Last year's balanced-budget law has helped spawn its first major merger in the long-term-care industry.
Paragon Health Network last week announced plans to acquire competitor Mariner Health Group in a deal valued at nearly $1.2 billion.
Atlanta-based Paragon operates 328 facilities in 36 states. Mariner, based in New London, Conn., operates 94 facilities in 39 states.
With $3 billion in combined annual revenues, the merged long-term-care company, to be headquartered in Atlanta, will operate 422 skilled-nursing, subacute and assisted-living facilities in 42 states.
Paragon would acquire Mariner for $580 million in stock and assume Mariner's $584 million in debt. Mariner shareholders would receive one share of Paragon common stock for each Mariner share.
The companies said the merger was spurred in part by new federal Medicare payment rules for long-term-care providers. Last year's balanced-budget law required a skilled-nursing prospective payment system. When the PPS takes effect July 1, skilled-nursing providers will be reimbursed on a fixed-rate rather than cost-based basis.
Paragon and Mariner executives said the merger will generate about $70 million in savings the first two years because it will allow them to eliminate duplicate services and increase economic efficiency. They added that they don't plan to eliminate sites or employees.
"This deal is not going to be done at the expense of patient care," said Keith Pitts, Paragon's chairman, president and chief executive officer. "Medicaid is the safety net, and we plan to be in those programs."
The Paragon-Mariner deal comes a week after long-term-care competitor Vencor announced plans to pull out of the Medicaid program in nine states (April 13, p. 4). The Florida Agency for Health Care Administration fined Vencor $260,000 last week for evicting Medicaid patients in Tampa, Fla.
Louisville, Ky.-based Vencor wants to meet with federal lawmakers in an effort to delay the implementation of PPS.
Executives from Paragon and Mariner would not comment about Vencor's controversial eviction strategy. But they said their companies will be able to capitalize on the implementation of a PPS for long-term-care providers because their combined efficiency will help keep costs lower than the Medicare reimbursement rate.
That's something they will need to do. Medicare reimbursements make up 34% of the companies' combined annual revenues. Medicaid provides 36%, while revenues from private-pay and privately insured patients make up the rest.
"Mariner's operating model is based on prospective payment," said Mariner Chairman and CEO Arthur Stratton Jr. "PPS is about managing ancillaries. Some (other long-term-care companies) won't want to be in the high-acuity business, and we will be able to increase our market share."
Combined ancillary services include 43 institutional pharmacies and 56 home health agencies.
The deal, approved by both companies' boards, is expected to close by Sept. 30. Paragon will have nine seats on the combined company's new 11-member corporate board; Mariner will control two seats.
Pitts will be chairman and CEO of the still unnamed new company. Stratton will be vice chairman, president and chief operating officer.
Paragon was formed last year when Living Centers of America acquired GranCare for $1.8 billion. The companies agreed to operate under a new name.