Care for the developmentally disabled has traditionally conjured up images of helpless individuals shut away in drab state-run institutions and has surely been one of the last places where venture capitalists might look for investment opportunities.
But now private-sector companies like Houston-based American Habilitation Services have identified the industry as a growing, $20 billion-plus market niche and are offering community-based programs in lieu of warehouselike settings for the nation's more than 3 million individuals with developmental disabilities.
In April 1996, American Habilitation received $20 million in startup capital from Chicago-based venture capital firm Golder, Thoma, Cressey, Rauner with the intent of forming a national network to serve the developmentally disabled.
Then in September 1996, the new company completed its first major acquisition, picking up Houston-based Living Centers of America-DevCon, a subsidiary of Living Centers of America, also of Houston.
The private, for-profit company is now offering respite care, job training and supportive-living services in five states. It reported 1996 revenues of $65 million and projects $80 million this year.
President and Chief Executive Officer Bill M. Wooten says American Habilitation plans to complete its acquisition of Anderson, Ind.-based Paragon Services at the end of this month. He says the company has signed letters of intent to purchase five additional companies and would like to go public in the next 18 to 24 months.
Wooten's optimism and that of other industry leaders stems from a number of fundamental changes in the delivery and funding of care for the developmentally disabled.
Such individuals typically have physical or mental limitations as a result of mental retardation, autism, cerebral palsy or learning disorders and require long-term support services and special housing.
Companies are stepping in to take them out of the institutions and provide them with job training and placement, rehabilitation and respite care. Companies are also managing residential-living options such as group homes, where several developmentally disabled individuals may live together, and in-home personal assistance programs in private residences.
A major draw to this market has been the increasing privatization of state Medicaid programs, the primary payers for such long-term support services. In 1993, $11.4 billion in state and federal Medicaid funding went to the developmentally disabled, and industry estimates peg the total market at more than $20 billion.
"People didn't come to provide Medicaid services because they thought they'd lose money," notes Richard Hemp, proj-ect director for the HHS-funded National Study of Public Spending for Developmental Disabilities at the University of Illinois at Chicago. "The risk is not there."
A special Medicaid waiver for home- and community-based services has encouraged the emergence of alternatives to state-run facilities as well. Signed into law in 1981, the waiver program had been adopted by all 50 states and the District of Columbia by the end of last year. Hemp estimates services provided under the waiver program can cost half as much as those provided by the state.
Companies also point to the opportunities for consolidation in an industry with a severely underserved market. Thousands of mom-and-pop not-for-profit agencies continue to dominate the field at a time when states have waiting lists for individuals who need services or emergency placements.
Louisville, Ky.-based Res-Care is the only publicly traded company to date to specialize in services for the developmentally disabled. Formed in 1974, the company went public in December 1992.
Res-Care operates in 17 states where it provides institutional care and other residential-living options, such as group homes, in addition to vocational training and in-home, personal assistance services. The company reported 1996 revenues of $218 million.
Jeffrey Cross, executive vice president for operations in Res-Care's division for people with disabilities, says the company aims to grow by 20% each year and has established an aggressive acquisition program.
Cross explains that the company, like most others that care for the disabled, does not contract directly with managed-care plans to provide services for their enrollees.
Cross says Res-Care works with managed-care plans if, for example, a state provides Medicaid services through an HMO or a client carries managed-care insurance that covers support services.
"We will follow the market on this," he says. "This is a vulnerable population."
Dublin, Ohio-based Voca Corp. is the industry's largest private, for-profit player. Formed in 1979, Voca has grown 100% over the past 21/2 years and projects 1997 revenues of $160 million after posting $93.4 million last year.
The company grew dramatically after its October 1996 merger with Austin, Texas-based EduCare Community Living Corporation-America, another industry leader. Also last year, Voca took in $15 million in private equity financing.
It now runs group homes and provides respite-care, job-placement and other supportive services in 11 states and the District of Columbia.
Voca President and CEO Tim Vogel acknowledges the industry can be risky given the possibility of unfavorable changes in Medicaid reimbursement policy. But, he says, its opportunities are many.
"There are tremendous opportunities, not just from a business standpoint but also in terms of improving the quality of services," Vogel says. "There's not a lot of excess capacity. That means that going forward there's going to be an increased demand for services and continued opportunities for providing additional services."
Bordentown, N.J.-based Community Options represents one of the larger not-for-profit companies serving the developmentally disabled.
The company reported 1996 annual revenues of $16 million and projects $20 million for this year.
President and CEO Robert Stack says one of the company's newest initiatives is to provide foster-care and adoption programs for children with developmental disabilities. He says more than 6,000 babies with disabilities are now in nursing homes. Stack sees no limits for the industry's potential.
"We're starting to see more private companies come in," Stack says. "But there could be a lot more. I bet you could call any state and set up an operation and it would be lucrative within a year."