IHS reports $1.82B loss for 3Q99.

If Integrated Health Services was a nursing home resident, it would be in subacute care. The Sparks, Maryland-based provider, which pioneered the idea of nursing homes providing round-the-clock medical care as an alternative to continued hospitalization, reported a loss of $1.82 billion in its third quarter ended September 30, including a one-time charge of $1.78 billion. The loss before charges was $41.3 million versus the year-ago third quarter when it reported income before charges of $43 million. Net revenues for the third quarter totaled $659.9 million, a 12 percent decrease compared with the third quarter 1998. Integrated's stock, which traded at about $38 in early 1998 was going for about $0.38 at press time.

The company took a noncash charge of $1.4 billion (net of tax) in accordance with accounting standards that require it to write-down an asset's basis based on its future cash flows, and a charge of $425 million (net of tax) related to the sale of its infusion business, the sale of one facility, the termination of the sale of RoTech, and other charges. IHS also recorded a non-recurring charge of $200.9 million (net of tax) related to the adoption of a plan of disposition of its home health nursing business segment.

As a result of the financial results, IHS is out of compliance with certain financial covenants in its bank credit facility, and is seeking a waiver to its credit agreement.

Meanwhile, IHS elected not to make two interest payments totaling $24.7 million, telling its senior lenders that suspension of the payments was necessary to preserve liquidity to operate the business.

Marc Levin, executive vice president, would not comment on the company's financial problems, except to say that it is in active discussions with its lenders regarding the restructuring of its debt.

IHS' problems just might be hastening the day when it files for protection of the U.S. Bankruptcy Court, an outcome many industry observers view as inevitable. If that happens, IHS will be the third major nursing home chain, the others being Vencor and Sun Healthcare, to take this drastic step. And like those companies, IHS is blaming its problems on the federal government.

"The Medicare prospective payment system is clearly having a devastating impact on revenues and cash flow, said Robert Elkins, chairman and CEO. "In response, we have made numerous changes over the last year. We trained employees on the new PPS system, adjusted our operating model, and made painful personnel decisions in all operating divisions. Unfortunately, the reductions are not sufficient to offset the dramatic impact [PPS]."

While PPS is, without question, the reason the nursing home industry is in free-fall, industry analyst Robert Mains of Advest says "a lot of the companies-IHS among them--were not as prepared as they should have been for the magnitude of the change. They probably shouldn't have gone into it with balance sheets loaded with debt."

IHS racked up a lot of debt pioneering the concept of subacute care, an opportunity created by hospitals that were discharging patients quicker and sicker. But PPS has rendered certain parts of the subacute business either flat-out unprofitable or profitable only after major cost-cutting.

While IHS has been scrambling to rid itself of businesses that were being hammered by PPS, such as home health and infusion, it's paying the price for being poky. "They've been divesting themselves, but not as fast as they would have wanted or at the price they would have wanted," says Mains.

The company's lack of foresight was typical of many nursing home chains. "The rates came out in May 1998 and the bloodletting didn't occur until this year," Mains says. "So if you're a December Medicare cost report filer, you had six months to study them and determine the impact. Then, following the studying, a lot of people concluded it was going to be relatively benign."