Events at National Medical Enterprises-although more severe than most-reflected the turmoil among psychiatric providers in 1993.
On Aug. 26, 1993, NME Chairman Jeffrey Barbakow walked into the company's Santa Monica, Calif., offices to find federal agents swarming the place. The surprise raid coordinated by five federal agencies may have caused the former Wall Street banker to wonder what he had gotten himself into when he accepted the top NME post just four months earlier. He didn't take long to act.
By December 1993, NME agreed to pay $215 million to settle dozens of insurer and patient lawsuits stemming from the psychiatric hospital business that nearly brought the company to its knees. The problems also prompted NME to almost entirely exit the psychiatric business.
NME, traditionally among the top three psychiatric hospital chains, sold most of its psychiatric hospitals in 1994 to Charter Medical Corp., Macon, Ga.
Although the business wasn't quite as sour for the rest of the industry, it certainly wasn't sweet, either. The number of psychiatric hospitals and the revenues generated by them dropped last year, according to MODERN HEALTHCARE's Multi-unit Providers Survey.
In 1993, 434 freestanding psychiatric hospitals were operated by systems responding to the survey, a 10.3% drop compared with the previous year. The number of beds dropped 5% to 40,549.
Patient revenues for those hospitals fell 9.1% to $1.1 billion, the survey said.
This came on top of a 6% decrease in the number of psychiatric hospitals in 1992.
The psychiatric hospital industry is dominated by investor-owned chains, whose fortunes roiled with the bad times in 1993 and 1992. According to the survey, 91% of the beds operated by systems are controlled by investor-owned chains. The number of beds operated by investor-owned systems dropped 4.3% in 1993 to 36,869, according to the survey.
Although they make up a smaller part of the industry, secular not-for-profit systems showed larger decreases, with the number of beds down 12.3% to 2,255 and the number of facilities down 28% to 28.
The new Charter.The largest psychiatric hospital chain, Charter Medical, retooled during 1993, and its efforts were warmly received on Wall Street.
After emerging from bankruptcy reorganization in late 1992, Charter regained its spot on the American Stock Exchange. Its stock price increased fourfold in the first year as a new public company from $6 per share in October 1992 to $23.63 per share on Sept. 30, 1993, the end of Charter's fiscal year.
While others retreated from the psychiatric hospital business, Charter charged ahead. Saying it wanted to focus solely on the mental health business, the company sold its 10 medical/surgical hospitals to Quorum Health Group, Nashville, Tenn., in September for $340 million.
In 1994, Charter agreed to buy 46 NME psychiatric hospitals for $186 million, reinforcing its spot as the top psychiatric hospital chain with 121 facilities.
Although those hospitals generated $407 million in revenues and $54 million in operating income during the fiscal year ended May 31, 1993, their performance had faltered under NME's banner. During the first six months of 1994, the hospitals generated $174 million in net revenues and $20 million in operating income. Charter's goal is to turn around the facilities during 1994.
Charter also re-engineered itself to market its business to payers. It contracted with Perot Systems, Dallas, to provide updated and integrated clinical and business information systems. In addition, it bought Strategic Advantage, a Minneapolis-based outcomes research and clinical information systems firm, to track the continuum of care for Charter patients.
Charter's activity wasn't unique as numerous psychiatric hospitals changed hands during 1993 and early 1994. Vendell Healthcare, a Nashville, Tenn.-based chain, bought one hospital from NME and two from Hospital Corporation of America. Vendell also leased one hospital from Ramsay Health Care, New Orleans, and has an option to buy the facility.
New players.A new company, Behavioral Healthcare Corp., was started by HCA Psychiatric Group President Edward Stack. It bought six HCA psychiatric hospitals in Nevada and Texas. Financial terms weren't available.
Another new company that resulted from a spin-off in 1993 was Mental Health Management. McLean, Va.-based Mental Health had been a subsidiary of Mediq, a Pennsauken, N.J.-based medical equipment firm. In September, Mental Health, which operates six freestanding hospitals and 45 hospital-based units, became a separate publicly traded firm.
In another development, Healthcare International and HealthVest merged after Healthcare International emerged from Chapter 11 bankruptcy reorganization. The newly combined Austin, Texas-based company, renamed Healthcare America, owns and operates 11 hospitals with projected net patient revenues of $100 million for 1994. It also owns seven hospitals that are operated by other companies, a relationship that stems from HealthVest's history as a real estate investment trust.
To offset falling profits, some psychiatric hospital chains diversified. Ramsay Health Care and Laguna Beach, Calif.-based Community Psychiatric Centers plunged into subacute and long-term intensive care. CPC was the largest psychiatric hospital chain at the end of 1993, but Charter's purchase of NME's hospitals put Charter back on top this year.
CPC's subacute venture was by far the most aggressive, although long-term profitability is still to come. The company, through its Transitional Hospitals Corp. subsidiary, began operating seven long-term-care hospitals in its fiscal year ended Nov. 30, 1993. Since then, it's opened three others. Of the 10, four were created by converting portions of CPC psychiatric hospitals. Three more are under development.
This extremely fast rollout by the company has interested Wall Street analysts, who see promise in the transitional hospitals niche.
For fiscal 1993, CPC reported a loss of $24.9 million, or 58 cents per share, on revenues of $335.6 million. However, the loss included a first-quarter restructuring charge of $35 million.
"CPC faced many hard choices and uphill battles in 1993," Chairman and Chief Executive Officer Richard Conte told shareholders. "The consolidation of the psychiatric industry is still under way as managed care penetrates new regions of the country, but we are confident that CPC will be one of the key survivors."
The cloud of reform.In retrospect, 1993 was the year psychiatric providers perhaps hoped for relief after two years of falling profits and bad press. Unfortunately, little relief came, and future prospects are clouded by the uncertainties of healthcare reform.
As Congress crafts a basic benefits package for all Americans, mental health providers remain nervous about the inclusion of their services. Several business groups would like to see mental health deleted from a basic benefits package, charging that the benefit would lead to uncontrollable costs.
In response, various groups representing the $50 billion behavioral health industry are arguing that a mental health benefit is necessary and can be controlled.