John Foster has a track record for taking healthcare companies public, then having them bought out.
That's why many people are wondering if a pending initial public offering by one of Mr. Foster's companies could involve a potential takeover target.
This month, Apogee, a King of Prussia, Pa.-based provider of outpatient geriatric mental health services founded by Mr. Foster, filed an IPO to raise $56 million.
Because of the downturn in commercial payments for psychiatric services, more providers are focusing on the Medicare-reimbursed geriatric segment of the business. However, it's Mr. Foster's past performance that is behind Apogee's favorable prospects.
Three of the companies he's founded have been bought by NovaCare, a rehabilitation company of which Mr. Foster also is founder, chairman and chief executive officer (See chart).
Often, if a corporate CEO buys other companies that he has started, it raises eyebrows. "NovaCare shareholders have been most upset about whether these transactions have been at arm's length," said O. Michael Gray, vice president of Rauscher Pierce Refsnes, a Dallas-based investment banking firm.
Even so, Mr. Foster has managed to complete three such transactions as the top executive of NovaCare.
Mr. Foster was unavailable for comment.
The most recent deal took place in February, when NovaCare bought RehabClinics, an outpatient rehabilitation company that Mr. Foster founded in 1990 and took public in 1992. RehabClinics' shareholders came out well, receiving 1.6 shares of NovaCare stock for each share they held. For those who bought shares for as low as $12.50 in the past year, the value doubled.
Mr. Foster founded NovaCare in 1984 after selling Foster Home Health Care, a chain of home medical equipment dealers, to New York-based Avon Products.
Since then, he's been a one-man consolidation crew in rehabilitation services. In addition to RehabClinics, NovaCare has bought two other Foster-led ventures, Orthopedic Services, an orthotics and prosthetics company, and Rehabilitation Hospital Corporation of America, a privately held chain of five hospitals and three outpatient centers, for $51 million.
NovaCare now operates 12 rehabilitation hospitals and said it is the nation's largest operator of outpatient physical therapy clinics, with more than 200 facilities.
Apogee differs only slightly from Mr. Foster's other businesses. For example, NovaCare provides speech pathology, occupational therapy and physical therapy to 1,900 nursing homes. In fact, the nation's largest nursing home chain, Fort Smith, Ark.-based Beverly Enterprises, accounted for 13% of NovaCare's $531.9 million in revenues in fiscal 1993. The company earned $46.8 million, or 93 cents per share.
Interestingly, the same reimbursement vehicle that launched NovaCare benefits Apogee. The Omnibus Budget Reconciliation Act of 1987 mandated that nursing homes provide speech, occupational and physical therapy. It also mandated mental health services, but a reimbursement mechanism for mental health didn't become effective until April 1992.
Apogee, which has contracts with 700 nursing homes for mental health services, sees the market as "large, emerging and substantially underserved," according to its prospectus.
In addition, Apogee operates 35 mental health clinics and claims to be the nation's first company to pursue a national strategy of consolidating mental health group practices.
But Apogee isn't the only company going after geriatric mental health business. "We're seeing an entrepreneurial push to access this benefit and take services into nursing homes," said Mark Knight, executive director of the American Association for Partial Hospitalization, which represents outpatient mental health providers.
However, "HCFA is looking closely at (the expansion of geriatric mental health services), and we have concerns as well," Mr. Knight said. "Sometimes it can be clinically appropriate, and other times not."
Apogee has set up systems to guard against possible abuse, said President Lawrence Davies. "We get physician orders on everyone we treat," he said. Also, the company's clinical protocols are determined by clinical advisory boards, not business managers, he noted.
Typically, nursing home residents wouldn't get the high quality of care that Apogee's therapists and psychologists can provide, he said.
