Responding to competition from alternative care facilities, Meridian Healthcare Inc. says it will spend up to $87 million in the next five years in an ambitious plan to retool its nursing home facilities and branch off into new businesses.
Meridian's planned investment comes as nursing homes, including its own, are losing business to less expensive alternatives such as home health care, assisted living and retirement centers.
"We felt running a business in the '90s was much more challenging than in the '70s and '80s," said Edward A. Burchell, president and chief executive officer of Meridian.
Its plan, one year in the making, includes expansion into subacute care, an alternative medical care business that competes with hospitals in price and quality for patients young and old. Generally, subacute care is intended for patients whose conditions have stabilized but who are too ill to go home unattended.
Completed this spring, the plan calls for Meridian initially to open five new subacute units, including two in Maryland -- a 20-bed unit in its Spa Creek facility near Annapolis and a second unit inside a new nursing home to be built on the grounds of Franklin Square Hospital.
In addition to these units, Meridian will undertake major physical plant construction or renovations at selected nursing homes and introduce new care programs such as adult day care, including specialty care for Alzheimer's disease patients. It also wants to expand its pharmacy business into New Jersey and Indiana, where it has nursing facilities, and to expand its rehabilitation and group purchasing businesses.
Meridian, the single largest owner of nursing homes in Maryland, is a privately held Towson company founded in 1969 and owned by Mr. Burchell and four others since then. It has 5,300 employees and annual revenues of $200 million. Mr. Burchell estimated profits at 4 to 5 percent of revenues.
The industry has been losing patients at the rate of between 2 to 4 percent annually, he said, but Meridian has been able to stem its losses beginning this year.
The subacute health care field is one of the fastest-growing alternative health care industries. It was pioneered by another Maryland company, Integrated Health Services Inc. of Cockeysville, whose strategy is to acquire management rights or ownership of existing nursing homes. Many nursing homes have rushed tofollow. The business is thriving in part because hospitals have not dropped their own prices or adapted services in response to demands by patients and insurance companies.
But there is such a variety of services and prices that there is tremendous confusion about what's really new, said Neal C. Bradsher, health care analyst for Alex. Brown & Sons. "Meridian's approach is tied in closely with acute-care hospitals, which I think is the right approach in that business," he said.
Mr. Burchell said the company's decision to launch five subacute centers in the first phase of its expansion reflects confidence following the success of its first such unit at its Lakeland, Fla., nursing home.
"The key is to demonstrate to the managed care network -- that drives referrals -- that you have a service that is unique and quality oriented," he said.
A typical hospital stay ranges from $800 to $1,800 per day, while subacute units charge between $300 and $900. For nursing homes including Meridian, which charges $90 to $130 a day for regular nursing home beds, subacute units can fast become the single largest source of revenues.
Meridian will borrow $65 million and finance the rest of its expansion from earned income. Meridian is heavily leveraged -- it has borrowed up to 75 percent of the fair market value of its buildings -- which Mr. Burchell said is high for the industry but typical for developers.
The company's debt level is "not an issue" for Maryland National Bank, Meridian's lead lender, said Gary Dorsch, senior vice president of corporate lending. That's because of Meridian's conservative approach to changes in the health care market, he said.
"The Meridian people have been in the business since 1969 in a very, very volatile business, and if you're going to do business with anyone in that business, they have to be flexible," he said.
The nursing home to be built on the campus of Franklin Square Hospital, which involves an investment of $5 million to $6 million, is a unusual joint venture in which Meridian would manage the facility and receive many of its patients from Franklin Square. More typically, hospitals have developed their own nursing homes. A handful of Maryland hospitals have opened their own subacute care units and more are under consideration.
Meridian has 34 nursing home facilities and two retirement centers in five states. More than half, 19 nursing homes and one retirement center, are in Maryland. It also manages one hospital-based subacute care unit in Raleigh, N.C.
Meridian is among the 20 largest nursing home companies in the country. It was a public company until 1975. Since then it has raised money from refinancing mortgages and selling part-ownership in its facilities. In 1989, it raised $38 million in a partnership with Alex. Brown & Sons in which Meridian sold interest in seven of its nursing homes but remained the manager. Meridian will continue to develop its core business, the company said.
Besides construction, the company will focus on reducing employee turnover and stemming losses of patients in the first phase of expansion, Mr. Burchell said. It will reassess its investments within a year to decide which investments should be continued or strengthened.
More than 130 employees are involved in Meridian's restructuring, which includes a streamlining of paperwork and retraining employees to participate in management decisions.