to pay it back if it fails to meet the employment goals.

"We will be working with the Bankruptcy Court, and we will take appropriate action to protect our claim," West said.

The bankruptcy was preceded by a long and drastic decline in the company's stock that essentially wiped out a market value that was once as high as $2 billion; it is now just under $5 million.

"For Baltimore, it's the loss of a major institution and one that at one point in time we thought could have been a $15 billion company," said Charles Newhall, a venture capitalist and former board member.

Shares, which were more than $42 in 1995, closed yesterday at 9.5 cents in over-the-counter trading. The company was delisted by the New York Stock Exchange in December.

Integrated Health was founded in 1986 by Dr. Robert N. Elkins, who saw an opportunity to provide sub-acute care, funded largely by Medicare, for patients who were ready to leave the hospital but too sick to go home. Elkins, who remains the company's chairman and chief executive, saw the plan succeed for about a decade, until the recent funding cuts.

Over the past several years the company has made numerous leveraged acquisitions and went from revenue of $195 million in 1992, the year it went public, to $3 billion in 1998.

It also moved into its new multimillion-dollar headquarters last year and did a $24 million stock buy-back.

"When they made these decisions, they were using a different model to figure out if they were good business decisions," said Premila Peters, a high-yield bond analyst at KDP Investment Advisors in Vermont. "Is it a reasonable assumption to assume the status quo would remain and they would get these hefty reimbursements?"

She said if the company was betting on the fact that Medicare payments wouldn't be reduced, so were its shareholders, banks and bond holders.

"No one expected this," she said.

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