Last week's decision by Integrated Health Services to buy Coram Healthcare Corp. for $655 million paved the way for a novel deal between IHS and MedPartners.
MedPartners has chosen IHS to be its exclusive provider of post-acute services in certain markets across the country and its preferred provider in others. The agreement marries the nation's largest physician practice management company with its largest post-acute provider.
"IHS is by far the first company to do something on this broad of a scale in the post-acute arena," said Jean Swenson, an analyst with Alex. Brown & Sons in Boston.
IHS now has a greased path to the patients seen in 25 states by 7,400 physicians managed by Birmingham, Ala.-based MedPartners, which has projected 1996 revenues of $4.6 billion.
The companies overlap in most major markets, said Randy Pittman, MedPartners' vice president for finance. IHS, based in Owings Mills, Md., provides subacute care, home care, rehabilitation services, respiratory therapy, hospice care and diagnostic services at 1,000 sites in 47 states.
Pittman said exclusive contracts will be negotiated on a market-by-market basis, with the most likely markets being those with a high concentration of managed-care providers, such as California.
"Many times we are providing prepaid care for a group of patients," Pittman said. "Sometimes the most cost-effective care is home care. We purchase a lot of that care, especially in markets that are heavily capitated."
Swenson said the agreement will likely give IHS an additional $100 million to $150 million in revenues over the next several years, a small part of IHS' overall financial pot. IHS posted $1.2 billion in revenues in 1995 and is expected to double that within another year as a result of recent acquisitions.
However, she said, the deal will give the company a lot of experience in handling managed-care contracts. This expertise will become more important for post-acute providers, she said, as Medicare HMOs continue to spread.
The provider agreement grew out of negotiations between the two companies to end the yearlong legal battles between Denver-based Coram and MedPartners' Caremark International subsidiary (See chart).
Since September 1995, Coram and Northbrook, Ill.-based Caremark have been hurling lawsuits and countersuits at each other. The skirmishes stem from Caremark's 1995 sale of its home infusion business to Coram for $209 million in cash and $100 million in securities.
When MedPartners acquired Caremark in May, it inherited the company's legacy of litigation. When IHS and Coram began merger talks, Pittman said the company saw an opportunity to "gain a settlement of the lawsuit at no cost to us and gain a relationship with a company we are comfortable can provide quality services that we like to contract for on a nationwide basis."
Under terms of the merger, IHS will pay $280 million in stock to Coram shareholders and assume $375 million in Coram debt. Upon completion of the deal, expected in the first quarter of 1997, IHS and MedPartners agreed to drop the lawsuits between their subsidiaries. They also agreed to reduce the amount Coram still owed to Caremark from the initial purchase of its home infusion unit to $57.5 million from $111 million.
IHS appears to have a penchant for resolving the legal woes of other companies. Two weeks ago, IHS acquired Brunswick, Ga.-based First American Health Care after settling the scandal-plagued home-care company's disputes with the federal government (Oct. 28, p. 6).
All this brokering is intended to help IHS further prepare for an increased reliance on managed care and changes in the federal government's reimbursement of medical services.
"Our strategy remains the development of post-acute-care networks, which provide care to patients throughout their episode of treatment, and to focus on the managed-care payer," said Robert Elkins, M.D., chairman and chief executive officer of IHS.
With its recent acquisitions, IHS has become the nation's second-largest home-care provider, behind Melville, N.Y.-based Olsten Corp.'s Olsten Kimberly QualityCare division. In addition to its other post-acute services, IHS will now operate more than 700 home-care branch locations in 44 states that are expected to bring in $1.2 billion in revenues.