Charter to buy majority stake in Green Spring Biggest U.S. operator in psychiatry field is paying $73 million; Targeting public employees; New entity to have revenue of $1.4 billion and 22,000 employees


Charter Medical Corp., the nation's largest operator of psychiatric hospitals, said yesterday that it will pay $73 million for a majority share in Green Spring Health Services, a rapidly growing Columbia-based company that manages mental health and substance abuse programs for 12 million people nationwide.

The deal, seen by stock analysts as an extremely positive move by Charter, creates the first behavioral health care company in the country that is "fully integrated," meaning it handles every aspect of care from deciding how much services should cost to providing emergency counseling and hospitalization.

Atlanta-based Charter said it would buy 51 percent of Green Spring Health Services, which employs 1,000 nationwide, 450 of them at its headquarters and claims processing center in Columbia. The other 49 percent of Green Spring will be held by four Blue Cross-Blue Shield plans.

The combined company, to be called Magellan Health Services, will have estimated revenues of $1.4 billion in 1996 and employ 22,000, company executives said yesterday.

"I'm very encouraged by this move," said Joel Ray, an analyst with Wheat First Butcher Singer in Richmond, Va., who has watched Charter Medical for 14 years.

"Charter has been stumbling and battling to maintain their profits and revenues for some time. Finally we have something that says this could get them moving so it can grow again."

With the purchase, Charter Medical will gain access to Green Spring's strong network of Blue Cross-Blue Shield plan clients -- 26 of the nation's 69 such plans, including Maryland's.

That means it is likely that when a customer of one of those plans needs psychiatric or substance abuse help, Green Spring would refer them to one of Charter's clinics or hospitals. The nearest hospitals to Baltimore that Charter operates are on the ,, Delmarva Peninsula.

The other big plus for Charter in the deal is Green Spring's strategy of targeting the $200 billion market for psychiatric and substance abuse care among employees of public agencies.

That, says Mr. Ray, holds the potential for helping to boost Charter's annual revenues to $3 billion within several years.

Existing contracts

Green Spring already holds contracts to provide mental health and substance abuse services to several large public employee groups, including those working for Howard County government and the states of Virginia and Georgia, said Catherine Campbell, a spokeswoman for Green Spring.

Yesterday's deal caps a three-year effort by Charter Medical to restructure itself to be competitive in an industry full of profit pressures. The big profit pressures arise from the sharp cutbacks in the amount of time many insurers will allow patients to stay in a psychiatric facility. This trend has been a drain on revenues at Charter, according to Mac Crawford, chief executive officer for Charter Medical.

He said that while the demand for Charter Medical's broad range of services had increased, insurers and other so-called "purchasers of care" were holding down reimbursements. To combat those forces, said Mr. Crawford, the company has diversified into several new areas of service, including in-home care.

The last part of its restructuring plan was to add a managed care operation that had a strong track record of deciding what type of care a patient needed and how that care could be handled most efficiently. Building such an operation from scratch was ruled out as too lengthy and costly, said company executives.

The deal is seen by industry experts as further evidence of the consolidation under way in all aspects of health care nationwide.

Such alliances between companies engaged in providing health services and those engaged in managing the costs of such services have been occurring throughout the medical end of health care for some time. they are seen as a way to control administrative costs, avoid the costs of expanding into new services, and please insurers, which increasingly are demanding that companies offer clients a one-stop place for a full range of service and care.

Driving forces

Those were exactly the forces that drove Green Spring to seek out an alliance with a large psychiatric health provider, said Dr. Henry Harbin, president and chief executive officer of Green Spring.

The merger should give Green Spring added power in marketing its services to insurers and health maintenance organizations, said Dr. Harbin, who was just named one of the entrepreneurs of the year by Inc. magazine.

"We were facing in our niche increasing competition from providers, while our HMOs and other clients were pushing us in )) this direction as well," said Dr. Harbin.

Said Mr. Crawford of Charter Medical: "This deal catapults us to a position of significant strength. We are now way ahead of the rest of the field. No one else has done what we have in this industry."

Green Spring, which was founded in 1989 by Blue Cross and Blue Shield of Maryland and later sold to a consortium of six other Blue Cross groups, has grown rapidly in the past two years.

This year, the company is expected to have revenues of about $205 million, up from $12 million in 1991. During the past year, it has added 300 employees at its Columbia headquarters, Dr.

Harbin said.

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