From Trend Setter to Has-Been : Comp Care Glamour, Profits Fade in Saturated Field

Steve Howe’s arrival at a drug treatment center in Orange was such a big story in 1983 that television camera crews blocked the building’s entrance to get a good view of the nation’s most talked-about addict.

The star Dodger pitcher was checking himself into a unit of Comprehensive Care, the country’s biggest alcohol and drug treatment company. Professional sports and drugs were not yet synonymous, but plenty of celebrities in the early 1980s were seeking the help of Comp Care, which is widely credited with inventing for-profit substance-abuse programs.

“There were movie stars, country western stars, rock stars, lots of athletes and company presidents,” said Dr. Joseph Pursch, Comp Care’s medical director at the time. “They brought a lot of credibility.”

Soon, the not-so-famous began checking into Comp Care in droves. Two years after Howe’s visit, the company’s revenue had soared 77% to about $160 million, and its profits grew about 60% to $17.2 million.

But now, looking back at that period, it’s clear that Comp Care and the ace ballplayer who helped bring it fame and fortune had both peaked by 1985.

The Irvine-based company reported last week that it had lost $5.1 million in its fiscal fourth quarter, in part because fewer and fewer people are using its services and those who do are not staying as long as they once did.

Deteriorating Condition

For the fiscal year ended May 31, Comp Care earned $502,000, a far cry from its record performance four years ago. Revenue was up 9% to $212 million. The company is having problems collecting payments, has failed to live up to some of the agreements on its $78 million in debt and is operating on a negative cash-flow basis.

Because of its deteriorating financial condition, the company tentatively agreed Friday to accept a reduced merger offer from First Hospital Corp., which last week cut its original $130-million bid made last April by at least $20 million.

During interviews this week, former executives and analysts said Comp Care has gone from being a trend setter to something of a has-been because it--and Chairman B. Lee Karns in particular--failed to react soon enough to changing market conditions including increased competition and a clampdown by insurers on the money they reimburse to drug and alcohol centers.

Karns said the criticism is basically on target. “I get the credit for the good years, and I have to take the blame for the bad. In the last two to three years, we have not reacted in a timely manner,” he said during an interview Friday. “We were entirely too passive.”

And in the meantime, the company’s reputation in recent years has taken a beating because of several lawsuits charging that executives were more concerned about profits than patient care. Specifically, two former administrators have charged in lawsuits that budget cuts at one of Comp Care’s facilities--Brea Hospital Neuropsychiatric Center--caused a shortage in supervision that allegedly resulted in one unattended patient’s death from a drug overdose and the homosexual gang rape of a teen-ager.

Comp Care has vigorously denied the allegations.

Former executives said Karns failed to see any of these problems until it was too late and adamantly refused to believe that the company’s declining profits were anything but temporary.

They say Karns became addicted to the company’s success. “He was the one who promised investors this continuing 20% growth,” said one former high-ranking official. “Senior management kept telling him this is not going to continue to happen, and he refused to believe it. He thought he had hooked on to a real star, and he was going to ride it to the top.”

Karns, 59, spent $52 million worth of Comp Care funds buying back 4 million shares of the company’s stock at $13 each in January, 1987, and another $11 million in March, 1988, because he believed that the stock was undervalued.

The buyback was a major blunder because Comp Care’s stock has continued to slide. This week the company’s shares were trading around $7.75, near an all-time low.

Twenty years ago, Karns was working in the health-care industry and saw a market overlooked by entrepreneurs--middle-class and affluent drug addicts and alcoholics. He joined Comp Care in 1972--which was formed in 1969 as a group of psychiatric care hospitals--and a year later opened the company’s first treatment program at South Coast Hospital in Laguna Beach.

‘Only Game in Town’

Comp Care has three primary types of facilities: free-standing drug and alcohol treatment centers, psychiatric hospitals and CareUnit substance abuse programs run under contract for various hospitals around the country.

“When they began, they were the only game in town,” said David Langness, the company’s former spokesman.

But beginning in the early 1980s, hospitals and health-care companies saw Comp Care was on to a good thing, and they began to copy it. The National Institute of Alcoholism and Alcohol Abuse said there were 376 public and private alcohol and drug treatment programs in California in 1982. Just five years later, that number had tripled to 1,133.

“Everyone and their brother has been moving into the field. The longer term for the last several years has not really been all that good,” said Larry Selwitz, director of research at Cruttenden & Co., a Newport Beach investment firm.

Comp Care’s market share nationally had fallen from 27% to just 11% in 1988, a company spokesman said. Occupancy levels in the company’s free-standing facilities fell from 66% in the fourth quarter of 1988 to just 57% in the same period this year, and the average length of stay fell from 21 to 19 days.

Because of reductions in Medicare and Medicaid spending, hospitals were looking for ways to fill empty beds, and many looked to drug and alcoholism treatment programs as one solution.

“A lot of hospitals went to school at Comp Care,” said Langness. “They would install a CareUnit and two years later they would cut off the contract, hire the Comp Care workers there and establish the same unit in the same place. People figured out how to do what Comp Care was doing and went out and did it.”

Former executives maintain that resentment of low pay and poor employee benefits was building in the early 1980s but that Karns--who drives a Rolls-Royce and has two large homes in Newport Beach and Palm Springs--was oblivious to it. Karns said Friday that salaries were above industry averages and that the company’s benefit packages were adequate.

“There are so many people who have left,” said one former official, “that we joke when we have a reunion we’re going to have to rent the Coliseum.”

On Sept. 13, Comp Care is scheduled to hold a special meeting for stockholders to vote on the proposed merger with First Hospital. If approved, the two companies will merge their operations into an entirely new corporation called FHC Comp Care based at First Hospital’s Norfolk, Va., headquarters.

Karns will resign as Comp Care’s chairman and take a position on FHC’s board of directors. “I would have been much more delighted,” Karns said Friday, “if my business career would have ended on a higher note than this.”