Continental Medical Systems, Inc.

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Continental Medical Systems, Inc.

600 Wilson Lane
P.O. Box 715
Mechanicsburg, Pennsylvania 17055
U.S.A.
(717) 790-8300
Fax: (717) 766-8277

Public Company
Incorporated: 1986
Employees: 13,500
Sales: $901 million
Stock Exchanges: New York
SICs: 8051 Skilled Nursing Care Facilities

Continental Medical Systems, Inc. (CMS), is the country’s largest provider of rehabilitative medical services. The company operates 36 rehabilitation hospitals, 120 out-patient clinics, and a wide range of contract rehabilitation and medical services in all 50 states. CMS got its start as a nursing home operator, but left this field quickly in order to concentrate on rehabilitative medicine. After embarking on a rapid and ambitious program of acquisitions and hospital construction, CMS slowed its spending to retrench in the early 1990s as high healthcare costs in general were called into question.

CMS was founded in 1986 by Rocco A. Ortenzio. Ortenzio got his start in the rehabilitation business in 1958, when he began working as an independent physical therapist. Over the next 25 years, he built and then sold two multi-million dollar rehabilitation companies. In 1985 the second of these enterprises, the Rehab Hospital Services Corporation, was sold to National Medical Enterprises.

In February 1986, Ortenzio incorporated CMS in a suburb of Harrisburg, Pennsylvania. On March 15, the new company commenced operations when it finalized a pact with the Continental Care Group, a consortium of nursing homes based in New Jersey that was struggling financially. CMS derived its name from this organization, and became the corporate successor to it. In the contract between the two companies, CMS agreed to manage ten of Continental’s affiliated nursing facilities. These sites were located in six different states. In addition, CMS agreed to buy four of the nursing homes over the next twelve months, for a total of $15 million, and it received an option to buy the other six in the following year.

At the end of its first three-and-a-half months in operation, CMS reported a loss of $867,000 on its management of the ten nursing homes. The company attributed part of this loss to the expense of recruiting new personnel to work in these facilities.

On June 30, 1986, CMS also purchased the Riverdale Gardens Nursing Home for $9.6 million, to bring its total of owned medical facilities to seven. In July the company purchased California Physical Therapy, Inc., for $1.5 million in cash.

Five months later, on the last day of 1986, CMS bought the Braintree Rehabilitation Hospital, outside Boston, Massachusetts, and its affiliated properties, for $10.2 million. The Braintree property was a regional comprehensive medical rehabilitation facility. In business for just nine months, CMS had picked up seven nursing homes, two physical therapy services, and one hospital.

In February 1987 the company bought the Chestnut Hill Nursing Home, another medical facility in the Boston area, for $2.3 million. Later in that month, CMS bought the Hialeah Convalescent Center, Inc., located in Florida, for $2.4 million. On February 27, the company made further inroads into the California market when it paid $13.3 million for the Western Neuro Care Center, situated in the town of Tustin. This facility specialized in the care of head trauma, coma, and ventilator-dependent patients.

In the following month, CMS bought 50 percent of the South Dade Nursing Home, Ltd., further expanding its holdings in the Florida market. Because of Florida’s large concentration of older residents, this area was key to CMS’s plans for further growth.

At the end of June 1987, CMS acquired the Kentfield Hospital, a 60-bed medical facility specializing in rehabilitation which was located in Kentfield, California. CMS paid $9.5 million for this property and spent an additional $6.5 million for VTA Management Services, Inc., an affiliated business that served the New York metropolitan area. At the same time, CMA also purchased the stock of California Physical Therapy, Inc., its earlier acquisition.

In the fiscal year that ended on June 30, 1987, CMS generated $51.5 million in income. Fifty-seven percent of these profits were generated by the company’s nursing home facilities. CMS used some of these profits to fund a 68,000-square-foot expansion of its Braintree Hospital, to be used for outpatient services. This facility opened in July 1987. In addition, CMS established seven satellite outpatient facilities of the hospital, serving various locations around Massachusetts.

In the fall of 1987, CMS continued its streak of acquisitions. On September 1, 1987, the company bought the Helen Wilkes Residence, an 85-bed skilled nursing home in Lake Park, Florida. With this purchase, CMA increased its holdings in the nursing home field to 16 different facilities with 1,711 beds. These nursing homes were located along the eastern seaboard, in Florida, Virginia, Maryland, Pennsylvania, New Jersey, and Massachusetts.

Although CMS had originally assumed that it would be able to prosper by converting money-losing nursing home properties into profitable operations through superior management and experience, the company had discovered that this was not the most efficient route to growth. In nine months ending in early 1988, for instance, CMS lost $1.2 million on four of its nursing homes in Florida, as an over-supply of nursing home beds kept revenues depressed. In 1987 CMS sued the Continental Care Group, from which it had purchased the bulk of its nursing home properties. At the end of the year, Continental settled the litigation, agreeing to cancel promissory notes worth $1.8 million and to pay $600,000 toward renovations of three separate nursing homes. With this agreement, the cost of CMS’s further acquisitions from Continental was reduced by $2.4 million.

Before this settlement took place, however, CMS announced on October 13, 1987, that it would offer stock to the public. In this way, the company would be able to raise capital to fund further growth. Two weeks later, however, CMS announced that current stock market conditions had caused it to postpone indefinitely its initial public offering. Nevertheless, the company believed that its current financing was sufficient to pay for any further desired growth, and stock was sold a short time later.

In November 1987, CMA opened the Lakeview Rehabilitation Hospital in Elizabethtown, Kentucky. During this time, the company also completed its purchase of four other nursing homes that had originally been owned by the Continental Care Group.

In buying these properties, CMS sought to establish a nationwide presence in a highly fragmented market. By establishing a single, unified system, the company hoped to compete more effectively for patients and business. A young industry, rehabilitation services was being driven by the aging of the American population and by improved medical care that allowed people to live longer. The need for services such as therapy in the wake of a stroke or other catastrophic medical event would only increase. In addition, the market for rehabilitation was growing as it became clear that huge cost savings resulted from increasing the capabilities of people who had been disabled.

Accordingly, in 1988, CMS began to refocus its efforts. The company started to move out of the nursing home business, to emphasize its rehabilitation facilities exclusively. In March 1988, CMS augmented its rehabilitation operations by buying Pro Therapy of America, Inc., and its subsidiaries, for $9.1 million. This company contracted to provide physical, occupational, and speech therapy services to clients in ten states. It also had holdings in several joint venture outpatient clinics. With this acquisition, which joined the company’s previously purchased California Physical Therapy and VTA Management Services, CMS became one of the largest contract therapy service providers in the United States.

To further strengthen its standing in the rehabilitation field, CMS broke ground on seven other rehabilitation hospitals in locations around the country. These new facilities were placed primarily in areas where CMS had not previously done business, moving the company into Arkansas, Louisiana, Kansas, Texas, Colorado, and California.

To build hospitals in these areas, Ortenzio turned to the construction company run by his son as the primary contractor on the projects. In seeking funding, the company entered into partnerships with other hospitals, lining up many doctors as investors. This process raised the issue of ethics, as doctors would later refer patients to facilities in which they had a financial interest, arousing the interest of regulators.

CMS continued its move away from the nursing home industry in the spring of 1988, when it sold three long-term care facilities. In June 1988, the company announced a leveraged buy-out of the rest of its nursing home properties by the division’s management. With this deal, which was not completed for another four years, the company essentially exited this segment of the healthcare industry.

By the end of June 1988, these efforts had reduced the portion of CMS’s revenues derived from nursing homes to 33 percent. The other 67 percent were provided by rehabilitation, contract therapy, and development operations. Revenues for the previous twelve-month period at this point passed the $100 million mark, reaching $113 million. This represented an increase of 120 percent from the previous year. Earnings grew by 192 percent to reach $4.7 million.

CMS’s strong growth in revenues had been driven by its brisk pace of acquisitions, and the company had grown into a nationwide organization in a relatively brief period of time. In mid-1988, CMS began to institute the changes in administration that would allow it to manage its operations and further growth efficiently. The company more than doubled the size of its corporate staff, and also opened regional offices in Denver, Colorado, and Sacramento, California.

In September 1988, CMS announced that it would embark on another building project, developing an 80-bed facility in Irvine, California, to be called the Irvine Rehabilitation Hospital. This project was a joint venture with American Medical International, Inc., which owned the hospital next to the site of the proposed facility.

Also at this time, CMS completed an agreement first made in 1986 to acquire the Drew Village Nursing Home. Despite this move, the company pushed ahead in early 1989 with its plan to exit the nursing home field and refocus its energies on rehabilitation services.

In May 1989, Ortenzio passed the baton of company leadership to his son, Robert A. Ortenzio, who became the company’s president and chief executive officer, while his father remained chairman. By the following month, CMS had opened eight new rehabilitation hospitals, with 571 new beds. In doing so, the company tripled its number of such facilities to 12, with a total of 882 beds. With these additions, CMS became the largest independent provider of rehabilitation services in the United States.

Revenue from these operations climbed to $151 million in the twelve-month period ending in June 1989. Despite this gain, the company’s earnings were depressed by losses associated with CMS’s withdrawal from the long-term nursing care market, primarily an $8 million loss on the sale of three nursing homes.

In September 1989, CMS further expanded its operations in the contract rehabilitation services industry when it bought Rehab-Works, Inc., of Clearwater, Florida. This company employed over 418 therapists in seven states. Eleven months later, CMS made another acquisition in this industry when its purchased Communic-Care of America, Inc./Pro-Rehab, Inc., on August 31, 1990. With this move, the company established a presence in the contract rehabilitation market of 30 different states.

In addition, CMS continued its effort to build and open new rehabilitation hospitals. In July 1990, the Fort Worth Rehabilitation Hospital opened its doors. Later that year, CMS began construction on six other facilities in five states.

CMS began to see the fruits of these labors in 1991, as eight new rehabilitation sites in four states opened, bringing the company’s total of hospitals to 19. In addition, CMS expanded its number of outpatient clinics to 50. On the basis of these operations, CMS’s revenue reached $340 million, an increase by half from the previous year’s total of $227 million. To finance further growth, CMS sold additional shares of stock to the public, and transferred its listing to the New York Stock Exchange on June 21, 1991.

CMS continued to grow rapidly throughout 1991 and early 1992. The company opened eight new rehabilitation hospitals spread across eight states, and nearly doubled the size of its network of outpatient rehabilitation centers, to 96. To staff these new facilities, CMS hired 3,500 new employees.

In addition, CMS moved to enhance its contract rehabilitation services area by buying CompHealth, Inc., in November 1991. This company, based in Salt Lake City, Utah, acted as a temporary agency for medical professionals. In May 1992, CMS purchased Advanced Care Medicine, Inc., of Louisville, Kentucky. This company provided respiratory therapy and ventilator programs. With these additions, CMS could boast that its contract health care branch operated in all 50 states. From these operations, and its other fields of activity, CMS reaped $658 million in revenues in fiscal 1992.

By the start of 1993, CMS had begun to feel the effects of a nation-wide re-examination of the nature of American healthcare. To counteract potential government efforts to reign in healthcare costs, the company began a public relations campaign to educate people about the need for its services.

In addition, CMS prepared for reduced future revenues by scaling down its planned expansion, significantly reducing the number of new hospitals it intended to build. As part of this change in strategy, the company scuttled 30 development projects it had embarked upon, incurring a one-time charge against earnings of $14.5 million in the process. Also, CMS rearranged its staffing plan at the hospitals it operated, in an effort to keep costs down.

In January 1993, CMS further responded to the growing need for economical health care by forming a Unit Management group. This sector of CMS was assigned to develop programs in which rehabilitation services would be offered within existing acute care hospitals, rather than in separate, free-standing facilities, such as the rehabilitation hospitals the company had been building for the bulk of its history. With this move, CMS acknowledged that the future of rehabilitation services might differ significantly from the industry the company’s leaders had first imagined.

In February 1993, CMS acquired the Kron Medical Corporation, another provider of temporary medical help. This property was added to its Compuhealth operations, and filled a growing demand for flexible, cost-efficient medical staffing.

To better justify its costs to insurance companies or managed health care organizations, CMS also began a program to document the effectiveness of its rehabilitation programs for each patient. The company moved to upgrade its computer capabilities, as well, in an effort to gain further efficiency and economies in operations.

By June 1993, CMS’s revenues had grown to $901 million, and the company anticipated that it would pass the $ 1 billion mark in the next year. Although the outlook of the healthcare industry as a whole remained an open question, CMS’s solid record of growth and profitability suggested that the company would be a part of that industry in the late 1990s, regardless of the direction it took.