Integrated Health Services Inc. has hit an atypical bad patch.
The Owings Mills nursing home chain has grown spectacularly since it went public in 1991.
Through the purchase of nursing homes and related businesses, IHS' revenue increased from less than $150 million in 1991 to more than $3 billion in 1998.
The stock lost more than 80 percent of its value, plummeting from a 52-week high of $39.375 in April to an all-time low of $7.0625 on Friday.
IHS warned Feb. 11 that earnings for the last quarter of 1998 are likely to be 35 to 45 cents a share, not the 75 cents expected by analysts.
The company took a charge of more than $200 million in the third quarter of last year to cover losses in its home care division and to write down the subsidiary's assets.
IHS was forced to eliminate 1,000 jobs in its contract therapy division and was expecting "further reductions" in its overall work force of more than 80,000 employees in 47 states.
IHS is not suffering alone. Over the past few months, the large nursing home chains have experienced precipitous drops in stock prices after surprising Wall Street with negative earnings or other bad news.
The jolts were the result of a new Medicare reimbursement structure that not only cut payments, but also set limited national payment rates based on each patient's health problems. Previously, payments were determined by costs reported by each nursing home.
The new system, which is being phased in but hit the largest number of nursing homes Jan. 1, has made it impossible to predict revenue and earnings with any confidence.
"The whole industry has been hit very hard with the transition," said Joel M. Ray, an analyst with First Union Capital Markets in Richmond, Va.
This has made February a miserable month for the industry.
Genesis Health Ventures of Kennett Square, Pa., which has extensive operations in the Baltimore area, announced that its Medicare payments had fallen from $364 a day for each patient to $305.
Hardest hit was Sun Healthcare Group, based in Albuquerque, N.M., which fired 7,490 workers after saying it would lose money in the fourth quarter.
"Effectively, Medicare is changing the rules of the game, and now the players have to figure out how to play, " said Robert M. Mains, a health care analyst with Advest Inc. in Albany, N.Y.
The upheaval has meant a shift in strategy for IHS, one of the pioneers in revolutionizing nursing home care.
Until recently, IHS had been buying up a range of health businesses with the aim of becoming a full-service provider for people leaving the hospital. But now, it's not adding business lines, it's shedding them.
'Ball and chain'
In August, it sold its pharmacy operations, saying they were too small to be efficient. This month, it sold its money-losing home care division. "Home care has been a ball and chain for them," Ray said.
Then, to raise cash to reduce debt and boost the sagging stock price, the company announced it might sell or spin off all or part of its successful RoTech division, which provides patients with home respiratory therapy and durable medical equipment, such as wheelchairs.
"Clearly, they're focusing more of their efforts on the nursing home side," said Mains, the Advent analyst.
IHS was founded in 1986 by Dr. Robert N. Elkins, a psychiatrist who anticipated that as managed care grew, so would the demand for "subacute" services -- care that is less intense than that of a hospital but more intense than that of a traditional nursing home.
He bought nursing homes and converted many of the rooms to subacute care.
(Although the company is based here, none of its nursing homes is in Maryland. Elkins once said he hadn't been able to acquire any in this market at a price he wanted to pay.)
At times, the company used the slogan: "Hospital care without hospital costs."
That concept caught the attention of Medicare, the federal government's insurance program for the elderly, which was seeking ways to lower its spiraling payments for post-hospital care.
Medicare spending for skilled nursing facilities zoomed from $2.8 billion in 1989, or 4.7 percent of all Medicare spending, to $10.6 billion in 1996, 9 percent of all Medicare spending.
As IHS grew and developed a business dependent on federal reimbursement, Elkins became one of the country's largest political contributors.
In the 1996 election cycle, Elkins and IHS gave $572,500 to the Clinton-Gore campaign and the Democratic Party, winning him invitations to three White House coffees for donors.
IHS was not the only large chain collecting Medicare reimbursements by boosting its level of care.
Other companies began drawing substantial revenue from shorter-stay post-hospital Medicare patients, shifting away somewhat from the long-term care of frail elderly that had traditionally made up most of their business.
The idea of "hospital care without hospital costs" also had an obvious appeal for health mantainence organizations (HMOs) and other managed-care insurers who saw it as a way to control costs for a variety of services.
IHS developed a new HMO strategy based on that view. The company decided to offer one-stop shopping to HMOs looking to control costs in post-hospital care by contracting with operators who could offer a full range of services at a fixed price per patient, a system of payment known as capitation.
'Continuum of care'
Elkins, in the 1993 IHS annual report, said the company was looking to provide "a full continuum of care" in each market. That would include, he wrote, "subacute care, outpatient care, home care, rehabilitation care and pharmacy services."
By moving a patient from subacute skilled nursing facilities to outpatient centers to home care, IHS reasoned, it could maximize its margins on the flat payments.
To build such a full-service system, it stepped up the size and variety of its acquisitions.
In 1996, it bought First American Health Care, a large ($400 million annual revenue) but bankrupt home health care operator, paying $154 million at closing, with an additional payment due later based on earnings.
IHS bought RoTech in 1997 for $858 million in stock and assumed debt.
And the next month, IHS paid $1.15 billion in cash for a large chunk of Horizon/CMS Healthcare from Healthsouth Corp.
The "chunk" was 139 nursing homes, 12 specialty hospitals, 35 institutional pharmacies and more than 1,000 rehabilitation therapy contracts.
"Although this transaction will further enhance and broaden Integrated's capabilities, the all-cash transaction significantly increased an already high debt load and strained Integrated's credit profile," Standard & Poor's said in January 1998.
Though its credit was stretched -- its debt topped $3 billion -- IHS had assembled the one-stop-shopping network it thought would appeal to HMOs. The HMOs, however, never showed up with the big, flat-rate contracts.
"Integrated got a couple of small capitated contracts, then managed care got into trouble," said Stephen Monroe, a partner in Irving Levin Associates, a Connecticut publisher of health industry trade journals.
With profits melting, HMOs spurned capitated contracts for subacute services and concentrated on dealings with doctors, hospitals and drug companies. "Getting into capitated contracts for post-acute care was not high on their priorities," Monroe said.
Meanwhile, he said, "the federal government started to get concerned when nursing home spending ballooned."
The Balanced Budget Act of 1997 dictated a new Medicare payment system for skilled nursing facilities that was projected to save $9.2 billion over five years.
"Clearly, the new Medicare reimbursement system is causing more problems for Integrated than anyone anticipated, and when I say 'anyone,' I mean investors, people like me, and the company itself," said Mains, the Advest analyst.
IHS officials declined to be interviewed for this article. But in its Feb. 11 earnings warning, IHS said the new Medicare system seemed to be working about as expected in its subacute facilities but had caused a big drop in volume for its contract rehabilitation therapy division, which provides therapy to other nursing homes.
In the short term, IHS is looking to reduce its debt load. In January, for example, it sold 32 nursing homes for $135 million in cash to a real estate investment trust founded by Elkins.
The REIT, in turn, leases them to a company owned half by IHS and half by an IHS board member. The leasing company hires IHS to run the homes.
A sale of RoTech could raise a lot more cash. Several analysts estimate its value at about $1.2 billion.
Robert M. Wasserman, vice president for research at Southeast Research Partners in Boca Raton, Fla., said IHS could also sell a minority stake in RoTech through an initial public offering.
That would allow IHS to keep a majority of RoTech's stock and its earnings, while establishing a market value for a subsidiary that could enhance the price of the parent company's stock.
In time, Mains said, IHS should regain business for its contract therapy services because it can provide therapy at a lower cost than most of its competitors.
Under the old reimbursement system, the nursing homes contracting for therapy had no incentive to shop for price because they could pass the costs through to Medicare.
Also, Mains said, IHS and the other large chains stand to pick up patients as smaller operators, with only a few Medicare patients, stop dealing with Medicare. Hospital subacute units, with higher overhead costs, might also give up market share to the chains, he said.
But he doesn't expect the gains to be huge. "There's not going to be a tsunami of new patients," Mains said.
Market share doesn't help if costs exceed reimbursement, so IHS and the other companies are struggling to adjust.
Mains said of the industry, "In the real long term, it's going to be fine. There's a growing demand and limited supply."
But all of the analysts expect the industry to languish for several quarters -- perhaps several years -- as it adjusts to the new reimbursements.
"1999 is just going to be a disastrous year for the nursing home industry, probably the most difficult year they're going to have," Monroe said.
"Until the Bob Elkinses of the world figure out the next great wave for nursing homes, it's going to be a period of change and slow growth."
Pub Date: 2/21/99