CHAINS:

UHS deal shows the growth po­ten­tial in psy­chi­atric care

Modern Healthcare - - Front Page - Vince Gal­loro

Over the past few years, Psy­chi­atric So­lu­tions, Franklin, Tenn., has demon­strated the in­creas­ing value of psy­chi­atric fa­cil­i­ties. The com­pany showed that first as an ac­quirer, in­clud­ing ma­jor cor­po­rate deals in 2005 and 2007. Last week, Psy­chi­atric So­lu­tions went from ac­quirer to acquired, as Uni­ver­sal Health Ser­vices, King of Prus­sia, Pa., com­pleted the biggest health­care ser­vices trans­ac­tion of 2010, pay­ing $3.33 bil­lion in cash, as­sumed debt and ac­qui­si­tion costs to takeover Psy­chi­atric So­lu­tions. Uni­ver­sal agreed to di­vest four psy­chi­atric hos­pi­tals (three of them Psy­chi­atric So­lu­tions fa­cil­i­ties) to win an­titrust clear­ance from the Fed­eral Trade Com­mis­sion last week.

The ac­qui­si­tion of Psy­chi­atric So­lu­tions ex­pands Uni­ver­sal’s port­fo­lio from 32 to 37 states, deep­ens the man­age­ment pool and strength­ens it fi­nan­cially be­cause of its greater size and more di­ver­si­fied as­sets, Alan Miller, Uni­ver­sal’s chair­man and CEO, said in an in­ter­view. Uni­ver­sal acquired its first be­hav­ioral as­sets nearly 30 years ago, but the real ex­pan­sion into the sec­tor came with its ac­qui­si­tion of 12 hos­pi­tals from the for­mer Char­ter Be­hav­ioral Health Sys­tems, Al­pharetta, Ga., in 2000 (Aug. 28, 2000, p. 15), Miller said.

“We have the di­ver­si­fi­ca­tion in two busi­nesses that we’ve been in for a num­ber of years, and we find them to be com­ple­men­tary,” Miller said. One com­ple­ment is in terms of in­vestor sen­ti­ment—when in­vestors like one sec­tor but not the other, Uni­ver­sal is pro­tected, he added.

The se­nior ex­ec­u­tives of Psy­chi­atric So­lu­tions did not stay on af­ter clos­ing, but Uni­ver­sal is re­tain­ing man­agers at the fa­cil­ity and re­gional lev­els and hopes to draw on their ex­pe­ri­ence, Miller said. “We don’t have ev­ery an­swer in the busi­ness,” he added.

The se­nior ex­ec­u­tives who founded Psy­chi­atric So­lu­tions in 1997 won’t go away empty handed, how­ever, ac­cord­ing to a se­cu­ri­ties fil­ing Psy­chi­atric So­lu­tions made in July. For ex­am­ple, Joey Ja­cobs, chair­man, pres­i­dent and CEO will take home $50.6 mil­lion, in­clud­ing a severance pack­age of nearly $14.2 mil­lion, and $23 mil­lion in stock op­tions and $13.4 mil­lion in re­stricted stock grants that were cashed out as a re­sult of the deal, ac­cord­ing to the fil­ing.

The be­hav­ioral sec­tor also is draw­ing re­newed in­ter­est from pri­vate eq­uity firm Welsh, Car­son, An­der­son & Stowe, which re­cently in­vested $100 mil­lion in eq­uity with Spring­stone, a Louisville, Ky.-based com­pany that owns a psy­chi­atric hos­pi­tal in In­di­ana.

Welsh Car­son had ex­ited the be­hav­ioral­health sec­tor more than five years ago when one of its port­fo­lio com­pa­nies, Nashville­based Ar­dent Health Ser­vices, sold its psy­chi­atric hos­pi­tals to Psy­chi­atric So­lu­tions for $560 mil­lion in cash and stock (March 14, 2005, p. 4), noted Dar­ren Lehrich, a health­care ser­vices stock an­a­lyst for Deutsche Bank. Be­hav­ioral Health­care Corp. be­came Ar­dent af­ter Welsh Car­son took a ma­jor­ity stake in the com­pany and brought in a man­age­ment team to fo­cus on gen­eral acute-care hos­pi­tals in 2001 (July 9, 2001, p. 13).

Welsh Car­son’s re­newed in­ter­est in psy­chi­atric care is a pos­i­tive sign of the op­por­tu­ni­ties in the sec­tor, Lehrich said.

On the sup­ply side, the num­ber of psy­chi­atric hos­pi­tal beds, in free-stand­ing psy­chi­atric hos­pi­tals and psy­chi­atric units within gen­eral hos­pi­tals, dropped by more than a quar­ter be­tween 1995 and 2008, ac­cord­ing to the Amer­i­can Hos­pi­tal As­so­ci­a­tion (See chart). The num­ber of free-stand­ing psy­chi­atric hos­pi­tals dropped from 662 to 448 dur­ing that time pe­riod. Hos­pi­tal-based units dropped from 1,507 to 1,320.

On the de­mand side, the mental health par­ity law and the likely ex­pan­sion of in­surance cov­er­age un­der re­form are likely to pro­duce more pa­tients. Be­hav­ioral health also of­fers hos­pi­tal op­er­a­tors a respite from un­com­pen­sated care com­pared with med­i­cal­sur­gi­cal care, Lehrich said.

Greater aware­ness of mental ill­ness and greater ac­cep­tance that mental ill­ness is as se­ri­ous as phys­i­cal ill­ness also should be pos­i­tive fac­tors for providers, Lehrich added. Fi­nally, the ag­ing of the pop­u­la­tion also should pro­vide more pa­tients, for dementia and Alzheimer’s treat­ment es­pe­cially, he said.

Spring­stone ex­ec­u­tives see the same op­por­tu­ni­ties. The com­pany’s chair­man is Ken New­man, who founded Hori­zon Health Corp., Lewisville, Texas, a psy­chi­atric hos­pi­tal op­er­a­tor that was sold for $426 mil­lion in cash and as­sumed debt to Psy­chi­atric So­lu­tions in 2007, ac­cord­ing to a se­cu­ri­ties fil­ing. Its CEO is Earl Reed, a vet­eran of in­vestor-owned health­care com­pa­nies such as Life­Care Man­age­ment Ser­vices, Ven­cor (now known as Kin­dred Health­care) and Hu­mana.

“When you look at the en­tire coun­try, with 308 mil­lion peo­ple, and the num­ber of beds that ex­isted 10 or 12 years ago and the num­ber that ex­ists to­day, there’s been a tremen­dous drop,” Reed said. “There’s room for a lot of play­ers or a lot more hos­pi­tals.”

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