Many long-term-care companies are blaming Medicare for their financial problems.
At least one appears to be blaming its chief executive officer as well.
On June 11, Mariner Post-Acute Network Chairman and CEO Keith Pitts resigned abruptly to take a position at Vanguard Health Corp., a private acute-care hospital company in Nashville (See story, p. 21).
Mariner did not immediately replace Pitts, but instead formed an interim management team.
"Pitts is highly respected in the healthcare industry, and his departure was a big surprise," said Victor Seoane, an analyst with Robinson-Humphrey Co., Atlanta.
Pitts is a longtime healthcare executive, having been chief financial officer at Nashville-based OrNda HealthCorp in the early 1990s, and later chairman and CEO of Atlanta-based Paragon Health Network, a precursor firm to Mariner.
While Mariner officials and Pitts declined to comment, Pitts appeared to be taking the fall for the company's failure to turn a profit under Medicare's new prospective payment system.
By resigning, Pitts walked away from control of a company in which he had invested $2 million of his own money.
As chairman and CEO of Paragon, Pitts engineered the creation of Mariner Post-Acute through the $536 million acquisition of New London, Conn.-based Mariner Health Group in July 1998. Paragon itself was a new company, formed in 1997 through the recapitalization of Living Centers of America, Houston, and its merger with Grancare, Atlanta.
When the Mariner merger was announced, Pitts said the merged company would create efficiencies that would let it capitalize on the PPS by keeping costs lower than reimbursements.
Instead, Mariner has faced mounting losses since its facilities began making a transition to the PPS on July 1, 1998.
For the first two quarters ended March 31, 1999, Mariner posted a loss of $118 million on $973 million in revenues.
Mariner is now the third long-term-care company, after Vencor and Sun Healthcare Group, to see its stock prices fall below $1 per share this year.
In recent months, Mariner has shed large chunks of its business in an attempt to stem losses and raise cash (See chart). In May the company said it would consider divestiture of all noncore units.
The board of directors recently created a committee with an outside financial adviser to examine a possible restructuring of its balance sheet.
But continued losses at the company have created a debilitating credit crunch with immediate ramifications.
Standard & Poor's dropped its ratings on Mariner earlier this month, citing "heightened concern that there may not be sufficient liquidity in meeting near-term interest and principal obligations." The downgrade took Mariner's corporate credit rating to CCC from B-.
Moody's Investors Service downgraded the company last week to Caa2 from B1, citing similar reasons.
Near-term obligations include a repayment of $46.7 million on loans due Aug. 15 and the possibility that HCFA could demand millions in repayment for rehabilitation services rendered from 1995 to 1997.
Mariner had $56 million in operating cash as of March 31.
The company is out of compliance with one of its senior credit facilities, through which it has borrowed $424 million.
A waiver for the terms of a second credit facility covering more than $891 million of debt expires June 28.
Mariner is negotiating with its banks to modify the terms of all its loans and avert a declaration of default.
"They currently have no credit available to them, so if operations don't improve very quickly they will run out of cash very quickly," Seoane said.
Pitts is not the first Mariner executive to leave this year. In January, CFO Charles Carden resigned his post, followed in March by the resignation of President and Chief Operating Officer Arthur Stratton, M.D.
Stratton had been CEO of Mariner Health before last year's merger.
George Morgan, who was senior vice president of managed care at Columbia/HCA Healthcare Corp. and had been vice president for financial operations under Pitts at OrNda, was recruited to the CFO position in January.
In January, the company hired Chris Winkle, a former executive at Integrated Health Services, as an executive vice president.
The management team that replaces Pitts includes Morgan and Winkle; Bill Korslin, president of the pharmaceutical division; and Chief Information Officer Bob Napier.