Nursing home CEO gets departure deal

Elkins led IHS chain to boom, bankruptcy

January 13, 2001|By M. William Salganik | M. William Salganik,SUN STAFF

Dr. Robert N. Elkins, who built Integrated Health Services Inc. into a Fortune 500 company, only to see it spiral into bankruptcy last year, will leave the company in the next few days after court approval of a severance package worth nearly $55 million.

Elkins has led the nursing home chain, which has its headquarters in Sparks, since he started it in 1986, but his aggressive acquisition strategy also led to problems. And when the federal government cut Medicare reimbursements to nursing homes in 1998, IHS was unable to meet its debt payments.

When the separation deal closes in a few days, Elkins will officially resign from IHS. Joseph A. Bondi, a turnaround specialist who joined the company in July as "chief restructuring officer," will officially become chief executive officer, said Arthur Steinberg, a lawyer for IHS.

Under the agreement, IHS will pay Elkins $1.494 million, will forgive $34.5 million that the company lent Elkins to buy now-nearly-worthless IHS stock, and will pay $18.9 million in taxes resulting from the loan forgiveness. Elkins will perform 100 hours of consulting work over the next year.

Such a package for a CEO who took his company into bankruptcy "looks excessive, but it also looks inevitable," said Kevin Murphy, professor of finance at the University of Southern California and a consultant on executive compensation.

"Even though the numbers are staggering, you have to distinguish this from a case where you write a $50 million check and say, `Thank you for destroying our company.'"

Companies believe executives have incentive for good performance if they have stock options or stock bought through company loans - when the company does well, the executive benefits. "That's something I'll encourage companies to do," Murphy said.

However, when stock prices drop, companies are often left with little recourse other than to take back the devalued stock.

Elkins was "an industry visionary" in adding staff and equipment to treat "subacute" patients - those who are well enough to be discharged from a hospital but still too sick to go home, said Stephen B. Monroe, editor of Senior Care Investor, an industry newsletter.

"He wasn't the inventor of it, but he took advantage of a market opportunity and saw that as the future of the industry," he said.

The subacute business helped IHS grow rapidly, but when Medicare, which pays for most subacute care, cut its rates, IHS was one of the most vulnerable nursing home chains.

A committee of IHS' unsecured creditors had pressed for Elkins' departure and participated in negotiating a separation agreement in July, according to court filings. However, the U.S. Bankruptcy Trustee and some creditors objected to the terms. The Elkins agreement was renegotiated:

Three oil paintings, valued at $1.1 million, which Elkins would have kept, were taken out of the deal.

Elkins' agreement not to compete with IHS was broadened and extended from one year to three.

Elkins and his wife agreed to give IHS the option of buying, for $1, his share in a company called Monarch LLC, which owns 33 nursing homes that IHS operates.

Most objections to the deal were dropped, but the U.S. Department of Justice continued its opposition, arguing at a hearing last month in U.S. Bankruptcy Court in Wilmington, Del., that the settlement was unreasonable. The federal government has potential claims against IHS, including a whistle-blower lawsuit charging Medicare fraud. The Justice Department joined the fraud case last month.

IHS officials referred questions to Steinberg, an attorney with the New York firm Kaye, Scholer, Fierman, Hays & Handler.

Glenn B. Rice, the attorney for the creditors committee, was out of his office for the day.

Elkins and James G. Bruen Jr., the attorney who represented the Justice Department, did not return phone messages.

However, at a hearing in Wilmington last month, Bruen said the terms were excessive and the company had offered "no reasons for the settlement agreement but a number of rationalizations."

Judge Mary F. Walrath, presiding over the case, ruled last week that the separation agreement was reasonable. And, she wrote, reasonableness was her legal standard for reviewing the agreement, "not to determine whether the settlement is the best that can be achieved."

In her decision, she cited arguments by IHS that the $34.5 million in loans had to be forgiven anyway under the terms of Elkins' employment agreement. As for the $18.9 million in taxes, Judge Walrath wrote, "It is uncertain whether Dr. Elkins would be legally obligated [or financially able] to repay the Debtors for that tax payment."

With the Elkins settlement resolved, Steinberg said, IHS will review its long-term business plan.

"We will have discussions with our creditors on a plan of reorganization, and discussions with the government to resolve all outstanding issues," he said.

He said IHS would "do everything we can to emerge from bankruptcy reorganization as soon as possible," but he could not offer a specific timetable.

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