IHS looks at options for RoTech

An HHBR Staff Report

Integrated Health Services (IHS; Owings Mills, MD) said its board has authorized the company to explore options for its RoTech division. IHS says it has seen a sudden drop in demand for its therapy services. Alternatives being considered include an initial public offering for all or part of RoTech or a sale of the division to a financial or strategic purchaser. IHS has confirmed that there have been discussions with financial organizations interested in a leveraged buyout, and these discussions, the company said, are ongoing.

IHS, citing a sudden decline in demand for rehabilitation services and increased expenses from the new Medicare reimbursement system, said it expects to report sharply lower 4Q98 operating earnings, reported The Wall Street Journal. The company said that, without including additional costs it is incurring for cutting jobs, it expects to report operating earnings of between 35 cents and 45 cents per share for 4Q98 ended Dec. 31 and of $2.69 to $2.79 per share for FY98. The projection, reported the Journal, is sharply lower than a First Call consensus estimate of 75 cents per share for 4Q98 and $3.02 per share for FY98.

IHS posted a loss in 4Q97 of $61.9 million, $1.59 per share. In FY97, the company recorded a net loss of $33.5 million, $1.19 per share. IHS said it already has cut 1,000 jobs to counter a slowdown in demand for therapy and expects to eliminate more, the Journal reported.

IHS said 4Q98 was also hurt by Medicare-related severance and transition expenses. The company said Medicare charges for the year could total about $15 million. Usage of the company’s Symphony rehabilitation services in smaller operations decreased by a greater level than expected in December, while labor costs weren’t cut fast enough to match the fall-off. IHS said Medicare’s transition to a prospective payment system, which will effect its 1Q99 results, reduced demand for therapy services. Customers of the company’s contract rehabilitation division are admitting fewer Medicare patients. IHS said it expects its rehabilitation service business to rebound over the next six to 12 months.

IHS acquired RoTech Medical in July 1997 for $915 million. The company said at that time that the merger would create one of the largest post-acute care companies. With the acquisition, IHS added RoTech’s home respiratory services, home infusion services, and home medical equipment products to its business lines. At the time of the RoTech acquisition, Erik Wiberg, a consultant with securities firm UBS Securities (New York) said the acquisition "will give IHS complete home care agency services. Getting into respiratory therapy and infusion services really fills out their home care offering."

But recently, IHS decided to get out of the home health nursing business. IHS said last fall that it would sell its home health nursing division, and just three weeks ago, the company announced that it will sell the division to Medshares (Memphis, TN) for an undisclosed price. Marc Levin, IHS executive vice president, at the time of the announcement, said the company decided to sell "because of the change in the (Medicare) reimbursement system."