Comprehensive Care Corporation

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Comprehensive Care Corporation

4350 Von Karman Avenue, Suite 280
Newport Beach California 92660
U.S.A.
(714) 798-0460

Public Company
Incorporated: 1969
Employees: 448
Sales: $29.28 million (1995)
Stock Exchanges: New York
SICs: 8049 Offices of Health Practitioners, Not Elsewhere Classified; 8063 Psychiatric Hospitals

Comprehensive Care Corporation (CompCare) specializes in managed care and drug detoxification programs. It dominated the market for treatment of alcoholism in the late 1970s and early 1980s, but suffered enormous setbacks when the market changed in the late 1980s. Between 1990 and 1995, the company’s annual revenues decreased from around $84 million to just over $29 million. However, under the leadership of Chairman, President, and CEO Chriss W. Street, the company was optimistic about its ability to reverse its fortunes, and Street maintained that in 1995, CompCare was “repositioned to potentially grow rapidly as it strives to achieve profitability.”

CompCare was founded in Newport Beach, California, in 1969 with the goal of creating a chain of acute-care psychiatric hospitals and nursing homes. The company was undercapitalized, however, and other companies already had the same idea. Startup costs proved higher than expected, and one hospital was damaged by an earthquake. By 1972 the firm faced bankruptcy as it lost $2.8 million on revenue of $3 million.

Hoping to turn things around, the firm named B. Lee Karns, a 42-year-old hospital management consultant, president in 1973. He looked for a market niche that required no further capital outlay and decided on treatment for alcoholism. CompCare set up treatment units in existing hospitals that had empty beds. It used hospital personnel for its staff and made its income from a share of each patient’s bill. As additional incentive for the hospitals to join the plan, hospitals were not required to pay CompCare any fee until the alcoholism unit was in full operation. For many hospitals with beds to fill, the arrangement was attractive.

Alcoholism—and the awareness of it as a treatable disease—was growing in the United States, and Karns’ plan quickly proved successful. To assist hospitals, which had been unwilling to make such treatment a specialty, CompCare’s CareUnits combined medical treatment with psychiatric care and social workers, all supervised by an on-site CompCare employee. Patients were detoxified in the first few days of the three-to-four week program. Then patients attended individual and group therapy sessions geared toward changing their attitudes and behavior patterns.

The recruitment, training, and advertising for an average 20-bed CareUnit cost CompCare between $20,000 and $25,000. Ads in newspapers and on television brought in 30 percent of patients. Another 20 percent of the clientele came from corporate alcoholism programs, while the remainder were a result of personal referrals. Once set up, hospitals set their own patient fees and paid CompCare $55 per patient each day.

Seeking to expand its markets, in 1978 CompCare bought a money-losing Los Angeles surgical hospital, hoping to turn it around. The firm had $28.7 million in revenues in 1979, of which 35 percent came from its alcoholism rehabilitation program. By 1980 CompCare had 55 of its CareUnits in 17 states and was waiting regulatory approval for 18 more. In fact, its rehab program had become the second-largest in the United States, after that of the Veterans Administration. Sixty percent of CompCare’s patients stopped drinking, while the other 40 percent of its patients reduced their drinking by two-thirds, a success rate well above the industry average. With this success, CompCare had 104 hospitals in its system by 1982. It therefore decided to sell its long-term care business. Its three nursing homes only accounted for three percent of the firm’s 1982 revenues of $73.5 million, and CompCare chose to concentrate on its alcoholism and psychiatric services instead.

Profits reached $17.2 million in 1985, on revenues of $153 million. And then some problems began to occur, although it would take several years for the extent of the firm’s change in fortune to become apparent. Specifically, the insurers and corporations that had been the major funding source behind the growth of the firm’s treatment business became far more cost conscious. They began demanding lower rates and shorter hospital stays. At the same time, the treatment business became more competitive. Though CompCare’s revenues continued to grow for several years, its earnings began to slowly decline. Moreover, the company also lost some key management personnel.

In 1987, CompCare proposed spinning off its subsidiary RehabCare Corp. as a separate public company. It backed away from the plan when the stock failed to attract sufficient interest and the stock market crashed in October 1987. Despite its earnings slowdown, the firm kept spending money on advertising. One particularly striking 1987 television ad showed a woman and her children looking into the open grave of a drug user. The ad prompted consumer complaints, however, and soon thereafter the firm began using softer-focus ads, most often on radio. The ads often employed treatment counselors talking about the dangers of abusing drugs.

CompCare earned $502,000 in 1988 on revenues of $211.6 million. In April 1989 the firm agreed in principle to merge with First Hospital Corp., which operated psychiatric hospitals and substance abuse centers. As First Hospital tried to work out financing, CompCare’s financial condition deteriorated. The merger finally collapsed in November when First Hospital claimed that it could not obtain the necessary financing.

CompCare then announced that it would restructure itself and sell most of its California hospitals, including its Brea Hospital-Neuropsychiatric Center, with 142 beds; its CareUnit Hospital of San Diego, with 92 beds; and its Crossroads Hospital, Los Angeles, with 43 beds. It also sold its CareUnit Hospital in St. Louis for $2 million to Bethesda Eye Institute, and sold undeveloped property in Florida. The firm worked out new agreements with its creditors for its $43 million in secured debt, moved its headquarters to St. Louis, and sold its old headquarters for $9 million. Most of its management was already located in St. Louis, and the sale of the California facilities removed the need to have staff there to oversee them. Karns resigned, though he remained on the board of directors. W. James Nichol, who had managed the firm’s CareUnit subsidiary and its RehabCare rehabilitation services subsidiary, became the new president.

Despite the restructuring, the firm’s fortunes continued to sink. It lost $61.3 million in 1990 on revenues of $143.7 million. By 1990, a group of major shareholders had had enough. They seized control of the company and unseated six of the seven members on the board of directors. The board then brought in James P. Carmany to serve as the company’s new chief executive. Carmany had been a CompCare manager from 1978 to 1989, when he was dismissed over his resistance to the merger with First Hospital Corp.

In May 1990 the firm’s long-term debt stood at $87 million. But through debt-for-equity trades that raised $36.5 million, and the spinning off of RehabCare as a public company, which raised $20.2 million, CompCare cut long-term debt to $30 million by October. But its debt schedule remained tough and some industry observers—as well as its auditor KPMG Peat Marwick—expressed doubt about its ability to survive as an independent company. Still, the company announced that it was moving toward a new strategy of growth. It began seeking federal and state contracts for psychiatric as well as chemical dependency services. It also offered managed care services and management information services, in addition to its traditional chemical dependency services.

In early 1992 CompCare announced plans to further cut its debt by spinning off its CMP Properties Inc., which managed hospital properties. CMP would then buy up to $31 million worth of CC hospitals and lease them back to the firm. The plan failed to get off the ground, however. Meanwhile CompCare continued to try and cut costs. It laid off 125 employees, about ten percent of its work force, in April 1992. In August CEO James Carmany and COO Donald G. Simpson resigned; the firm then went through several top executives in quick succession.

Despite its debt, CompCare found the money to buy Mental Health Programs Inc., located in Tampa, Florida. Mental Health cost $700,000 in stock, cash, and the assumption of debts. CompCare lost $4.5 million in 1992 on revenues of $59.9 million. At the time, the company was converting most of its substance-abuse treatment locations into psychiatric care facilities. In 1993, the still-struggling firm decided to give up on the inpatient hospital business entirely. It announced plans to sell or close most of its nine hospitals and shift to managed care. By October 1993, Comprehensive Care had closed six hospitals in a year, but five of them were still for sale. It still owned six hospitals, most of which were operating at far under capacity. The firm had 365 total hospital beds, with an average occupancy rate of 28 percent.

In May 1994 turnaround specialist and investment banker Chriss W. Street was named company chairperson. Street faced a formidable task. In addition to the declining revenues and increasing debt load that had characterized the past five years, a new snag arose: in 1994 the Internal Revenue Service refused CompCare’s classification of some doctors and psychologists as independent contractors rather than employees, a decision that added about $5.7 million to the firm’s debts.

In early 1995 the Lindner Funds mutual-funds group invested $2 million in CompCare, which the firm used to complete another restructuring. Thereafter the firm had four hospitals left, and its work force had been pared to 550 people, a drop from 2,800 in 1990. As part of the restructuring, CompCare moved its headquarters to Newport Beach, California, nearer the homes of Street and several other top executives.

Recognizing that the fee-for-service market whose growth it had ridden in the 1970s and 1980s had now shrunk severely, CompCare began to remake itself into a managed-care organization. The firm organized networks of medical specialists to contract with health care payers to assume the risk for chronic and catastrophic care. CompCare referred to its strategy as Disease State Management and signed contracts with HMOs, workman’s compensation insurers and governmental organizations. Under the Disease State Management plan, doctors were professionally and financially responsible for managing a patient’s care, a practice the company called ‘reverse gate-keeping.’

The number of patients under the plan grew rapidly, from 360,000 in June 1995 to 593,000 in September 1995. CompCare announced it would seek to form networks specializing in orthopedics, nephrology, spina bifida, and AIDS. The firm also restructured and expanded CareUnit to 17 programs, its first expansion in five years.

Despite some successes, the firm’s revenue came to only $29.3 million in 1995, and it lost $11.5 million. Moreover, it was in default on $9.5 million of debentures. In its 1995 annual report, CompCare admitted that its financial condition raised “substantial doubt about the company’s ability to continue as a going concern.” Nevertheless, the company had made some progress toward settling some of its federal tax debts, and management remained hopeful that the recent restructuring and new focus on managed care would help restore investor confidence. In November 1995 the firm won a $1.2 million contract to develop a drug treatment center for juveniles in conjunction with a hospital in Cincinnati.