With acquisition of Meridian, Genesis Health nears goal of regional domination

THE BALTIMORE SUN

KENNETT SQUARE, Pa. -- In the same way that it retrofitted an old furniture store in this small town south of Philadelphia, Genesis Health Ventures Inc. is trying to modernize the nation's chipped and peeling health-care system.

The fast-growing company -- which is buying Maryland's largest nursing-home chain -- has acquired drug and other medical businesses, melding them and nursing homes into geriatric health-care networks. Its plan: to dominate health care for the elderly in sections of Florida, New England, the Delaware Valley and the mid-Atlantic.

Genesis' $205 million purchase of Towson-based Meridian Healthcare nursing homes will make Maryland the company's biggest market and a showcase for its bold strategy.

That acquisition will double Genesis' annual revenue, to $400 million, making it the nation's sixth-largest publicly held nursing-home chain. And it ensures that little-known Genesis, which owns or manages 58 nursing homes and more than a dozen life-care commu nities, will be noticed alongside major players like Manor Care Inc. of Silver Spring.

So far, Wall Street has responded favorably to Genesis' plan. The dayafter the chairman and chief executive, Michael R. Walker, outlined to institutional investors in New York his strategy for buying Meridian Healthcare, the company's stock rose $1.25, to $17.25. It closed Friday at $19.25.

Mr. Walker and Richard R. Howard, Genesis' president, have worked together since the 1970s, building a pair of $100 million nursing-home chains that were swallowed by Beverly Enterprises and HCR Inc. Genesis offered the executives a chance to build for themselves what they had built for others, and their reputation helped the company borrow $32 million on its first day of operation.

In 1985, they set up shop in a quaint former furniture and dry goods store. As Genesis grew, they stayed close to home, remodeling and expanding the headquarters and sticking with the niche of providing health care to the elderly.

Mr. Walker, 45, still walks two blocks home for lunch, amid the falling leaves of a small-town main street. Inside the old facade, though, Genesis' operations are highly computerized and thoroughly modern, except for its constantly ringing phones -- Mr. Walker banned electronic voice mail because it was seen as impersonal.

From the beginning, the partners embarked on the strategy that sets them apart from competitors: buying up suppliers that eat away at nursing-home profit margins.

They developed a full range of health-care services for people ages 85 and older -- a group estimated at 2.5 million and growing -- rather than offering limited specialties like the subacute care provided by Integrated Health Services Inc. of Owings Mills.

And unlike Manor Care and others that bought drug companies, Genesis added such services only when they were near its nursing homes. Even then, the company planned to cut costs by managing care.

"If you own a pharmacy in Pennsylvania and a nursing home in North Carolina, you can't share information," Mr. Walker said. "But if I have a pharmacy, a physical therapist, a physician in the same place, guess what? They can all get together once a week to discuss the patient's health and get that person out of long-term care."

For example, in Maryland, where Genesis employs 700 people, the company added a physician-managed clinic in Salisbury in 1988.

Then it bought drug suppliers, which had profit margins of 10 percent to 15 percent, compared with 3 percent to 5 percent on nursing homes. In Maryland in the late 1980s, it bought two companies that repackaged and sold drugs worth $15 million annually and expanded them into full-service medical-supply companies. Those companies and others that were added later, based in Columbia under the name ASCO Healthcare Inc., now have sales of $80 million a year, 80 percent of it to non-Genesis customers. ASCO serves 25,000 people in nine states.

Mr. Walker, 45, built ASCO from Drug Lane Pharmacies Inc. and Accredited Surgical Companies Inc. And he broadened the product line to include computerized drug information management systems and contract therapy programs to nursing homes, chronic-care centers and corrections facilities.

"His idea was to expand the pharmacy services into other areas," said Marvin Freedenberg, who founded Drug Lane in 1964 and serves as president and chief executive officer of ASCO. The ASCO umbrella includes Baltimore-based Health Concepts and Services Inc., a nursing-home staff-training and service company acquired in June, and a home-health-care company in Linthicum.

This year, 34 percent of Genesis' revenue and 42 percent of its profits are expected to come from higher-margin specialty services like drugs and medical supplies, according to an analysis by Dillon, Read & Co. Inc., the investment house.

"Of all the nursing-home companies founded eight to 10 years ago, those that have done well have gone into specialty services," said Alice Katz, a former Genesis vice president who is a consultant for Market Associates of Baltimore. "What Genesis does well is integrated systems: pharmacy, durable medical equipment, home health, life care and skilled nursing."

It also has developed lucrative contracts to manage nursing and elder-care facilities, opening channels to sell its products without an investment in bricks and mortar.

Profits rise

Such moves have paid off handsomely. In the first three quarters of 1993, Genesis' profits hit $8 million, up from $4.8 million last year; revenue climbed to $161 million, up from $144 last year. For all of 1992, the company earned $7.4 million, on revenue of $196 million.

Now, the company wants to sell its ability to manage elderly health care to non-Genesis customers -- including the U.S. government.

With national health reform comes the expectation that care will be bought and sold in large quantities, on a prepaid basis rather than a fee-for-service plan, even for the elderly. Genesis believed that the competition and risk in providing such services would squeeze profits. So it shifted its strategy from the high-profit subsidiaries toward building strength in its markets. That's why it bought Meridian Healthcare, whose specialty services represent only 16 percent of revenue.

"One of the reasons to acquire Meridian [Healthcare] was to put in place a critical mass so we can negotiate with the government to care for the elderly," Mr. Walker said.

When the Meridian Healthcare deal is completed in November, Maryland will pass Massachusetts as Genesis' biggest market, with 3,900 beds. Genesis plans to retrain employees so its Maryland homes can serve patients who need higher-level nursing. Then it will start marketing the Maryland properties to insurance companies and hospitals.

Meanwhile, Genesis will try to overcome its relative obscurity by adding its corporate name to its nursing homes. Besides 20 Meridian Healthcare homes in Maryland, Genesis owns Magnolia Gardens in Lanham; Mallory Bay Nursing and Rehabilitation in Cambridge; Laurelwood Rehabilitation in Elkton; and Salisbury Nursing and Rehabilitation Center. The company also manages Knollwood Manor in Millersville.

Government contracts

With a range of services, Genesis also hopes to capture big government contracts. Even little ones. "I'd be happy with 10 percent of the Baltimore Medicare market," Mr. Walker said.

But the bold move carries risks. To buy Meridian Healthcare, Genesis plans to borrow $100 million from commercial banks and to raise another $100 million in subordinated debentures from institutional markets, pushing its debt ratio up to about 70 percent.

The acquisition also has slowed Genesis' goal to earn 50 percent of its revenue from businesses outside traditional nursing homes.

The handful of analysts who follow Genesis are optimistic, saying the company can now sell its home-health, drug and other services in the huge Maryland market and maintain profits by cutting costs. For now, there's plenty of room to link Genesis' specialty services to nursing homes in Maryland and elsewhere -- Genesis serves only 2 percent of the 65-and-older population in its territories, according to a report by Donaldson, Lufkin & Jenrette.

Genesis' broad view of caring for the elderly means that it will compete in Maryland not only with nursing homes but also with hospitals, health maintenance organizations, insurance companies and any group that wants to assemble and control a health-provider network.

Another important factor: the shape of President Clinton's health-care reform. No one knows how competition for services will develop in each market or whether the federal government will move Medicare recipients into managed care.

In Maryland, its success also depends on favorable rulings from regulators to allow Genesis into the lucrative marketplace for home-health services and subacute care, a reduced level of medical care that can be handled in nursing homes instead of in hospitals.

Mr. Walker hopes that Genesis' revenue can grow to $1 billion annually, half of it from prepaid government contracts.

But, he adds, the company won't budge from its old building in Kennett Square -- or from delivering health care to the people who use the system most: the elderly.

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