Irvine-Based Comp Care Faltered as Field Grew

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 is 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.

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 and has failed to live up to some of the agreements on its debt, which now totals about $78 million, 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 that 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, which allegedly resulted in one unattended patient’s death from a drug overdose, an attempted suicide and the homosexual gang rape of a teen-ager.

Comp Care has vigorously denied the allegations, but industry insiders said publicity surrounding the cases, plus charges of poor care and inadequate staffing at two other facilities, have taken a toll on admissions.

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 spent $52 million worth of Comp Care funds in buying back 4 million shares of the company’s stock at $13 a share 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.

“It was a mistake, obviously a mistake,” said Karns, 59. “But our investment bankers suggested and endorsed it.”

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 what is now South Coast Medical Center in Laguna Beach.

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

“When they began, they were the only game in town. They were the only firm doing what they were doing,” said David Langness, the company’s former spokesman and now vice president of the Hospital Council of Southern California.

But beginning in the early 1980s, hospitals and health-care companies saw that 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 banking 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 in particular were looking for ways to fill empty beds, and many looked to drug and alcoholism-treatment programs as one solution.

“The cost-containment trends came into place, and Comp Care’s contract business, which had been very lucrative, deteriorated sharply,” said Margo Vignola, an analyst with the New York investment firm of Salomon Bros.

During fiscal 1987, about 40 hospital contracts were canceled though some of those were terminated by Comp Care itself.

Making matters worse, the number of days that Comp Care’s patients were staying at facilities were dropping because insurance companies were requiring clients to clean up their acts in a shorter period of time than previously.

The bad news was coming in the midst of an expansion binge at Comp Care.

“They had start-up costs associated with new facilities at the same time that they were faced with a decline in the length of stay of patients,” said Ken Estes, a former Comp Care executive.

Comp Care’s former business partners and employees saw the opportunity to strike out on their own, and there was very little the company could do to stop them.

“A lot of hospitals went to school at Comp Care,” Langness said. “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, however, that salaries were above industry averages and that the company’s benefit packages were adequate.

Nevertheless, when hospitals and health-care companies came calling, numerous employees accepted offers to leave Comp Care.

“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.”