Nu-Med Acquiring Psychiatric Hospitals, Sees Lucrative Field
Nu-Med, an Encino-based hospital chain on an acquisition spree, is setting its sights on new targets.
Over the last two years, the company has transformed itself from a small hospital-billing review company into a chain of 16 hospitals with more than $200 million in annual revenue. Those 16 hospitals all are traditional acute-care facilities, the kind that treat everything from colitis to cancer.
Nu-Med now is concentrating on buying psychiatric hospitals. Company executives and analysts alike are convinced that there is more money to be made in these hospitals with their increasingly popular programs to treat such problems as drug addiction and alcoholism.
On Aug. 16, Nu-Med announced preliminary plans to buy two companies with hospitals that specialize in treating behavioral disorders--Maxim Healthcare Corp. of Philadelphia and Hospital Group of America, based in McLean, Va. The company also announced a final agreement to buy a third hospital company, Community Care Systems of Boston.
‘Ripe for Expansion’
“Nu-Med can find its niche by moving into psychiatric hospitals,” said Bill Garland, an Encino financial consultant with First Affiliated Securities. “It’s an area still ripe for expansion.”
For Nu-Med executives, acquisitions are nothing new. The nucleus of the senior management team, including Chairman Maurice Lewitt, previously worked at two health-care firms that were bought out by bigger companies.
This time, however, the executives at Nu-Med appear determined to develop a big hospital company of their own. To that end, they are sacrificing short-term profits and spending big money on expanding their chain.
“We’re going to sit back and absorb for a while. But we’re in an aggressive, acquisitive mode, and we’re always looking at deals,” Lewitt said.
The 8-year-old company still is a relatively small player in the hospital industry.
The industry is dominated by four older and much bigger companies with annual revenue in the billions: National Medical Enterprises in Los Angeles, Beverly Hills-based American Medical International, Hospital Corp. of America of Nashville, Tenn., and Humana of Louisville, Ky.
Of the four, only Humana has no psychiatric hospitals. The other companies all have been buying psychiatric hospitals in the last several years.
Nu-Med began buying its way into the hospital management business in 1983 by acquiring the 112-bed Valley Park Medical Center in Canoga Park for $15.2 million.
By last month, it had acquired 15 more, including West Park Hospital in Canoga Park and Sherman Oaks Community Hospital, which has one of the largest private burn centers in the country. The Sherman Oaks hospital also opened a special treatment center for victims of acquired immune deficiency syndrome, or AIDS, this month.
During the fiscal year ended April 30, Nu-Med’s profits were up 35% from the year before, to $7.5 million, and its revenue rose 46% to $200.6 million.
While taking on its new facilities, Nu-Med also has burdened itself with a growing debt, nearly $185 million for its last quarter, up 49% from a year earlier.
“It’s already pretty rough and they’re going deeper,” said Carl Sherman, an analyst for Oppenheimer & Co. in New York.
But the psychiatric hospitals that Nu-Med has agreed to buy should inject a lot of revenue into the company. Together, they took in $70 million last year.
Community Care, one of the three companies that Nu-Med has agreed to acquire, has three small hospitals and two outpatient clinics, all in New England. Hospital Group of America operates one hospital in Chicago and plans to have three under construction by the end of the year. Maxim Healthcare owns two psychiatric hospitals in Pennsylvania.
Part of the attraction of the psychiatric hospital business is the low cost of building and maintaining the facilities, at least compared to the expenses for acute-care hospitals.
“Psychiatric hospitals are more like hotels,” Lewitt said. “There are no special technical requirements for the buildings, no special wiring, less equipment.”
On top of that, psychiatric hospitals have not been hit by the federal spending curbs that have hurt acute-care hospitals.
William N. Hartauer, Nu-Med’s president, said patients in for-profit psychiatric hospitals tend to be covered by private insurance companies, not government plans such as Medicare. Because private plans tend to set higher reimbursement levels for medical services, the psychiatric hospitals can collect more.
Option in Boston
There is also room for further expansion: Community Care has an option to buy a psychiatric hospital, in Boston, and holds a certificate of need enabling it to build another in Florida; Maxim holds certificates entitling it to build two hospitals in Texas.
The cap on payments from federal medical-insurance programs has helped shorten the average hospital stay of patients, cutting hospital profits. Psychiatric hospitals--with their highly advertised facilities for alcoholism, drug abuse and eating disorders--have been seeing more patients, who are staying for longer periods of time.
State governments have cleared the way for hospital chains to enter the psychiatric field, said Donald Johnson, editor of Modern Healthcare, a Chicago-based trade magazine. “The states are shutting down their institutions, contracting out the work.”
‘Less Stigma’
Moreover, Nu-Med has moved into the mental health business because society perceives more of a need for it, Nu-Med executives said. “There’s less stigma to psychiatric hospitals than there used to be with all the celebrities being treated at special clinics,” Hartauer said.
Nu-Med Chairman Lewitt began his career in the hospital management business in 1969 when he helped establish Setco Inc. in Los Angeles. His co-founders included Marvin Strin, who now is Nu-Med’s vice chairman, and Kenneth Rappoport, Nu-Med’s executive vice president.
When Setco merged with Hyatt Corp. as Hyatt Medical Enterprises, the three businessmen ran it together. They also survived Hyatt Medical’s subsequent sale to American Medical International.
In 1982, Hartauer, former chief financial officer for Hyatt Corp.’s holding company, bought into Nu-Med, then a Van Nuys consulting company with 75 employees. Lewitt, Strin and Rappoport joined Hartauer there.
Built From ‘Ground Zero’
“Lewitt’s built Nu-Med from ground zero into a successful company,” said Garland of First Affiliated Securities.
There are 100 employees at the company’s headquarters on Ventura Boulevard. They oversee more than 4,000 workers nationwide, 1,100 of those at the three San Fernando Valley hospitals.
Lewitt concedes that the company’s name is not a household word. “But I think we have become recognized where we have hospitals and in the financial world,” he said.
