Beverly Nursing Homes Focus on Repairing Image

Until California authorities disclosed last summer that they were investigating the treatment of nine patients who died in three nursing homes owned by Beverly Enterprises, the Pasadena company appeared to be riding high.

Unconstrained by the cost controls that slowed most of the rest of the health-care industry, Beverly--the nation’s largest nursing home chain--grew from 70 nursing homes in 1976 to 1,025 homes by 1986, generating revenue of $2 billion. Its stock hit a 52-week high of $22.25 a share in July, 1986.

“We were holding our own even though the rest of the health-care industry had lost its glamour,� said Robert Van Tuyle, Beverly’s 74-year-old chairman.

But the luster began to fade when the state Department of Health Services launched an investigation, citing Beverly for 50 health and safety violations and alleging that deficiencies in care led to the deaths in 1985 of nine patients at three Beverly nursing homes in California.

Last October, three of Beverly’s 93 homes in California, including the two where the deaths occurred, were placed on four years’ probation, and the company agreed to pay the state $600,000 to settle the complaints--the biggest such fine ever assessed against a nursing home operator.

State inspectors will make periodic unannounced, on-site inspections during the probationary period. In addition, the Department of Health Services said it would not grant Beverly any new licenses for 14 months.

During the four months of settlement talks with the state, the price of Beverly shares fell to a low of $14.75 at the beginning of October from the $22.25-a-share peak in July. Today, Beverly shares still trade at only about two-thirds of their 1986 peak.

“The state investigation started the stock slide, no doubt about it,� said Steve B. Reid, a health-care analyst for the Los Angeles investment house Wedbush, Nobel, Cooke. “From that point, it became a throwaway year.�

“I would think the publicity regarding the investigation had an effect on us,� agreed David Banks, president of Beverly.

Although Beverly officials say they aren’t convinced that the stock tumble was caused entirely by the investigation, Beverly has altered its aggressive growth strategy in the wake of the action.

“We decided it was time to consolidate now and get our house in order, because anytime you grow rapidly you are going to be acquiring some facilities that don’t fit your long-term image,� explained Chairman Van Tuyle.

With more than 105,000 employees caring for some 110,000 patients, many of whom are frail and in poor health, Van Tuyle has acknowledged that mistakes are virtually unavoidable. Yet after years of trying to grow faster and bigger than anyone else in the industry, Beverly now is undertaking a wide-ranging restructuring program aimed at shoring up patient care, boosting its floundering stock price and improving its flagging profits.

Beverly says it is planning to repurchase up to 10 million shares to bolster the sagging price of its stock and sell as many as eight nursing home facilities containing 10,000 beds. Beverly has also reduced its operating divisions to five from seven. By the end of the year, Van Tuyle said, Beverly will operate in only about 38 states, compared to 47 currently.

What’s more, in July it will open a new center in Atlanta that will train up to 8,000 employees a year in an effort “to provide a more proficient and effective staff,� said Van Tuyle, who added the center was under development before the state nursing home investigation.

Analysts say it is too soon to know whether those actions can invigorate Beverly and improve its reputation for quality care.

They point out that Beverly’s net income dropped to $44.9 million for the fiscal year ended Dec. 31, 1986, from $59.8 million the previous year. More crucially, they say, Beverly’s average occupancy rate fell to 89% for the first quarter ended March 31, 1987, compared to 91% in 1986 as publicity regarding the state’s action against Beverly may have scared away some potential patients.

“The occupancy has suffered at least some extent because of the publicity surrounding the whole issue of quality of care,� said Dorothy E. Ryan, a health-care analyst at the San Francisco office of the New York investment house Swergold Chefitz & Sinsabaugh Inc. “Investors are taking their money out now mostly because of bad earnings, which relate to the investigation. I don’t think it’s bad management on the part of Beverly, just bad luck.�

Beverly officials acknowledge that the company must improve its image: “If we do a good job, our actions will dictate that we will get more business,� said Banks.

Only seven years ago, many experts were predicting a bright future for nursing homes due to the nation’s burgeoning elderly population. But the entry of new acquisition-minded competitors has pushed up prices for nursing homes, slowing the expansion plans of companies including Beverly. Meanwhile, state efforts to keep Medicaid reimbursements low have cut profit margins.

However, Van Tuyle’s acquisition-minded company had kept its earnings growing at double-digit rates for nearly a decade by gobbling up scores of small “mom and pop� nursing homes.

From its modest, nondescript headquarters in Pasadena, Beverly imbued its homes with such corporate homogeneity that administrators had to call California to get permission to change menu offerings, according to Jill Duson, president of the National Assn. of State Long Term Care Ombudsmen, a federally funded watchdog group that tracks complaints against nursing homes.

Van Tuyle said the only reason administrators must check with headquarters is so the company can ensure that all meals meet the same nutritional standards.

Still, Beverly’s formula seemed so foolproof that even companies that had little background in health care, such as cosmetic maker Avon Products Inc. and Owens-Illinois Inc., the packaging conglomerate, have rushed in the last few years to buy up homes.

Others already in the health-care field, such as National Medical Enterprises, have also moved to reduce their emphasis in the troubled hospital field in order to gain a larger foothold in the seemingly brighter nursing home industry.

But even though the nursing home industry continues to draw interest from new entrants to the field, Beverly, with its massive holdings and decade of experience, is unlikely to be challenged as the nation’s largest nursing home operator even though Beverly is growing less rapidly today.

The challenge for Beverly and other nursing home operators, experts say, will be whether they can fill their nursing homes with more profitable privately insured patients and reduce the number of Medicaid residents, who pay an average of only about $40 a day for care.

“There’s a lot of people having problems in the nursing home industry today,� said Randall Huyser, an analyst at Montgomery Securities in San Francisco. “People got caught up in all of the talk about the ‘graying of America’ and started overpaying for acquisitions the last three or four years.

“They thought nursing homes were a franchise--a license to make money.� But the nursing home business, Huyser said, “is not the kind of business where there are instant answers.�

Largest for-profit nursing home operators ranked by total number of beds owned and operated in 1986.

NAME AND LOCATION BEDS 1. Beverly Enterprises, Pasadena 127,349 2. Hillhaven Corp., (Sub. National Medical 48,378 Enterprises) Los Angeles 3. ARA Living Centers Inc., Houston 29,735 4. National Heritage Inc., (80% owned by Southmark Corp.) 23,001 Louisville, Ky. 5. Manor Care Inc., Silver Spring, Md. 18,105 6. United Health Inc., Milwaukee, Wis. 15,700 7. Health Care & Retirement Corp. of America, 15,692 (Sub. Owens-Illinois), Toledo 8. National Health Corp., Murfreesboro, Tenn. 8,032 9. Adventist Health System/United States, 6,602 Arlington, Texas 10. Care Corp., Grand Rapids, Mich. 5,278

Source: Modern Healthcare magazine.