Nestled in the gentle rolling slopes of southern Indiana along a sleepy stretch of the interstate between Indianapolis and Cincinnati, Batesville is to hospital beds and caskets what the Middle East is to oil. Hillenbrand Industries, the deferential company that makes it all happen for this Tudor-style village, found its fortune in the sick and expired.
From its Batesville home, the Fortune 500 company operates two major divisions: Hill-Rom, the hospital bed manufacturer that first "brought the home to the hospital," and Batesville Casket, a company known for no longer calling its products "coffins." The Hillenbrand family-the company's founders and Batesville's earliest settlers-still own a healthy chunk of the publicly traded company, an estimated 55%. Hillenbrand employs 10,400 people worldwide, 3,700 of them in Batesville, which has a total population of about 5,000.
For years, Hillenbrand has reigned as the undisputed leader in the two major markets. Despite-or because of-these positions, the two units have struggled and thrived along with the industries they supply.
Both operating units fiercely guard their pricing and financial data, but brokerage house Salomon Smith Barney estimates that Hill-Rom is locked into 90% of the market for general medical/surgical beds and owns comfortable majority stakes in the rental bed market and the specialty bed market. On the funeral industry side, it commands an enviable 48% of the casket market nationwide, Salomon Smith Barney reports.
People will always get sick and die, but both businesses have their financial downside, especially Hill-Rom. When economics demand that hospitals shed beds and shorten lengths of stay, the town of Batesville suffers from the fallout. As hospitals' capital budgets go, so goes Hill-Rom.
"We are kind of like looking at the mercury in the thermometer," says Paul Joyce, Hill-Rom's executive director for North American sales and service administration.
As a result, any clues concerning the long-term survival of the hospital industry might be gleaned from Hill-Rom. Hospital executives may take heart that "after a few rough years," Hill-Rom's outlook is brightening after some internal belt-tightening and external loosening in hospital reimbursements, finds Dhulsini de Zoysa, an analyst with Salomon Smith Barney.
"We believe the company's struggling healthcare business, Hill-Rom, has turned the corner," de Zoysa wrote in an April 12 research report. "An improved outlook for hospitals, Hill-Rom's primary customers, explains much of this turnaround."
Even though some might joke about how the company can make up profits on one end of the business when the other end is struggling, Hillenbrand indeed is uniquely positioned to cash in on the graying of America, de Zoysa says. The hospital-bed systems manufactured by the 72-year-old company contributed 52% of the corporation's $2.1 billion in sales last year, while Batesville Casket, the older of Hillenbrand's business lines, accounted for 30% of sales. Forethought Financial Services, which sells prepaid funeral services, generated the remaining 18% in sales.
The company's financials have remained firmly in the black. Hillenbrand does not break out net income for its operating units, but in 1999, according to its annual report, Hill-Rom earned a gross profit of $402 million on $1.09 billion in revenue from healthcare sales and rentals. Gross profit grew 13% to $454 million on $1.1 billion in 2000. Revenue of $766 million in healthcare sales in 1999 grew to $800 million last year, while revenue from rentals slipped to $312 million in 2000 from $324 million in 1999. Hill-Rom officials say declining revenue in rentals reflects the struggles in the long-term-care and home-care industries.
Corporationwide, Hillenbrand posted net income of $124 million, or $1.87 per share, on $2.05 billion in net revenue in 1999. For 2000, earnings rose 24% to $154 million, or $2.44 per share, on $2.1 billion in net revenue. Excluding unusual charges, including the cost of restructuring, consolidated operating profits dropped 1% from 1999 to 2000.
R. Ernest Waaser, Hill-Rom's president and chief executive officer, was senior vice president of AGFA Corp. and president of its medical imaging division before joining Hill-Rom in January. He replaced Robert Tennison, who worked as a vice president for continuous improvement at Hillenbrand Industries for three years before taking the helm at Hill-Rom for 18 lackluster months. Tennison agreed to resign "to pursue other interests," company officials say.
Collateral BBA damage
In the wake of the Balanced Budget Act of 1997, Hill-Rom suffered through a two-year drop in sales, from mid-1998 to mid-2000. In late 2000 and early 2001, the company restructured its operations by melding five separate units-acute-care, long-term care, home care, European operations and international operations. The reorganization ultimately eliminated 400 positions, or 6% of its workforce, and was focused on redefining strategies in the struggling long-term-care and home-care operations, a situation mirroring what was happening in the industry with Medicare reimbursements, company officials say.
In addition, the restructuring was designed to streamline operations-to create "one Hill-Rom mind-set with no more mini-branding of units," says Joel Reuter, a company spokesman.
"This isn't a fix-it; this is a build-upon," Waaser says.
Changes at the top
Perhaps not coincidentally, Hillenbrand Industries' leadership experienced a similar sea change at the start of this year. For the first time in the company's nearly 100-year history, a nonfamily member holds the titles of president and CEO: Frederick Rockwood. At the same time, Ray Hillenbrand succeeded his uncle, Daniel Hillenbrand, as board chairman.
But rather than marking a change in direction, Rockwood, who has been with the company for 23 years, "surfaced very logically," says Ray Hillenbrand. It was a simple case of taking the most-qualified person, regardless of bloodlines, he says.
Hill-Rom officials say the company is taking the hospital industry's hard times in stride by remaining focused on the ever-evolving needs of its core customers: nurses. As the hospital industry's demand for beds shrinks, the bed manufacturer is compensating with the sophistication of its offerings. Hill-Rom also boasts that after decades in the business, it has the expertise and wherewithal to help clinicians do their jobs better. The company mantra is that it is "taking the mule out of nursing" by offering hospital bed "systems" and support services to help prevent injuries to both caregivers and patients and, in some cases, even provide therapy.
If doubts persist about Hillenbrand Industries' resolve to weather upheavals in both the healthcare and funeral industries, it's worth taking note that the company has a long history of diving into markets no one else would go near. More times than not, a customer first sparked the idea.
"If you look across (the company), you find some common end-of-the day principles," Waaser says. First and foremost, perhaps, "We both maintain close, intimate relationships with our customers to drive innovation."
Once one of many furniture companies that sprouted in the Batesville area as a result of the hardwood forests and immigrant German woodworkers who settled there, Hill-Rom traces its 1929 founding to a casual comment by a visiting priest, the Rev. Charles Moulinier. Admiring the furniture in the area, Moulinier, then president of the Catholic Hospital Association, mentioned that he thought it would be a good idea to create homier hospital beds by building them of wood rather than the cold tubular steel that dominated the hospital wards of the day. And so a company was born.
Sometime between then and now, the company's focus changed. Rather than bringing the home to the hospital, Hill-Rom now is bringing the hospital to the mattress. The company probably is selling fewer beds than it sold in the early 1980s before the advent of DRGs transformed the hospital industry, says Joe Swenson, vice president of marketing and product development. But their complexity-and price-have taken up the slack.
Hill-Rom is now elbow-deep in monitoring and paging systems, medical gas delivery systems and operating room fixtures-almost any piece of hospital equipment that can be connected to a bed or platform in even a tangential way. The only spot in a hospital where Hill-Rom lacks a significant presence is radiology, but even then, Hill-Rom can sell hospitals the equipment needed to transport patients to and from imaging, Swenson says.
In short, Hill-Rom stopped being a bed manufacturer and reinvented itself to become a medical device company. The company offers a variety of products that for the most part share one common link: a mattress, cushion or platform on which to care for a sick patient.
"Hill-Rom is well-positioned because we occupy that real estate under the patient," says David Minning, director of marketing and program development at Hill-Rom.
Rapidly changing technology has the added financial benefit-for Hill-Rom-of shortening the life span of a hospital bed. Swenson notes that 85% of the beds on hospital floors in Europe are still manually operated. Twenty years ago many hospital patients were healthy enough to get out of bed and crank it up themselves. The irony is that any patient who is well enough to do that today would be discharged, Swenson adds.
These days, an American hospital could reasonably expect to get five years out of a Hill-Rom bed before newer technologies come along to challenge its viability. The latest offerings include beds constructed to effortlessly fill doctors' orders for post-surgical patients who need to get on their feet, as well as mattresses engineered to reduce the risk of hospital-acquired pressure wounds. The company also has launched a complete bariatric patient-care system, which meets the needs of obese patients.
Press a button on the newest Hill-Rom product, the TotalCare SpO2RT, and an immobile patient therapeutically rolls from side to side, preventing bedsores and sparing the nurse's back. Press another button and the nurse can step aside while the bed vibrates, which helps prevent hospital-acquired pneumonia by shaking the patient's lungs. The cost of the TotalCare SpO2RT easily reaches five figures-the cost of a good car, says one of the company's clinical-care specialists.
In the future, Hill-Rom officials say it won't be manufacturing beds so much as docking stations-providing the stage from which virtually every act of a patient's hospital stay is performed.
Covering the waterfront
The product line Hill-Rom offers today probably would be unrecognizable to its founder, William Hillenbrand, a member of Modern Healthcare's Health Care Hall of Fame. But the business practices would be familiar. Almost compulsively autonomous in the way it does business, both of Hillenbrand's two major units set their sights on owning everything even remotely tied to the manufacturing and distribution processes, including a century-old inn, Sherman House, that is a Batesville landmark.
The Batesville-based Ritter plant-the largest of Hill-Rom's four U.S. manufacturing facilities in four states-churns out as many as 300 beds per day as part of a just-in-time system that manufactures products only as they are ordered. The plant encompasses 14 acres under one roof and employs 850 workers who do everything from cutting and pressing huge slabs of steel to welding, painting and assembling the increasingly complex circuit boards that act as the brains for many of the products.
Joyce, who heads the service end of the 500-strong sales force, says the company has sold something to just about every one of the 5,200 hospitals in the U.S. That has forged a network of customer relationships that the company tries to build upon-much like the difference between being a used-car lot or a full-service car dealership.
"We know we will need them (customers) again," Joyce says.
To that end the company caters to its customers. Hillenbrand operations include 10 pilots, a fleet of five corporate jets and a nearby airstrip to fly in customers for tours of the company's showrooms. At night, they are bused to the Hillenbrand family farm, probably one of the few places on earth where funeral directors routinely find themselves in the same company as hospital administrators.
About 750 groups of customers come through the Hill-Rom showrooms yearly. Other suppliers may balk at the cost of doing business this way, but Joyce insists it pays dividends in rock-solid relationships. As an example, the San Diego-based Premier hospital alliance struck a six-year contract with Hill-Rom in August 1999 that represents, excluding imaging products, the largest capital equipment expenditures made by the group purchasing organization's nearly 2,000 hospital members. (As does Hill-Rom, Premier guards the specifics on its pricing and contracts.) Many of the Hill-Rom products offered to Premier members are under sole-source agreements, meaning Hill-Rom is the only choice they have if they want to buy under the Premier contract.
It may sound like a monopoly, but customers tend to view Hill-Rom more as a gentle giant whose strength is in its products.
"They are a big business partner, and they have a lot of market share and it comes from widespread clinical acceptance of their products and technology," says Gregg Lauder, director of clinical and biomedical contracting at Premier.