Genesis Health Ventures Announces Reduced Fourth Quarter Expectations and Anticipated Impact of Prospective Payment System.

KENNETT SQUARE, Pa.--(BW HealthWire)--Nov. 2, 1998--Genesis Health Ventures Inc.(SM) (NYSE:GHV) Monday announced that it expects its earnings for the fourth quarter of its fiscal year ended Sept. 30, 1998 to be significantly below the $0.45 per share, on a diluted basis, reported by the Company for its prior fiscal quarter ended June 30, 1998.

The anticipated results are lower as a result of the Company's reduced earnings pick-up from its 43.6% owned Multicare affiliate which will be below expectations primarily due to lower than anticipated occupancy and quality mix in Multicare's eldercare centers heightened by a higher than anticipated effective tax rate (non-cash) which will be recorded in the current quarter.

Additionally, the anticipated results, which will include one month of the results of operations from Vitalink Pharmacy Services Inc., are lower as a result of reduced quality mix while maintaining occupancy levels at Genesis' centers, increased benefit costs, and the previously announced termination of management agreements covering eight eldercare centers.

The Company believes that fourth quarter earnings were also adversely impacted by challenges posed from external factors such as changes in Medicare reimbursement under the Medicare Prospective Payment System ("PPS"), increased regulatory initiatives by state and federal agencies and continued pressures on operating margins by payors.

As a result of these factors, the Company currently expects its fourth quarter earnings per share (before anticipated fourth quarter non-cash charges described below) will be approximately $0.16 to $0.18 lower than its prior quarter of which $0.05 relates to the non-cash change in Multicare's anticipated effective tax rate.

Anticipated Non-Cash Fourth Quarter Charges

Due to specific events occurring in the fourth quarter and a focus on core business operations in response to PPS, the Company anticipates that in the fourth quarter it will record non-cash charges of approximately $77 million, after-tax, of which approximately $18 million relates to the disposition of one eldercare center and certain non-core businesses, including the Company's ambulance business and certain Medicare home health operations; approximately $27 million relates to investments in owned eldercare centers and other assets the Company believes are impaired as a result of PPS; approximately $15 million relates to impaired investments in eldercare centers previously owned or managed by the Company; and approximately $17 million relates to the Company's investment in Doctors Health, a medical care management company in the Company's Chesapeake region.

The Company believes that its investment in Doctors Health was impaired as a result of the termination by NYLCare Health Plans of Mid-Atlantic ("NYLCare") of its global capitation contract with Doctors Health through which it derived approximately 56% of its global capitation revenue.

Doctors Health received a going concern opinion from its independent public accountants relating to its financial statements contained in its Form 10-K.

Anticipated Impact of PPS

Based upon the Company's recent experience with 11 eldercare centers which it manages that transitioned to PPS effective July 1, 1998 and based upon the Company's ongoing budget process for its fiscal year ending Sept. 30, 1999, the Company believes that the impact of PPS on the Company's earnings is likely to be greater than originally anticipated by management due to various factors, including lower than anticipated Medicare per diem revenues, lower than anticipated Medicare Part B revenues caused by a census shift to Medicare patients having a greater length of stay, higher than expected ancillary costs at the centers due to expanded services covered in the Medicare Part A rates, lower than anticipated routine cost reductions and lower than expected revenues for contract therapy services.

The Genesis eldercare centers began implementation of PPS on Oct. 1, 1998 and the majority of the Multicare eldercare centers will begin implementation of PPS on Jan. 1, 1999.

Based upon assumptions, the Company estimates that the adverse revenue impact of PPS in the Company's fiscal year ending Sept. 30, 1999 will be approximately $28 million on the Genesis centers and approximately $18 million on the Multicare centers. In each of fiscal years 2000-2002, the Company estimates the adverse revenue impact of PPS on its Genesis centers will approximate an additional $8 million.

The Company estimates that the adverse revenue impact of PPS on the Multicare eldercare centers will be approximately an additional $13 million in Fiscal 2000 and an additional $5 million in each of fiscal years 2001 and 2002.

The actual impact of PPS on the Company's earnings in fiscal 1999 will depend on many variables which can not be quantified at this time, including regulatory changes, patient acuity, patient length of stay, Medicare census, referral patterns, ability to reduce costs, and growth of ancillary businesses.

The Company anticipates that its cash flow from operations (EBITDA) for the fiscal year ending Sept. 30, 1999, including the impact of the Vitalink transaction may increase by approximately 30% from the 1998 fiscal year although PPS may reduce the Company's fiscal year 1999 earnings per share by as much as 20% below the 1998 anticipated earnings per share.

The Company anticipates that fiscal 1999 EBITDA, excluding Vitalink, will only decrease by approximately 3% to 5% from fiscal year 1998. The Company expects that its 1998 and 1999 earnings per share will include approximately $0.44 and $0.84, respectively, of expense from the amortization of goodwill. The Company's book value per share is estimated to be approximately $20.20 at Sept. 30, 1998.

To adapt to the significant challenges posed by PPS and recent changes in the health care marketplace, the Company has taken the following actions: identified non-core businesses for disposition; reduced its corporate overhead by approximately $15 million; reorganized its businesses into a Core Business Division, including the Company's eldercare centers, pharmacy, therapy and other ancillary companies, and a Strategic Business Division, including the Company's clinical program development, care management, business development, managed care division and community based programs; restructured the compensation structure for contract therapists; spent significant time training and educating its personnel to prepare for the administration of PPS; and established targets to increase Medicare census and overall occupancy levels at its centers.

"The need for eldercare services should only grow with the aging of the population and we want Genesis to lead in meeting this demand," commented Michael R. Walker, the Company's chairman and chief executive officer. "Genesis is committed to continuing its strategy of becoming the preeminent provider of quality eldercare services in the regional markets we serve.

We believe that our regional market concentrations and array of eldercare services allow us to meet the challenges posed by recent changes in the health care environment.

Over the next fiscal year, the Company intends to focus on transactions that will delever our balance sheet, dispose of non-core assets, and allow us to become an even more efficient health care organization while continuing to deliver quality health care to elders.

The Company also plans to grow its Medicare census, expand certain core, community-based products and strengthen our current eldercare networks," stated Walker.

"The efforts of our employees in meeting the challenges of caring for the elderly is greatly valued," added Walker.

George V. Hager, Jr., the Company's chief financial officer noted, "the ability of the Company to enter into deleveraging transactions will depend on various factors including the ability of the Company to access the capital markets at reasonable rates."

Genesis, a recognized innovator in the healthcare industry, was founded in 1985 to redefine how America cares for the elderly and is dedicated to helping older adults live a full life.

The Company, which consolidated its businesses under the brand name Genesis ElderCare in 1996, has established Genesis ElderCare Networks in five regional markets in the eastern United States and currently serves more than 175,000 customers. Genesis is headquartered in Kennett Square.

Certain of the above statements, including statements relating to anticipated earnings, cash flow from operations, anticipated fourth quarter charges, the impact of the Medicare prospective payment system and potential impacts upon investors in Multicare, are forward-looking statements. Genesis cautions investors that any forward-looking statements are not guarantees of future performance.

Numerous factors exist which, in some cases have affected, and in the future could cause results to differ materially from these expectations, including those described in the Company's annual report on Form 10-K and other filings with Securities and Exchange Commission such as the Company's substantial indebtedness and significant debt service, the Company's ability to obtain capital at attractive rates to fund future growth, changes in the healthcare system and government regulations, dependence on reimbursement by third party payors and competition.

There can be no assurance that these or other factors will not impact the accuracy of such forward looking statements.

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