Introduction
This article gives a profound insight into the way the market thinks. I have therefore taken the liberty of reproducing the entire article here.
It describes the rise and rise of Sun healthcare and Horizon. It provides a profound insight into marketplace thinking at the time. This is a market analyst writing. Many of the subsequent problems in aged care can be traced to the policies and culture reflected in this article. One can understand that with so much effort and money devoted to the business of the marketplace, primarily growth, there was little time or money left for care.
Both founders come from Hillhaven. At that time it was owned by the infamous National Medical Enterprises (NME), now renamed Tenet Healthcare. Richard Eamer, the eccentric chairman of NME was the driving force behind its exploitation of vulnerable psychiatic patients and its multimillion dollar record fraud.
Eamer was also chairman of Hillhaven -
subsequently the subject of a critical review titled "Hillhaven:
Unsafe haven". The patterns of thought, business practices, and
readiness to exploit funding systems are readily traced back to
National Medical Enterprises.
New 'Mexico Business Journal, April. 1996
April, 1996 Vol 20; No 4; pg 15
Arlene Odenwald - - - - - Albuquerque; NM
HOW IS IT THAT TWO FAST-GROWING. publicly listed companies with national and international activities in the health care industry happen to be located in New Mexico. where publicly listed companies are few and far between?
It helps if the chief executives of the two firms wanted to forsake the wetness of the Pacific Northwest in favor of drier. sunnier climes. And so we have Horizon/CMS Healthcare Corp. and Sun Healthcare Group Inc. friendly rivals and. one might say, spinoffs of another health care company, Hillhaven Corp., of Tacoma, Wash. which -- in a rather daring move -- Horizon attempted to acquire last year. Instead, Hillhaven was acquired by Vencor. Inc., Louisville. Ky., a long-term acute care company, one-fourth the size of Hillhaven. the company where Andrew Turner: 49, Sun's chairman. and Neal Elliott. 55, Horizon's chairman. met.
Follow closely. please. There are some twists and turns to overcome. Elliott and Turner left Hillhaven in 1986 (Elliott was Hillhaven's president) to form Horizon, which they quickly moved to dry and sunny Albuquerque. In 1989. Turner bought seven unprofitable nursing homes from Horizon and left to form Sun.
Turner's Sun has been busy. In 1994. it acquired Mediplex Group Inc., a Massachusetts - based health care provider which catapulted it above Public Service Co. of New Mexico as the state's largest publicly traded company. Not to be outdone. Elliott's Horizon, after its unsuccessful attempt to acquire Hillhaven acquired Pennsylvania - based Continental Medical Systems instead, which more than doubled its size and took away the largest-publicly -traded laurel from Sun. CMS was the largest single provider of rehabilitation therapy services in the country. Now Horizon/CMS is.
All clear? Horizon's and Sun's extraordinary growth hasn't stopped yet. Turner and Elliott aren't pausing very long for deep breaths, about which more later. Both are billion-dollar companies, for the moment, but additional mergers and acquisitions could make them the two biggest kids on the health care block. But first. here's the story of Sun and Horizon and how they grew.
Just a Nursing Home Company
Back in 1989, Sun was just your average nursing home company, according to Mark Wimer, senior vice president of Inpatient Services for Sun. "As we grew we became a little more specialized. focusing on taking sicker, or heavier acuity patients, people who might otherwise be receiving inpatient services in hospitals."
That evolution escalated in 1994, said Wimer, when Sun merged with Mediplex Group, a long-term nursing facility that was providing a lot of fairly technical service to a significant population. Now Sun considers itself the sixth largest provider of subacute services in the country.
Horizon sees itself as one of the top three nursing facility chains in the country. Its strategy. says Michael Seeliger, vice president of investor and corporate relations is to go beyond the traditional long-term care and care and create a post-acute health care delivery system in each geographic region it serves. The strategy is designed to improve profit margins, occupancy levels and payor mix. It will also allow Horizon to serve an increasing number of patients who continue to require rehabilitation services, subacute care and long-term care after being discharged from the traditional acute care hospital.
Both companies' histories have been of mergers and acquisitions in what appears to be a race to position themselves for the niche being created by the pressure to curtail stays in regular acute hospitals. As traditional acute-care hospitals are pressured to shorten their length of stays even more - some are currently averaging four days -- a new market niche is being created for just the kind of service that Horizon and Sun provide: post and subacute care either in dedicated specialty hospitals or in special acute units in long term nursing home facilities. The evolution has been successful for New Mexico's two long-term health care providers.
Long-term health care companies are in a unique position to provide lower cost care than traditional hospital settings for patients who hospitals can no longer afford to keep but who still need 24-hour supervision or the services of special medical equipment before they can go home. Post and subacute care are providing higher profit margins for companies like Sun and Horizon/CMS as they position themselves to take care of the increasing number of patients being discharged early from hospitals.
Long-term or geriatric care facilities have traditionally had lower capital and operating costs than acute care hospitals, which is why they are able to offer subacute care at significantly lower costs than the traditional acute care hospital, sometimes 30 to 50 percent lower. One factor driving higher profit margins for these companies are their exemption from prospective payment and Diagnostic Related Groups (DRG) --government imposed caps that currently hamstring hospitals.
In addition, there is a trend in the industry toward consolidation. Managed care payors are making it increasingly difficult for smaller operators to compete. Competitive pressures within the industry are forcing consolidation of small local operators into larger regional or national operators.
Smaller operators will find it hard to compete because of the increasing complexity of medical services, growing regulatory and compliance requirements, and increasingly complicated reimbursement systems. Other factors squeezing small operators out of the business are a lack of sophisticated management information systems, a lack of operating efficiencies, and a lack of financial resources to keep them going when Medicare or Medicaid reimbursements are either delayed or curtailed.
The strategy today is growth and expansion through mergers and acquisitions for Sun and Horizon as they jockey for position for tomorrow's consolidated long-term and subacute health care dollar. But the growth is not only in nursing home centers and post and subacute care units but in other ancillary services. Diversification is also the name of this game.
Besides post and subacute care facilities, Sun and Horizon/CMS supplement their main line of business-long-term care facilities--with other diversified lines. Horizon provides services in rehabilitation therapy, pharmacy, sleep diagnostics and medical testing. Sun also provides services in rehabilitation therapy and temporary rehabilitation staffing, as well as pharmacy and Medicare consulting.
Both use these ancillary services to contract with their own and other non-affiliated facilities. Horizon/CMS for instance stands to gain a lot from providing pharmacy services to its newly acquired CMS facilities. Sun profits in the same way with every ancillary service acquisition it makes.
With its acquisition of CMS. Horizon increased the number of its employees from 1 5,500 to 35,000 nationwide. With 3,000 of its employees in New Mexico, Horizon has a much larger presence here than Sun, which has most of its facilities in Massachusetts. Washington and Connecticut. Of Sun's 28.000 employees, 449 are employed in New Mexico either in Sun's corporate headquarters or in one of its three New Mexico nursing homes. Why doesn't Sun have more? Mainly because Horizon has most of them. and one way of exercising operating efficiency is by acquiring companies in areas where one already has a high concentration.
Today these two giants are busy concentrating on integrating and incorporating their newly obtained acquisitions. But even now they still continue to acquire small and medium-sized nursing home companies at a steady clip. Indeed, in February Horizon announced another acquisition: Medical Innovations, Inc. of Houston. a $ 70 million company with home health-care services in Texas. Nevada, Virginia and Florida.
Sun and Horizon/CMS are growth companies; they do not disburse dividends. Instead, they reinvest their earnings in their respective companies and in future growth to place themselves in the best possible position for the next major merger, the next large acquisition.
An Aging Nation
Besides trying to fill the cap in subacute care, Sun and Horizon./CMS also stand to benefit from demographic trends. Patients 65 years and older account for more than two thirds of this country's total health care expenditures. Meanwhile, medical technology continues to increase life expectancies. The number of Americans 85 years and older is expected to double in the next '40 years.
According to the U.S. Bureau of the Census, approximately 1.4 percent of people 65 to 75 years of age received care in long-term care facilities in 1990, while 6.1 percent of people 75 to 84 years of age and 24.5 percent of people over age 85 received the same kind of care.
Dependence on the federal government is not news for the long-term care industry. According to Alex, Brown & Sons, an investment banking firm. if Republicans in Congress have their way, government reimbursement will be funnelled through the private sector via an acceleration of enrolment into Medicare risk managed care plans, which this investment firm expects to be a plus for the industry.
Health care reform, Clinton style. a Brown report stated. represents an enormous buying opportunity for well positioned, cost-efficient, quality health care service providers. Either way, Sun and Horizon/CMS appear to be occupying catbird seat.
Medicaid, Medicare
Most of this industry's revenues come from Medicare and Medicaid. Forty percent of Sun's revenues, for example, came from Medicaid for its fiscal year ending December 1994: 21 percent from Medicare; and 38 percent from private ate payors and others. Figures for the Year ending December 1995 are unavailable, but for the nine months ending September 1995 Sun received 35 percent of its revenues from Medicaid; 40 percent from Medicare; and 23 percent from private payors.
The Medicaid/Medicare payor mix for Horizon CMS. on the other hand, for its fiscal year ending May 1995 resulted in revenues of 41 percent from Medicaid, 20 percent from Medicare, and 39 percent from private payors.
Time now to look at the numbers. which are impressive to say the least. Total revenues for each company should soon top the $ 1 billion mark. With the acquisition of CMS. Horizon expects its total revenues for its fiscal year ending May 1996 to be $ 1.8 billion. Sun expects to top the $ 1 billion mark in its fiscal year ending December 1995.
For FY 1995. Horizon reported earnings of $ 31 million, an increase of 88 percent over the year before. For six months ended November 1995, the most recent statistics available, Horizon reported earnings before one-time charges of $ 38.2 million. a 74.4 percent increase over the same period the year before.
For nine months ended September 1995. Sun reported earnings of $ 42.4 million.
The Fickle Market
In early 1995 the market was favorable to nursing home companies. Today, nursing home companies are trading at levels 40 percent lower than they were 12 to 18 months ago primarily because of uncertainty in the market, according to investment bankers. No one knows what the government is going to do with Medicare and Medicaid reimbursement and as a consequence all nursing home stocks are in less favor today than they were 18 months ago.
Investment bankers note, however, that the more health providers diversify with acquisitions in rehabilitation and pharmacy services for example, the better the chances these companies will have of weathering any changes in Medicaid and Medicare proposed by Congress. And of course, the bigger you are the better the chance of survival as well.
As health care operations continue to combine, it is reasonable to speculate on the merger of mergers: Sun and Horizon/CMS. After all, Neal Elliott and Andrew Turner did work together once before. Both companies say that anti-trust laws will limit complete consolidation of the industry. What is possible. however. are large companies that will dominate different regions of the country. Will the Sun slip over the Horizon, or will the Horizon swallow the Sun? Or will Vencor, the company that acquired Hillhaven, look with heightened interest at Hillhaven's children and try to create one. big--very big--happy family once again?
Arlene Odenwald writes frequently for the New Mexico Business Journal.
