Shelving a bid to become the country's largest publicly traded mental-healthcare provider, outpatient-care provider PMR has called off its acquisition of Nashville-based Behavioral Healthcare.
Under the $209 million deal, announced in July, San Diego-based PMR would have paid $94.4 million in cash and 2.6 million shares of stock, and assumed $90 million of Behavioral Healthcare's debt.
PMR runs 55 outpatient programs for the seriously mentally ill in 23 states. Behavioral Healthcare owns 43 psychiatric hospitals in 18 states.
Together, the companies generate revenues of about $370 million annually.
This isn't Behavioral Healthcare's first scuttled merger. Last September, Charter Behavioral Health Systems announced it would acquire Behavioral Healthcare for about $230 million, but the deal was called off in November 1997. The companies did not disclose the reason (Nov. 10, 1997, p. 48).
Behavioral Healthcare is the second-largest private provider of mental health services, after Atlanta-based Charter, which operates 92 facilities nationwide.
"We had put the deal together originally to combine our outpatient and disease-management capabilities with their inpatient capabilities to form an integrated system that would provide the full continuum for patients that had mental illness," said Mark Clein, PMR's chief financial officer.
PMR has a similar arrangement with seven acute-care hospitals owned by Columbia/HCA Healthcare Corp., Clein said.
But the companies pulled the plug on the merger for financial reasons, companies officials said.
The deal was contingent on PMR's ability to raise as much as $125 million on the high-yield debt market. "At the time it was a financial arrangement that made sense for PMR," Clein said.
Bond market liquidity has contracted during the past few months, pushing up interest rates in that market and "raising the risk profile, so it (borrowing on the debt market) didn't make any sense," he said.
Instead of merging, the companies will jointly develop 10 outpatient programs for people with schizophrenia and bipolar disorder, to be run from Behavioral Healthcare hospitals, the companies said.
Ed Stack, chief executive officer of Behavioral Healthcare, said the new agreement would add "a couple of percentage points" to the company's outpatient revenues. Outpatient care accounts for 12% of Behavioral Healthcare's $300 million annual revenues, he said.
Mike Covall, executive director of the National Association of Psychiatric Health Systems, said the "synergy" between the outpatient and inpatient components of the two companies made the deal unique. But the reimbursement environment deters such deals.
"Behavioral Healthcare inpatient providers are continuing to expand into outpatient care because inpatient revenue has fallen," Covall said. But inpatient providers remain wary of such expansions.
"There is uncertainty about how Medicare will pay for outpatient mental health services" when it moves to a prospective payment system in 2000, he said.
In recent months, Behavioral has concentrated its growth on inpatient services. It acquired 25 psychiatric hospitals in May from Las Vegas-based Community Psychiatric Centers and five other hospitals from Sterling Healthcare in Bellevue, Wash.
PMR recently helped found an HMO focusing on the mentally ill. The company is looking for other ways to expand, Clein said.
"I wouldn't say that we are out there shopping, trying to figure out how to get into inpatient care," Clein said. But, he added, "we aren't precluding anything."