InteCare's founder and top executive is blaming the demise of the unusual venture in part on bad publicity surrounding for-profit ownership of hospitals-publicity that might have been fanned by one of its investors.
The company was formed 18 months ago to help not-for-profit hospitals convert to for-profit status. It ceased operations last month (May 26, p. 4).
John Casey, InteCare's founder and top executive, said a lack of business led to the company's demise, and the lack of business was caused, in part, by negative publicity.
"A lot of those (not-for-profit) boards were concerned about negative publicity, and they didn't want to go forth with anything that had a for-profit angle," said Casey, InteCare chairman and chief executive officer.
Casey, former president and chief operating officer of American Medical International, declined to comment on the role VHA, a not-for-profit hospital alliance, might have played in generating that negative publicity.
Irving-based VHA owned a 10% stake in InteCare. But VHA also has been a staunch critic of not-for-profit hospital conversions, publicly voicing its criticisms during hospital conferences and releasing comparative reports bashing for-profit hospitals.
The most recent VHA report targeted for-profit giant Columbia/HCA Healthcare Corp. specifically, alleging its hospitals in key Florida markets are less efficient and higher priced than not-for-profits in the same locations (May 26, p. 8).
However, VHA executives said the alliance's criticism of investor-owned companies didn't have anything to do with the failure of InteCare.
"I think that's way too big a stretch," said C. Thomas Smith, president and CEO of VHA. "The publicity is that evoked by the FBI and the federal government. We don't deserve that kind of credit."
As an investor in InteCare, VHA viewed the company's efforts as a way to help preserve the traditional community hospital model.
Smith said he didn't know if VHA would invest in another company like InteCare: "We'll have to see."
VHA declined to disclose how much money it invested in InteCare or how much, if any, it lost with the company's demise.
Casey and three other investors owned 45% of the company, and Chase Capital, a unit of Chase Manhattan Bank, owned the remaining 45%.
InteCare was backed by $2 million to $3 million, Casey said. "All we really had was a development budget to support the four (InteCare) executives," he said.
InteCare had hoped to craft 50-50 joint ventures with an initial cluster of four to six large not-for-profit hospitals. Chase Capital planned to refinance the hospitals' tax-exempt debt.
The plan was for each hospital or health system's foundation to retain a 50% stake, while the other 50% would have been held by InteCare. If InteCare had been able to complete a first deal with the group of hospitals, it would have conducted a public offering.
"We would have made sure the community-oriented missions would have been more than lip service," Casey said. "That's why VHA supported us."
But InteCare wasn't able to attract enough hospitals or systems to the venture, Casey acknowledged.
He said that to be viable, InteCare would have needed enough healthcare systems to generate $1 billion in annual revenues. No letters of intent were signed with InteCare after 18 months in business.
"We had three systems that were ready to go forward, but we needed another two," Casey said.
VHA said not-for-profit hospitals are finding their own way to finance their future viability.
"Equity capital isn't free, and there's a price to pay for that," Smith said. "There is the cost of community alienation. Community after community in this country are waking up."
InteCare will maintain its corporate status if there are demands for such an ownership model in the future.
"We think somebody can make this work," Casey said.
Wall Street thinks so, according to insiders of the healthcare finance community. Many see merit in developing alternative capital financing sources for not-for-profit healthcare providers.
"Raising the capital was not the constraining issue," said Daniel M. Cain, principal and founding partner of New York-based Cain Brothers, an adviser on the InteCare deal. He believes Wall Street would have embraced the ownership model.
Assuming InteCare needed to net at least five health systems with revenues of $500 million to tap the public markets, the venture probably could have raised some $100 million in an initial public offering, he estimated.
"I think it's kind of an idea before its time," Cain said. "Most hospitals, in spite of what you're hearing, are not financially hurting enough to embrace change."
And, he added, it was an idea that was intellectually attractive but required a leap of faith, since no actual examples exist.
-With Karen Pallarito