The bankruptcy filing last week by one of the nation's largest post-acute-care companies was the sharpest nail yet in the coffin of diversification.
Once a leading advocate of the one-stop-shop model for post-acute care, Integrated Health Services is now a leading example of aggressive expansion gone sour.
The Sparks, Md.-based company is the fourth publicly traded long-term-care firm in five months to seek protection from creditors under a Chapter 11 filing. All four were primarily skilled-nursing providers, but each also pursued several lines of business designed to complement its core operations.
And of the four, IHS may have been the most broadly diversified.
"With nursing homes, home care, home oxygen, rehab hospitals and the rest, (IHS) tried to put together a post-acute network of services," said Debra Lawson, a New York-based analyst for Salomon Smith Barney. "That sounds good and looks good on paper but hasn't worked out in practice."
The company operates 400 nursing homes, 17 specialty hospitals and more than 10,000 contracts to provide physical, infusion, oxygen and other therapies to long-term-care patients. It sold its home nursing division in 1999 after changes in the Medicare payment system made that business unprofitable for the company.
IHS will continue to operate during its reorganization and has secured initial court approval of $300 million debtor-in-possession financing.
Like Vencor, Sun Healthcare Group and Mariner Post-Acute Network- each of which filed for bankruptcy in recent months-IHS blamed its financial failings on Medicare payment cuts to skilled-nursing facilities.
"There are a lot of similarities among the four. They all had an operating structure that took advantage of the old environment and then the government changed the rules," said A.J. Rice, a New York-based analyst for Merrill Lynch & Co.
The IHS filing in U.S. Bankruptcy Court in Wilmington, Del., followed several months of bleak news emanating from the company, including several missed interest payments on bank and bond debt and a $1.4 billion charge for asset impairment in the third quarter ended Sept. 30, 1999. IHS lost $1.8 billion, or $37.64 per share, on revenue of $659.9 million in that quarter.
In its voluntary bankruptcy petition, IHS said it had $3.6 billion in assets and $4.1 billion in liabilities.
Analysts point out that the company's rapid expansion before the implementation of the new Medicare payment system for skilled-nursing facilities resulted in a huge debt load. With reduced cash flow, servicing that debt became all but impossible. Medicare increased payments for some skilled-nursing facility patients under a bill passed last year to revise the Balanced Budget Act of 1997, but those changes came too late for IHS.
Despite its downward spiral, the company apparently went to great lengths to entice its chairman, chief executive officer and president, Robert Elkins, M.D., to stay at its helm. As recently as March 1999 the company lent him $11.5 million to "assist the company in retaining Dr. Elkins on a long-term basis in light of the significantly reduced stock price and loss of equity incentives," according to company filings. That sum brought loans outstanding to Elkins to $37.3 million.
As of the end of 1998 the company also had contributed a total of $18.1 million to Elkins' retirement trust.
Elkins co-founded the company in 1986, after spending four years as a practicing physician and six years as vice president and co-founder of another long-term-care company.
In a written statement, Elkins cast the bankruptcy as a positive move in light of dire circumstances. "The dramatic impact of the implementation of the 1997 Balanced Budget Act on our revenue and cash flow severely impacted the company's ability to service our current capital structure," he said. "We believe we are taking the appropriate steps to assure that we emerge from the reorganization process with a sound capital structure."
During the reorganization, the company will exit unprofitable leases and negotiate agreements with creditors to reduce its debt load.
The survivors in the long-term-care field are those that have stuck to their core businesses, analysts said.
For example, both Beverly Enterprises and Manor Care earn most of their revenue from the nursing home business, with very little from ancillary services. By contrast, Genesis Health Ventures, which analysts say has avoided insolvency in part through recently completing a partial buyout by an investor group, is heavily into the pharmacy and therapy contracts business.
With the IHS filing, 10% of the nation's 17,000 nursing homes are operated by companies that have filed for bankruptcy. Nearly all those facilities continue to operate as before. The company's largest unsecured creditor was HCFA, which it owes $155 million under a settlement agreement reached when IHS bought into the home health business in 1996.