The Hillhaven Corporation

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The Hillhaven Corporation

1148 Broadway Plaza
Tacoma, Washington 98402
U.S.A.
(206) 572-4901
Fax: (206) 502-3934

Public Company
Incorporated: 1955 as Hillhaven, Inc.
Employees: 42,000
Sales: $1.57 billion
Stock Exchanges: New York
SICs: 8051 Skilled Nursing Care Facilities; 5912 Drug Stores
& Proprietary Stores

One of the largest diversified health care providers in the United States, The Hillhaven Corporation owned, leased, and managed nearly 300 nursing centers in 33 states during the mid-1990s. In addition to its considerable presence in the nursing home market, which the company helped transform during the late 1940s and 1950s, Hillhaven managed 19 retirement housing and assisted living centers and 59 pharmacy outlets. From its inception in 1946, the company has been regarded as a pioneer in providing care for the elderly, contributing greatly to the advances made by the nursing home industry during the latter half of the 20th century.

When Tacoma, Washington-based Hillhaven was incorporated in 1955 it represented a new and progressive force in the nursing home industry, a company distinguished from all other competitors by its innovative approach to caring for the elderly. Chiefly responsible for creating the company’s unique perspective, which later would be adopted by nursing home operators throughout the country, helping to transform the quality of the nation’s nursing facilities, was Ted B. Hill, Hillhaven’s founder.

Born in 1923, Hill was raised in Rock Rapids, Iowa, where he remained until he completed high school. After graduation, he moved across the country to Tacoma, a small city 30 miles south of Seattle, where he began working as an optometrist, biding his time and saving his money before he made a business investment that would change his life and an antiquated U.S. industry.

As his savings grew so did his entrepreneurial inclinations, one building in intensity and the other in volume, until he saw an advertisement one day that listed a nursing home for sale. Hill bought the frame structure with his savings, hired a friend to manage it, and convinced his wife to handle the bookkeeping; he continued to work as an optometrist, spending his weekends taking care of maintenance work at his new nursing home.

Soon after buying the nursing home, which years earlier had been occupied by an affluent family, Hill made a disheartening discovery, one that dampened his hopes for a prosperous new business. When Hill purchased the frame structure, he acquired a typical 1940s nursing home: a multistory structure identical in nearly all respects to an ordinary home. He had also inherited the ills of the U.S. nursing home industry. Narrow doorways, high, claw-footed bathtubs, and stairways were common features in nursing homes during the first half of the 20th century—Hill’s nursing home was no exception—but for the elderly and disabled high bathtubs made bathing difficult, narrow corridors made wheelchair access impossible, and flights of stairs represented formidable barriers restricting movement, particularly in an emergency situation such as a fire.

Hill quickly realized the inadequacies of his newly acquired nursing facility, but instead of abandoning the nursing home industry as the focus of his entrepreneurial efforts he searched for a solution and in 1946 devised one. That year, Hill reportedly mortgaged everything he and his wife owned, convinced a friend to do the same, and raised enough money to build the first specifically designed nursing home in Washington State. Hill’s creation was tailor-made for the elderly and disabled, a $100,000 structure outfitted with numerous features for the residents who would soon occupy it, including handrails along the corridors and adjacent to bathtubs, toilets, and showers, call-buttons in washrooms, and showers large enough to admit wheelchairs.

Then only 23 years old, Hill had made a definitive move in the nursing home industry, albeit one that drew little recognition. What little attention he did receive was largely negative, particularly from nursing home proprietors in the Pacific Northwest who predicted that the capital and operating costs of his nursing home would necessitate exorbitant rates. The design and layout of Hill’s facility, however, realized substantial efficiencies, enabling him to charge the same rates as he had at his first, outmoded nursing home.

Initially, Hill’s financial condition was precarious, with each dollar earned plowed back into his nursing facility or set aside to pay bills, but by 1949, three years after the completion of his first modern nursing facility, Hill was able to finance the construction of another facility in Olympia, Washington, although he had not yet decided to build a chain of nursing homes. Hill’s second creation was a one-story facility, a rarity among the nursing homes scattered across the country at the time and one of the chief characteristics that would distinguish Hillhaven as an innovative leader in the industry.

After another three-year break between new nursing home construction, Hill began to generate a profit, giving him the money and the inducement to begin contemplating the establishment of a nursing home chain for the first time. The following year, in November 1953, he completed the prototype for the nursing home empire that would develop in the decades ahead: a U-shaped, one-story facility in Hoquiem, Washington. Two months later another Hillhaven facility was opened in Bremerton, Washington; then in May 1955, one month after Hillhaven, Inc., was incorporated, Hill moved beyond Washington’s borders for the first time and established a Hillhaven home in Portland, Oregon.

Over the course of the next three years, Hillhaven continued to expand, both geographically by entering into the California nursing home market and in terms of the number of housing units it managed. By 1958, Hillhaven began to attract the attention it had earlier lacked, particularly when the company was hailed as a progressive nursing home innovator in a 1958 Readers’ Digest article. The company by this point operated 10 Hillhaven homes in Washington, Oregon, and California, all of which, like the nursing facility in Hoquiem, were U-shaped, one-story structures. The facilities averaged 57 beds per home, were constructed without ramps or steps, and avoided much of the institutional bleakness that was characteristic of more conventional nursing homes. But despite the many improvements, Hillhaven rates were commensurate with competing nursing homes, running between $6 and $7 per day in Washington and $10 to $11 per day in California.

As Hillhaven’s management looked forward from 1958 with the expectation of increasing the number of nursing homes under its control and expanding geographically, two factors bolstered the company’s optimism, one of which was closely familiar to those about to orchestrate the growth ahead; the other would only be discovered in retrospect. Hillhaven offered a unique, refreshing, and more accommodating approach to providing care to the elderly—this the company’s leaders knew—but unbeknownst to those at the top was the explosive growth the nursing home industry would record in the years ahead. Historically, the nursing home industry had never been very large, representing only a $200 million industry in 1950, or 1.6 percent of total U.S. health care expenditures. By the end of the 1950s nursing home expenditures had risen to $500 million, increasing exponentially as Hillhaven began its vigorous expansion program, but the industry’s most meteoric growth was yet to come.

During the 1960s, nursing home expenditures spiraled upward from $500 million to nearly $5 billion by 1970, a period during which Hillhaven developed a total of 32 new facilities in 10 states. Nursing home expenditures would continue to escalate during the 1970s, driving Hillhaven’s revenues upwards and positioning the company as one of the preeminent nursing home companies in the nation. To take advantage of rising nursing home expenditures, which by the mid-1970s had eclipsed $10 billion, Hillhaven’s management predicated the company’s growth on providing diversified services to the elderly, expanding upon the rudimentary services established by Hill. During the decade the company became the first multifacility, long-term care provider to nationally implement a broad range of rehabilitative services, which placed an emphasis on abilities rather than disabilities through speech and occupational therapy programs and restorative nursing.

In 1973 the company formed the Hillhaven Foundation to establish an independent organization devoted to conducting education, demonstration, and research in geriatrics; four years later, through the Hillhaven Foundation, it opened the first freestanding hospice in the United States at Tucson, Arizona. Designed to provide services to terminally ill patients and their families, the Tucson hospice opened the same year Hillhaven acquired First Healthcare, a 21-facility chain of nursing homes that strengthened the company’s national presence in a market that was becoming increasingly lucrative. Nursing home expenditures had increased from $4.7 billion in 1970 to $10.1 billion in 1975, then quickly doubled over the next five years, reaching $20.6 billion by 1980, or 8.3 percent of total U.S. health care expenditures. As one of the country’s largest long-term care providers, Hillhaven shared in the growth of its industry, becoming one of the key competitors in a market that began to attract the attention of large health care corporations.

Not surprisingly, the meteoric rise of the nursing home industry sparked outside interest and several large health care corporations sought to join the fray, hoping to secure a portion of what was becoming an increasingly larger market. As one of the largest companies in the industry, Hillhaven represented a coveted catch for whichever company could control it, and in 1979 Los Angeles-based National Medical Enterprises, Inc., did just that, acquiring the company before the growth of the nursing home market peaked.

With National Medical serving as its parent company, Hillhaven entered the 1980s propelled by the growth of the nursing home market. During the first two years of National Medical’s ownership, nursing home expenditures climbed resolutely from more than $20 billion to $27.3 billion, providing ample justification for its acquisition of Hillhaven and spurring management to plot ambitious expansion plans. By the middle of the decade, Hillhaven was the second-largest investor-owned nursing home in the United States, controlling slightly more than 400 nursing homes and 21 senior housing projects, which ranked the company a distant second to Pasadena-based Beverly Enterprises, owner of more than 1,000 nursing homes.

Looking forward, Hillhaven’s management planned to be more selective in its expansion throughout the country, deciding to invest only in new locations where the company was likely to attract more private-pay patients rather than those who relied on Medicaid, as nursing home expenditures began to record less prolific gains than they had during the previous two decades. Despite the more prosaic growth of the nursing home market, optimism remained high at Hillhaven, with the company’s management anticipating 15 percent annual growth for the remainder of the decade through the construction of new facilities, acquisitions, and conversion of existing facilities that focused on providing specialized services.

By the late 1980s, however, profits for investor-owned nursing home chains were declining, as the nursing home industry struggled with labor shortages, regulatory restrictions, and mounting competition. Hamstrung by fixed reimbursement and escalating operating costs, Hillhaven was hobbled by the onset of troubled times; profits fell sharply, dropping from $76.4 million earned from $989 million in revenue in 1987 to $44.1 million on $1 billion in revenue in 1988. The following year, while Hillhaven continued to suffer from the pernicious conditions characterizing the nursing home industry during the late 1980s, National Medical announced in January that it was spinning off Hillhaven into a separate, independently operated company. A year later, in January 1990, the spin-off was completed, leaving Hillhaven, with its management intact, as an independent, investor-owned operator of nearly 350 skilled-nursing facilities spread across 37 states. Also included in the spin-off was a 120-unit chain of pharmacies and 24 retirement housing centers, which Hillhaven now owned as it entered the 1990s and fought to stop its late 1980s retrogressive slide.

With its independence restored, Hillhaven faced a difficult road ahead. Many of the company’s nursing homes were recording lackluster results, exacerbating the harmful effects of intense competition and escalating operating costs that were crippling the nursing home industry. Saddled with debt, Hillhaven responded to the challenges it faced by streamlining its operations and establishing operating and financial criteria that each of its facilities were required to meet. During the four years following its spin-off from National Medical, Hillhaven eliminated 77 nursing centers, 87 pharmacies, and eight retirement centers that were not achieving the operating and financial goals it had established in 1990. Additionally, Hillhaven cut its headquarters staff by 20 percent and refinanced more than $500 million of its $731 million in long-term debt, which, combined with its facility closures, enabled the company to recover from its precarious position and look ahead once again with optimism.

Whereas Hillhaven was streamlining its operations during the early 1990s, the nursing home industry was beginning to consolidate, with several large health care providers joining forces to compete in the contentious 1990s. Hillhaven was not excluded from the industrywide trend, and in January 1995 Horizon Healthcare Corporation, a nursing home chain based in Albuquerque, New Mexico, made a $1.4 billion offer for Hillhaven and its 287 nursing homes. Hillhaven’s management rejected the offer, wishing to remain independent, but in March 1995 Horizon increased its ante, offering $1.8 billion for Hillhaven. Later that month, the deal collapsed when Hillhaven refused to accept Horizon’s offer before the specified deadline, but it was not long before another, much smaller health care company attempted to merge with Hillhaven, submitting an offer that would succeed and create one of the nation’s largest health care providers with more than $2 billion in revenues.

In April 1995, Hillhaven accepted a buyout offer valued at $1.9 billion from Vencor, Inc., a Louisville, Kentucky, operator of 35 long-term, intensive-care hospitals with $400 million in annual revenue. The proposed merger, which stipulated that Hillhaven’s management remain intact—something the proposal from Horizon did not—was regarded by pundits as a complementary marriage between two organizations whose facilities, once combined under one corporate umbrella, would create a prodigious, integrated health care force. Roughly 65 percent of Hillhaven’s nursing homes were located in states where Vencor operated hospitals, allowing the two merged companies to enjoy a significant boost in business through patient referrals.

On September 27, 1995, Hillhaven and Vencor announced that shareholders of both companies had separately approved the acquisition of Hillhaven by Vencor, thereby clearing the last obstacle barring the proposed merger. As Hillhaven prepared for its imminent merger into Vencor, prognostications for future growth were favorable. In 1995 there were more than 12 million Americans aged 75 or older, a number that was projected to reach 17 million by the end of the 1990s. With this estimated increase in Hillhaven’s core customer base fueling optimism, the company moved forward, ready to strengthen its position in the nursing home industry.